Estimating Changes in Capital Requirements under Basel 1A Proposals The Federal Agencies have released for comment proposals

for changing the capital requirements for U.S. banks that will not be following Basel II. These changes include: Basing risk weights for credit exposures, collateral, and guarantees on external ratings (e.g., S&P, Moodys) Using LTV ratios as the basis of risk weights for first lien 1-4 family residential mortgages Applying a 10% credit conversion factor for short-term commitments with an original maturity of less than one year that are not unconditionally cancelable Higher risk weights for loans 90 days or more past due or in nonaccrual Higher risk weights for certain acquisition, development, and construction loans 75% risk weight for certain small business loans Risk-based capital requirements for securitizations of personal and business credit card accounts, and other revolving credit exposures.

CSBS and state regulatory staff have developed custom spreadsheets that can be used to estimate the possible effects of these proposed changes. The spreadsheets produce estimates of bank Basel 1A capital requirements based on Call Report data using two different kinds of inputs: Use of scenarios representing different views of bank risk parameters (Conservative or Aggressive estimates), or Supplemental information on bank portfolios from examination staff or bank personnel (Custom estimates). Without the supplemental information, the risk parameters default to a moderate profile.

Since risk-weighted assets may depend on external ratings (where available for credit exposures or guarantees) and on Loan to Value for residential real estate exposures, the main risk parameters in the estimation process will be: the amount of the banks exposure to borrowers in different rating categories and the amount of residential real estate loans held by the bank that fall into different LTV buckets. The amount of different types of assets that meet certain criteria for lighter risk-weighting will also be estimated. The first step is to input the banks risk-weighted assets according to portfolio category as reported on the Schedule RC-R; next this information is combined with the breakdown of different types of loans and leases (reported on Schedule RC-C), loans on nonaccrual (reported on Schedule RC-N), and unused commitments (reported on Schedule RC-L). The amount and breakdown of riskweighted assets subject to change under the Basel 1A ANPR can then be determined. Finally, either custom risk parameters or scenario risk parameters are used to produce estimates of Basel 1A risk-weighted assets. These spreadsheets could also be used to produce estimates for aggregated portfolios, or bank portfolios at different points in time. An important part of the estimation process will be determining the portfolio composition for

An important part of the estimation process will be determining the portfolio composition for different banks. Depending on a particular banks portfolio make-up, Basel 1A could have little impact or a significant impact. For example, banks with large portfolios of residential real estate, or substantial exposure to publicly rated counter-parties, are more likely to be affected by Basel 1A. Estimating Basel 1A risk-weighted assets for some items will be aided by specialized information. For example The amount of loans guaranteed by the SBA or the Department of Education are currently riskweighted at 20%. Whether banks have loans with these guarantees may be determined by talking with examination staff. Small business loans and student loans without these guarantees are currently risk-weighted at 100%, but could carry a lower risk weight under the Basel 1A proposals. The change in treatment of asset-backed securitizations of credit cards and other revolving credit exposures depends on the presence of early amortization features. Exam teams can be approached for information on the types of securitizations held by the bank. Some small business loans reported on Schedule RC-C.II may be on nonaccrual. Current Call Report categories on Schedule RC-N do not include an item for small business loans. Again, examination staff can be consulted. However, the spreadsheets can be used when supplemental information is not available. Users can input a range of different risk parameters to estimate scenarios of possible changes in riskweighted assets. The risk weighting for some items doesnt change under the Basel 1A proposal: Exposures to OECD governments, Government agencies, and state and political subdivisions Securitizations other than asset-backed securitizations with early amortization features Municipal bonds and other exposures to municipalities Short-term bank exposures Market risk exposures Assumptions built into this estimation process include: Unused commitments for credit card lines and HELOCs are unconditionally cancelable by the bank Risk-weighting for Other Loans (RC-C.9) and Other Assets (RC-F) will not be affected by Basel 1A.

N),

l estate, or

lving credit

Domestic Capital / Basel IA Calculation Instructions

To complete this calculation you will need the following: Call Report Schedules RC - C RC - L RC - R RC - N Uniform Bank Performance Report page 11a Navigate through each sheet of the Excel workbook and enter the requested data in the light gray boxes. There are a total of 8 sheets to input data: Summary Intial Input Residential Real Estate Nonaccrual Small Business Loans Commercial Real Estate (ADC) Loans Consumer Loans Exposures to Externally Rated Borrowers In several categories, the proposal assigns risk weights based on credit quality factors not contained in the call report. In these instances, the calculation assumes three profiles: conservative, aggressive, and custom. Conservative is an estimated profile for a conservative institution. Aggressive is an estimated profile for an aggressive institution. Theses profiles are predetermined in the CSBS calculation. Custom is programmed as a "middle of the road" profile; however, the percentage allocation can be adjusted to reflect the actual or assumed profile of the institution. The final results estimate a percentage change in the minimum level of capital based on each of the three profiles.

Domestic Capital / Basel 1A Calculation Summary

Bank Name: Cert #:

Call Report Date

Total Risk Weighted Assets (RC.R59) Min. Required Capital (8% Assets for Risk Weighted of TRWA) Items not affected by ANPR Current Risk-Weighted Assets for items affected by ANPR $0 $0 $0 $0

UBPR Date
Total Risk Based Capital Ratio (page 11a) Tier One Leverage Capital Ratio (page 11a)

Basel 1A Estimated Risk-Weighted Assets for items affected by ANPR

Custom
Estimated Risk-Weighted Assets for items affected by ANPR Change in minimum required capital % Change in minimum required capital $2 $0 #DIV/0!

Conservative
$2 $0 #DIV/0!

Aggressive
$2 $0 #DIV/0!

Basel 1A ANPR proposes changes in risk-weighting for:

1. Loans secured by residential real estate 2. Loans 90 days past due and on nonaccrual 3. Small business loans 4. Commercial real estate (ADC loans) 5. Consumer loans 6. Exposures to externally rated borrowers 7. Unused commitments less than one year in original maturity that are not unconditionally cancelable by the bank

Basel 1A risk weights' are based on: --best estimates of values of ANPR risk parameters --assumption that commitments for credit card lines (RC-L.1.b) and HELOCs (RC-L 1.a) are unconditionally cancellable by the bank.

_______________ The Conference of State Bank Supervisors stands firm in its commitment to advancing professionalism in all state banking departments. Our strength lies in bringing all state banking departments together with bankers like you to present a unified voice in Washington. Founded in 1902 as a clearinghouse for ideas to solve common problems of state bank regulators, the Conference of State Bank Supervisors (CSBS) has evolved into a vital force that strengthens state banking departments. For one hundred years, CSBS has been uniquely positioned as the only national organization dedicated to protecting and advancing our nation's dual banking system. Through CSBS, state bank regulatory agencies and state-chartered banks continue to champion a system that offers competitive chartering options, efficient and effective supervision, and a lower cost of regulation for all banks.

2005, Conference of State Bank Supervisors. All Rights Reserved.

RC-R Calculation for "Items not affected by ANPR"

Notional Riskweighted assets

RC-R.59 RC-R.35(F) Held to maturity securities (100% RW) RC-R.36(F) Available for sale securities (100% RW) RC-R.38(F) Loans & leases held for sale (100% RW) RC-R.39(F) Loans & leases net of unearned income (100% RW) RC-R.53(F) Credit equivalent amount of unused commitments with original maturity > 1 yr (100% RW) RC-R.38(E) Loans and leases held for sale (50% RW) RC-R.39(E) Loans and leases net of unearned income (50% RW)

0 0 0 0 0 0 0 0 0

Total Current RWA for items affected: Total RWA for items not affected:

Other Items
RC-C.1.c Sum of all 1-4 family residential real estate loans RC-C 1.d Multi- family residential real estate loans Loans secured by residential real estate currently risk weighted at 100%

0 0 0

2005, Conference of State Bank Supervisors. All Rights Reserved.

Loans Secured by Residential Real Estate

ANPR proposes basing risk weight on LTV after consideration of PMI.
First-lien closed-end loans secured by 1-4 family residential properties (RC-C.1.c (2) a.) Residential real estate loans on nonaccrual (RC-N.1.c.2.a(C))

$0 $0

Important: This Loan Amount worksheet provides a rough estimate for Qualifying Estimate percentage of loans that fall in LTV buckets

%
91-100 LTV : 100% RW 10% 81-90 LTV : 50% RW 10% 61-80 LTV : 35% RW 80% <= 60 LTV : 20% RW 0%

Custom
$0

%
0%

Conservative

Aggressive
$0 $0 $0 $0

$0 30% $0 50% $0 20% $0 0%

$0 10% $0 60% $0 30%

If a bank holds both the first lien and the second lien (including HELOC) then loans can be combined and risk-weighted according to LTV. Stand-alone junior liens and HELOCS would be risk-weigted at 100% or higher.

Revolving open-end loans secured by 1-4 family properties (RC-C.1.c.1) Junior lien closed-end loans secured by 1-4 family properties (RC-C.1.c.2.b) Residential real estate loans on nonaccrual (RC-N.1.c.1(C)) Residential real estate loans on nonaccrual (RC-N.1.c.2.b(C))

$0 $0 $0

Important: This Loan Amount worksheet provides a rough estimate for Qualifying Estimate percentage eligible for LTV risk-weighting

%
91-100 LTV : 100% RW 0%

Custom
$0

%
0%

Conservative

Aggressive
$0 $0 $0 $0 $0

$0 20% $0 20% $0 $0 0% 0%

81-90 LTV : 50% RW 50% 61-80 LTV : 35% RW <= 60 LTV : 20% RW 0% 0%

$0 10% $0 30% $0 20% $0 40%

100% RW 50%

$0 60%

Agencies ask about lower than current risk weights for certain multifamily loans, based on small size, history of performance, and low loan to value.
Loans secured by multifamily residential properties (RC-C.1.d) Multifamily real estate loans on nonaccrual (RC-N.1.d(C))

$0 $0

Important: This Loan Amount worksheet provides a rough estimate for Qualifying Estimate percentage eligible for lower risk weights

%
20% RW 0%

Custom
$0

%
0%

Conservative
$0

%
0%

Aggressive
$0 $0 $0

50% RW 50% 100% RW 50%

$0 80% $0 20%

$0 20% $0 80%

Custom Estimated Basel 1A risk-weighted assets for residential real estate:

Conservative

Aggressive

$0

$0

$0

2005, Conference of State Bank Supervisors. All Rights Reserved.

Loans 90 Days Past Due And On Nonaccrual

Agencies are considering assigning exposures that are 90 days or more past due and those in nonaccrual status to a higher risk-weight category. However, the amount of the exposure to be assigned to the higher risk-weight category may be reduced by any reserves directly allocated to cover potential losses on that exposure.

Total loans on nonaccrual (RCN- 1 - RC-N.9)

Residential real estate loans on nonaccrual (RC-N 1.c.2.a) Residential real estate loans on nonaccrual (RC-N 1.c.1) Residential real estate loans on nonaccrual (RC-N 1.c.2.b) Multifamily real estate loans on nonaccrual (RC-N 1.d) ADC loans on nonaccrual (RC-N 1.a Col C) Consumer loans on nonaccrual (RC-N 5.a & 5.b Col C)

Important: This worksheet provides a rough estimate for

Estimate risk-weighted amount in different risk categories

%
150%

Custom

%
$0 100%

Conservative

Aggressive
$0

$0 200%

Important: This worksheet provides a rough estimate for If a bank holds both the first lien and the second lien (including HELOC) then loans can be

Important: This worksheet provides

2005, Conference of State Bank Supervisors. All Rights Reserved.

Small Business Loans

The Agencies suggest risk-weighting small business loans at 75% if they meet certain requirements: full amortization over 7 years, performance according to contract, and full protection by collateral.

Total outstanding amount of loans under $1 Million that are secured by nonfarm, nonresidential properties (RC-C.II.3.a-3.c) Total oustanding amount of C&I loans under $1 Million (RC-C.II.4.a-4.c)

$0

Important: This worksheet provides a rough estimate for

Estimate percentage of loans meeting requirements

%
75% RW 50% 100% RW 50%

Custom

%
$0 75% $0 25%

Conservative

Aggressive
$0 $0

$0 25% $0 75%

Important: This worksheet provides a rough estimate for If a bank holds both the first lien and the second lien (including HELOC) then loans can be

Custom

Conservative

Aggressive

Estimated Basel 1A risk-weighted assets for small business loans::

$0

$0

$0

Important: This worksheet provides

2005, Conference of State Bank Supervisors. All Rights Reserved.

Commercial Real Estate (ADC) Loans

Agencies are considering assigning heavier risk weights to acquisition, development, and construction (ADC) loans unless they meet Interagency Real Estate Lending Standards regulation and the project is supported by a substantial amount of borrowers equity for the duration of the facility.

Construction, land development, and other land loans (RC-C.1.a) ADC loans on nonaccrual (RC-N 1.a [Col. C])

$0 $0

Important: This worksheet provides a rough estimate for

Estimate percentage of loans at higher risk weights

%
100% RW 50% 150% RW 40% 200% RW 10% 350% RW 0%

Custom

%
$0 75% $0 25% $0 $0 0% 0%

Conservative

Aggressive
$0 $0 $0 $0

$0 20% $0 20% $0 30% $0 30%

Important: This worksheet provides a rough estimate for If a bank holds both the first lien and the second lien (including HELOC) then loans can be

Custom

Conservative

Aggressive

Estimated Basel 1A risk-weighted assets for small business loans::

$0

$0

$0

Important: This worksheet provides

2005, Conference of State Bank Supervisors. All Rights Reserved.

Consumer Loans
The Agencies are considering assigning risk weights for other retail exposures using the borrower's credit score or debt service ability. The ANPR does not propose specific risk weights for consumer loans. The following assumes a mix of risk weights based on any number of credit evaluation factors.

Consumer loans outstanding (RC-C.6.a - 6.c) Consumer loans on nonaccrual (RC-N 5.a and RC-N 5.b[Col. C])

$0 $0

Important: This worksheet provides a rough estimate for

Estimated Basel 1A risk-weighted assets for consumer loans at 75% RW

%
50% RW 20% 75% RW 50% 100% RW 30% 150% RW 0%

Custom

%
$0 50% $0 25% $0 25% $0 0%

Conservative
$0

%
5%

Aggressive
$0 $0 $0 $0

$0 15% $0 50% $0 30%

Important: This worksheet provides a rough estimate for If a bank holds both the first lien and the second lien (including HELOC) then loans can be

Custom

Conservative

Aggressive

Estimated Basel 1A risk-weighted assets for consumer loans:

$0

$0

$0

Important: This worksheet provides

2005, Conference of State Bank Supervisors. All Rights Reserved.

Exposures To Externally Rated Borrowers

ANPR proposes that banks be allowed to risk weight externally rated exposures according to the exposure's rating category. This proposal would also allow recognition of externally rated guarantors and collateral.

Held to maturity securities risk-weighted at 100% (RC-R 35) Available for sale securities risk-weighted at 100% (RC-R 36) Loans and leases held for sale risk-weighted at 100% (RC-R 38) Loans and leases net of unearned income risk-weighted at 100% (RC-R 39) -- exclude RRE at 100% RW, small business loans, loans on nonaccrual, ADC loans, and other retail loans) Unused commitments not unconditionally cancellable (RC-L 1.c.1, 1.c.2, 1.e) Greater than 1 year (50% CREQ) (RC-R 53(A)) Less than 1 year (10% CREQ)

$0 $0 $0 $0

$0 $0 $0

Securities Estimate percentage in external rating category

% AAA/AA -- 20% RW 10% A -- 35% RW 10% BBB+ -- 50% RW 10% BBB -- 75% RW 10% BBB- -- 100% RW BB+, BB, BB- -- 200% RW B and lower -- 350% RW
0% 0% 0%

$0
%
$0 50% $0 30% $0 $0 $0 $0 $0 $0 20%

Custom

Conservative

Aggressive
$0 $0 $0 $0 $0 $0 $0 $0

$0 10% $0 20% $0 20% $0 10% $0 20% $0 10% $0 $0 10%

Unrated -- 100% RW 60%

If aImportant: Thisboth the first lien andrough estimate for (including HELOC) then loans can be bank holds worksheet provides a the second lien
Custom Conservative Estimated Basel 1A risk-weighted assets:

Aggressive

$0

$0

$0

Important: This worksheet provides

Loans and leases Estimate percentage in external rating category

% AAA/AA -- 20% RW A -- 35% RW BBB+ -- 50% RW BBB -- 75% RW BBB- -- 100% RW BB+, BB, BB- -- 200% RW B and lower -- 350% RW Unrated -- 100% RW 95%
5%

$0
%
$0 10% $0 $0 $0 $0 $0 $0 $0 85% 5%

Custom

Conservative
$0 $0 $0 $0 $0 $0 $0

Aggressive
$0 $0 $0 $0 $0

5% 5%

$0 $0 $0

$0 90%

If aImportant: Thisboth the first lien andrough estimate for (including HELOC) then loans can be bank holds worksheet provides a the second lien
Custom Conservative Estimated Basel 1A risk-weighted assets:

Aggressive

$1

$1

$1

2005, Conference of State Bank Supervisors. All Rights Reserved.

Unused commitments - credit equivalent amount Estimate percentage in external rating category
% AAA/AA -- 20% RW A -- 35% RW BBB+ -- 50% RW BBB -- 75% RW BBB- -- 100% RW BB+, BB, BB- -- 200% RW B and lower -- 350% RW
5%

$0
% Conservative
$0 $0 $0 $0 $0 $0 $0 5% 5%

Custom
$0 $0 $0 $0 $0 $0

Aggressive
$0 $0 $0 $0 $0 $0 $0

$0 10% 5%

Unrated -- 100% RW 95% $0 85% $0 90% $0 If aImportant: Thisboth the first lien andrough estimate for (including HELOC) then loans can be bank holds worksheet provides a the second lien

If aImportant: Thisboth the first lien andrough estimate for (including HELOC) then loans can be bank holds worksheet provides a the second lien
Custom Conservative Estimated Basel 1A risk-weighted assets:

Aggressive

$1

$1

$1

Custom Total Basel 1A risk-weighted assets for exposures to externally rated borrowers:

Conservative

Aggressive

$2

$2

$2

2005, Conference of State Bank Supervisors. All Rights Reserved.