AUTHORITY: Implementing Section 32 and authorized by Section 48(6) of the Illinois Banking Act [205 ILCS 5/32 and 48(6)] and Section 6013 and Section 9002 of the Savings Bank Act [205 ILCS 205/6013 and 9002].

SOURCE: Adopted at 12 Ill. Reg. 7991, effective April 25, 1988; amended at 12 Ill. Reg. 17280, effective October 12, 1988; recodified from Chapter II, Commissioner of Banks and Trust Companies, to Chapter II, Office of Banks and Real Estate, pursuant to PA 89-508, at 20 Ill. Reg. 12645; amended at 37 Ill. Reg. 5807, effective April 22, 2013.

SUBPART A: GENERAL LENDING PROVISIONS

 

Section 330.10  Definitions

 

            "Act" means the Illinois Banking Act [205 ILCS 5].

 

"Department" means the Department of Financial and Professional Regulation.

 

"Director" means the Director of the Division of Banking with the authority delegated by the Secretary.

 

"Division" means the Department of Financial and Professional Regulation-Division of Banking with the authority delegated by the Secretary.

 

            "Loan or Extension of Credit" means any direct or indirect advance of funds that results in a liability of any person for money borrowed or otherwise.  An indirect advance of funds shall include, but not be limited to, a purchase by a bank of a note or obligation from another person.

 

            "Person" shall have the meaning ascribed to it in Section 2 of the Act.

 

"Secretary" means the Secretary of the Department of Financial and Professional Regulation.

 

(Source:  Amended at 37 Ill. Reg. 5807, effective April 22, 2013)

 

Section 330.20  Renewals of Loans or Extensions of Credit

 

A renewal of a loan or extension of credit shall not be deemed to be a new loan or extension of credit except in instances when interest on the renewed loan or extension of credit is capitalized.

SUBPART B: AGGREGATION OF LOANS

 

Section 330.100  Purpose

 

Section 32 of the Act is intended to prevent one person or a relatively small group of persons, from borrowing an unduly large amount of a bank's funds.  It is also intended to safeguard a bank's depositors by diversifying the risk of loan losses among a relatively large number of persons engaged in different types of businesses.

 

Section 330.110  Combining Loans to Separate Persons

 

a)         A loan or extension of credit to one person shall be considered a loan or extension of credit to a second person if the credit worthiness of the one person does not justify the loan or extension of credit without reliance on the credit worthiness of the second person.

 

b)         Factors which may be relevant in determining whether a loan or extension of credit to one person can be justified without reliance on the credit worthiness of a second person incude the following:

 

1)         Will the credit analysis and documentation on file at the bank at the time the loan or extension of credit was made substantiate that the one person has or will have the financial capacity to generate sufficient funds from his or her own assets and operations to repay the loan or extension of credit or is the source of repayment the second person?;

 

2)         Were the proceeds of the loan or extension of credit to one person used for the primary benefit of the one person or was a substantial portion of the proceeds used for the benefit of the second person without a corresponding economic benefit to the one person?;

 

3)         In instances involving a guaranty or other secondary liability, is the liability of the second person that an accommodation party pursuant to Section 32(5) of the Act, namely a person who becomes obligated on the loan or extension of credit to one person and does not receive any of the proceeds thereof, or is the purpose of the guaranty or other secondary liability to enhance the loan or extension of credit for reasons other than repayment, such as to obtain an investment grade rating or to reduce the rate of interest charged on the loan or extension of credit, or would the loan or extension of credit to one person not have been made without the second person's guaranty or other secondary liability?

 

c)         This Section shall not apply to loan combination questions involving loans or extensions of credit to a partnership and its general partner(s) or to a joint venture and its member(s).  These lending situations are governed by Section 32 of the Act.

 

Section 330.120  Good Faith Reliance

 

When determining whether a loan combination question exists, the directors, officers, employees and agents of a state bank shall be entitled to rely and shall be protected in relying in good faith upon the books and records of the bank and upon credit applications, representations, certifications and other disclosures furnished by the borrower, guarantor and other related persons with respect to the purpose, use and source of repayment for a given loan or extension of credit, interrelationships among the various parties at interest and other pertinent factual considerations, provided careful attention and effort are given to reviewing such information.

 

(Source:  Amended at 12 Ill. Reg. 17280, effective October 12, 1988)

SUBPART C: DERIVATIVE TRANSACTIONS

 

Section 330.200  Definitions

 

For purposes of this Subpart, the following definitions apply:

 

"Appropriate Federal Banking Agency" means the Federal Deposit Insurance Corporation, the Federal Reserve Bank of Chicago or the Federal Reserve Bank of St. Louis.

 

"Borrower" means a person who is named as a borrower or debtor in a loan or extension of credit; a person to whom a state bank has credit exposure arising from a derivative transaction entered by the bank or any other person, including a drawer, endorser or guarantor, who is deemed to be a borrower under Section 32 of the Act, Section 6013 of the Savings Bank Act [205 ILCS 205], or this Part.

 

"Contractual Commitment to Advance Funds" includes a bank's obligation to:

 

Make payment (directly or indirectly) to a third person contingent upon default by a customer of the bank in performing an obligation and to make the payment in keeping with the agreed upon terms of the customer's contract with the third person, or to make payments upon some other stated condition;

 

Guarantee or act as surety for the benefit of a person;

 

Advance funds under a qualifying commitment to lend; and

 

Advance funds under a standby letter of credit, a put or other similar arrangement.

 

The term does not include commercial letters of credit and similar instruments when the issuing bank expects the beneficiary to draw on the issuer, that do not guarantee payment, and that do not provide for payment in the event of a default by a third party.

 

"Credit Derivative" means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure, e.g., currency interest or equities exposure) to another party (the protection provider).

 

"Derivative Transaction" includes any transaction that is a 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.

 

"Effective Margining Arrangement" means a master legal agreement governing derivative transactions between a bank or savings association and a counterparty that requires the counterparty to post, on a daily basis, the variation margin to fully collateralize that amount of the bank's net credit exposure to the counterparty that exceeds $1,000,000 created by the derivative transactions covered by the agreement.

 

"Eligible Credit Derivative" means a single-name credit derivative or a standard, non-tranched index credit derivative provided that:

 

The derivative contract meets the requirements of an eligible guarantee, as defined in Section 32 of the Act, Section 6013 of the Savings Bank Act, or this Part and has been confirmed by the protection purchaser and the protection provider;

 

Any assignment of the derivative contract has been confirmed by all relevant parties;

 

If the credit derivative is a credit default swap, the derivative contract includes the following credit events:

 

Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and

 

Bankruptcy, insolvency or inability of the obligor on the reference exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;

 

The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract;

 

If the derivative contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss with respect to the derivative reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;

 

If the derivative contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provides that any required consent to transfer may not be unreasonably withheld; and

 

If the credit derivative is a credit default swap, the derivative contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.

 

"Eligible Guarantee" means a guarantee that:

 

Is written and unconditional;

 

Covers all, or a pro rata portion of, all contractual payments of the obligor on the reference exposure;

 

Gives the beneficiary a direct claim against the protection provider;

 

Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;

 

Is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;

 

Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;

 

Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; and

 

Is not provided by an affiliate of the bank, unless the affiliate is an insured depository institution, bank, securities broker or dealer, or insurance company that:

 

Does not control the bank; and

 

Is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be).

 

"Eligible Protection Provider" means:

 

A sovereign entity (a central government, including the U.S. government, an agency, department, ministry or central bank);

 

The Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission or a multilateral development bank;

 

A Federal Home Loan Bank;

 

The Federal Agricultural Mortgage Corporation;

 

A depository institution, as defined in Section 3 of the Federal Deposit Insurance Act (12 USC 1813(c));

 

A federal bank holding company, as defined in Section 2 of the Bank Holding Company Act, as amended (12 USC 1841);

 

A savings and loan holding company, as defined in Section 10 of the federal Home Owners' Loan Act (12 USC 1467a);

 

A securities broker or dealer registered with the SEC under the Securities Exchange Act of 1934 (15 USC 78o);

 

An insurance company that is subject to the supervision of a state insurance regulator;

 

A foreign banking organization;

 

A non-US-based securities firm or a non-US-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies; and

 

A qualifying central counterparty.

 

"Extension of Credit" shall have the same meaning as ascribed to Letter of Credit in Section 5-102 of Uniform Commercial Code [810 ILCS 5/5-102] and any credit exposure, as determined pursuant to Section 330.230, arising from a derivative transaction.

 

Loans or extensions of credit, for purposes of this Part, include a contractual commitment to advance funds.

 

The following items do not constitute loans or extensions of credit for purposes of Section 32 of the Act, Section 6013 of the Savings Bank Act, or this Part:

 

Additional funds advanced for the benefit of a borrower by a bank for payment of taxes, insurance, utilities, security and maintenance and operating expenses necessary to preserve the value of real property securing the loan, consistent with safe and sound banking practices, but only if the advance is for the protection of the bank's interest in the collateral, and provided that the amounts must be treated as an extension of credit if a new loan or extension of credit is made to the borrower;

 

Accrued and discounted interest on an existing loan or extension of credit, including interest that has been capitalized from prior notes and interest that has been advanced under terms and conditions of a loan agreement;

 

Financed sales of a bank's own assets, including other real estate owned, if the financing does not put the bank in a worse position than when the bank held title to the assets;

 

Amounts paid against uncollected funds in the normal process of collection; and

 

That portion of a loan or extension of credit sold as a participation by a bank on a nonrecourse basis, provided that the participation results in a pro rata sharing of credit risk proportionate to the respective interests of the originating and participating lenders. When a participation agreement provides that repayment must be applied first to the portions sold, a pro rata sharing will be deemed to exist only if the agreement also provides that, in the event of a default or comparable event defined in the agreement, participants must share in all subsequent repayments and collections in proportion to their percentage participation at the time of the occurrence of the event.

 

When an originating bank funds the entire loan, it must receive funding from the participants before the close of business of its next business day. If the participating portions are not received within that period, then the portions funded will be treated as a loan by the originating bank to the borrower. If the portions so attributed to the borrower exceed the originating bank's lending limit, the loan may be treated as nonconforming, rather than a violation of Section 32 of the Act or Section 6013 of the Savings Bank Act, as applicable, if:

 

The originating bank had a valid and unconditional participation agreement with a participant or participants that was sufficient to reduce the loan to within the originating bank's lending limit;

 

The participant reconfirmed its participation and the originating bank had no knowledge of any information that would permit the participant to withhold its participation; and

 

The participation was to be funded by close of business of the originating bank's next business day.

 

"Notice" means a copy of the state bank's application to its appropriate federal banking agency for approval to establish a branch.

 

"Qualifying Master Netting Agreement" means any written, legally enforceable, bilateral agreement, provided that:

 

The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including bankruptcy, insolvency or similar proceeding, of the counterparty;

 

The agreement provides the bank the right to accelerate, terminate and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of bankruptcy, insolvency or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;

 

The bank has conducted sufficient legal review to conclude with a well-founded basis, and maintains sufficient written documentation of that legal review, that:

 

The agreement meets the requirements of this definition; and

 

In the event of a legal challenge, including one resulting from default or from bankruptcy, insolvency or similar proceeding, the relevant court and administrative authorities would find the agreement to be legal, valid, binding and enforceable under the law of the relevant jurisdictions;

 

The bank establishes and maintains procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of this definition; and

 

The agreement does not contain a walk-away clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it would make otherwise under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement).

 

"State Bank" or "Bank" means a bank that has a banking charter issued under the Act, or a savings bank that has a charter issued under Section 1001 of the Savings Bank Act.

 

(Source:  Added at 37 Ill. Reg. 5807, effective April 22, 2013)

 

Section 330.210  Lending Limits;  Derivatives  

 

For purposes of Section 32 of the Act and Section 6013 of the Savings Bank Act, derivative transactions shall be included in the calculation of lending limits.

 

a)         The calculation of derivatives as applied to lending limits for purposes of Section 32 of the Act and Section 6013 of the Savings Bank Act shall be determined pursuant to Section 330.230.

 

b)         Intraday credit exposures arising from a derivative transaction are not subject to the lending limits of Section 32 of the Act and Section 6013 of the Savings Bank Act, as applicable, or this Part.

 

(Source:  Added at 37 Ill. Reg. 5807, effective April 22, 2013)

 

Section 330.220  Nonconforming Loans and Extensions of Credit

 

a)         A loan or extension of credit, within a state bank's legal lending limit when made, will not be deemed a violation but will be treated as nonconforming if the loan or extension of credit is no longer in conformity with the state bank's lending limit because:

 

1)         The bank's capital has declined, borrowers have subsequently merged or formed a common enterprise, lenders have merged, or the lending limit or capital rules have changed;

 

2)         Collateral securing the loan to satisfy the requirements of a lending limit exception as defined in Sections 32, 33 and 35 of the Act, or in Sections 6003 or 6013 of the Savings Bank Act, as applicable, has declined in value.

 

b)         A state bank must use reasonable efforts to bring a loan or extension of credit that is nonconforming as a result of subsection (a)(1) into conformity with the bank's lending limit unless to do so would be inconsistent with safe and sound banking practices.

 

c)         A state bank must bring a loan that is nonconforming as a result of circumstances described in subsection (a)(2) into conformity with the bank's lending limit within 30 calendar days, except when judicial proceedings, regulatory actions or other extraordinary circumstances beyond the bank's control prevent it from taking action.

 

(Source:  Added at 37 Ill. Reg. 5807, effective April 22, 2013)

 

Section 330.230  Credit Exposure Arising from Derivative Transactions

 

a)         Scope. This Section sets forth the standards for calculating the credit exposure arising from a derivative transaction entered into by a state bank for purposes of determining the bank's lending limit pursuant to Section 32 of the Act, Section 6013 of the Savings Bank Act or, as applicable, this Part.

 

b)         Derivative Transactions

 

1)         Non-Credit Derivatives

Subject to subsections (b)(2) and (b)(3), a state bank shall calculate the non-credit derivative exposure (e.g., a contract regarding performance at a point in time unrelated to specific credit risk, such as, but not limited to, interest rates or future delivery, such as forwards, futures, options, caps or floors) to a counterparty arising from a derivative transaction by one of the methods described in this subsection (b)(1). Subject to subsection (b)(3), a state bank shall use the same method for calculating counterparty credit exposure arising from all of its derivative transactions.

 

            Conversion Factor Matrix Method

The credit exposure arising from a derivative transaction under the Conversion Factor Matrix Method shall equal and remain fixed at the potential future credit exposure of the derivative transaction as determined at the execution of the transaction by reference to the following table, which is based on the following formula:

 

Credit exposure = (notional amount) x (conversion factor)

 

Conversion Factor Matrix for Calculating Potential Future Credit Exposure*
Original Maturity**	Interest Rate	Foreign Exchange Rate and Gold	Equity	Other*** (includes commodities and precious metals except gold)
1 year or less	.015	.015	.20	.06
Over 1 to 3 years	.03	.03	.20	.18
Over 3 to 5 years	.06	.06	.20	.30
Over 5 to 10 years	.12	.12	.20	.60
Over 10 years	.30	.30	.20	1.00

 

2)         Credit Derivatives

 

A)        A state bank shall calculate the counterparty credit exposure arising from credit derivatives entered by the bank or savings association by adding the net notional value of all protection purchased from the counterparty on each reference entity.

 

B)        A state bank shall calculate the credit exposure to a reference entity arising from credit derivatives entered by the bank by adding the notional value of all protection sold on the reference entity. However, the bank may reduce its exposure to a reference entity by the amount of any eligible credit derivative purchased on that reference entity from an eligible protection provider.

 

3)         Mandatory Use of a Certain Method

 

A)        Upon request by a state bank, the Department may allow a state bank to use any method the Department deems appropriate to calculate the credit exposure of derivative transactions if the Department finds that the method is necessary to promote the safety and soundness of the bank.

 

B)        A state bank may elect to determine credit exposure on the basis of such other method of determining credit exposure as may be permitted by 12 CFR 32.9 (June 12, 2012) for national banks by the Office of the Comptroller of Currency.

 

*     For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.

 

**   For an OTC derivative contract that is structured so that, on specified dates, any outstanding exposure is settled and the terms are reset so that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.

 

*** Transactions not explicitly covered by any other column in the Table are to be treated as "Other".

               

(Source:  Added at 37 Ill. Reg. 5807, effective April 22, 2013)