External Meetings: Definitions Meeting with Regional Banks

The meeting discussed issues raised in the banks’ comment letters and summarized in the attached agenda, regarding the exception in the definition of swap dealer for swaps entered into by insured depository institutions in connection with originating loans.  The banks explained how interest rate swaps provide flexibility for borrowers and risk management for lending banks.  They discussed how the accounting treatment of loans and swaps encourages banks to lend at a fixed rate and enter into fixed/floating swaps with the borrowers.  The banks listed the costs of swap dealer status, including the uncertainty regarding the registration process, the hiring of a chief compliance officer and the requirement that the CCO report directly to the board, providing daily valuations of swaps, and the potential that a particular interest rate swap may be deemed non-standard and therefore high risk.  The main cost issues for the banks are personnel and information systems.  The meeting also discussed the timing issues and the question of which transactions are treated as loans, along the lines of the banks’ comment letters.