On January 21, 2013, the Ohio Division of Financial Institutions (the “Division”) issued guidelines to provide clarification to Ohio chartered banks and savings banks on the Division’s expectations with respect to the interplay of Ohio’s lending limit laws and Section 611 of the Dodd- Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).
Effective January 21, 2013, Section 611 of the Dodd-Frank Act prohibits FDIC-insured state banks from engaging in derivative transactions unless “the law with respect to lending limits of the State in which the insured State bank is chartered takes into consideration credit exposure to derivative transactions.” While Section 611 gives states considerable discretion to determine how to implement the directive, Section 610 gives more specific directives to national banks and federal savings associations. Section 610 amended the statutory definition of loans and extensions of credit applicable to national banks to include credit exposures arising from derivative transactions, repurchase agreements, reverse repurchase agreements, securities lending transactions and securities borrowing transactions. The Office of the Comptroller of the Currency (the “OCC”) adopted an interim final rule in June 2012 which provides national banks and savings associations with three methods for calculating the credit exposure of derivative transactions, other than credit derivatives. Although the rule was effective on July 21, 2012, the OCC delayed the effective date for the new derivative and securities financing transaction exposure calculations until January 1, 2013 and, pursuant to a December 2012 final rule, this exception was extended to July 1, 2013.
The state bank regulators are taking different approaches to implementing Section 611. Some states have issued rulings or guidance adopting the OCC’s rule under the basis of their parity statute. Illinois, for example, issued an interpretative letter stating that the Illinois Banking Act already meets the requirements of Section 611 by virtue of their parity statute which “incorporates provisions that consider derivative transactions in the context of lending limits.” Illinois Department of Financial and Professional Regulation, State Chartered Banks are Authorized to Participate in Derivative Transaction (February 13, 2013). Similarly, Maryland’s Commissioner of Financial Regulation issued a Wildcard Lending Limit Declaratory Ruling that stated that for the purposes of calculating the derivative-securities credit exposure for compliance with the Maryland’s existing legal lending limit, statechartered banking institutions will be required to measure their derivative-securities credit exposure in accordance with and subject to the limitations and exemptions under the OCC's Interim Final Rule, as amended by the final rule upon issuance. Other states have taken legislative action. Georgia amended its legal lending limit statute to include credit exposure under a derivative when calculating its legal lending limit to any one borrower.
The Ohio guidelines state that Ohio’s existing lending limit laws take credit exposure from derivative transactions into consideration. However, the Division adopted a temporary regulation effective on December 10, 2012 to “reinforce the need to consider credit exposure from derivative transactions under the applicable lending laws.” Section 1301:1-3-01.1 of the Ohio Administrative Code provides that “ loans and extensions of credit” under the legal lending statute (Section 1109.22) include “any credit exposure to a person arising from a derivative transaction between the person and the bank.” Derivative transaction is defined to include “any contract, agreement, swap, warrant, note or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.” In addition, pending amendments to Section 1109.22(B), which will be effective on March 22, 2013, add “derivative transactions” to the definition of “loans and extensions of credit” and provide that the Superintendent may adopt rules to administer and carry out the purposes of Section 1109.22 including “rules relating to credit exposure arising from derivative transactions.” Unless or until additional regulations are adopted specifying the methods for calculating derivative credit exposure, Ohio banks and savings associations appear to retain discretion to determine such methods, including retaining any model previously used and approved by its examiners or by adopting one of the other models outlined in the OCC’s rule.