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the last day of the quarter in which the swap was considered
initiated; e.g., if the swap was actually initiated on a day that
fell between March 1 and May 31, the initial credit adjustment
was calculated on June 30.38 Second, FNBC assigned the swap
counterparty to one of its credit risk rating classes (discussed
infra p. 133) and ascertained the corresponding CRESCO39 loss
reserve factor from the credit rating that FNBC had assigned to
that CRESCO loss reserve factor.40 Third, FNBC multiplied the
swap’s CEM amount by the counterparty’s CRESCO loss reserve
factor to arrive at the swap’s initial credit adjustment.41
For the period beginning in the fourth quarter of 1992, FNBC
accounted for its credit adjustment as follows. First, on the
quarterly basis, FNBC reduced income by the credit adjustment for
the group of swaps originating in the quarter (with the 1-month
38 The CEM determined how much of the credit limit was
consumed by each swap.
39 The acronym “CRESCO” refers to the Credit Strategy
Committee, a committee consisting of the most senior officers of
FNBC, including the chairman, the president, the chief financial
officer, the chief credit officer, and the chief economist.
40 FNBC also referred to the CRESCO loss reserve factor as
the loan loss reserve factor.
41 For example, if the counterparty had a credit rating of
2, the corresponding CRESCO loss reserve factor during most of
1993 was .05 percent. Therefore, if a swap with this
counterparty had a CEM of $1 million, the swap’s initial credit
adjustment would be $500 (0.05% x $1 million).
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