Federal Banking Agencies Finalize Capital Treatment of Recourse Obligations, Residual Interests and Direct Credit Substitutes
The four federal banking agencies finalized their capital rules (aggregating two 2000 proposals) regarding recourse obligations ("ROs"), residual interests ("RIs"), and direct credit substitutes ("DCS"). The rules treat ROs and DCS more consistently than the historical standards and add new standards for RIs. All transactions settled on or after January 1, 2002 are subject to the rules, but as of November 29, 2001 banking organizations may elect to apply any provision of the final rule that results in a reduced capital charge. The new rules generally apply to positions held in the banking book; positions in the trading book should be treated in accordance with those rules. This summary first details key terms defined in the rule, then provides representative examples of ROs and DCS discussed in the rule and its preamble, and finally details the risk-based
