OCC Lending Limit Rules: OCC Issues Interim Final Rules Applying the Lending Limit for National Banks and Savings Associations to the Credit Exposure to Derivatives and Securities Financing Transactions

Sullivan & Cromwell LLP - June 27, 2012

On June 20, the Office of the Comptroller of the Currency (“OCC”) issued interim final rules (including both the interim final rule and the preamble, the “Lending Limit Release”) to implement section 610 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Section 610 expands the statutory definition of “loans and extensions of credit” in the lending limit provisions of the National Bank Act and Home Owners’ Loan Act to include the credit exposure from repurchase and reverse repurchase transactions and securities lending and borrowing transactions (collectively, “securities financing transactions”) and derivative transactions. The Lending Limit Release sets out the procedures and methodologies for calculating the credit exposure for these newly covered transactions. The Lending Limit Release also establishes a single set of lending limit rules applicable to both national banks and federal and state-chartered savings associations. The lending limit rules are effective July 21, 2012, with an exemption until January 1, 2013 for credit exposures from derivatives and securities financing transactions.

The Lending Limit Release is the second agency rulemaking to define “credit exposure” arising from derivative and securities financing transactions. Previously the Board of Governors of the Federal Reserve System (“Federal Reserve”) proposed rules to implement the single-counterparty credit limit in Section 165(e) of Dodd-Frank (“Proposed SCCL Rules”). The Proposed SCCL Rules apply to bank holding companies with $50 billion or more in total consolidated assets and nonbank financial companies that have been designated as systemic by the Financial Stability Oversight Council. The OCC’s approach to measuring credit exposure in the Lending Limit Release is less burdensome and provides significantly more flexibility than that in the Proposed SCCL Rules, including by permitting banks to measure credit exposures using supervisor-approved internal models and treating credit exposures that come to exceed the lending limit after inception of the transaction as nonconforming transactions that a bank must bring back into compliance with the lending limit rather than as automatic violations of the limit. In addition, for each type of transaction, the Lending Limit Release includes an alternative streamlined approach to measuring credit exposure that allows a bank to lock in the amount of the credit exposure at inception of the exposure.