Allocation of Carrying Amount Based on Relative Fair Values: Fair Value Percentage Allocated of Total Carrying Fair Value Amount Loans sold $1,040 94.55% $945.5 Interest-only $ 60 5.45% $ 54.5 strip receivable Total $1,100 100% $1,000 (Interpretive note: The carrying amount of the loans ($1,000) is allocated to loans sold and the interest-only strip
receivable, which is another asset created in this transaction and not sold.
Total (Credit) Enhancements: Sum of interest-only strips
, subordinated securities, and other residual interest; standby letters of credit; and other enhancements divided by total loans in the category.
Previously recognized servicing receivables that exceed contractually specified servicing fees should be reclassified as interest-only strips
The final rule also imposes a "dollar-for-dollar" capital charge on residual interests and a concentration limit on credit-enhancing interest-only strips
, a subset of residual interests.
The guidance addresses risk-based capital treatment pertaining to (1) split or partially rated instruments, (2) nonqualification of corporate bonds or other securities for the ratings-based approach, (3) spread accounts that function as credit-enhancing interest-only strips
, (4) audits of internal credit-risk rating systems, and (5) cleanup calls.
New standards are added for the treatment of residual interests, including a concentration limit for credit-enhancing interest-only strips
. Credit ratings from rating agencies and certain limited alternative credit-rating approaches can be used by banks to match the risk-based capital requirement more closely to their relative risk of loss for certain positions in asset securitizations.
Innovative financial instruments and transactions--such as interest rate swaps and caps, foreign currency options, interest-only strips
, asset securitizations and many more--have become commonplace and are changing the role of traditional instruments such as loans, bonds and stocks.