Risk-Based Capital Treatment for Spread Accounts
January 31, 1997
Circular No. 10919

To the Chief Executive Officers of All Bank Holding Companies in the Second Federal Reserve District:

Attached is a supervisory letter regarding the appropriate risk-based capital treatment for transactions in which a bank holding company recognizes on its balance sheet a spread account that provides credit enhancement to assets the organization has securitized. Such transactions are most commonly found in connection with the securitization of credit card receivables and are deemed to be asset sales with recourse. The treatment set forth in the supervisory letter is a clarification and reiteration of existing policy and is consistent with the effective risk-based capital treatment of spread accounts for commercial banks.

The supervisory guidance notes that a bank holding company that has recorded on its balance sheet a spread account providing credit protection to assets it has sold must hold a minimum of 8 percent capital against the full amount of assets transferred, and not just against the amount of the spread account. Additionally, such transactions may qualify for the low level recourse capital treatment that applies to asset sales with limited recourse. Under the low level recourse rule, a banking organization that contractually limits its maximum recourse obligation to less than the full effective risk-based capital requirement for the transferred assets would be required to hold risk-based capital equal only to the contractual maximum amount of its recourse obligation.

If you have any questions about this guidance on spread accounts that provide credit enhancement, please contact Sarah J. Dahlgren, Assistant Vice President, or Daniel Nickolich, Financial Analyst.