Comments and Questions

A citation on the policy of the Federal Reserve evaluating capital. Courtesy of Tschaff Reisberg. "Commercial Bank Examination Manual," Division of Banking Supervision and Regulation. Washington, DC: Board of Governors of the Federal Reserve System, 2000, pp. 531, 1068 pages. Page 531: "For risk-based capital purposes, total-rate-ofreturn swaps and credit-default swaps generally should be treated as off-balance-sheet direct credit substitutes.21 The notional amount of a contract should be converted at 100 percent to determine the credit-equivalent amount to be included in the risk-weighted assets of a guarantor.22 A bank that provides a guarantee through a credit derivative transaction should assign its credit exposure to the risk category appropriate to the obligor of the reference asset or any collateral.In some instances, the reference asset in the credit derivative transaction may not be identical to the underlying asset for which the beneficiary has acquired credit protection. For example, a credit derivative used to offset the credit exposure of a loan to a corporate customer may use as the reference asset a publicly traded corporate bond of that customer, with the credit quality of the bond serving as a proxy for the on-balance-sheet loan. In such a case, the underlyingasset would still generally be considered guaranteed for capital purposes as long as both the underlying asset and the reference asset are obligations of the same legal entity and have the same level of seniority in bankruptcy."