Bank One Corporation - Page 56

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               D.  Static Instead of Dynamic Procedure                                
               FNBC used a static rather than dynamic procedure to                    
          ascertain its credit adjustment.  With a static procedure, the              
          credit adjustment for each swap is calculated once, usually at              
          the inception of the swap, and then amortized on a straight-line            
          basis.  With a dynamic procedure, the credit adjustments for each           
          swap are redetermined periodically over the life of the swap, on            
          the basis of a new calculation of the loan equivalent amounts and           
          taking into account changes in credit ratings, market conditions,           
          and other developments.  FNBC’s static methodology for                      
          calculating the credit adjustment did not account for changes in            
          interest rates, credit quality, credit exposures, or credit risk            
          ratings.  Nor did it account for early terminations or subsequent           
          chargeoffs.                                                                 
               FNBC’s practice of straight-line amortization instead of               
          revaluing the credit risk is inconsistent with the G-30 report’s            
          suggestion to adjust a credit adjustment dynamically.  The cases            
          in which one might expect a credit adjustment to be sizable                 
          (e.g., after the inception of a swap, when the fair market value            
          could most likely deviate the most from midmarket value) are the            
          very cases that are not captured in a static valuation system.  A           
          dynamic approach must be used to capture the actual market value            
          of credit risk at a date later than the inception of a swap.                








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