Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action, 52791-52886 [2012-16757]
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Vol. 77
Thursday,
No. 169
August 30, 2012
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Parts 3, 5, 6, et al.
Federal Reserve System
12 CFR Parts 208, 217, and 225
Federal Deposit Insurance Corporation
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12 CFR Parts 324, 325, and 362
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III,
Minimum Regulatory Capital Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective Action; Proposed Rule
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3, 5, 6, 165, and 167
[Docket ID OCC–2012–0008]
RIN 1557–AD46
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 217, and 225
Regulations H, Q, and Y
[Docket No. R–1442]
RIN 7100–AD87
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324, 325, and 362
RIN 3064–AD95
Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III,
Minimum Regulatory Capital Ratios,
Capital Adequacy, Transition
Provisions, and Prompt Corrective
Action
Office of the Comptroller of
the Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Joint notice of proposed
rulemaking.
AGENCIES:
The Office of the Comptroller
of the Currency (OCC), Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC)
(collectively, the agencies) are seeking
comment on three Notices of Proposed
Rulemaking (NPR) that would revise
and replace the agencies’ current capital
rules. In this NPR, the agencies are
proposing to revise their risk-based and
leverage capital requirements consistent
with agreements reached by the Basel
Committee on Banking Supervision
(BCBS) in ‘‘Basel III: A Global
Regulatory Framework for More
Resilient Banks and Banking Systems’’
(Basel III). The proposed revisions
would include implementation of a new
common equity tier 1 minimum capital
requirement, a higher minimum tier 1
capital requirement, and, for banking
organizations subject to the advanced
approaches capital rules, a
supplementary leverage ratio that
incorporates a broader set of exposures
in the denominator measure.
Additionally, consistent with Basel III,
the agencies are proposing to apply
limits on a banking organization’s
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SUMMARY:
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capital distributions and certain
discretionary bonus payments if the
banking organization does not hold a
specified amount of common equity tier
1 capital in addition to the amount
necessary to meet its minimum riskbased capital requirements. This NPR
also would establish more conservative
standards for including an instrument in
regulatory capital. As discussed in the
proposal, the revisions set forth in this
NPR are consistent with section 171 of
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act), which requires the agencies to
establish minimum risk-based and
leverage capital requirements.
In connection with the proposed
changes to the agencies’ capital rules in
this NPR, the agencies are also seeking
comment on the two related NPRs
published elsewhere in today’s Federal
Register. The two related NPRs are
discussed further in the SUPPLEMENTARY
INFORMATION.
DATES: Comments must be submitted on
or before October 22, 2012.
ADDRESSES: Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Regulatory
Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action’’ to facilitate
the organization and distribution of the
comments. You may submit comments
by any of the following methods:
Federal eRulemaking Portal—
‘‘regulations.gov’’: Go to https://
www.regulations.gov. Click ‘‘Advanced
Search’’. Select ‘‘Document Type’’ of
‘‘Proposed Rule’’, and in ‘‘By Keyword
or ID’’ box, enter Docket ID ‘‘OCC–
2012–0008,’’ and click ‘‘Search’’. If
proposed rules for more than one
agency are listed, in the ‘‘Agency’’
column, locate the notice of proposed
rulemaking for the OCC. Comments can
be filtered by agency using the filtering
tools on the left side of the screen. In the
‘‘Actions’’ column, click on ‘‘Submit a
Comment’’ or ‘‘Open Docket Folder’’ to
submit or view public comments and to
view supporting and related materials
for this rulemaking action.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
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and viewing the docket after the close
of the comment period.
• Email:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E Street
SW., Mail Stop 2–3, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2012–0008’’ in your comment.
In general, the OCC will enter all
comments received into the docket and
publish them on Regulations.gov
without change, including any business
or personal information that you
provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
notice by any of the following methods:
• Viewing Comments Electronically:
Go to https://www.regulations.gov. Click
‘‘Advanced Search’’. Select ‘‘Document
Type’’ of ‘‘Public Submission’’ and in
‘‘By Keyword or ID’’ box enter Docket ID
‘‘OCC–2012–0008,’’ and click ‘‘Search.’’
If comments from more than one agency
are listed, the ‘‘Agency’’ column will
indicate which comments were received
by the OCC. Comments can be filtered
by Agency using the filtering tools on
the left side of the screen.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC 20219. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and to submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described previously.
Board: When submitting comments,
please consider submitting your
comments by email or fax because paper
mail in the Washington, DC, area and at
the Board may be subject to delay. You
may submit comments, identified by
Docket No. R–1430; RIN No. 7100–
AD87, by any of the following methods:
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street NW., Washington, DC 20551)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web site: https://
www.FDIC.gov/regulations/laws/
federal/propose.html.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
• Hand Delivered/Courier: The guard
station at the rear of the 550 17th Street
building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m.
• Email: comments@FDIC.gov.
• Instructions: Comments submitted
must include ‘‘FDIC’’ and ‘‘RIN 3064–
AD95.’’ Comments received will be
posted without change to https://
www.FDIC.gov/regulations/laws/
federal/propose.html, including any
personal information provided.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk
Expert, (202) 874–6022; David Elkes,
Risk Expert, (202) 874–3846; Mark
Ginsberg, Risk Expert, (202) 927–4580;
or Ron Shimabukuro, Senior Counsel,
Patrick Tierney, Counsel, or Carl
Kaminski, Senior Attorney, Legislative
and Regulatory Activities Division,
(202) 874–5090, Office of the
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Comptroller of the Currency, 250 E
Street SW., Washington, DC 20219.
Board: Anna Lee Hewko, Assistant
Director, (202) 530–6260, Thomas
Boemio, Manager, (202) 452–2982,
Constance M. Horsley, Manager, (202)
452–5239, or Juan C. Climent, Senior
Supervisory Financial Analyst, (202)
872–7526, Capital and Regulatory
Policy, Division of Banking Supervision
and Regulation; or Benjamin
McDonough, Senior Counsel, (202) 452–
2036, April C. Snyder, Senior Counsel,
(202) 452–3099, or Christine Graham,
Senior Attorney, (202) 452–3005, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Bobby R. Bean, Associate
Director, bbean@fdic.gov; Ryan
Billingsley, Senior Policy Analyst,
rbillingsley@fdic.gov; Karl Reitz, Senior
Policy Analyst, kreitz@fdic.gov, Division
of Risk Management Supervision; David
Riley, Senior Policy Analyst,
dariley@fdic.gov, Division of Risk
Management Supervision, Capital
Markets Branch, (202) 898–6888; or
Mark Handzlik, Counsel,
mhandzlik@fdic.gov, Michael Phillips,
Counsel, mphillips@fdic.gov, Greg
Feder, Counsel, gfeder@fdic.gov, or
Ryan Clougherty, Senior Attorney,
rclougherty@fdic.gov; Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION: In
connection with the proposed changes
to the agencies’ capital rules in this
NPR, the agencies are also seeking
comment on the two related NPRs
published elsewhere in today’s Federal
Register. In the notice titled ‘‘Regulatory
Capital Rules: Standardized Approach
for Risk-Weighted Assets; Market
Discipline and Disclosure
Requirements’’ (Standardized Approach
NPR), the agencies are proposing to
revise and harmonize their rules for
calculating risk-weighted assets to
enhance risk sensitivity and address
weaknesses identified over recent years,
including by incorporating aspects of
the BCBS’s Basel II standardized
framework in the ‘‘International
Convergence of Capital Measurement
and Capital Standards: A Revised
Framework,’’ including subsequent
amendments to that standard, and
recent BCBS consultative papers. The
Standardized Approach NPR also
includes alternatives to credit ratings,
consistent with section 939A of the
Dodd-Frank Act. The revisions include
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methodologies for determining riskweighted assets for residential
mortgages, securitization exposures, and
counterparty credit risk. The
Standardized Approach NPR also would
introduce disclosure requirements that
would apply to top-tier banking
organizations domiciled in the United
States with $50 billion or more in total
assets, including disclosures related to
regulatory capital instruments.
The proposals in this NPR and the
Standardized Approach NPR would
apply to all banking organizations that
are currently subject to minimum
capital requirements (including national
banks, state member banks, state
nonmember banks, state and federal
savings associations, and top-tier bank
holding companies domiciled in the
United States not subject to the Board’s
Small Bank Holding Company Policy
Statement (12 CFR part 225, appendix
C)), as well as top-tier savings and loan
holding companies domiciled in the
United States (together, banking
organizations).
In the notice titled ‘‘Regulatory
Capital Rules: Advanced Approaches
Risk-Based Capital Rule; Market Risk
Capital Rule,’’ (Advanced Approaches
and Market Risk NPR) the agencies are
proposing to revise the advanced
approaches risk-based capital rules
consistent with Basel III and other
changes to the BCBS’s capital standards.
The agencies also propose to revise the
advanced approaches risk-based capital
rules to be consistent with section 939A
and section 171 of the Dodd-Frank Act.
Additionally, in the Advanced
Approaches and Market Risk NPR, the
OCC and FDIC are proposing that the
market risk capital rules be applicable to
federal and state savings associations
and the Board is proposing that the
advanced approaches and market risk
capital rules apply to top-tier savings
and loan holding companies domiciled
in the United States, in each case, if
stated thresholds for trading activity are
met.
As described in this NPR, the agencies
also propose to codify their regulatory
capital rules, which currently reside in
various appendixes to their respective
regulations. The proposals are
published in three separate NPRs to
reflect the distinct objectives of each
proposal, to allow interested parties to
better understand the various aspects of
the overall capital framework, including
which aspects of the rules would apply
to which banking organizations, and to
help interested parties better focus their
comments on areas of particular
interest.
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Table of Contents 1
I. Introduction
A. Overview of the Proposed Changes to
the Agencies’ Current Capital
Framework. A summary of the proposed
changes to the agencies’ current capital
framework through three concurrent
notices of proposed rulemaking,
including comparison of key provisions
of the proposals to the agencies’ general
risk-based and leverage capital rules.
B. Background. A brief review of the
evolution of the agencies’ capital rules
and the Basel capital framework,
including an overview of the rationale
for certain revisions in the Basel capital
framework.
II. Minimum Capital Requirements,
Regulatory Capital Buffer, and
Requirements for Overall Capital
Adequacy
A. Minimum Capital Requirements and
Regulatory Capital Buffer. A short
description of the minimum capital
ratios and their incorporation in the
agencies’ Prompt Corrective Action
(PCA) framework; introduction of a
regulatory capital buffer.
B. Leverage Ratio
1. Minimum Tier 1 Leverage Ratio. A
description of the minimum tier 1
leverage ratio, including the calculation
of the numerator and the denominator.
2. Supplementary Leverage Ratio for
Advanced Approaches Banking
Organizations.* A description of the new
supplementary leverage ratio for
advanced approaches banking
organizations, including the calculation
of the total leverage exposure.
C. Capital Conservation Buffer. A
description of the capital conservation
buffer, which is designed to limit capital
distributions and certain discretionary
bonus payments if a banking
organization does not hold a certain
amount of common equity tier 1 capital
in additional to the minimum risk-based
capital ratios.
D. Countercyclical Capital Buffer.* A
description of the countercyclical buffer
applicable to advanced approaches
banking organizations, which would
serve as an extension of the capital
conservation buffer.
E. Prompt Corrective Action Requirements.
A description of the proposed revisions
to the agencies’ prompt corrective action
requirements, including incorporation of
a common equity tier 1 capital ratio, an
updated definition of tangible common
equity, and, for advanced approaches
banking organizations only, a
supplementary leverage ratio.
F. Supervisory Assessment of Overall
Capital Adequacy. A brief overview of
the capital adequacy requirements and
supervisory assessment of a banking
organization’s capital adequacy.
G. Tangible Capital Requirement for
Federal Savings Associations. A
discussion of a statutory capital
1 Sections marked with an asterisk generally
would not apply to less-complex banking
organizations.
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requirement unique to federal savings
associations.
III. Definition of Capital
A. Capital Components and Eligibility
Criteria for Regulatory Capital
Instruments
1. Common Equity Tier 1 Capital. A
description of the common equity tier 1
capital elements and a description of the
eligibility criteria for common equity tier
1 capital instruments.
2. Additional Tier 1 Capital. A description
of the additional tier 1 capital elements
and a description of the eligibility
criteria for additional tier 1 capital
instruments.
3. Tier 2 Capital. A description of the tier
2 capital elements and a description of
the eligibility criteria for tier 2 capital
instruments.
4. Capital Instruments of Mutual Banking
Organizations. A discussion of potential
issues related to capital instruments
specific to mutual banking organizations.
5. Grandfathering of Certain Capital
Instruments. A discussion of the
recognition within regulatory capital of
instruments specifically related to
certain U.S. government programs.
6. Agency Approval of Capital Elements. A
description of the approval process for
new capital instruments.
7. Addressing the Point of Non-viability
Requirements under Basel III.* A
discussion of disclosure requirements for
advanced approaches banking
organizations for regulatory capital
instruments addressing the point of nonviability requirements in Basel III.
8. Qualifying Capital Instruments Issued by
Consolidated Subsidiaries of a Banking
Organization. A description of limits on
the inclusion of minority interest in
regulatory capital, including a discussion
of Real Estate Investment Trust (REIT)
preferred securities.
B. Regulatory Adjustments and Deductions
1. Regulatory Deductions from Common
Equity Tier 1 Capital. A discussion of the
treatment of goodwill and certain other
intangible assets and certain deferred tax
assets.
2. Regulatory Adjustments to Common
Equity Tier 1 Capital. A discussion of the
adjustments to common equity tier 1 for
certain cash flow hedges and changes in
a banking organization’s own
creditworthiness.
3. Regulatory Deductions Related to
Investments in Capital Instruments. A
discussion of the treatment for capital
investments in other financial
institutions.
4. Items subject to the 10 and 15 Percent
Common Equity Tier 1 Capital Threshold
Deductions. A discussion of the
treatment of mortgage servicing assets,
certain capital investments in other
financial institutions and certain
deferred tax assets.
5. Netting of Deferred Tax Liabilities
against Deferred Tax Assets and Other
Deductible Assets. A discussion of a
banking organization’s option to net
deferred tax liabilities against deferred
tax assets if certain conditions are met
under the proposal.
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6. Deduction from Tier 1 Capital of
Investments in Hedge Funds and Private
Equity Funds Pursuant to section 619 of
the Dodd-Frank Act.* A description of
the deduction from tier 1 capital for
investments in hedge funds and private
equity funds pursuant to section 619 of
the Dodd-Frank Act.
IV. Denominator Changes. A description of
the changes to the calculation of riskweighted asset amounts related to the
Basel III regulatory capital requirements.
V. Transition Provisions
A. Minimum Regulatory Capital Ratios. A
description of the transition provisions
for minimum regulatory capital ratios.
B. Capital Conservation and
Countercyclical Capital Buffer. A
description of the transition provisions
for the capital conservation buffer, and
for advanced approaches banking
organizations, the countercyclical capital
buffer.
C. Regulatory Capital Adjustments and
Deductions. A description of the
transition provisions for regulatory
capital adjustments and deductions.
D. Non-qualifying Capital Instruments. A
description of the transition provisions
for non-qualifying capital instruments.
E. Leverage Ratio.* A description of the
transition provisions for the new
supplementary leverage ratio for
advanced approaches banking
organizations.
VI. Additional OCC Technical Amendments.
A description of additional technical and
conforming amendments to the OCC’s
current capital framework in 12 CFR part
3.
VII. Abbreviations
VIII. Regulatory Flexibility Act Analysis
IX. Paperwork Reduction Act
X. Plain Language
XI. OCC Unfunded Mandates Reform Act of
1995 Determination
Addendum 1: Summary of This NPR for
Community Banking Organizations
I. Introduction
A. Overview of the Proposed Changes to
the Agencies’ Current Capital
Framework
The Office of the Comptroller of the
Currency (OCC), Board of Governors of
the Federal Reserve System (Board), and
the Federal Deposit Insurance
Corporation (FDIC) (collectively, the
agencies) are proposing comprehensive
revisions to their regulatory capital
framework through three concurrent
notices of proposed rulemaking (NPR).
These proposals would revise the
agencies’ current general risk-based
rules, advanced approaches risk-based
capital rules (advanced approaches),
and leverage capital rules (collectively,
the current capital rules).2 The proposed
2 The agencies’ general risk-based capital rules are
at 12 CFR part 3, appendix A, 12 CFR part 167
(OCC); 12 CFR parts 208 and 225, appendix A
(Board); and 12 CFR part 325, appendix A, and 12
CFR part 390, subpart Z (FDIC). The agencies’
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revisions incorporate changes made by
the Basel Committee on Banking
Supervision (BCBS) to the Basel capital
framework, including those in ‘‘Basel
III: A Global Regulatory Framework for
More Resilient Banks and Banking
Systems’’ (Basel III).3 The proposed
revisions also would implement
relevant provisions of the Dodd-Frank
Act and restructure the agencies’ capital
rules into a harmonized, codified
regulatory capital framework.4
This notice (Basel III NPR) proposes
the Basel III revisions to international
capital standards related to minimum
requirements, regulatory capital, and
additional capital ‘‘buffers’’ to enhance
the resiliency of banking organizations,
particularly during periods of financial
current leverage rules are at 12 CFR 3.6(b), 3.6(c),
and 167.6 (OCC); 12 CFR part 208, appendix B, and
12 CFR part 225, appendix D (Board); and 12 CFR
325.3, and 390.467 (FDIC) (general risk-based
capital rules). For banks and bank holding
companies with significant trading activity, the
general risk-based capital rules are supplemented
by the agencies’ market risk rules, which appear at
12 CFR part 3, appendix B (OCC); 12 CFR part 208,
appendix E, and 12 CFR part 225, appendix E
(Board); and 12 CFR part 325, appendix C (FDIC)
(market risk rules).
The agencies’ advanced approaches rules are at
12 CFR part 3, appendix C, 12 CFR part 167,
appendix C, (OCC); 12 CFR part 208, appendix F,
and 12 CFR part 225, appendix G (Board); 12 CFR
part 325, appendix D, and 12 CFR part 390, subpart
Z, Appendix A (FDIC) (advanced approaches rules).
The advanced approaches rules are generally
mandatory for banking organizations and their
subsidiaries that have $250 billion or more in total
consolidated assets or that have consolidated total
on-balance sheet foreign exposure at the most
recent year-end equal to $10 billion or more. Other
banking organizations may use the advanced
approaches rules with the approval of their primary
federal supervisor. See 12 CFR part 3, appendix C,
section 1(b) (national banks); 12 CFR part 167,
appendix C (federal savings associations); 12 CFR
part 208, appendix F, section 1(b) (state member
banks); 12 CFR part 225, appendix G, section 1(b)
(bank holding companies); 12 CFR part 325,
appendix D, section 1(b) (state nonmember banks);
and 12 CFR part 390, subpart Z, appendix A,
section 1(b) (state savings associations).
The market risk capital rules apply to a banking
organization if its total trading assets and liabilities
is 10 percent or more of total assets or exceeds $1
billion. See 12 CFR part 3, appendix B, section 1(b)
(national banks); 12 CFR parts 208 and 225,
appendix E, section 1(b) (state member banks and
bank holding companies, respectively); and 12 CFR
part 325, appendix C, section 1(b) (state nonmember
banks).
3 The BCBS is a committee of banking supervisory
authorities, which was established by the central
bank governors of the G–10 countries in 1975. It
currently consists of senior representatives of bank
supervisory authorities and central banks from
Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States. Documents
issued by the BCBS are available through the Bank
for International Settlements Web site at https://
www.bis.org.
4 Public Law 111–203, 124 Stat. 1376, 1435–38
(2010) (Dodd-Frank Act).
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stress. It also proposes transition
periods for many of the proposed
requirements, consistent with Basel III
and the Dodd-Frank Act. A second NPR
(Standardized Approach NPR) would
revise the methodologies for calculating
risk-weighted assets in the general riskbased capital rules, incorporating
aspects of the Basel II Standardized
Approach and other changes.5 The
Standardized Approach NPR also
proposes alternative standards of
creditworthiness (to credit ratings)
consistent with section 939A of the
Dodd-Frank Act.6 A third NPR
(Advanced Approaches and Market Risk
NPR) proposes changes to the advanced
approaches rules to incorporate
applicable provisions of Basel III and
other agreements reached by the BCBS
since 2009, proposes to apply the
market risk capital rule (market risk
rule) to savings associations and savings
and loan holding companies and to
apply the advanced approaches rule to
savings and loan holding companies,
and also removes references to credit
ratings.
Other than bank holding companies
subject to the Board’s Small Bank
Holding Company Policy Statement 7
(small bank holding companies), the
proposals in the Basel III NPR and the
Standardized Approach NPR would
apply to all banking organizations
currently subject to minimum capital
requirements, including national banks,
state member banks, state nonmember
banks, state and federal savings
associations, top-tier bank holding
companies domiciled in the United
States that are not small bank holding
companies, as well as top-tier savings
and loan holding companies domiciled
in the United States (together, banking
organizations).8 Certain aspects of these
proposals would apply only to
advanced approaches banking
organizations or banking organizations
with total consolidated assets of more
5 See BCBS, ‘‘International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework,’’ (June 2006), available at
https://www.bis.org/publ/bcbs128.htm (Basel II).
6 See section 939A of the Dodd-Frank Act (15
U.S.C. 78o–7 note).
7 12 CFR part 225, appendix C (Small Bank
Holding Company Policy Statement).
8 Small bank holding companies would continue
to be subject to the Small Bank Holding Company
Policy Statement. Application of the proposals to
all savings and loan holding companies (including
small savings and loan holding companies) is
consistent with the transfer of supervisory
responsibilities to the Board and the requirements
of section 171 of the Dodd-Frank Act. Section 171
of the Dodd-Frank Act by its terms does not apply
to small bank holding companies, but there is no
exemption from the requirements of section 171 for
small savings and loan holding companies. See 12
U.S.C. 5371.
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than $50 billion. Consistent with the
Dodd-Frank Act, a bank holding
company subsidiary of a foreign banking
organization that is currently relying on
the Board’s Supervision and Regulation
Letter (SR) 01–1 would not be required
to comply with the proposed capital
requirements under any of these NPRs
until July 21, 2015.9 In addition, the
Board is proposing for all three NPRs to
apply on a consolidated basis to top-tier
savings and loan holding companies
domiciled in the United States, subject
to the applicable thresholds of the
advanced approaches rules and the
market risk rules.
The agencies are publishing all the
proposed changes to the agencies’
current capital rules at the same time in
these three NPRs so that banking
organizations can read the three NPRs
together and assess the potential
cumulative impact of the proposals on
their operations and plan appropriately.
The overall proposal is being divided
into three separate NPRs to reflect the
distinct objectives of each proposal and
to allow interested parties to better
understand the various aspects of the
overall capital framework, including
which aspects of the rules will apply to
which banking organizations, and to
help interested parties better focus their
comments on areas of particular
interest. The agencies believe that
separating the proposals into three NPRs
makes it easier for banking
organizations of all sizes to more easily
understand which proposed changes are
related to the agencies’ objective to
improve the quality and increase the
quantity of capital (Basel III NPR) and
which are related to the agencies’
objective to enhance the overall risksensitivity of the calculation of a
banking organization’s total riskweighted assets (Standardized
Approach NPR).
The agencies believe that the
proposals would result in capital
requirements that better reflect banking
organizations’ risk profiles and enhance
their ability to continue functioning as
financial intermediaries, including
during periods of financial stress,
thereby improving the overall resiliency
of the banking system. The agencies
have carefully considered the potential
impact of the three NPRs on all banking
organizations, including community
banking organizations, and sought to
minimize the potential burden of these
changes where consistent with
applicable law and the agencies’ goals of
9 See section 171(b)(4)(E) of the Dodd-Frank Act
(12 U.S.C. 5371(b)(4)(E)); see also SR letter 01–1
(January 5, 2001), available at https://www.federal
reserve.gov/boarddocs/srletters/2001/sr0101.htm.
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establishing a robust and
comprehensive capital framework.
In developing each of the three NPRs,
wherever possible and appropriate, the
agencies have tailored the proposed
requirements to the size and complexity
of a banking organization. The agencies
believe that most banking organizations
already hold sufficient capital to meet
the proposed requirements, but
recognize that the proposals entail
significant changes with respect to
certain aspects of the agencies’ capital
requirements. The agencies are
proposing transition arrangements or
delayed effective dates for aspects of the
revised capital requirements consistent
with Basel III and the Dodd-Frank Act.
The agencies anticipate that they
separately would seek comment on
regulatory reporting instructions to
harmonize regulatory reports with these
proposals in a subsequent Federal
Register notice.
Many of the proposed requirements in
the three NPRs are not applicable to
smaller, less complex banking
organizations. To assist these banking
organizations in rapidly identifying the
elements of these proposals that would
apply to them, this NPR and the
Standardized Approach NPR provide, as
addenda to the corresponding
preambles, a summary of the various
aspects of each NPR designed to clearly
and succinctly describe the two NPRs as
they would typically apply to smaller,
less complex banking organizations.10
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Basel III NPR
In 2010, the BCBS published Basel III,
a comprehensive reform package that is
designed to improve the quality and the
quantity of regulatory capital and to
build additional capacity into the
banking system to absorb losses in times
of future market and economic stress.11
This NPR proposes the majority of the
revisions to international capital
standards in Basel III, including a more
restrictive definition of regulatory
capital, higher minimum regulatory
capital requirements, and a capital
conservation and a countercyclical
10 The Standardized Approach NPR also contains
a second addendum to the preamble, which
contains the definitions proposed under the Basel
III NPR. Many of the proposed definitions also are
applicable to the Standardized Approach NPR,
which is published elsewhere in today’s Federal
Register.
11 BCBS published Basel III in December 2010
and revised it in June 2011. The text is available
at https://www.bis.org/publ/bcbs189.htm. This NPR
does not incorporate the Basel III reforms related to
liquidity risk management, published in December
2010, ‘‘Basel III: International Framework for
Liquidity Risk Measurement, Standards and
Monitoring.’’ The agencies expect to propose rules
to implement the Basel III liquidity provisions in
a separate rulemaking.
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capital buffer, to enhance the ability of
banking organizations to absorb losses
and continue to operate as financial
intermediaries during periods of
economic stress.12 The proposal would
place limits on banking organizations’
capital distributions and certain
discretionary bonuses if they do not
hold specified ‘‘buffers’’ of common
equity tier 1 capital in excess of the new
minimum capital requirements.
This NPR also includes a leverage
ratio contained in Basel III that
incorporates certain off-balance sheet
assets in the denominator
(supplementary leverage ratio). The
supplementary leverage ratio would
apply only to banking organizations that
use the advanced approaches rules
(advanced approaches banking
organizations). The current leverage
ratio requirement (computed using the
proposed new definition of capital)
would continue to apply to all banking
organizations, including advanced
approaches banking organizations.
In this NPR, the agencies also propose
revisions to the agencies’ prompt
corrective action (PCA) rules to
incorporate the proposed revisions to
the minimum regulatory capital ratios.13
Standardized Approach NPR
The Standardized Approach NPR
aims to enhance the risk-sensitivity of
the agencies’ capital requirements by
revising the calculation of risk-weighted
assets. It would do this by incorporating
aspects of the Basel II Standardized
Approach, including aspects of the 2009
‘‘Enhancements to the Basel II
Framework’’ (2009 Enhancements), and
other changes designed to improve the
risk-sensitivity of the general risk-based
capital requirements. The proposed
changes are described in further detail
in the preamble to the Standardized
Approach NPR.14 As compared to the
general risk-based capital rules, the
Standardized Approach NPR includes a
greater number of exposure categories
for purposes of calculating total riskweighted assets, provides for greater
recognition of financial collateral, and
permits a wider range of eligible
12 Selected aspects of Basel III that would apply
only to advanced approaches banking organizations
are proposed in the Advanced Approaches and
Market Risk NPR.
13 12 CFR part 6, 12 CFR 165 (OCC); 12 CFR part
208, subpart E (Board); 12 CFR part 325 and part
390, subpart Y (FDIC).
14 See BCBS, ‘‘Enhancements to the Basel II
Framework’’ (July 2009), available at https://
www.bis.org/publ/bcbs157.htm (2009
Enhancements). See also BCBS, ‘‘International
Convergence of Capital Measurement and Capital
Standards: A Revised Framework,’’ (June 2006),
available at https://www.bis.org/publ/bcbs128.htm
(Basel II).
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guarantors. In addition, to increase
transparency in the derivatives market,
the Standardized Approach NPR would
provide a more favorable capital
treatment for derivative and repo-style
transactions cleared through central
counterparties (as compared to the
treatment for bilateral transactions) in
order to create an incentive for banking
organizations to enter into cleared
transactions. Further, to promote
transparency and market discipline, the
Standardized Approach NPR proposes
disclosure requirements that would
apply to top-tier banking organizations
domiciled in the United States with $50
billion or more in total assets that are
not subject to disclosure requirements
under the advanced approaches rule.
In the Standardized Approach NPR,
the agencies also propose to revise the
calculation of risk-weighted assets for
certain exposures, consistent with the
requirements of section 939A of the
Dodd-Frank Act by using standards of
creditworthiness that are alternatives to
credit ratings. These alternative
standards would be used to assign risk
weights to several categories of
exposures, including sovereigns, public
sector entities, depository institutions,
and securitization exposures. These
alternative standards and risk-based
capital requirements have been
designed to result in capital
requirements that are consistent with
safety and soundness, while also
exhibiting risk sensitivity to the extent
possible. Furthermore, these capital
requirements are intended to be similar
to those generated under the Basel
capital framework.
The Standardized Approach NPR
would require banking organizations to
implement the revisions contained in
that NPR on January 1, 2015; however,
the proposal would also allow banking
organizations to early adopt the
Standardized Approach revisions.
Advanced Approaches and Market Risk
NPR
The proposals in the Advanced
Approaches and Market Risk NPR
would amend the advanced approaches
rules and integrate the agencies’ revised
market risk rules into the codified
regulatory capital rules.15 The
Advanced Approaches and Market Risk
NPR would incorporate revisions to the
Basel capital framework published by
the BCBS in a series of documents
between 2009 and 2011, including the
2009 Enhancements and Basel III. The
proposals would also revise the
15 The agencies’ market risk rules are revised by
a final rule published elsewhere today in the
Federal Register.
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advanced approaches rules to achieve
consistency with relevant provisions of
the Dodd-Frank Act.
Significant proposed revisions to the
advanced approaches rules include the
treatment of counterparty credit risk, the
methodology for computing riskweighted assets for securitization
exposures, and risk weights for
exposures to central counterparties. For
example, the Advanced Approaches and
Market Risk NPR proposes capital
requirements to account for credit
valuation adjustments (CVA), wrongway risk, cleared derivative and repostyle transactions (similar to proposals
in the Standardized Approach NPR) and
default fund contributions to central
counterparties. The Advanced
Approaches and Market Risk NPR
would also require banking
organizations subject to the advanced
approaches rules (advanced approaches
banking organizations) to conduct more
rigorous credit analysis of securitization
exposures and implement certain
disclosure requirements.
The Advanced Approaches and
Market Risk NPR additionally proposes
to remove the ratings-based approach
and the internal assessment approach
from the current advanced approaches
rules’ securitization hierarchy
consistent with section 939A of the
Dodd-Frank Act, and to include in the
hierarchy the simplified supervisory
formula approach (SSFA) as a
methodology to calculate risk-weighted
assets for securitization exposures. The
SSFA methodology is also proposed in
the Standardized Approach NPR and is
included in the market risk rule. The
agencies also are proposing to remove
references to credit ratings from certain
defined terms under the advanced
approaches rules and replace them with
alternative standards of
creditworthiness.
Banking organizations currently
subject to the advanced approaches rule
would continue to be subject to the
advanced approaches rules. In addition,
the Board proposes to apply the
advanced approaches and market risk
rules to savings and loan holding
companies, and the OCC and FDIC
propose to apply the market risk rules
to federal and state savings associations
that meet the scope of application of
those rules, respectively.
For advanced approaches banking
organizations, the regulatory capital
requirements proposed in this NPR and
the Standardized Approach NPR would
be ‘‘generally applicable’’ capital
requirements for purposes of section
171 of the Dodd-Frank Act.16
Proposed Structure of the Agencies’
Regulatory Capital Framework and Key
Provisions of the Three Proposals
In connection with the changes
proposed in the three NPRs, the
52797
agencies intend to codify their current
regulatory capital requirements under
applicable statutory authority. Under
the revised structure, each agency’s
capital regulations would include
definitions in subpart A. The minimum
risk-based and leverage capital
requirements and buffers would be
contained in Subpart B and the
definition of regulatory capital would be
included in subpart C. Subpart D would
include the risk-weighted asset
calculations required of all banking
organizations; these proposed riskweighted asset calculations are
described in the Standardized Approach
NPR. Subpart E would contain the
advanced approaches rules, including
changes made pursuant to the advanced
approach NPR. The market risk rule
would be contained in subpart F.
Transition provisions would be in
subpart G. The agencies believe that this
revision would reduce the burden
associated with multiple reference
points for applicable capital
requirements, promote consistency of
capital rules across the banking
agencies, and reduce repetition of
certain features, such as definitions,
across the rules.
Table 1 outlines the proposed
structure of the agencies’ capital rules,
as well as references to the proposed
revisions to the PCA rules.
TABLE 1—PROPOSED STRUCTURE OF THE AGENCIES’ CAPITAL RULES AND PROPOSED REVISIONS TO THE PCA
FRAMEWORK
Subpart or regulation
Description of content
Subpart A (included in the Basel III NPR) ...............................................
Subpart B (included in the Basel III NPR) ...............................................
Purpose; applicability; reservation of authority; definitions.
Minimum capital requirements; minimum leverage capital requirements;
capital buffers.
Regulatory capital: Eligibility criteria, minority interest, adjustments and
deductions.
Calculation of standardized total risk-weighted assets for general credit
risk, off-balance sheet items, over the counter (OTC) derivative contracts, cleared transactions and default fund contributions, unsettled
transactions, securitization exposures, and equity exposures. Description of credit risk mitigation.
Calculation of advanced approaches total risk-weighted assets.
Subpart C (included in the Basel III NPR) ...............................................
Subpart D (included in the Standardized Approach NPR) ......................
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Subpart E (included in the Advanced Approaches and Market Risk
NPR).
Subpart F (included in the Advanced Approaches and Market Risk
NPR).
Subpart G (included in the Basel III NPR) ...............................................
Subpart D of Regulation H (Board), 12 CFR part 6 (OCC), Subpart H
of part 324 (FDIC).
While the agencies are mindful that
the proposal will result in higher capital
requirements and costs associated with
changing systems to calculate capital
16 See
Calculation of market risk-weighted assets.
Transition provisions.
Revised PCA capital framework, including introduction of a common
equity tier 1 capital threshold; revision of the current PCA thresholds
to incorporate the proposed regulatory capital minimums; an update
of the definition of tangible common equity, and, for advanced approaches organizations only, a supplementary leverage ratio.
requirements, the agencies believe that
the proposed changes are necessary to
address identified weaknesses in the
agencies’ current capital rules;
strengthen the banking sector and help
reduce risk to the deposit insurance
fund and the financial system; and
revise the agencies’ capital rules
12 U.S.C. 5371.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
consistent with the international
agreements and U.S. law. Accordingly,
this NPR includes transition
arrangements that aim to provide
banking organizations sufficient time to
adjust to the proposed new rules and
that are generally consistent with the
transitional arrangements of the Basel
capital framework.
In December 2010, the BCBS
conducted a quantitative impact study
of internationally active banks to assess
the impact of the capital adequacy
standards announced in July 2009 and
the Basel III proposal published in
December 2009. Overall, the BCBS
found that as a result of the proposed
changes, banking organizations
surveyed will need to hold more capital
to meet the new minimum
requirements. In addition, quantitative
analysis by the Macroeconomic
Assessment Group, a working group of
the BCBS, found that the stronger Basel
capital requirements would lower the
probability of banking crises and their
associated output losses while having
only a modest negative impact on gross
domestic product and lending costs, and
that the negative impact could be
mitigated by phasing the requirements
in over time.17 The agencies believe that
the benefits of these changes to the U.S.
financial system, in terms of the
reduction of risk to the deposit
insurance fund and the financial
system, ultimately outweigh the burden
on banking organizations of compliance
with the new standards.
As part of developing this proposal,
the agencies conducted an impact
analysis using depository institution
and bank holding company regulatory
reporting data to estimate the change in
capital that banking organizations
would be required to hold to meet the
proposed minimum capital
requirements. The impact analysis
assumed the proposed definition of
capital for purposes of the numerator
and the proposed standardized riskweights for purposes of the
denominator, and made stylized
assumptions in cases where necessary
input data were unavailable from
regulatory reports. Based on the
agencies’ analysis, the vast majority of
banking organizations currently would
meet the fully phased-in minimum
capital requirements as of March 31,
2012, and those organizations that
would not meet the proposed minimum
requirements should have ample time to
adjust their capital levels by the end of
the transition period.
Table 2 summarizes key changes
proposed in the Basel III and
Standardized Approach NPRs and how
these changes compare with the
agencies’ general risk-based and
leverage capital rules.
TABLE 2—KEY PROVISIONS OF THE BASEL III AND STANDARDIZED APPROACH NPRS AS COMPARED WITH THE CURRENT
RISK-BASED AND LEVERAGE CAPITAL RULES
Aspect of proposed requirements
Proposed treatment
Basel III NPR
Minimum Capital Ratios:
Common equity tier 1 capital ratio (section 10) ................................
Tier 1 capital ratio (section 10) .........................................................
Total capital ratio (section 10) ...........................................................
Leverage ratio (section 10) ...............................................................
Components of Capital and Eligibility Criteria for Regulatory Capital Instruments (sections 20–22).
Capital Conservation Buffer (section 11) .................................................
Countercyclical Capital Buffer (section 11) ..............................................
Introduces a minimum requirement of 4.5 percent.
Increases the minimum requirement from 4.0 percent to 6.0 percent.
Minimum unchanged (remains at 8.0 percent).
Modifies the minimum leverage ratio requirement based on the new
definition of tier 1 capital. Introduces a supplementary leverage ratio
requirement for advanced approaches banking organizations.
Enhances the eligibility criteria for regulatory capital instruments and
adds certain adjustments to and deductions from regulatory capital,
including increased deductions for mortgage servicing assets (MSAs)
and deferred tax assets (DTAs) and new limits on the inclusion of
minority interests in capital. Provides that unrealized gains and
losses on all available for sale (AFS) securities and gains and losses
associated with certain cash flow hedges flow through to common
equity tier 1 capital.
Introduces a capital conservation buffer of common equity tier 1 capital
above the minimum risk-based capital requirements, which must be
maintained to avoid restrictions on capital distributions and certain
discretionary bonus payments.
Introduces for advanced approaches banking organizations a mechanism to increase the capital conservation buffer during times of excessive credit growth.
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Standardized Approach NPR Risk-Weighted Assets
Credit exposures to:
U.S. government and its agencies.
U.S. government-sponsored entities.
U.S. depository institutions and credit unions.
U.S. public sector entities, such as states and municipalities (section 32).
Credit exposures to:
Foreign sovereigns
Foreign banks
Foreign public sector entities (section 32)
Corporate exposures (section 32) ............................................................
17 See ‘‘Assessing the Macroeconomic Impact of
the Transition to Stronger Capital and Liquidity
Requirements’’ (August 2010), available at https://
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Unchanged.
Introduces a more risk-sensitive treatment using the Country Risk Classification measure produced by the Organization for Economic Cooperation and Development.
Assigns a 100 percent risk weight to corporate exposures, including
exposures to securities firms.
www.bis.org/publ/othp10.pdf; ‘‘An assessment of
the long-term economic impact of stronger capital
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and liquidity requirements’’ (August 2010),
available at https://www.bis.org/publ/bcbs173.pdf.
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TABLE 2—KEY PROVISIONS OF THE BASEL III AND STANDARDIZED APPROACH NPRS AS COMPARED WITH THE CURRENT
RISK-BASED AND LEVERAGE CAPITAL RULES—Continued
Aspect of proposed requirements
Proposed treatment
Residential mortgage exposures (section 32) ..........................................
Introduces a more risk-sensitive treatment based on several criteria, including certain loan characteristics and the loan-to-value-ratio of the
exposure.
Applies a 150 percent risk weight to certain credit facilities that finance
the acquisition, development or construction of real property.
Applies a 150 percent risk weight to exposures that are not sovereign
exposures or residential mortgage exposures and that are more than
90 days past due or on nonaccrual.
Maintains the gross-up approach for securitization exposures.
Replaces the current ratings-based approach with a formula-based approach for determining a securitization exposure’s risk weight based
on the underlying assets and exposure’s relative position in the
securitization’s structure.
Introduces more risk-sensitive treatment for equity exposures.
Revises the measure of the counterparty credit risk of repo-style transactions. Raises the credit conversion factor for most short-term commitments from zero percent to 20 percent.
Removes the 50 percent risk weight cap for derivative contracts.
Provides preferential capital requirements for cleared derivative and
repo-style transactions (as compared to requirements for non-cleared
transactions) with central counterparties that meet specified standards. Also requires that a clearing member of a central counterparty
calculate a capital requirement for its default fund contributions to
that central counterparty.
Provides a more comprehensive recognition of collateral and guarantees.
Introduces qualitative and quantitative disclosure requirements, including regarding regulatory capital instruments, for banking organizations with total consolidated assets of $50 billion or more that are not
subject to the separate advanced approaches disclosure requirements.
High volatility commercial real estate exposures (section 32) .................
Past due exposures (section 32) .............................................................
Securitization exposures (sections 41–45) ..............................................
Equity exposures (sections 51–53) ..........................................................
Off-balance Sheet Items (sections 33) .....................................................
Derivative Contracts (section 34) .............................................................
Cleared Transactions (section 35) ...........................................................
Credit Risk Mitigation (section 36) ...........................................................
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Disclosure Requirements (sections 61–63) .............................................
Under section 165 of the Dodd-Frank
Act, the Board is required to establish
the enhanced risk-based and leverage
capital requirements for bank holding
companies with total consolidated
assets of $50 billion or more and
nonbank financial companies that the
Financial Stability Oversight Council
has designated for supervision by the
Board (collectively, covered
companies).18 The Board published for
comment in the Federal Register on
January 5, 2012, a proposal regarding
the enhanced prudential standards and
early remediation requirements. The
capital requirements as proposed in the
three NPRs would become a key part of
the Board’s overall approach to
enhancing the risk-based capital and
leverage standards applicable to covered
companies in accordance with section
165 of the Dodd-Frank Act.19 In
addition, the Board intends to
supplement the enhanced risk-based
capital and leverage requirements
included in its January 2012 proposal
with a subsequent proposal to
implement a quantitative risk-based
capital surcharge for covered companies
18 See
section 165 of the Dodd-Frank Act (12
U.S.C. 5365).
19 77 FR 594 (January 5, 2012).
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or a subset of covered companies. The
BCBS is calibrating a methodology for
assessing an additional capital
surcharge for global systemically
important banks (G–SIBs).20 The Board
intends to propose a quantitative riskbased capital surcharge in the United
States based on the BCBS approach and
consistent with the BCBS’s
implementation time frame. The
forthcoming proposal would
contemplate adopting implementing
rules in 2014, and requiring G–SIBs to
meet the capital surcharges on a phasedin basis from 2016–2019. The OCC also
is reviewing the BCBS proposal and is
considering whether to propose to apply
a similar surcharge for globally
significant national banks.
Question 1: The agencies solicit
comment on all aspects of the proposals
including comment on the specific
issues raised throughout this preamble.
Commenters are requested to provide a
detailed qualitative or quantitative
analysis, as appropriate, as well as any
relevant data and impact analysis to
support their positions.
20 See ‘‘Global Systemically Important Banks:
Assessment Methodology and the Additional Loss
Absorbency Requirement’’ (July 2011), available at
https://www.bis.org/publ/bcbs201.pdf.
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B. Background
In 1989, the agencies established a
risk-based capital framework for U.S.
national banks, state member and
nonmember banks, and bank holding
companies with the general risk-based
capital rules.21 The agencies based the
framework on the ‘‘International
Convergence of Capital Measurement
and Capital Standards’’ (Basel I),
released by the BCBS in 1988.22 The
general risk-based capital rules
instituted a uniform risk-based capital
system that was more risk-sensitive
than, and addressed several
shortcomings in, the regulatory capital
rules in effect prior to 1989. The
agencies’ capital rules also included a
minimum leverage measure of capital to
total assets, established in the early
1980s, to place a constraint on the
maximum degree to which a banking
organization can leverage its capital
base.
In 2004, the BCBS introduced a new
international capital adequacy
framework (Basel II) that was intended
21 See 54 FR 4186 (January 27, 1989) (Board); 54
FR 4168 (January 27, 1989) (OCC); 54 FR 11500
(March 21, 1989).
22 BCBS, ‘‘International Convergence of Capital
Measurement and Capital Standards’’ (July 1988),
available at https://www.bis.org/publ/bcbs04a.htm.
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to improve risk measurement and
management processes and to better
align minimum risk-based capital
requirements with risk of the underlying
exposures.23 Basel II is designed as a
‘‘three pillar’’ framework encompassing
risk-based capital requirements for
credit risk, market risk, and operational
risk (Pillar 1); supervisory review of
capital adequacy (Pillar 2); and market
discipline through enhanced public
disclosures (Pillar 3). To calculate riskbased capital requirements for credit
risk, Basel II provides three approaches:
the standardized approach (Basel II
standardized approach), the foundation
internal ratings-based approach, and the
advanced internal ratings-based
approach. Basel II also introduces an
explicit capital requirement for
operational risk, which may be
calculated using one of three
approaches: the basic indicator
approach, the standardized approach, or
the advanced measurement approaches.
On December 7, 2007, the agencies
implemented the advanced approaches
rules that incorporated Basel II
advanced internal ratings-based
approach for credit risk and the
advanced measurement approaches for
operational risk.24
To address some of the shortcomings
in the international capital standards
exposed during the crisis, the BCBS
issued the ‘‘2009 Enhancements’’ in July
2009 to enhance certain risk-based
capital requirements and to encourage
stronger management of credit and
market risk. The ‘‘2009 Enhancements’’
strengthen the risk-based capital
requirements for certain securitization
exposures to better reflect their risk,
increase the credit conversion factors for
certain short-term liquidity facilities,
and require that banking organizations
conduct more rigorous credit analysis of
their exposures.25
In 2010, the BCBS published a
comprehensive reform package, Basel
III, which is designed to improve the
quality and the quantity of regulatory
capital and to build additional capacity
into the banking system to absorb losses
in times of future market and economic
stress. Basel III introduces or enhances
a number of capital standards, including
23 See ‘‘International Convergence of Capital
Measurement and Capital Standards: A Revised
Framework’’ (June 2006), available at https://www.
bis.org/publ/bcbs128.htm.
24 See 72 FR 69288 (December 7, 2007).
25 In July 2009, the BCBS also issued ‘‘Revisions
to the Basel II Market Risk Framework,’’ available
at https://www.bis.org/publ/bcbs193.htm. The
agencies issued an NPR in January 2011 and a
supplement in December 2011, that included
provisions to implement the market-risk related
provisions. 76 FR 1890 (January 11, 2011); 76 FR
79380 (December 21, 2011).
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a stricter definition of regulatory capital,
a minimum tier 1 common equity ratio,
the addition of a regulatory capital
buffer, a leverage ratio, and a disclosure
requirement for regulatory capital
instruments. Implementing Basel III is
the focus of this NPR, as described
below. Certain elements of Basel III are
also proposed in the Standardized
Approach NPR and the Advanced
Approaches and Market Risk NPR, as
discussed in those notices.
Quality and Quantity of Capital
The recent financial crisis
demonstrated that the amount of highquality capital held by banks globally
was insufficient to absorb losses during
that period. In addition, some noncommon stock capital instruments
included in tier 1 capital did not absorb
losses to the extent previously expected.
A lack of clear and easily understood
disclosures regarding the amount of
high-quality regulatory capital and
characteristics of regulatory capital
instruments, as well as inconsistencies
in the definition of capital across
jurisdictions, contributed to the
difficulties in evaluating a bank’s capital
strength. To evaluate banks’
creditworthiness and overall stability
more accurately, market participants
increasingly focused on the amount of
banks’ tangible common equity, the
most loss-absorbing form of capital.
The crisis also raised questions about
banks’ ability to conserve capital during
a stressful period or to cancel or defer
interest payments on tier 1 capital
instruments. For example, in some
jurisdictions banks exercised call
options on hybrid tier 1 capital
instruments, even when it became
apparent that the banks’ capital
positions would suffer as a result.
Consistent with Basel III, the
proposals in this NPR would address
these deficiencies by imposing, among
other requirements, stricter eligibility
criteria for regulatory capital
instruments and increasing the
minimum tier 1 capital ratio from 4 to
6 percent. To help ensure that a banking
organization holds truly loss-absorbing
capital, the proposal also introduces a
minimum common equity tier 1 capital
to total risk-weighted assets ratio of 4.5
percent. In addition, the proposals
would require that most regulatory
deductions from, and adjustments to,
regulatory capital (for example, the
deductions related to mortgage servicing
assets (MSAs) and deferred tax assets
(DTAs) be applied to common equity
tier 1 capital. The proposals would also
eliminate certain features of the current
risk-based capital rules, such as
adjustments to regulatory capital to
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neutralize the effect on the capital
account of unrealized gains and losses
on AFS debt securities. To reduce the
double counting of regulatory capital,
Basel III also limits investments in the
capital of unconsolidated financial
institutions that would be included in
regulatory capital and requires
deduction from capital if a banking
organization has exposures to these
institutions that go beyond certain
percentages of its common equity tier 1
capital. Basel III also revises riskweights associated with certain items
that are subject to deduction from
regulatory capital.
Finally, to promote transparency and
comparability of regulatory capital
across jurisdictions, Basel III introduces
public disclosure requirements,
including those for regulatory capital
instruments, that are designed to help
market participants assess and compare
the overall stability and resiliency of
banking organizations across
jurisdictions.
Capital Conservation and
Countercyclical Capital Buffer
As noted previously, some banking
organizations continued to pay
dividends and substantial discretionary
bonuses even as their financial
condition weakened as a result of the
recent financial crisis and economic
downturn. Such capital distributions
had a significant negative impact on the
overall strength of the banking sector.
To encourage better capital conservation
by banking organizations and to
improve the resiliency of the banking
system, Basel III and this proposal
include limits on capital distributions
and discretionary bonuses for banking
organizations that do not hold a
specified amount of common equity tier
1 capital in addition to the common
equity necessary to meet the minimum
risk-based capital requirements (capital
conservation buffer).
Under this proposal, for advanced
approaches banking organizations, the
capital conservation buffer may be
expanded by up to 2.5 percent of riskweighted assets if the relevant national
authority determines that financial
markets in its jurisdiction are
experiencing a period of excessive
aggregate credit growth that is
associated with an increase in systemwide risk. The countercyclical capital
buffer is designed to take into account
the macro-financial environment in
which banking organizations function
and help protect the banking system
from the systemic vulnerabilities.
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Basel III Leverage Ratio
Since the early 1980s, U.S. banking
organizations have been subject to a
minimum leverage measure of capital to
total assets designed to place a
constraint on the maximum degree to
which a banking organization can
leverage its equity capital base.
However, prior to the adoption of Basel
III, the Basel capital framework did not
include a leverage ratio requirement. It
became apparent during the crisis that
some banks built up excessive on- and
off-balance sheet leverage while
continuing to present strong risk-based
capital ratios. In many instances, banks
were forced by the markets to reduce
their leverage and exposures in a
manner that increased downward
pressure on asset prices and further
exacerbated overall losses in the
financial sector.
The BCBS introduced a leverage ratio
(the Basel III leverage ratio) to
discourage the acquisition of excess
leverage and to act as a backstop to the
risk-based capital requirements. The
Basel III leverage ratio is defined as the
ratio of tier 1 capital to a combination
of on- and off-balance sheet assets; the
minimum ratio is 3 percent. The
introduction of the leverage requirement
in the Basel capital framework should
improve the resiliency of the banking
system worldwide by providing an
ultimate limit on the amount of leverage
a banking organization may incur.
As described in section II.B of this
preamble, the agencies are proposing to
apply the Basel III leverage ratio only to
advanced approaches banking
organizations as an additional leverage
requirement (supplementary leverage
ratio). For all banking organizations, the
agencies are proposing to update and
maintain the current leverage
requirement, as revised to reflect the
proposed definition of tier 1 capital.
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Additional Revisions to the Basel
Capital Framework
To facilitate the implementation of
Basel III, the BCBS issued a series of
releases in 2011 in the form of
frequently asked questions.26 In
addition, in 2011, the BCBS proposed to
revise the treatment of counterparty
credit risk and specific capital
requirements for derivative and repostyle transaction exposures to central
counterparties (CCP) to address
concerns related to the
interconnectedness and complexity of
26 See, e.g., ‘‘Basel III FAQs answered by the Basel
Committee’’ (July, October, December 2011),
available at https://www.bis.org/list/press_releases/
index.htm.
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the derivatives markets.27 The proposed
revisions provide incentives for banking
organizations to clear derivatives and
repo-style transactions through
qualifying central counterparties (QCCP)
to help promote market transparency
and improve the ability of market
participants to unwind their positions
quickly and efficiently. The agencies
have incorporated these provisions in
the Standardized Approach NPR and
the Advanced Approaches and Market
Risk NPR.
II. Minimum Regulatory Capital Ratios,
Additional Capital Requirements, and
Overall Capital Adequacy
A. Minimum Risk-Based Capital Ratios
and Other Regulatory Capital Provisions
Consistent with Basel III, the agencies
are proposing to require that banking
organizations comply with the following
minimum capital ratios: (1) A common
equity tier 1 capital ratio of 4.5 percent;
(2) a tier 1 capital ratio of 6 percent; (3)
a total capital ratio of 8 percent; and (4)
a tier 1 capital to average consolidated
assets of 4 percent and, for advanced
approaches banking organizations only,
an additional requirement tier 1 capital
to total leverage exposure ratio of 3
percent.28 As noted above, the common
equity tier 1 capital ratio would be a
new minimum requirement. It is
designed to ensure that banking
organizations hold high-quality
regulatory capital that is available to
absorb losses. The proposed capital
ratios would apply to a banking
organization on a consolidated basis.
Under this NPR, tier 1 capital would
equal the sum of common equity tier 1
capital and additional tier 1 capital.
Total capital would consist of three
capital components: common equity tier
1, additional tier 1, and tier 2 capital.
The definitions of each of these
categories of regulatory capital are
discussed below in section III of this
preamble. To align the proposed
regulatory capital requirements with the
agencies’ current PCA rules, this NPR
also would incorporate the proposed
revisions to the minimum capital
requirements into the agencies’ PCA
framework, as further discussed in
section II.E of this preamble.
27 The BCBS left unchanged the treatment of
exposures to CCPs for settlement of cash
transactions such as equities, fixed income, spot
foreign exchange and spot commodities. See
‘‘Capitalization of Banking Organization Exposures
to Central Counterparties’’ (December 2010, revised
November 2011) (CCP consultative release),
available at https://www.bis.org/publ/bcbs206.pdf.
28 Advanced approaches banking organizations
should refer to section 10 of the proposed rule text
and to the Advanced Approaches and Market Risk
NPR for a more detailed discussion of the
applicable minimum capital ratios.
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In addition, a banking organization
would be subject to a capital
conservation buffer in excess of the riskbased capital requirements that would
impose limitations on its capital
distributions and certain discretionary
bonuses, as described in sections II.C
and II.D of this preamble. Because the
regulatory capital buffer would apply in
addition to the regulatory minimum
requirements, the restrictions on capital
distributions and discretionary bonus
payments associated with the regulatory
capital buffer would not give rise to any
applicable restrictions under section 38
of the Federal Deposit Insurance Act
and the agencies’ implementing PCA
rules, which apply when an insured
institution’s capital levels drop below
certain regulatory thresholds.29
As a prudential matter, the agencies
have a long-established policy that
banking organizations should hold
capital commensurate with the level
and nature of the risks to which they are
exposed, which may entail holding
capital significantly above the minimum
requirements, depending on the nature
of the banking organization’s activities
and risk profile. Section II.F of this
preamble describes the requirement for
overall capital adequacy of banking
organizations and the supervisory
assessment of an entity’s capital
adequacy.
Furthermore, consistent with the
agencies’ authority under the current
capital rules, section 10(d) of the
proposal includes a reservation of
authority that would allow a banking
organization’s primary federal
supervisor to require a banking
organization to hold a different amount
of regulatory capital than otherwise
would be required under the proposal,
if the supervisor determines that the
regulatory capital held by the banking
organization is not commensurate with
a banking organization’s credit, market,
operational, or other risks.
B. Leverage Ratio
1. Minimum Tier 1 Leverage Ratio
Under the proposal, all banking
organizations would remain subject to a
4 percent tier 1 leverage ratio, which
would be calculated by dividing an
organization’s tier 1 capital by its
average consolidated assets, minus
amounts deducted from tier 1 capital.
The numerator for this ratio would be a
banking organization’s tier 1 capital as
defined in section 2 of the proposal. The
denominator would be its average total
on-balance sheet assets as reported on
29 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part
165 (OCC); 12 CFR 208.45 (Board); 12 CFR 325.105,
12 CFR 390.455 (FDIC).
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the banking organization’s regulatory
report, net of amounts deducted from
tier 1 capital.30
In this NPR, the agencies are
proposing to remove the tier 1 leverage
ratio exception for banking
organizations with a supervisory
composite rating of 1 that exists under
the current leverage rules.31 This
exception provides for a 3 percent tier
1 leverage measure for such
institutions.32 The current exception
would also be eliminated for bank
holding companies with a supervisory
composite rating of 1 and subject to the
market risk rule. Accordingly, as
proposed, all banking organizations
would be subject to a 4 percent
minimum tier 1 leverage ratio.
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2. Supplementary Leverage Ratio for
Advanced Approaches Banking
Organizations
Advanced approaches banking
organizations would also be required to
maintain the supplementary leverage
ratio of tier 1 capital to total leverage
exposure of 3 percent. The
supplementary leverage ratio
incorporates the Basel III definition of
tier 1 capital as the numerator and uses
a broader exposure base, including
certain off-balance sheet exposures
(total leverage exposure), for the
denominator.
The agencies believe that the
supplementary leverage ratio is most
appropriate for advanced approaches
banking organizations because these
banking organizations tend to have more
significant amounts of off-balance sheet
exposures that are not captured by the
current leverage ratio. Applying the
supplementary leverage ratio rather than
the current tier 1 leverage ratio to other
banking organizations would increase
the complexity of their leverage ratio
calculation, and in many cases could
result in a reduced leverage capital
requirement. The agencies believe that,
30 Specifically, to determine average total onbalance sheet assets, bank holding companies and
savings and loan holding companies would use the
Consolidated Financial Statements for Bank
Holding Companies (FR Y–9C); national banks,
state member banks, state nonmember banks, and
savings associations would use On-balance sheet
Reports of Condition and Income (Call Report).
31 Under the agencies’ current rules, the
minimum ratio of tier 1 capital to total assets for
strong banking organizations (that is, rated
composite ‘‘1’’ under the CAMELS system for state
nonmember and national banks, ‘‘1’’ under UFIRS
for state member banks, and ‘‘1’’ under RFI/CD for
bank holding companies) not experiencing or
anticipating significant growth is 3 percent. See 12
CFR 3.6, 12 CFR 167.8 (OCC); 12 CFR 208.43, 12
CFR part 225, Appendix D (Board); 12 CFR 325.3,
12 CFR 390.467 (FDIC).
32 See 12 CFR 3.6 (OCC); 12 CFR part 208,
Appendix B and 12 CFR part 225, Appendix D
(Board); and 12 CFR part 325.3 (FDIC).
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along with the 5 percent ‘‘wellcapitalized’’ PCA leverage threshold
described in section II.E of this
preamble, the proposed leverage
requirements are, for the majority of
banking organizations that are not
subject to the advanced approaches rule,
both more conservative and simpler
than the supplementary leverage ratio.
An advanced approaches banking
organization would calculate the
supplementary leverage ratio, including
each of the ratio components, at the end
of every month and then calculate a
quarterly leverage ratio as the simple
arithmetic mean of the three monthly
leverage ratios over the reporting
quarter. As proposed, total leverage
exposure would equal the sum of the
following exposures:
(1) The balance sheet carrying value
of all of the banking organization’s onbalance sheet assets minus amounts
deducted from tier 1 capital;
(2) The potential future exposure
amount for each derivative contract to
which the banking organization is a
counterparty (or each single-product
netting set for such transactions)
determined in accordance with section
34 of the proposal;
(3) 10 percent of the notional amount
of unconditionally cancellable
commitments made by the banking
organization; and
(4) The notional amount of all other
off-balance sheet exposures of the
banking organization (excluding
securities lending, securities borrowing,
reverse repurchase transactions,
derivatives and unconditionally
cancellable commitments).
The BCBS continues to assess the
Basel III leverage ratio, including
through supervisory monitoring during
a parallel run period in which the
proposed design and calibration of the
Basel III leverage ratio will be evaluated,
and the impact of any differences in
national accounting frameworks
material to the definition of the leverage
ratio will be considered. A final
decision by the BCBS on the measure of
exposure for certain transactions and
calibration of the leverage ratio is not
expected until closer to 2018.
Due to these ongoing observations and
international discussions on the most
appropriate measurement of exposure
for repo-style transactions, the agencies
are proposing to maintain the current
on-balance sheet measurement of repostyle transactions for purposes of
calculating total leverage exposure.
Under this NPR, a banking organization
would measure exposure as the value of
repo-style transactions (including
repurchase agreements, securities
lending and borrowing transactions, and
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reverse repos) carried as an asset on the
balance sheet, consistent with the
measure of exposure used in the
agencies’ current leverage measure. The
agencies are participating in
international discussions and ongoing
quantitative analysis of the exposure
measure for repo-style transactions, and
will consider modifying in the future
the measurement of repo-style
transactions in the calculation of total
leverage exposure to reflect results of
these international efforts.
The agencies are proposing to apply
the supplementary leverage ratio as a
requirement for advanced approaches
banking organizations beginning in
2018, consistent with Basel III.
However, beginning on January 1, 2015,
advanced approaches banking
organizations would be required to
calculate and report their
supplementary leverage ratio.
Question 2: The agencies solicit
comments on all aspects of this
proposal, including regulatory burden
and competitive impact. Should all
banking organizations, banking
organizations with total consolidated
assets above a certain threshold, or
banking organizations with certain risk
profiles (for example, concentrations in
derivatives) be required to comply with
the supplementary leverage ratio, and
why? What are the advantages and
disadvantages of the application of two
leverage ratio requirements to advanced
approaches banking organizations?
Question 3: What modifications to the
proposed supplementary leverage ratio
should be considered and why? Are
there alternative measures of exposure
for repo-style transactions that should
be considered by the agencies? What
alternative measures should be used in
cases in which the use of the current
exposure method may overstate leverage
(for example, in certain cases of
calculating derivative exposure) or
understate leverage (for example, in the
case of credit protection sold)? The
agencies request data and
supplementary analysis that would
support consideration of such
alternative measures.
Question 4: Given differences in
international accounting, particularly
the difference in how International
Financial Reporting Standards and
GAAP treat securities for securities
lending, the agencies solicit comments
on the adjustments that should be
contemplated to mitigate or offset such
differences.
Question 5: The agencies solicit
comments on the advantages and
disadvantages of including off-balance
sheet exposures in the supplementary
leverage ratio. The agencies seek
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detailed comments, with supporting
data, on the proposed method of
calculating exposures and estimates of
burden, particularly for off-balance
sheet exposures.
C. Capital Conservation Buffer
Consistent with Basel III, the proposal
incorporates a capital conservation
buffer that is designed to bolster the
resilience of banking organizations
throughout financial cycles. The buffer
would provide incentives for banking
organizations to hold sufficient capital
to reduce the risk that their capital
levels would fall below their minimum
requirements during stressful
conditions. The capital conservation
buffer would be composed of common
equity tier 1 capital and would be
separate from the minimum risk-based
capital requirements.
As proposed, a banking organization’s
capital conservation buffer would be the
lowest of the following measures: (1)
The banking organization’s common
equity tier 1 capital ratio minus its
minimum common equity tier 1 capital
ratio; (2) the banking organization’s tier
1 capital ratio minus its minimum tier
1 capital ratio; and (3) the banking
organization’s total capital ratio minus
its minimum total capital ratio.33 If the
banking organization’s common equity
tier 1, tier 1 or total capital ratio were
less than or equal to its minimum
common equity tier 1, tier 1 or total
capital ratio, respectively, the banking
organization’s capital conservation
buffer would be zero. For example, if a
banking organization’s common equity
tier 1, tier 1, and total capital ratios are
7.5, 9.0, and 10 percent, respectively,
and the banking organization’s
minimum common equity tier 1, tier 1,
and total capital ratio requirements are
4.5, 6, and 8, respectively, the banking
organization’s applicable capital
conservation buffer would be 2 percent
for purposes of establishing a 60 percent
maximum payout ratio under table 3.
Under the proposal, a banking
organization would need to hold a
capital conservation buffer in an amount
greater than 2.5 percent of total riskweighted assets (plus, for an advanced
approaches banking organization, 100
percent of any applicable
countercyclical capital buffer amount)
to avoid being subject to limitations on
capital distributions and discretionary
bonus payments to executive officers, as
33 For purposes of the capital conservation buffer
calculations, a banking organization would be
required to use standardized total risk weighted
assets if it is a standardized approach banking
organization and it would be required to use
advanced total risk weighted assets if it is an
advanced approaches banking organization.
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defined under the proposal. The
maximum payout ratio would be the
percentage of eligible retained income
that a banking organization would be
allowed to pay out in the form of capital
distributions and certain discretionary
bonus payments during the current
calendar quarter and would be
determined by the amount of the capital
conservation buffer held by the banking
organization during the previous
calendar quarter. Under the proposal,
eligible retained income would be
defined as a banking organization’s net
income (as reported in the banking
organization’s quarterly regulatory
reports) for the four calendar quarters
preceding the current calendar quarter,
net of any capital distributions, certain
discretionary bonus payments, and
associated tax effects not already
reflected in net income.
A banking organization’s maximum
payout amount for the current calendar
quarter would be equal to the banking
organization’s eligible retained income,
multiplied by the applicable maximum
payout ratio in accordance with table 3.
A banking organization with a capital
conservation buffer that is greater than
2.5 percent (plus, for an advanced
approaches banking organization, 100
percent of any applicable
countercyclical buffer) would not be
subject to a maximum payout amount as
a result of the application of this
provision (but the agencies’ authority to
restrict capital distributions for other
reasons remains undiminished).
In a scenario where a banking
organization’s risk-based capital ratios
fall below its minimum risk-based
capital ratios plus 2.5 percent of total
risk-weighted assets, the maximum
payout ratio would also decline, in
accordance with table 3. A banking
organization that becomes subject to a
maximum payout ratio would remain
subject to restrictions on capital
distributions and certain discretionary
bonus payments until it is able to build
up its capital conservation buffer
through retained earnings, raising
additional capital, or reducing its riskweighted assets. In addition, as a
general matter, a banking organization
would not be able to make capital
distributions or certain discretionary
bonus payments during the current
calendar quarter if the banking
organization’s eligible retained income
is negative and its capital conservation
buffer is less than 2.5 percent as of the
end of the previous quarter.
As illustrated in table 3, the capital
conservation buffer is divided into equal
quartiles, each associated with
increasingly stringent limitations on
capital distributions and discretionary
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bonus payments to executive officers as
the capital conservation buffer falls
closer to zero percent. As described in
more detail in the next section, each
quartile, associated with a certain
maximum payout ratio in table 3, would
expand proportionately for advanced
approaches banking organizations when
the countercyclical capital buffer
amount is greater than zero.
The agencies propose to define a
capital distribution as: (1) A reduction
of tier 1 capital through the repurchase
of a tier 1 capital instrument or by other
means; (2) a reduction of tier 2 capital
through the repurchase, or redemption
prior to maturity, of a tier 2 capital
instrument or by other means; (3) a
dividend declaration on any tier 1
capital instrument; (4) a dividend
declaration or interest payment on any
tier 2 capital instrument if such
dividend declaration or interest
payment may be temporarily or
permanently suspended at the
discretion of the banking organization;
or (5) any similar transaction that the
agencies determine to be in substance a
distribution of capital. The proposed
definition is similar in effect to the
definition of capital distribution in the
Board’s rule requiring annual capital
plan submissions for bank holding
companies with $50 billion or more in
total assets.34
The agencies propose to define a
discretionary bonus payment as a
payment made to an executive officer of
a banking organization or an individual
with commensurate responsibilities
within the organization, such as a head
of a business line, where: (1) The
banking organization retains discretion
as to the fact of the payment and as to
the amount of the payment until the
discretionary bonus is paid to the
executive officer; (2) the amount paid is
determined by the banking organization
without prior promise to, or agreement
with, the executive officer; and (3) the
executive officer has no contract right,
express or implied, to the bonus
payment.
An executive officer would be defined
as a person who holds the title or,
without regard to title, salary, or
compensation, performs the function of
one or more of the following positions:
president, chief executive officer,
executive chairman, chief operating
officer, chief financial officer, chief
investment officer, chief legal officer,
chief lending officer, chief risk officer,
or head of a major business line, and
other staff that the board of directors of
the banking organization deems to have
34 See
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equivalent responsibility.35 The purpose
of limiting restrictions on discretionary
bonus payments to executive officers is
to focus these measures on the
individuals within a banking
organization who could expose the
organization to the greatest risk. The
agencies note that a banking
organization may otherwise be subject
to limitations on capital distributions
under other laws or regulations.36
Table 3 shows the relationship
between the capital conservation buffer
and the maximum payout ratio. The
maximum dollar amount that a banking
organization would be permitted to pay
out in the form of capital distributions
or discretionary bonus payments during
the current calendar quarter would be
equal to the maximum payout ratio
multiplied by the banking organization’s
eligible retained income. The
calculation of the maximum payout
amount would be made as of the last
day of the previous calendar quarter and
any resulting restrictions would apply
during the current calendar quarter.
TABLE 3—CAPITAL CONSERVATION BUFFER AND MAXIMUM PAYOUT RATIO 37
Maximum payout ratio
(as a percentage of eligible retained
income)
Capital conservation buffer
(as a percentage of total risk-weighted assets)
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Greater than 2.5 percent ..............................................................................................................................
Less than or equal to 2.5 percent, and greater than 1.875 percent ............................................................
Less than or equal to 1.875 percent, and greater than 1.25 percent ..........................................................
Less than or equal to 1.25 percent, and greater than 0.625 percent ..........................................................
Less than or equal to 0.625 percent ............................................................................................................
76 FR 21170 (April 14, 2011).
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with the agencies’ current practice with
respect to regulatory restrictions on
dividend payments and other capital
distributions, each agency would retain
its authority to permit a banking
organization supervised by that agency
to make a capital distribution or a
discretionary bonus payment, if the
agency determines that the capital
distribution or discretionary bonus
payment would not be contrary to the
purposes of the capital conservation
buffer or the safety and soundness of the
banking institution. In making such a
determination, the agency would
consider the nature and extent of the
request and the particular circumstances
giving rise to the request.
The agencies are proposing that
banking organizations that are not
subject to the advanced approaches rule
would calculate their capital
conservation buffer using total riskweighted assets as calculated by all
banking organizations, and that banking
organizations subject to the advanced
approaches rule would calculate the
buffer using advanced approaches total
risk-weighted assets. Under the
proposed approach, internationally
active U.S. banking organizations using
the advanced approaches would face
capital conservation buffers determined
in a manner comparable to those of their
foreign competitors. Depending on the
difference in risk-weighted assets
calculated under the two approaches,
capital distributions and bonus
restrictions applied to an advanced
approaches banking organization could
be more or less stringent than if its
capital conservation buffer were based
on risk-weighted assets as calculated by
all banking organizations.
Question 6: The agencies seek
comment on all aspects of the proposed
capital buffer framework, including
issues of domestic and international
competitive equity, and the adequacy of
the proposed buffer to provide
incentives for banking organizations to
hold sufficient capital to withstand a
stress event and still remain above
regulatory minimum capital levels.
What are the advantages and
disadvantages of requiring advanced
approaches banking organizations to
calculate their capital buffers using total
risk-weighted assets that are the greater
of standardized total risk-weighted
assets and advanced total risk-weighted
assets? What is the potential effect of the
proposal on banking organizations’
processes for planning and executing
capital distributions and utilization of
discretionary bonus payments to retain
key staff? What modifications, if any,
should the agencies consider?
Question 7: The agencies solicit
comments on the scope of the definition
of executive officer for purposes of the
limitations on discretionary bonus
payments under the proposal. Is the
scope too broad or too narrow? Should
other categories of employees who
could expose the institution to material
risk be included within the scope of
employees whose discretionary bonuses
could be subject to the restriction? If so,
how should such a class of employees
be defined? What are the potential
implications for a banking organization
of restricting discretionary bonus
payments for executive officers or for
broader classes of employees? Please
36 See 12 U.S.C. 56, 60, and 1831o(d)(1); 12 CFR
1467a(f); see also 12 CFR 225.8.
For example, a banking organization
with a capital conservation buffer
between 1.875 and 2.5 percent (for
example, a common equity tier 1 capital
ratio of 6.5 percent, a tier 1 capital ratio
of 8 percent, or a total capital ratio of
10 percent) as of the end of the previous
calendar quarter would be allowed to
distribute no more than 60 percent of its
eligible retained income in the form of
capital distributions or discretionary
bonus payments during the current
calendar quarter. That is, the banking
organization would need to conserve at
least 40 percent of its eligible retained
income during the current calendar
quarter.
A banking organization with a capital
conservation buffer of less than or equal
to 0.625 percent (for example, a banking
organization with a common equity tier
1 capital ratio of 5.0 percent, a tier 1
capital ratio of 6.5 percent, or a total
capital ratio of 8.5 percent) as of the end
of the previous calendar quarter would
not be permitted to make any capital
distributions or discretionary bonus
payments during the current calendar
quarter.
In contrast, a banking organization
with a capital conservation buffer of
more than 2.5 percent (for example, a
banking organization with a common
equity tier 1 capital ratio of 7.5 percent,
a tier 1 capital ratio of 9.0 percent, and
a total capital ratio of 11.0 percent) as
of the end of the previous calendar
quarter would not be subject to
restrictions on the amount of capital
distributions and discretionary bonus
payments that could be made during the
current calendar quarter. Consistent
35 See
No payout ratio limitation applies.
60 percent.
40 percent.
20 percent.
0 percent.
37 Calculations in this table are based on the
assumption that the countercyclical buffer amount
is zero.
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provide data and analysis to support
your views.
Question 8: What are the pros and
cons of the proposed definition for
eligible retained income in the context
of the proposed quarterly limitations on
capital distributions and discretionary
bonus payments?
Question 9: What would be the
impact, if any, in terms of the cost of
raising new capital, of not allowing a
banking organization that is subject to a
maximum payout ratio of zero percent
to make a penny dividend to common
stockholders? Please provide data to
support any responses.
D. Countercyclical Capital Buffer
Under Basel III, the countercyclical
capital buffer is designed to take into
account the macro-financial
environment in which banking
organizations function and to protect
the banking system from the systemic
vulnerabilities that may build-up during
periods of excessive credit growth, then
potentially unwind in a disorderly way
that may cause disruptions to financial
institutions and ultimately economic
activity. As proposed and consistent
with Basel III, the countercyclical
capital buffer would serve as an
extension of the capital conservation
buffer.
The agencies propose to apply the
countercyclical capital buffer only to
advanced approaches banking
organizations, because large banking
organizations generally are more
interconnected with other institutions
in the financial system. Therefore, the
marginal benefits to financial stability
from a countercyclical buffer function
should be greater with respect to such
institutions. Application of the
countercyclical buffer to advanced
approaches banking organizations also
reflects the fact that making cyclical
adjustments to capital requirements is
costly for institutions to implement and
the marginal costs are higher for smaller
institutions.
The countercyclical capital buffer
aims to protect the banking system and
reduce systemic vulnerabilities in two
ways. First, the accumulation of a
capital buffer during an expansionary
phase could increase the resilience of
the banking system to declines in asset
prices and consequent losses that may
occur when the credit conditions
weaken. Specifically, when the credit
cycle turns following a period of
excessive credit growth, accumulated
capital buffers would act to absorb the
above-normal losses that a banking
organization would likely face.
Consequently, even after these losses are
realized, banking organizations would
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remain healthy and able to access
funding, meet obligations, and continue
to serve as credit intermediaries.
Countercyclical capital buffers may also
reduce systemic vulnerabilities and
protect the banking system by mitigating
excessive credit growth and increases in
asset prices that are not supported by
fundamental factors. By increasing the
amount of capital required for further
credit extensions, countercyclical
capital buffers may limit excessive
credit extension.
Consistent with Basel III, the agencies
propose a countercyclical capital buffer
that would augment the capital
conservation buffer under certain
circumstances, upon a determination by
the agencies.
The countercyclical capital buffer
amount in the U.S. would initially be
set to zero, but it could increase if the
agencies determine that there is
excessive credit in the markets, possibly
leading to subsequent wide-spread
market failures.38 The agencies expect
to consider a range of macroeconomic,
financial, and supervisory information
indicating an increase in systemic risk
including, but not limited to, the ratio
of credit to gross domestic product, a
variety of asset prices, other factors
indicative of relative credit and
liquidity expansion or contraction,
funding spreads, credit condition
surveys, indices based on credit default
swap spreads, options implied
volatility, and measures of systemic
risk. The agencies anticipate making
such determinations jointly. Because the
countercyclical capital buffer amount
would be linked to the condition of the
overall U.S. financial system and not the
characteristics of an individual banking
organization, the agencies expect that
the countercyclical capital buffer
amount would be the same at the
depository institution and holding
company levels.
To provide banking organizations
with time to adjust to any changes, the
agencies expect to announce an increase
in the countercyclical capital buffer
amount up to12 months prior to
implementation. If the agencies
determine that a more immediate
implementation would be necessary
based on economic conditions, the
agencies may announce implementation
of a countercyclical capital buffer in less
than 12 months. The agencies would
make their determination and
announcement in accordance with any
applicable legal requirements. The
agencies would follow the same
38 The proposed operation of the countercyclical
capital buffer is also consistent with section 616(c)
of the Dodd-Frank Act. See 12 U.S.C. 3907(a)(1).
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52805
procedures in adjusting the
countercyclical capital buffer applicable
for exposures located in foreign
jurisdictions.
A decrease in the countercyclical
capital buffer amount would become
effective the day following
announcement or the earliest date
permitted by applicable law or
regulation. In addition, the
countercyclical capital buffer amount
would return to zero percent 12 months
after its effective date, unless an agency
announces a decision to maintain the
adjusted countercyclical capital buffer
amount or adjust it again before the
expiration of the 12-month period.
In the United States, the
countercyclical capital buffer would
augment the capital conservation buffer
by up to 2.5 percent of a banking
organization’s total risk-weighted assets.
For other jurisdictions, an advanced
approaches banking organization would
determine its countercyclical capital
buffer amount by calculating the
weighted average of the countercyclical
capital buffer amounts established for
the national jurisdictions where the
banking organization has private sector
credit exposures, as defined below in
this section. The contributing weight
assigned to a jurisdiction’s
countercyclical capital buffer amount
would be calculated by dividing the
total risk-weighted assets for the
banking organization’s private sector
credit exposures located in the
jurisdiction by the total risk-weighted
assets for all of the banking
organization’s private sector credit
exposures.39
As proposed, a private sector credit
exposure would be defined as an
exposure to a company or an individual
that is included in credit risk-weighted
assets, not including an exposure to a
sovereign, the Bank for International
Settlements, the European Central Bank,
the European Commission, the
International Monetary Fund, a
multilateral development bank (MDB), a
public sector entity (PSE), or a
government sponsored entity (GSE).
The geographic location of a private
sector credit exposure (that is not a
securitization exposure) would be the
national jurisdiction where the borrower
is located (that is, where the borrower
39 As described in the discussion of the capital
conservation buffer, an advanced approaches
banking organization would calculate its total riskweighted assets using the advanced approaches
rules for purposes of determining the capital
conservation buffer amount. An advanced
approaches banking organizations may also be
subject to the capital plan rule and its stress testing
provisions, which may have a separate effect on a
banking organization’s capital distributions. See 12
CFR 225.8.
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is incorporated, chartered, or similarly
established or, if it is an individual,
where the borrower resides). If,
however, the decision to issue the
private sector credit exposure is based
primarily on the creditworthiness of the
protection provider, the location of the
non-securitization exposure would be
the location of the protection provider.
The location of a securitization
exposure would be the location of the
borrowers of the underlying exposures.
If the borrowers on the underlying
exposures are located in multiple
jurisdictions, the location of a
securitization exposure would be the
location of the borrowers of the
underlying exposures in one
jurisdiction with the largest proportion
of the aggregate unpaid principal
balance of the underlying exposures.
Table 4 illustrates how an advanced
approaches banking organization would
calculate the weighted average
countercyclical capital buffer. In the
following example, the countercyclical
capital buffer established in the various
jurisdictions in which the banking
organization has private sector credit
exposures is reported in column A.
Column B contains the banking
organization’s risk-weighted asset
amounts for the private sector credit
exposures in each jurisdiction. Column
C shows the contributing weight for
each countercyclical buffer amount,
which is calculated by dividing each of
the rows in column B by the total for
column B. Column D shows the
contributing weight applied to each
countercyclical capital buffer amount,
calculated as the product of the
corresponding contributing weight
(column C) and the countercyclical
capital buffer set by each jurisdiction’s
national supervisor (column A). The
sum of the rows in column D shows the
banking organization’s weighted average
countercyclical capital buffer, which is
1.4 percent of risk-weighted assets.
TABLE 4—EXAMPLE OF WEIGHTED AVERAGE COUNTERCYCLICAL CAPITAL BUFFER CALCULATION FOR ADVANCED
APPROACHES BANKING ORGANIZATIONS
(A)
Countercyclical buffer
amount set by national
supervisor
(percent)
(B)
Banking organization’s
risk-weighted assets
(RWA) for private sector
credit exposures
($b)
(C)
Contributing weight (column B/column B total)
(D)
Contributing weight applied to each countercyclical capital buffer
amount
(column A * column C)
2.0
1.5
1
250
100
500
0.29
0.12
0.59
0.6
0.2
0.6
Total ..........................................
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Non-U.S. jurisdiction 1 .....................
Non-U.S. jurisdiction 2 .....................
U.S. ..................................................
........................................
850
1.00
1.4
A banking organization’s maximum
payout ratio for purposes of its capital
conservation buffer would vary
depending on its countercyclical buffer
amount. For instance, if its
countercyclical capital buffer amount is
equal to zero percent of total riskweighted assets, the banking
organization that held only U.S. credit
exposures would need to hold a
combined capital conservation buffer of
at least 2.5 percent to avoid restrictions
on its capital distributions and certain
discretionary bonus payments.
However, if its countercyclical capital
buffer amount is equal to 2.5 percent of
total risk-weighted assets, the banking
organization whose assets consist of
only U.S. credit exposures would need
to hold a combined capital conservation
and countercyclical buffer of at least 5
percent to avoid restrictions on its
capital distributions and discretionary
bonus payments.
Question 10: The agencies solicit
comment on potential inputs used in
determining whether excessive credit
growth is occurring and whether a
formula-based approach might be useful
in determining the appropriate level of
the countercyclical capital buffer. What
additional factors, if any, should the
agencies consider when determining the
countercyclical capital buffer amount?
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What are the pros and cons of using a
formula-based approach and what
factors might be incorporated in the
formula to determine the level of the
countercyclical capital buffer amount?
Question 11: The agencies recognize
that a banking organization’s riskweighted assets for private sector credit
exposures should include relevant
covered positions under the market risk
capital rule and solicit comment
regarding appropriate methodologies for
incorporating these positions;
specifically, what position-specific or
portfolio-specific methodologies should
be used for covered positions with
specific risk and particularly those for
which a banking organization uses
models to measure specific risk?
Question 12: The agencies solicit
comment on the appropriateness of the
proposed 12-month prior notification
period to adjust to a newly implemented
or adjusted countercyclical capital
buffer amount.
E. Prompt Corrective Action
Requirements
Section 38 of the Federal Deposit
Insurance Act directs the federal
banking agencies to take prompt
corrective action (PCA) to resolve the
problems of insured depository
institutions at the least cost to the
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Deposit Insurance Fund.40 To facilitate
this purpose, the agencies have
established five regulatory capital
categories in the current PCA
regulations that include capital
thresholds for the leverage ratio, tier 1
risk-based capital ratio, and the total
risk-based capital ratio for insured
depository institutions. These five PCA
categories under section 38 of the Act
and the PCA regulations are: ‘‘Well
capitalized,’’ ‘‘adequately capitalized,’’
‘‘undercapitalized,’’ ‘‘significantly
undercapitalized,’’ and ‘‘critically
undercapitalized.’’ Insured depository
institutions that fail to meet these
capital measures are subject to
increasingly strict limits on their
activities, including their ability to
make capital distributions, pay
management fees, grow their balance
sheet, and take other actions.41 Insured
depository institutions are expected to
be closed within 90 days of becoming
‘‘critically undercapitalized,’’ unless
their primary federal regulator takes
such other action as the agency
determines, with the concurrence of the
40 12
U.S.C. 1831o.
U.S.C. 1831o(e)–(i). See 12 CFR part 6
(OCC); 12 CFR part 208, subpart D (Board); 12 CFR
part 325, subpart B (FDIC).
41 12
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FDIC, would better achieve the purpose
of PCA.42
All insured depository institutions,
regardless of total asset size or foreign
exposure, are required to compute PCA
capital levels using the agencies’ general
risk-based capital rules, as
supplemented by the market risk capital
rule. Under this NPR, the agencies are
proposing to augment the PCA capital
categories by introducing a common
equity tier 1 capital measure for four of
the five PCA categories (excluding the
critically undercapitalized PCA
category).43 In addition, the agencies are
proposing to amend the current PCA
leverage measure to include in the
leverage measure for the ‘‘adequately
capitalized’’ and ‘‘undercapitalized’’
capital categories for advanced
approaches depository institutions an
additional leverage ratio based on the
leverage ratio in Basel III. All banking
organizations would continue to be
subject to leverage measure thresholds
using the current tier 1, or ‘‘standard’’
leverage ratio in the form of tier 1
capital to total assets. In addition, the
agencies are proposing to revise the
three current capital measures for the
five PCA categories to reflect the
changes to the definition of capital, as
provided in the proposed revisions to
the agencies’ PCA regulations.
The proposed changes to the current
minimum PCA thresholds and the
introduction of a new common equity
tier 1 capital measure would take effect
January 1, 2015. Consistent with
transition provisions in Basel III, the
proposed amendments to the current
PCA leverage measure for advanced
52807
approaches depository institutions
would take effect on January 1, 2018. In
contrast, changes to the definitions of
the individual capital components that
are used to calculate the relevant capital
measures under PCA would coincide
with the transition arrangements
discussed in section V of the preamble,
or with the transition provisions of
other capital regulations, as applicable.
Thus, the changes to these definitions,
including any deductions or
modifications to capital, automatically
would flow through to the definitions in
the PCA framework.
Table 5 sets forth the current riskbased and leverage capital thresholds
for each of the PCA capital categories for
insured depository institutions.
TABLE 5—CURRENT PCA LEVELS
Total RiskBased Capital
(RBC) measure
(total RBC
ratio—percent)
Tier 1 RBC
measure
(tier 1 RBC
ratio—percent)
Well Capitalized ....................
Adequately Capitalized .........
≥10
≥8
≥6
≥4
Undercapitalized ...................
<8
<4
<4 (or <3)
Significantly undercapitalized
<6
<3
<3
Requirement
Leverage
measure
(tier 1 (standard) leverage
ratio—percent)
44 ≥4
≥5
(or ≥3)
Tangible Equity to Total Assets ≤2
Critically undercapitalized .....
Table 6 sets forth the proposed riskbased and leverage capital thresholds
for each of the PCA capital categories for
insured depository institutions that are
PCA requirements
None.
May limit nonbanking activities at DI’s FHC and includes
limits on brokered deposits.
Includes adequately capitalized restrictions, and also includes restrictions on asset growth; dividends; requires
a capital plan.
Includes undercapitalized restrictions, and also includes
restrictions on sub-debt payments.
Generally receivership/conservatorship within 90 days.
not advanced approaches banks. For
each PCA category except critically
undercapitalized, an insured depository
institution would be required to meet a
minimum common equity tier 1 capital
ratio, in addition to a minimum tier 1
risk-based capital ratio, total risk-based
capital ratio, and leverage ratio.
TABLE 6—PROPOSED PCA LEVELS FOR INSURED DEPOSITORY INSTITUTIONS NOT SUBJECT TO THE ADVANCED
APPROACHES RULE
Total RBC
measure
(total RBC
ratio—percent)
Requirement
Tier 1 RBC
measure
(tier 1 RBC
ratio—percent)
Common equity
tier 1 RBC
measure
(common equity
tier 1 RBC ratio
(percent)
Leverage
Measure
(leverage
ratio—percent)
≥10
≥8
<8
<6
≥8
≥6
<6
<4
≥6.5
≥4.5
<4.5
<3
≥5
≥4
<4
<3
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Well Capitalized ............................
Adequately Capitalized .................
Undercapitalized ...........................
Significantly undercapitalized ........
Critically undercapitalized .............
PCA requirements
Unchanged from current rules *.
Do.
Do.
Do.
Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual
preferred stock) to Total Assets ≤2
Do.
* Additional restrictions on capital distributions that are not reflected in the agencies’ proposed revisions to the PCA regulations are described
in section II.C of this preamble.
42 12
U.S.C. 1831o(g)(3).
12 U.S.C. 1831o(c)(1)(B)(i).
44 The minimum ratio of tier 1 capital to total
assets for strong depository institutions (rated
composite ‘‘1’’ under the CAMELS system and not
43 See
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experiencing or anticipating significant growth) is
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To be well capitalized, an insured
depository institution would be
required to maintain a total risk-based
capital ratio equal to or greater than 10
percent; a tier 1 capital ratio equal to or
greater than 8 percent; a common equity
tier 1 capital ratio equal to or greater
than 6.5 percent; and a leverage ratio
equal to or greater than 5 percent. An
adequately capitalized depository
institution would be required to
maintain a total risk-based capital ratio
equal to or greater than 8 percent; a tier
1 capital ratio equal to or greater than
6 percent; common equity tier 1 capital
ratio equal to or greater than 4.5 percent;
and a leverage ratio equal to or greater
than 4 percent.45
An insured depository institution
would be considered undercapitalized
under the proposal if its total capital
ratio were less than 8 percent, or if its
tier 1 capital ratio were less than 6
percent, if its common equity tier 1 ratio
were less than 4.5 percent, or if its
leverage ratio were less than 4 percent.
If an institution’s tier 1 capital ratio
were less than 4 percent, or if its
common equity tier 1 ratio were less
than 3 percent, it would be considered
significantly undercapitalized. The
other numerical capital ratio thresholds
for being significantly undercapitalized
would be unchanged.46
Table 7 sets forth the proposed riskbased and leverage thresholds for
advanced approaches depository
institutions. As indicated in the table, in
addition to the PCA requirements and
categories described above, the leverage
measure for advanced approaches
depository institutions in the adequately
capitalized and undercapitalized PCA
capital categories would include a
supplementary leverage ratio based on
the Basel III leverage ratio.
TABLE 7—PROPOSED PCA LEVELS FOR INSURED DEPOSITORY INSTITUTIONS SUBJECT TO THE ADVANCED APPROACHES
RULE
Requirement
Total RBC
measure (total
RBC ratio—
percent)
Tier 1 RBC
measure (tier 1
RBC ratio—
percent)
Common Equity
tier 1 RBC
measure
(common equity
tier 1 RBC ratio
percent)
Leverage measure
Leverage ratio
(percent)
Supplementary
leverage ratio
(percent)
PCA requirements
Unchanged from current rule *.
Do.
Well Capitalized ........
≥10
≥8
≥6.5
≥5
Not applicable ...........
Adequately Capitalized.
Undercapitalized .......
Significantly undercapitalized.
≥8
≥6
≥4.5
≥4
≥3 ..............................
<8
<6
<6
<4
<4.5
<3
<4
<3
<3 ..............................
Not applicable ...........
Do.
Do.
Not applicable ...........
Do.
Critically undercapitalized.
Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual
preferred stock) to Total Assets ™2
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* Additional restrictions on capital distributions that are not reflected in the agencies’ proposed revisions to the PCA regulations are described
in section II.C of this preamble.
As discussed above, the agencies
believe that the supplementary leverage
ratio is an important measure of an
advanced approaches depository
institution’s ability to support its on-and
off-balance sheet exposures, and
advanced approaches institutions tend
to have significant amounts of offbalance sheet exposures that are not
captured by the current leverage ratio.
Consistent with other minimum ratio
requirements, the agencies propose that
the minimum requirement for the
supplementary leverage ratio in section
10 of the proposal would be the
minimum supplementary leverage ratio
a banking organization would need to
maintain in order to be adequately
capitalized. With respect to the other
PCA categories (other than critically
undercapitalized), the agencies are
proposing ranges of minimum
thresholds for comment. The agencies
intend to specify the minimum
threshold for each of those categories
when the proposed PCA requirements
are finalized.
Under the proposed PCA framework,
for each measure other than the leverage
measure, an advanced approaches
depository institution would be well
capitalized, adequately capitalized,
undercapitalized, significantly
undercapitalized, or critically
undercapitalized on the same basis as
all other insured depository institutions.
An advanced approaches bank would
also be subject to the same thresholds
with respect to the leverage ratio on the
same basis as other insured depository
institutions. In addition, with respect to
the supplementary leverage ratio, in
order to be adequately capitalized, an
advanced approaches depository
institution would be required to
maintain a supplementary leverage ratio
of greater than or equal to 3 percent. An
advanced approaches depository
institution would be undercapitalized if
its supplementary leverage ratio were
less than 3 percent.
Question 13: The agencies seek
comment regarding the proposed
incorporation of the supplementary
leverage ratio into the PCA framework,
as well as the proposed ranges of PCA
categories for the supplementary
leverage ratio. Within the proposed
ranges, what is the appropriate
percentage for each PCA category?
Please provide data to support your
answer.
As discussed in section II of this
preamble, the current PCA framework
permits an insured depository
institution that is rated composite 1
under the CAMELS rating system and
not experiencing or anticipating
significant growth to maintain a 3
percent ratio of tier 1 capital to average
total consolidated assets (leverage ratio)
rather than the 4.0 percent minimum
45 An insured depository institution is considered
adequately capitalized if it meets the qualifications
for the adequately capitalized capital category and
does not qualify as well capitalized.
46 Under current PCA standards, in order to
qualify as well capitalized, an insured depository
institution must not be subject to any written
agreement, order, capital directive, or prompt
corrective action directive issued by the Board
pursuant to section 8 of the Federal Deposit
Insurance Act, the International Lending
Supervision Act of 1983, or section 38 of the
Federal Deposit Insurance Act, or any regulation
thereunder, to meet a maintain a specific capital
level for any capital measure. See 12 CFR
6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(iv) (Board);
12 CFR 325.103(b)(1)(iv) (FDIC). The agencies are
not proposing any changes to this requirement.
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leverage ratio that is otherwise required
for an institution to be adequately
capitalized under PCA. The agencies
believe that it would be appropriate for
all insured depository institutions,
regardless of their CAMELS rating, to
meet the same minimum leverage ratio
requirements. Accordingly, the agencies
propose to eliminate the 3 percent
leverage ratio requirement for insured
depository institutions with composite 1
CAMELS ratings.
The proposal would increase some of
the existing PCA capital requirements
while maintaining the structure of the
current PCA framework. For example,
similar to the current PCA requirements,
the risk-based capital ratios for well
capitalized banking organizations would
be two percentage points higher than
the ratios for adequately capitalized
banking organizations. The tier 1
leverage ratio for well capitalized
banking organizations would be one
percentage point higher than for
adequately capitalized banking
organizations. While the PCA levels do
not explicitly incorporate the capital
conservation buffer, the agencies believe
that the PCA and capital conservation
buffer frameworks will complement
each other to ensure that banking
organizations hold an adequate amount
of common equity tier 1 capital.
The determination of whether an
insured depository institution is
critically undercapitalized for PCA
purposes is based on its ratio of tangible
equity to total assets. This is a statutory
requirement within the PCA framework,
and the experience of the recent
financial crisis has confirmed that
tangible equity is of critical importance
in assessing the viability of an insured
depository institution. Tangible equity
for PCA purposes is currently defined as
including core capital elements, which
consist of (1) Common stock holder’s
equity, (2) qualifying noncumulative
perpetual preferred stock (including
related surplus), and (3) minority
interest in the equity accounts of
consolidated subsidiaries; plus
outstanding cumulative preferred
perpetual stock; minus all intangible
assets except mortgage servicing rights
that are included in tier 1 capital. The
current PCA definition of tangible
equity does not address the treatment of
DTAs in determining whether an
insured depository institution is
critically undercapitalized.
The agencies propose to clarify the
calculation of the capital measures for
the critically undercapitalized PCA
category by revising the definition of
tangible equity to consist of tier 1
capital, plus outstanding perpetual
preferred stock (including related
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surplus) not included in tier 1 capital.
The revised definition would more
appropriately align the calculation of
tangible equity with the calculation of
tier 1 capital generally for regulatory
capital requirements. Assets included in
a banking organization’s equity account
under GAAP, such as DTAs, would be
included in tangible equity only to the
extent that they are included in tier 1
capital. This modification should
promote consistency and provide for
clearer boundaries across and between
the various PCA categories. In
connection with this modification to the
definition of tangible equity, the
agencies propose to retain the current
critically undercapitalized capital
category threshold for insured
depository institutions of less than 2
percent tangible equity to total assets.
Based on the proposed new definition of
tier 1 capital, the agencies believe the
proposed critically undercapitalized
threshold is at least as stringent as the
agencies’ current approach.
Question 14: The agencies solicit
comment on the proposed regulatory
capital requirements in the PCA
framework, the introduction of a
common equity tier 1 ratio as a new
capital measure for purposes of PCA,
and the proposed PCA thresholds for
each PCA category.
In addition to the changes described
in this section, the OCC is proposing the
following amendments to 12 CFR part 6
to integrate the rules governing national
banks and federal savings associations.
Under the proposal, part 6 would be
applicable to federal savings
associations. The OCC also would make
various non-substantive, technical
amendments to part 6. In addition, the
OCC proposes to rescind the current
PCA rules in part 165 governing federal
savings associations, with the exception
of sections 165.8, Procedures for
reclassifying a federal savings
association based on criteria other than
capital, and 165.9, Order to dismiss a
director or senior executive officer; and
to make non-substantive, technical
amendments to sections 165.8 and
165.9. Any substantive issues regarding
sections 165.8 and 165.9 will be
addressed as part of a separate
integration rulemaking.
F. Supervisory Assessment of Overall
Capital Adequacy
Capital helps to ensure that
individual banking organizations can
continue to serve as credit
intermediaries even during times of
stress, thereby promoting the safety and
soundness of the overall U.S. banking
system. The agencies’ current capital
rules indicate that the capital
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requirements are minimum standards
based on broad credit-risk
considerations. The risk-based capital
ratios do not explicitly take account of
the quality of individual asset portfolios
or the range of other types of risk to
which banking organizations may be
exposed, such as interest-rate, liquidity,
market, or operational risks.
A banking organization is generally
expected to have internal processes for
assessing capital adequacy that reflect a
full understanding of its risks and to
ensure that it holds capital
corresponding to those risks to maintain
overall capital adequacy.47 Accordingly,
a supervisory assessment of capital
adequacy must take account of the
internal processes for capital adequacy,
as well as risks and other factors that
can affect a banking organization’s
financial condition, including, for
example, the level and severity of
problem assets and its exposure to
operational and interest rate risk. For
this reason, a supervisory assessment of
capital adequacy may differ
significantly from conclusions that
might be drawn solely from the level of
a banking organization’s risk-based
capital ratios.
In light of these considerations, as a
prudential matter, a banking
organization is generally expected to
operate with capital positions well
above the minimum risk-based ratios
and to hold capital commensurate with
the level and nature of the risks to
which it is exposed, which may entail
holding capital significantly above the
minimum requirement. For example,
banking organizations contemplating
significant expansion proposals are
expected to maintain strong capital
levels substantially above the minimum
ratios and should not allow significant
diminution of financial strength below
these strong levels to fund their
expansion plans. Banking organizations
with high levels of risk are also
expected to operate even further above
minimum standards. In addition to
evaluating the appropriateness of a
banking organization’s capital level
given its overall risk profile, the
supervisory assessment takes into
account the quality and trends in a
banking organization’s capital
composition, including the share of
common and non-common-equity
capital elements.
Section 10(d) of the proposal would
maintain and reinforce these
supervisory expectations by requiring
that a banking organization maintain
capital commensurate with the level
47 The Basel framework incorporates similar
requirements under Pillar 2 of Basel II.
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and nature of all risks to which it is
exposed and that a banking organization
have a process for assessing its overall
capital adequacy in relation to its risk
profile, as well as a comprehensive
strategy for maintaining an appropriate
level of capital.
The supervisory evaluation of a
banking organization’s capital adequacy,
including compliance with section
10(d), may include such factors as
whether the banking organization is
newly chartered, entering new
activities, or introducing new products.
The assessment would also consider
whether a banking organization is
receiving special supervisory attention,
has or is expected to have losses
resulting in capital inadequacy, has
significant exposure due to risks from
concentrations in credit or
nontraditional activities, or has
significant exposure to interest rate risk,
operational risk, or could be adversely
affected by the activities or condition of
a banking organization’s holding
company.
In addition, a banking organization
should have an appropriately rigorous
process for assessing its overall capital
adequacy in relation to its risk profile
and a comprehensive strategy for
maintaining an appropriate level of
capital, consistent with the longstanding
approach employed by the agencies in
their supervision of banking
organizations. Supervisors also would
evaluate the comprehensiveness and
effectiveness of a banking organization’s
capital planning in light of its activities
and capital levels. An effective capital
planning process would require a
banking organization to assess the risks
to which it is exposed and its processes
for managing and mitigating those risks,
evaluate its capital adequacy relative to
its risks, and consider potential impact
on its earnings and capital base from
current and prospective economic
conditions.48
While the elements of supervisory
review of capital adequacy would be
similar across banking organizations,
evaluation of the level of sophistication
of an individual banking organization’s
capital adequacy process would be
commensurate with the banking
organization’s size, sophistication, and
risk profile, similar to the current
supervisory practice.
48 See, for example, SR 09–4, Applying
Supervisory Guidance and Regulations on the
Payment of Dividends, Stock Redemptions, and
Stock Repurchases at Bank Holding Companies
(Board).
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G. Tangible Capital Requirement for
Federal Savings Associations
As part of the OCC’s overall effort to
integrate the regulatory requirements for
national banks and federal savings
associations, the OCC is proposing to
include a tangible capital requirement
for Federal savings associations in this
NPR.49 Under section 5(t)(2)(B) of the
Home Owners’ Loan Act (HOLA),50
federal savings associations are required
to maintain tangible capital in an
amount not less than 1.5 percent of
adjusted total assets.51 This statutory
requirement is implemented in the
capital rules applicable to federal
savings associations at 12 CFR 167.9.52
Under that rule, tangible capital is
defined differently from other capital
measures, such as tangible equity in 12
CFR part 165.
After reviewing HOLA, the OCC has
determined that a unique regulatory
definition of tangible capital is not
necessary to satisfy the requirement of
the statute. Therefore, the OCC is
proposing to define ‘‘tangible capital’’ as
the amount of tier 1 capital plus the
amount of outstanding perpetual
preferred stock (including related
surplus) not included in tier 1 capital.
This definition mirrors the proposed
definition of ‘‘tangible equity’’ for PCA
purposes.53
While OCC recognizes that the terms
used are not identical (‘‘capital’’ as
compared to ‘‘equity’’), the OCC
believes that this revised definition of
tangible capital would reduce the
computational burden on federal
savings associations in complying with
this statutory mandate, as well as being
consistent with both the purposes of
HOLA and PCA. Similarly, the FDIC
49 Under Title III of the Dodd-Frank Act, the OCC
assumed all functions of the Office of Thrift
Supervision (OTS) and the Director of the OTS
relating to Federal savings associations. As a result,
the OCC has responsibility for the ongoing
supervision, examination and regulation of Federal
savings associations as of the transfer date of July
21, 2011. The Act also transfers to the OCC the
rulemaking authority of the OTS relating to all
savings associations, both state and Federal for
certain rules. Section 312(b)(2)(B)(i) (to be codified
12 U.S.C. 5412(b)(2)(B)(i)). The FDIC has
rulemaking authority for the capital and PCA rules
pursuant to section 38 of the FDI Act (12 U.S.C.
1831n) and section 5(t)(1)(A) of the Home Owners’
Loan Act (12 U.S.C.1464(t)(1)(A)).
50 12 U.S.C. 1464(t).
51 ‘‘Tangible capital’’ is defined in section
5(t)(9)(B) to mean ‘‘core capital minus any
intangible assets (as intangible assets are defined by
the Comptroller of the Currency for national
banks.)’’ Section 5(t)(9)(A) defines ‘‘core capital’’ to
mean ‘‘core capital as defined by the Comptroller
of the Currency for national banks, less any
unidentifiable intangible assets [goodwill]’’ unless
the OCC prescribes a more stringent definition.
52 54 FR 49649 (Nov. 30, 1989).
53 See 12 CFR 6.2.
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also is proposing to include a tangible
capital requirement for state savings
associations as part of this proposal.
III. Definition of Capital
A. Capital Components and Eligibility
Criteria for Regulatory Capital
Instruments
1. Common Equity Tier 1 Capital
Under this proposal, a banking
organization’s common equity tier 1
capital would be the sum of its
outstanding common equity tier 1
capital instruments and related surplus
(net of treasury stock), retained
earnings, accumulated other
comprehensive income (AOCI), and
common equity tier 1 minority interest
subject to the provisions set forth in
section 21 of the proposal, minus
regulatory adjustments and deductions
specified in section 22 of the proposal.
a. Criteria
To ensure that a banking
organization’s common equity tier 1
capital is available to absorb losses as
they occur, consistent with Basel III, the
agencies propose to require that
common equity tier 1 capital
instruments issued by a banking
organization satisfy the following
criteria:
(1) The instrument is paid in, issued
directly by the banking organization,
and represents the most subordinated
claim in a receivership, insolvency,
liquidation, or similar proceeding of the
banking organization.
(2) The holder of the instrument is
entitled to a claim on the residual assets
of the banking organization that is
proportional with the holder’s share of
the banking organization’s issued
capital after all senior claims have been
satisfied in a receivership, insolvency,
liquidation, or similar proceeding. That
is, the holder has an unlimited and
variable claim, not a fixed or capped
claim.
(3) The instrument has no maturity
date, can only be redeemed via
discretionary repurchases with the prior
approval of the agency, and does not
contain any term or feature that creates
an incentive to redeem.
(4) The banking organization did not
create at issuance of the instrument
through any action or communication
an expectation that it will buy back,
cancel, or redeem the instrument, and
the instrument does not include any
term or feature that might give rise to
such an expectation.
(5) Any cash dividend payments on
the instrument are paid out of the
banking organization’s net income and
retained earnings and are not subject to
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a limit imposed by the contractual terms
governing the instrument.
(6) The banking organization has full
discretion at all times to refrain from
paying any dividends and making any
other capital distributions on the
instrument without triggering an event
of default, a requirement to make a
payment-in-kind, or an imposition of
any other restrictions on the banking
organization.
(7) Dividend payments and any other
capital distributions on the instrument
may be paid only after all legal and
contractual obligations of the banking
organization have been satisfied,
including payments due on more senior
claims.
(8) The holders of the instrument bear
losses as they occur equally,
proportionately, and simultaneously
with the holders of all other common
stock instruments before any losses are
borne by holders of claims on the
banking organization with greater
priority in a receivership, insolvency,
liquidation, or similar proceeding.
(9) The paid-in amount is classified as
equity under GAAP.
(10) The banking organization, or an
entity that the banking organization
controls, did not purchase or directly or
indirectly fund the purchase of the
instrument.
(11) The instrument is not secured,
not covered by a guarantee of the
banking organization or of an affiliate of
the banking organization, and is not
subject to any other arrangement that
legally or economically enhances the
seniority of the instrument.
(12) The instrument has been issued
in accordance with applicable laws and
regulations. In most cases, the agencies,
understand that the issuance of these
instruments would require the approval
of the board of directors of the banking
organization or, where applicable, of the
banking organization’s shareholders or
of other persons duly authorized by the
banking organization’s shareholders.
(13) The instrument is reported on the
banking organization’s regulatory
financial statements separately from
other capital instruments.
These proposed criteria have been
designed to ensure that common equity
tier 1 capital instruments do not possess
features that would cause a banking
organization’s condition to further
weaken during periods of economic and
market stress. For example, the
proposed requirement that a banking
organization have full discretion on the
amount and timing of distributions and
dividend payments would enhance the
ability of the banking organization to
absorb losses during periods of stress.
The agencies believe that most existing
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common stock instruments previously
issued by U.S. banking organizations
fully satisfy the proposed criteria.
The criteria would also apply to
instruments issued by banking
organizations where ownership of the
company is neither freely transferable,
nor evidenced by certificates of
ownership or stock, such as mutual
banking organizations. For these
entities, instruments that would be
considered common equity tier 1 capital
would be those that are fully equivalent
to common stock instruments in terms
of their subordination and availability to
absorb losses, and that do not possess
features that could cause the condition
of the company to weaken as a going
concern during periods of market stress.
The agencies believe that
stockholders’ voting rights generally are
a valuable corporate governance tool
that permits parties with an economic
interest at stake to take part in the
decision-making process through votes
on establishing corporate objectives and
policy, and in electing the banking
organization’s board of directors. For
that reason, the agencies continue to
expect under the proposal that voting
common stockholders’ equity (net of the
adjustments to and deductions from
common equity tier 1 capital proposed
under the rule) should be the dominant
element within common equity tier 1
capital. To the extent that a banking
organization issues non-voting common
shares or common shares with limited
voting rights, such shares should be
identical to the banking organization’s
voting common shares in all respects
except for any limitations on voting
rights.
Question 15: The agencies solicit
comments on the eligibility criteria for
common equity tier 1 capital
instruments. Which, if any, criteria
could be problematic given the main
characteristics of outstanding common
stock instruments and why? Please
provide supporting data and analysis.
b. Treatment of Unrealized Gains and
Losses of Certain Debt Securities in
Common Equity Tier 1 Capital
Under the agencies’ general risk-based
capital rules, unrealized gains and
losses on AFS debt securities are not
included in regulatory capital,
unrealized losses on AFS equity
securities are included in tier 1 capital,
and unrealized gains on AFS equity
securities are partially included in tier
2 capital.54 As proposed, unrealized
gains and losses on all AFS securities
54 See 12 CFR part 3, appendix A, section 2(b)(5)
(OCC); 12 CFR parts 208 and 225, appendix A,
section II.A.2.e (Board); 12 CFR part 325, appendix
A, section I.A.2.f (FDIC).
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would flow through to common equity
tier 1 capital. This would include those
unrealized gains and losses related to
debt securities whose valuations
primarily change as a result of
fluctuations in a benchmark interest
rate, as opposed to changes in credit risk
(for example, U.S. Treasuries and U.S.
government agency debt obligations).
The agencies believe this proposed
treatment would better reflect an
institution’s actual risk. In particular,
while unrealized gains and losses on
AFS securities might be temporary in
nature and might reverse over a longer
time horizon, (especially when they are
primarily attributable to changes in a
benchmark interest rate), unrealized
losses could materially affect a banking
organization’s capital position at a
particular point in time and associated
risks should be reflected in its capital
ratios. In addition, the proposed
treatment would be consistent with the
common market practice of evaluating a
firm’s capital strength by measuring its
tangible common equity.
Accordingly, the agencies propose to
require unrealized gains and losses on
all AFS securities to flow through to
common equity tier 1 capital. However,
the agencies recognize that including
unrealized gains and losses related to
certain debt securities whose valuations
primarily change as a result of
fluctuations in a benchmark interest rate
could introduce substantial volatility in
a banking organization’s regulatory
capital ratios. The potential increased
volatility could significantly change a
banking organization’s risk-based
capital ratios, in some cases, due
primarily to fluctuations in a benchmark
interest rate and could result in a
change in the banking organization’s
PCA category. Likewise, the agencies
recognize that such volatility could
discourage some banking organizations
from holding highly liquid instruments
with very low levels of credit risk even
where prudent for liquidity risk
management.
The agencies seek comment on
alternatives to the proposed treatment of
unrealized gains and losses on AFS
securities, including an approach where
the unrealized gains and losses related
to debt securities whose valuations
primarily change as a result of
fluctuations in a benchmark interest rate
would be excluded from a banking
organization’s regulatory capital. In
particular, the agencies seek comment
on an approach that would not include
in regulatory capital unrealized gains
and losses on U.S. government and
agency debt obligations, U.S. GSE debt
obligations and other sovereign debt
obligations that would qualify for a zero
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percent risk weight under the proposed
standardized approach. The agencies
also seek comment on whether
unrealized gains and losses on general
obligations issued by states or other
political subdivisions of the United
States should receive similar treatment,
even though unrealized gains and losses
on these obligations are more likely to
result from changes in credit risk and
not primarily from fluctuations in a
benchmark interest rate.
Question 16: To what extent would a
requirement to include unrealized gains
and losses on all debt securities whose
changes in fair value are recognized in
AOCI (1) result in excessive volatility in
regulatory capital; (2) impact the levels
of liquid assets held by banking
organizations; (3) affect the composition
of the banking organization’s securities
portfolios; and (4) pose challenges for
banking organizations’ asset-liability
management? Please provide supporting
data and analysis.
Question 17: What are the pros and
cons of an alternative treatment that
would allow U.S. banking organizations
to exclude from regulatory capital
unrealized gains and losses on debt
securities whose changes in fair value
are predominantly attributable to
fluctuations in a benchmark interest rate
(for example, U.S. government and
agency debt obligations and U.S. GSE
debt obligations)? In the context of such
an alternative treatment, what other
categories of securities should be
considered and why? Are there other
alternatives that the agencies should
consider (for example, retaining the
current treatment for unrealized gains
and losses on AFS debt and equity
securities)?
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2. Additional Tier 1 Capital
Consistent with Basel III, under the
proposal, additional tier 1 capital would
be the sum of: Additional tier 1 capital
instruments that satisfy certain criteria,
related surplus, and tier 1 minority
interest that is not included in a banking
organization’s common equity tier 1
capital (subject to the limitations on
minority interests set forth in section 21
of the proposal); less applicable
regulatory adjustments and deductions.
Under the agencies’ existing capital
rules, non-cumulative perpetual
preferred stock, which currently
qualifies as tier 1 capital, generally
would continue to qualify as additional
tier 1 capital under the proposal. The
proposed criteria for qualifying
additional tier 1 capital instruments,
consistent with Basel III criteria, are:
(1) The instrument is issued and paid
in.
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(2) The instrument is subordinated to
depositors, general creditors, and
subordinated debt holders of the
banking organization in a receivership,
insolvency, liquidation, or similar
proceeding.
(3) The instrument is not secured, not
covered by a guarantee of the banking
organization or of an affiliate of the
banking organization, and not subject to
any other arrangement that legally or
economically enhances the seniority of
the instrument.
(4) The instrument has no maturity
date and does not contain a dividend
step-up or any other term or feature that
creates an incentive to redeem.
(5) If callable by its terms, the
instrument may be called by the
banking organization only after a
minimum of five years following
issuance, except that the terms of the
instrument may allow it to be called
earlier than five years upon the
occurrence of a regulatory event (as
defined in the agreement governing the
instrument) that precludes the
instrument from being included in
additional tier 1 capital or a tax event.
In addition:
(i) The banking organization must
receive prior approval from the agency
to exercise a call option on the
instrument.
(ii) The banking organization does not
create at issuance of the instrument,
through any action or communication,
an expectation that the call option will
be exercised.
(iii) Prior to exercising the call option,
or immediately thereafter, the banking
organization must either:
(A) Replace the instrument to be
called with an equal amount of
instruments that meet the criteria under
section 20(b) or (c) of the proposal
(replacement can be concurrent with
redemption of existing additional tier 1
capital instruments); or
(B) Demonstrate to the satisfaction of
the agency that following redemption,
the banking organization will continue
to hold capital commensurate with its
risk.
(6) Redemption or repurchase of the
instrument requires prior approval from
the agency.
(7) The banking organization has full
discretion at all times to cancel
dividends or other capital distributions
on the instrument without triggering an
event of default, a requirement to make
a payment-in-kind, or an imposition of
other restrictions on the banking
organization except in relation to any
capital distributions to holders of
common stock.
(8) Any capital distributions on the
instrument are paid out of the banking
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organization’s net income and retained
earnings.
(9) The instrument does not have a
credit-sensitive feature, such as a
dividend rate that is reset periodically
based in whole or in part on the banking
organization’s credit quality, but may
have a dividend rate that is adjusted
periodically independent of the banking
organization’s credit quality, in relation
to general market interest rates or
similar adjustments.
(10) The paid-in amount is classified
as equity under GAAP.
(11) The banking organization, or an
entity that the banking organization
controls, did not purchase or directly or
indirectly fund the purchase of the
instrument.
(12) The instrument does not have
any features that would limit or
discourage additional issuance of
capital by the banking organization,
such as provisions that require the
banking organization to compensate
holders of the instrument if a new
instrument is issued at a lower price
during a specified time frame.
(13) If the instrument is not issued
directly by the banking organization or
by a subsidiary of the banking
organization that is an operating entity,
the only asset of the issuing entity is its
investment in the capital of the banking
organization, and proceeds must be
immediately available without
limitation to the banking organization or
to the banking organization’s top-tier
holding company in a form which meets
or exceeds all of the other criteria for
additional tier 1 capital instruments. De
minimis assets related to the operation
of the issuing entity can be disregarded
for purposes of this criterion.
(14) For an advanced approaches
banking organization, the governing
agreement, offering circular, or
prospectus of an instrument issued after
January 1, 2013 must disclose that the
holders of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
banking organization enters into a
receivership, insolvency, liquidation, or
similar proceeding.
The proposed criteria are designed to
ensure that additional tier 1 capital
instruments are available to absorb
losses on a going concern basis. Trust
preferred securities and cumulative
perpetual preferred securities, which are
eligible for limited inclusion in tier 1
capital under the general risk-based
capital rules for bank holding
companies, would generally not qualify
for inclusion in additional tier 1
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capital.55 The agencies believe that
instruments that allow for the
accumulation of interest payable are not
sufficiently loss-absorbent to be
included in tier 1 capital. In addition,
the exclusion of these instruments from
the tier 1 capital of depository
institution holding companies is
consistent with section 171 of the DoddFrank Act.
The agencies recognize that
instruments classified as liabilities for
accounting purposes could potentially
be included in additional tier 1 capital
under Basel III. However, as proposed,
an instrument classified as a liability
under GAAP would not qualify as
additional tier 1 capital. The agencies
believe that allowing only the inclusion
of instruments classified as equity under
GAAP in tier 1 capital would help
strengthen the loss-absorption
capabilities of additional tier 1 capital
instruments, further increasing the
quality of the capital base of U.S.
banking organizations.
The agencies are also proposing to
allow banking organizations to include
in additional tier 1 capital instruments
that were (1) issued under the Small
Business Jobs Act of 2010 or, prior to
October 4, 2010, under the Emergency
Economic Stabilization Act of 2008, and
(2) included in tier 1 capital under the
agencies’ current general risk-based
capital rules.56 These instruments
would be included in tier 1 capital
whether or not they meet the proposed
qualifying criteria for common equity
tier 1 or additional tier 1 capital
instruments. The agencies believe that
continued tier 1 capital treatment of
these instruments is important to
promote financial recovery and stability
following the recent financial crisis.57
Question 18: The agencies solicit
comments and views on the eligibility
criteria for additional tier 1 capital
instruments. Is there any specific
criterion that could potentially be
problematic given the main
characteristics of outstanding noncumulative perpetual preferred
instruments? If so, please explain.
Additional Criterion Regarding Certain
Institutional Investors’ Minimum
Dividend Payment Requirements
Some banking organizations may
want or need to limit their capital
distributions during a particular payout
period, but may opt to pay a penny
dividend instead of fully cancelling
55 See 12 CFR part 225, appendix A, section
II.A.1.
56 Public Law 110–343, 122 Stat. 3765 (October 3,
2008).
57 See 73 FR 43982 (July 29, 2008); see also 76
FR 35959 (June 21, 2011).
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dividends to common shareholders
because certain institutional investors
only hold stocks that pay a dividend.
The agencies believe that the payment
of a penny dividend on common stock
should not preclude a banking
organization from canceling (or making
marginal) dividend payments on
additional tier 1 capital instruments.
The agencies are therefore considering a
revision to criterion (7) of additional tier
1 capital instruments that would require
a banking organization to have the
ability to cancel or substantially reduce
dividend payments on additional tier 1
capital instruments during a period of
time when the banking organization is
paying a penny dividend to its common
shareholders.
The agencies believe that such a
requirement could substantially
increase the loss-absorption capacity of
additional tier 1 capital instruments. To
maintain the hierarchy of the capital
structure under these circumstances,
banking organizations would have the
ability to pay the holders of additional
tier 1 capital instruments the equivalent
of what they pay out to common
shareholders.
Question 19: What is the potential
impact of such a requirement on the
traditional hierarchy of capital
instruments and on the market
dynamics and cost of issuing additional
tier 1 capital instruments?
Question 20: What mechanisms could
be used to ensure, contractually, that
such a requirement would not result in
an additional tier 1 capital instrument
being effectively more loss absorbent
than common stock?
3. Tier 2 Capital
Under the proposal, tier 2 capital
would be the sum of: Tier 2 capital
instruments that satisfy certain criteria,
related surplus, total capital minority
interests not included in a banking
organization’s tier 1 capital (subject to
the limitations and requirements on
minority interests set forth in section 21
of the proposal), and limited amounts of
the allowance for loan and lease losses
(ALLL); less any applicable regulatory
adjustments and deductions. Consistent
with the general risk-based capital rules,
when calculating its standardized total
capital ratio, a banking organization
would be able to include in tier 2 capital
the amount of ALLL that does not
exceed 1.25 percent of its total
standardized risk-weighted assets not
including any amount of the ALLL (a
banking organization subject to the
market risk capital rules would exclude
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its standardized market risk-weighted
assets from the calculation).58
When calculating its advanced
approaches total capital ratio, rather
than including in tier 2 capital the
amount of ALLL described previously,
an advanced approaches banking
organization may include the excess of
eligible credit reserves over its total
expected credit losses (ECL) to the
extent that such amount does not
exceed 0.6 percent of its total credit risk
weighted-assets.59
The proposed criteria for tier 2 capital
instruments, consistent with Basel III,
are:
(1) The instrument is issued and paid
in.
(2) The instrument is subordinated to
depositors and general creditors of the
banking organization.
(3) The instrument is not secured, not
covered by a guarantee of the banking
organization or of an affiliate of the
banking organization, and not subject to
any other arrangement that legally or
economically enhances the seniority of
the instrument in relation to more
senior claims.
(4) The instrument has a minimum
original maturity of at least five years.
At the beginning of each of the last five
years of the life of the instrument, the
amount that is eligible to be included in
tier 2 capital is reduced by 20 percent
of the original amount of the instrument
(net of redemptions) and is excluded
from regulatory capital when remaining
maturity is less than one year. In
addition, the instrument must not have
any terms or features that require, or
create significant incentives for, the
banking organization to redeem the
instrument prior to maturity.
(5) The instrument, by its terms, may
be called by the banking organization
only after a minimum of five years
following issuance, except that the
terms of the instrument may allow it to
be called sooner upon the occurrence of
an event that would preclude the
instrument from being included in tier
2 capital, or a tax event. In addition:
(i) The banking organization must
receive the prior approval of the agency
to exercise a call option on the
instrument.
58 A banking organization would deduct the
amount of ALLL in excess of the amount permitted
to be included in tier 2 capital, as well as allocated
transfer risk reserves, from standardized total riskweighted risk assets and use the resulting amount
as the denominator of the standardized total capital
ratio.
59 An advanced approaches banking organization
would deduct any excess eligible credit reserves
that are not permitted to be included in tier 2
capital from advanced approaches total riskweighted assets and use the resulting amount as the
denominator of the total capital ratio.
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(ii) The banking organization does not
create at issuance, through action or
communication, an expectation the call
option will be exercised.
(iii) Prior to exercising the call option,
or immediately thereafter, the banking
organization must either:
(A) Replace any amount called with
an equivalent amount of an instrument
that meets the criteria for regulatory
capital under this section,60 or
(B) Demonstrate to the satisfaction of
the agency that following redemption,
the banking organization would
continue to hold an amount of capital
that is commensurate with its risk.
(6) The holder of the instrument must
have no contractual right to accelerate
payment of principal or interest on the
instrument, except in the event of a
receivership, insolvency, liquidation, or
similar proceeding of the banking
organization.
(7) The instrument has no creditsensitive feature, such as a dividend or
interest rate that is reset periodically
based in whole or in part on the banking
organization’s credit standing, but may
have a dividend rate that is adjusted
periodically independent of the banking
organization’s credit standing, in
relation to general market interest rates
or similar adjustments.
(8) The banking organization, or an
entity that the banking organization
controls, has not purchased and has not
directly or indirectly funded the
purchase of the instrument.
(9) If the instrument is not issued
directly by the banking organization or
by a subsidiary of the banking
organization that is an operating entity,
the only asset of the issuing entity is its
investment in the capital of the banking
organization, and proceeds must be
immediately available without
limitation to the banking organization or
the banking organization’s top-tier
holding company in a form that meets
or exceeds all the other criteria for tier
2 capital instruments under this
section.61
(10) Redemption of the instrument
prior to maturity or repurchase requires
the prior approval of the agency.
(11) For an advanced approaches
banking organization, the governing
agreement, offering circular, or
prospectus of an instrument issued after
January 1, 2013 must disclose that the
holders of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
60 Replacement of tier 2 capital instruments can
be concurrent with redemption of existing tier 2
capital instruments.
61 De minimis assets related to the operation of
the issuing entity can be disregarded for purposes
of this criterion.
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banking organization enters into a
receivership, insolvency, liquidation, or
similar proceeding.
As explained previously, under the
proposed eligibility criteria for
additional tier 1 capital instruments,
trust preferred securities and
cumulative perpetual preferred
securities would not qualify for
inclusion in additional tier 1 capital.
However, many of these instruments
could qualify for inclusion in tier 2
capital under the proposed eligibility
criteria for tier 2 capital instruments.
Given that as proposed, unrealized
gains and losses on AFS securities
would flow through to common equity
tier 1 capital, the agencies propose to
eliminate the inclusion of a portion of
certain unrealized gains on AFS equity
securities in tier 2 capital.
As a result of the proposed new
minimum common equity tier 1 capital
requirement, higher tier 1 capital
requirement, and the broader goal of
simplifying the definition of tier 2
capital, the agencies are proposing to
eliminate some existing limits related to
tier 2 capital. Specifically, there would
be no limit on the amount of tier 2
capital that could be included in a
banking organization’s total capital.
Likewise, existing limitations on term
subordinated debt, limited-life preferred
stock and trust preferred securities
within tier 2 would also be
eliminated.62
Question 21: The agencies solicit
comments on the eligibility criteria for
tier 2 capital instruments. Is there any
specific criterion that could potentially
be problematic? If so, please explain.
For the reasons explained previously
with respect to tier 1 capital
instruments, the agencies propose to
allow an instrument that qualified as
tier 2 capital under the general riskbased capital rules and that was issued
under the Small Business Jobs Act of
2010 or, prior to October 4, 2010, under
the Emergency Economic Stabilization
Act of 2008, to continue to be
includable in tier 2 capital regardless of
whether it meets all of the proposed
qualifying criteria.
4. Capital Instruments of Mutual
Banking Organizations
Most of the capital of mutual banking
organizations is generally in the form of
retained earnings (including retained
earnings surplus accounts) and the
agencies believe that mutual banking
organizations generally should be able
62 See 12 CFR part 3, Appendix A, section 2(b)(3);
12 CFR parts 208 and 225, appendix A, section
II.A.2; 12 CFR part 325, appendix A, section I.A.2.
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to meet the proposed regulatory capital
requirements.
Consistent with Basel III, the
proposed criteria for regulatory capital
instruments would potentially permit
the inclusion in regulatory capital of
certain capital instruments issued by
mutual banking organizations (for
example, non-withdrawable accounts,
pledged deposits, or mutual capital
certificates), provided that the
instruments meet all the proposed
eligibility criteria of the relevant capital
component.
However, some previously-issued
mutual capital instruments that were
includable in the regulatory capital of
mutual banking organizations may not
meet all of the relevant criteria for
capital instruments under the proposal.
For example, instruments that are
liabilities or that are cumulative would
not meet the criteria for additional tier
1 capital instruments. However, these
instruments would be subject to the
proposed transition provisions and
excluded from capital over time.
Question 21: What instruments or
accounts currently included in the
regulatory capital of mutual banking
organizations would not meet the
proposed criteria for capital
instruments?
Question 23: What impact, if any,
would the exclusion of such
instruments or accounts have on the
regulatory capital ratios of mutual
banking organizations? Please provide
data supporting your answer.
Question 24: Would such instruments
be unable to meet any of the proposed
criteria? Could the terms of such
instruments be modified to align with
the proposed criteria for capital
instruments? Please explain.
Question 25: Would the proposed
criteria for capital instruments affect the
ability of mutual banking organizations
to increase regulatory capital levels
going forward?
5. Grandfathering of Certain Capital
Instruments
Under Basel III, capital investments in
a banking organization made before
September 12, 2010 by the government
where the banking organization is
domiciled are grandfathered until
January 1, 2018. However, as described
above with respect to qualifying criteria
for tier 1 and tier 2 instruments, the
agencies are proposing a different
grandfathering treatment for the capital
investments by the U.S. government,
consistent with the Dodd-Frank Act.63
As discussed above, as proposed,
capital investments by the U.S.
63 See
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government included in the tier 1 and
tier 2 capital of banking organizations
issued under the Small Business Jobs
Act of 2010 or, prior to October 4,
2010,64 under the Emergency Economic
Stabilization Act 65 (for example, tier 1
instruments issued under the TARP
program) would be grandfathered
permanently. Transitional arrangements
for regulatory capital instruments that
do not comply with the Basel III criteria
and transitional arrangements for debt
or equity instruments issued by
depository institution holding
companies that do not qualify as
regulatory capital under the general
risk-based capital rules are discussed
under section V of this preamble.
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6. Agency Approval of Capital Elements
The agencies expect that most existing
common stock instruments that banking
organizations currently include in tier 1
capital would meet the proposed
eligibility criteria for common equity
tier 1 capital instruments. In addition,
the agencies expect that most existing
non-cumulative perpetual preferred
stock instruments that banking
organizations currently include in tier 1
capital and most existing subordinated
debt instruments they include in tier 2
capital would meet the proposed
eligibility criteria for additional tier 1
and tier 2 capital instruments,
respectively. However, the agencies
recognize that over time, capital
instruments that are equivalent in
quality and loss-absorption capacity to
existing instruments may be created to
satisfy different market needs and are
proposing to consider the eligibility of
such instruments on a case-by-case
basis.
Accordingly, the agencies propose to
require a banking organization request
approval from its primary federal
supervisor before it may include a
capital element in regulatory capital,
unless:
(i) Such capital element is currently
included in regulatory capital under the
agencies’ general risk-based capital and
leverage rules and the underlying
instrument complies with the applicable
proposed eligibility criteria for
regulatory capital instruments; or
(ii) The capital element is equivalent
in terms of capital quality and lossabsorption capabilities to an element
described in a previous decision made
publicly available by the banking
organization’s primary federal
supervisor.
64 Public
65 Public
Law 111–240 (September 27, 2010).
Law 110–343, 122 Stat. 3765 (October 3,
2008).
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The agency that is considering a
request to include a new capital element
in regulatory capital would consult with
the other agencies when determining
whether the element should be included
in common equity tier 1, additional tier
1, or tier 2 capital. Once an agency
determines that a capital element may
be included in a banking organization’s
common equity tier 1, additional tier 1,
or tier 2 capital, the agency would make
its decision publicly available,
including a brief description of the
element and the rationale for the
conclusion.
7. Addressing the Point of Non-Viability
Requirements Under Basel III
During the recent financial crisis, in
the United States and other countries,
governments lent to, and made capital
investments in, distressed banking
organizations. These investments
helped to stabilize the recipient banking
organizations and the financial sector as
a whole. However, because of the
investments, the recipient banking
organizations’ existing tier 2 capital
instruments, and (in some cases) tier 1
capital instruments, did not absorb the
banking organizations’ credit losses
consistent with the purpose of
regulatory capital. At the same time,
taxpayers became exposed to those
losses.
On January 13, 2011, the BCBS issued
international standards for all additional
tier 1 and tier 2 capital instruments
issued by internationally active banking
organizations, to ensure that such
regulatory capital instruments fully
absorb losses before taxpayers are
exposed to such losses (Basel nonviability standard). Under the Basel
non-viability standard, all non-common
stock regulatory capital instruments
issued by an internationally active
banking organization must include
terms that subject the instruments to
write-off or conversion to common
equity at the point that either (1) the
write-off or conversion of those
instruments occurs or (2) a government
(or public sector) injection of capital
would be necessary to keep the banking
organization solvent. Alternatively, if
the governing jurisdiction of the
banking organization has established
laws that require such tier 1 and tier 2
capital instruments to be written off or
otherwise fully absorb losses before tax
payers are exposed to loss, the standard
is already met. If the governing
jurisdiction has such laws in place, the
Basel non-viability standard states that
documentation for such instruments
should disclose that information to
investors and market participants, and
should clarify that the holders of such
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instruments would fully absorb losses
before taxpayers are exposed to loss.66
The agencies believe that U.S. law
generally is consistent with the Basel
non-viability standard. The resolution
regime established in Title 2, section
210 of the Dodd-Frank Act provides the
FDIC with the authority necessary to
place failing financial companies that
pose a significant risk to the financial
stability of the United States into
receivership.67 The Dodd-Frank Act
provides that this authority shall be
exercised in the manner that minimizes
systemic risk and moral hazard, so that
(1) Creditors and shareholders will bear
the losses of the financial company; (2)
management responsible for the
condition of the financial company will
not be retained; and (3) the FDIC and
other appropriate agencies will take
steps necessary and appropriate to
ensure that all parties, including holders
of capital instruments, management,
directors, and third parties having
responsibility for the condition of the
financial company, bear losses
consistent with their respective
ownership or responsibility.68 Section
11 of the Federal Deposit Insurance Act
has similar provisions for the resolution
of depository institutions.69
Additionally, under U.S. bankruptcy
law, regulatory capital instruments
issued by a company in bankruptcy
would absorb losses before more senior
unsecured creditors.
Furthermore, consistent with the
Basel non-viability standard, under the
proposal, additional tier 1 and tier 2
capital instruments issued by advanced
approaches banking organizations after
the proposed requirements for capital
instruments are finalized would be
required to include a disclosure that the
holders of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
banking organization enters into
receivership, insolvency, liquidation, or
similar proceeding.
8. Qualifying Capital Instruments Issued
by Consolidated Subsidiaries of a
Banking Organization
Investments by third parties in a
consolidated subsidiary of a banking
organization may significantly improve
the overall capital adequacy of that
subsidiary. However, as became
apparent during the financial crisis,
while capital issued by consolidated
subsidiaries and not owned by the
66 See ‘‘Final Elements of the Reforms to Raise the
Quality of Regulatory Capital’’ (January 2011),
available at: https://www.bis.org/press/p110113.pdf.
67 See 12 U.S.C. 5384.
68 12 U.S.C. 5384.
69 12 U.S.C. 1821.
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parent banking organization (minority
interest) is available to absorb losses at
the subsidiary level, that capital does
not always absorb losses at the
consolidated level. Therefore, inclusion
of minority interests in the regulatory
capital at the consolidated level should
be limited to prevent highly capitalized
subsidiaries from overstating the
amount of capital available to absorb
losses at the consolidated level.
Under the proposal, a banking
organization would be allowed to
include in its consolidated capital
limited amounts of minority interests, if
certain requirements are met. Minority
interest would be classified as a
common equity tier 1, tier 1, or total
capital minority interest depending on
the underlying capital instrument and
on the type of subsidiary issuing such
instrument. Any instrument issued by
the consolidated subsidiary to third
parties would need to meet the relevant
eligibility criteria under section 20 of
the proposal in order for the resulting
minority interest to be included in the
banking organization’s common equity
tier 1, additional tier 1 or tier 2 capital
elements, as appropriate. In addition,
common equity tier 1 minority interest
would need to be issued by a depository
institution or foreign bank that is a
consolidated subsidiary of a banking
organization.
The limits on the amount of minority
interest that may be included in the
consolidated capital of a banking
organization would be based on the
amount of capital held by the
consolidated subsidiary, relative to the
amount of capital the subsidiary would
have to hold in order to avoid any
restrictions on capital distributions and
discretionary bonus payments under the
capital conservation buffer framework,
as provided in section 11 of the
proposal.
For example, if a subsidiary needs to
maintain a common equity tier 1 capital
ratio of more than 7 percent to avoid
limitations on capital distributions and
discretionary bonus payments, and the
subsidiary’s common equity tier 1
capital ratio is 8 percent, the subsidiary
would be considered to have ‘‘surplus’’
common equity tier 1 capital and, at the
consolidated level, the banking
organization would not be able to
include the portion of such surplus
common equity tier 1 capital held by
third party investors.
The steps for determining the amount
of minority interest includable in a
banking organization’s regulatory
capital are described in this section
below and are illustrated in a numerical
example that follows. For example, the
amount of common equity tier 1
minority interest includable in the
common equity tier 1 capital of a
banking organization under the proposal
would be: the common equity tier 1
minority interest of the subsidiary
minus the ratio of the subsidiary’s
common equity tier 1 capital owned by
third parties to the total common equity
tier 1 capital of the subsidiary,
multiplied by the difference between
the common equity tier 1 capital of the
subsidiary and the lower of: (1) The
amount of common equity tier 1 capital
the subsidiary must hold to avoid
restrictions on capital distributions and
discretionary bonus payments, or (2) the
total risk-weighted assets of the banking
organization that relate to the
subsidiary, multiplied by the common
equity tier 1 capital ratio needed by the
banking organization subsidiary to
avoid restrictions on capital
distributions and discretionary bonus
payments. If the subsidiary were not
subject to the same minimum regulatory
capital requirements or capital
conservation buffer framework of the
banking organization, the banking
organization would need to assume, for
purposes of the calculation described
above, that the subsidiary is subject to
the minimum capital requirements and
to the capital conservation buffer
framework of the banking organization.
To determine the amount of tier 1
minority interest includable in the tier
1 capital of the banking organization
and the total capital minority interest
includable in the total capital of the
banking organization, a banking
organization would follow the same
methodology as the one outlined
previously for common equity tier 1
minority interest. Section 21 of the
proposal sets forth the precise
calculations. The amount of tier 1
minority interest that can be included in
the additional tier 1 capital of the
banking organization is equivalent to
the banking organization’s tier 1
minority interest, subject to the
limitations outlined above, less any tier
1 minority interest that is included in
the banking organization’s common
equity tier 1 capital. Likewise, the
amount of total capital minority interest
that can be included in the tier 2 capital
of the banking organization is
equivalent to its total capital minority
interest, subject to the limitations
outlined previously, less any tier 1
minority interest that is included in the
banking organization’s tier 1 capital.
As proposed, minority interest related
to qualifying common or noncumulative
perpetual preferred stock directly issued
by a consolidated U.S. depository
institution or foreign bank subsidiary,
which are eligible for inclusion in tier
1 capital under the general risk-based
capital rules without limitation, would
generally qualify for inclusion in
common equity tier 1 and additional tier
1 capital, respectively, subject to the
appropriate limits under section 21 of
the proposed rule. Likewise, under the
proposed rule, minority interest related
to qualifying cumulative perpetual
preferred stock directly issued by a
consolidated U.S. depository institution
or foreign bank subsidiary, which are
eligible for limited inclusion in tier 1
capital under the general risk-based
capital rules, would generally not
qualify for inclusion in additional tier 1
capital under the proposal.
TABLE 8— EXAMPLE OF THE CALCULATION OF THE PROPOSED LIMITS ON MINORITY INTEREST
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(a)
Capital issued
by subsidiary
($)
(b)
Capital owned
by third parties
(percent)
(c)
Amount of minority interest
($) ((a)*(b))
(d)
Minimum capital requirement plus capital conservation buffer
(percent)
(e)
Minimum capital requirement plus capital conservation buffer ($)
((RWAs*(d))
(f)
Surplus capital
of subsidiary
($) ((a)–(e))
(g)
Surplus minority interest ($)
((f)*(b))
(h)
Minority interest included at
banking organization level
($)((c)–(g))
Common equity tier 1 capital ..................................
80
30
24
7
70
10
3
21
Additional tier 1 capital ......
30
50
15
........................
........................
........................
........................
9.1
Tier 1 capital .....................
Tier 2 capital .....................
110
20
35
75
39
15
8.5
........................
85
........................
25
........................
8.9
........................
30.1
13.5
Total capital ................
130
42
54
10.5
105
25
10.4
43.6
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For purposes of the example in table
8, assume a consolidated depository
institution subsidiary has common
equity tier 1, additional tier 1 and tier
2 capital of $80, $30, and $20,
respectively, and third parties own 30
percent of the common equity tier 1
capital ($24), 50 percent of the
additional tier 1 capital ($15) and 75
percent of the tier 2 capital ($15). If the
subsidiary has $1000 of total riskweighted assets, the sum of its
minimum common equity tier 1 capital
requirement (4.5 percent) plus the
capital conservation buffer (2.5 percent)
(assuming a countercyclical capital
buffer amount of zero) is 7 percent
($70), the sum of its minimum tier 1
capital requirement (6.0 percent) plus
the capital conservation buffer (2.5
percent) is 8.5 percent ($85), and the
sum of its minimum total capital
requirement (8 percent) plus the capital
conservation buffer (2.5 percent) is 10.5
percent ($105).
In this example, the surplus common
equity tier 1 capital of the subsidiary
equals $10 ($80 ¥ $70), the amount of
the surplus common equity tier 1
minority interest is equal to $3
($10*$24/$80), and therefore the
amount of common equity tier 1
minority interest that may be included
at the consolidated level is equal to $21
($24 ¥ $3).
The surplus tier 1 capital of the
subsidiary is equal to $25 ($110 ¥ $85),
the amount of the surplus tier 1
minority interest is equal to $8.9
($25*$39/$110), and therefore the
amount of tier 1 minority interest that
may be included in the banking
organization is equal to $30.1 ($39 ¥
$8.9). Since the banking organization
already includes $21 of common equity
tier 1 minority interest in its common
equity tier 1 capital, it would include
$9.1 ($30.1 ¥ $21) of such tier 1
minority interest in its additional tier 1
capital.
The surplus total capital of the
subsidiary is equal to $25 ($130 ¥
$105), the amount of the surplus total
capital minority interest is equal to
$10.4 ($25*$54/$130), and therefore the
amount of total capital minority interest
that may be included in the banking
organization is equal to $43.6 ($54 ¥
$10.4). Since the banking organization
already includes $30.1 of tier 1 minority
interest in its tier 1 capital, it would
include $13.5 ($43.6 ¥ $30.1) of such
total capital minority interest in its tier
2 capital.
Question 26: The agencies solicit
comments on the proposed qualitative
restrictions and quantitative limits for
including minority interest in regulatory
capital. What is the potential impact of
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these restrictions and limitations on the
issuance of certain types of capital
instruments (for example, subordinated
debt) by depository institution
subsidiaries of banking organizations?
Please provide data to support your
answer.
Real Estate Investment Trust Preferred
Capital
A Real Estate Investment Trust (REIT)
is a company that is required to invest
in real estate and real estate-related
assets and make certain distributions in
order to maintain a tax-advantaged
status. Some banking organizations have
consolidated subsidiaries that are REITs,
and such REITs may have issued capital
instruments to be included in the
regulatory capital of the consolidated
banking organization as minority
interest.
Under the agencies’ general risk-based
capital rules, preferred shares issued by
a REIT subsidiary generally may be
included in a banking organization’s tier
1 capital as minority interest if the
preferred shares meet the eligibility
requirements for tier 1 capital.70 The
agencies have interpreted this
requirement to entail that the REIT
preferred shares must be exchangeable
automatically into noncumulative
perpetual preferred stock of the banking
organization under certain
circumstances. Specifically the primary
federal supervisor may direct the
banking organization in writing to
convert the REIT preferred shares into
noncumulative perpetual preferred
stock of the banking organization
because the banking organization: (1)
Became undercapitalized under the PCA
regulations; 71 (2) was placed into
conservatorship or receivership; or (3)
was expected to become
undercapitalized in the near term.72
Under the proposed rule, the
limitations described previously on the
inclusion of minority interest in
regulatory capital would apply to
capital instruments issued by
consolidated REIT subsidiaries.
Specifically, REIT preferred shares
issued by a REIT subsidiary that meets
the proposed definition of an operating
70 12 CFR part 325, subpart B (FDIC); 12 CFR part
3, Appendix A, Sec. 2(a)(3) (OCC).
71 12 CFR part 3, appendix A, section 2(a)(3), 12
CFR 167.5(a)(1)(iii) (OCC); 12 CFR part 208, subpart
D (Board); 12 CFR part 325, subpart B, 12 CFR part
390, subpart Y (FDIC).
72 See OCC Corporate Decision No. 97–109
(December 1997) available at https://www.occ.gov/
static/interpretations-and-precedents/dec97/cd97–
109.pdf and the Comptroller’s licensing manual,
Capital and Dividends available at https://
www.occ.gov/static/publications/capital3.pdf; 12
CFR parts 208 and 225, appendix A (Board); 12 CFR
part 325, subpart B (FDIC).
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52817
entity would qualify for inclusion in the
regulatory capital of a banking
organization subject to the limitations
outlined in section 21 of the proposed
rule only if the REIT preferred shares
meet the criteria for additional tier 1 or
tier 2 capital instruments outlined in
section 20 of the proposed rule. Under
the proposal, an operating entity is a
subsidiary of the banking organization
set up to conduct business with clients
with the intention of earning a profit in
its own right.
Because a REIT must distribute 90
percent of its earnings in order to
maintain its beneficial tax status, a
banking organization might be reluctant
to cancel dividends on the REIT
preferred shares. However, for a capital
instrument to qualify as additional tier
1 capital, which must be available to
absorb losses, the issuer must have the
ability to cancel dividends. In cases
where a REIT could maintain its tax
status by declaring a consent dividend
and has the ability to do so, the agencies
generally would consider REIT
preferred shares to satisfy criterion (7) of
the proposed eligibility criteria for
additional tier 1 capital instruments
under the proposed rule.73 The agencies
do not expect preferred stock issued by
a REIT that does not have the ability to
declare a consent dividend to qualify as
tier 1 minority interest; however, such
instrument could qualify as total capital
minority interest if it meets all of the
relevant tier 2 eligibility criteria under
the proposed rule.
Question 27: The agencies are seeking
comment on the proposed treatment of
REIT preferred capital. Specifically,
how would the proposed minority
interest limitations and interpretation of
criterion (7) of the proposed eligibility
criteria for additional tier 1 capital
instruments affect the future issuance of
REIT preferred capital instruments?
B. Regulatory Adjustments and
Deductions
1. Regulatory Deductions From
Common Equity Tier 1 Capital
The proposed rule would require a
banking organization to make the
deductions described in this section
from the sum of its common equity tier
1 capital elements. Amounts deducted
would be excluded from the banking
organization’s risk-weighted assets and
leverage exposure.
73 A consent dividend is a dividend that is not
actually paid to the shareholders, but is kept as part
of a company’s retained earnings, yet the
shareholders have consented to treat the dividend
as if paid in cash and include it in gross income
for tax purposes.
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Goodwill and Other Intangibles (Other
Than MSAs)
Goodwill and other intangible assets
have long been either fully or partially
excluded from regulatory capital in the
U.S. because of the high level of
uncertainty regarding the ability of the
banking organization to realize value
from these assets, especially under
adverse financial conditions.74
Likewise, U.S. federal banking statutes
generally prohibit inclusion of goodwill
in the regulatory capital of insured
depository institutions.75
Accordingly, under the proposal,
goodwill and other intangible assets
other than MSAs (for example,
purchased credit card relationships
(PCCRs) and non-mortgage servicing
assets), net of associated deferred tax
liabilities (DTLs), would be deducted
from common equity tier 1 capital
elements. Goodwill for purposes of this
deduction would include any goodwill
embedded in the valuation of significant
investments in the capital of an
unconsolidated financial institution in
the form of common stock. Such
deduction of embedded goodwill would
apply to investments accounted for
under the equity method. Under GAAP,
if there is a difference between the
initial cost basis of the investment and
the amount of underlying equity in the
net assets of the investee, the resulting
difference should be accounted for as if
the investee were a consolidated
subsidiary (which may include imputed
goodwill). Consistent with Basel III,
these deductions would be taken from
common equity tier 1 capital. Although
MSAs are also intangibles, they are
subject to a different treatment under
Basel III and the proposal, as explained
in this section.
DTAs
As proposed, consistent with Basel III,
a banking organization would deduct
DTAs that arise from operating loss and
tax credit carryforwards net of any
related valuation allowances (and net of
DTLs calculated as outlined in section
22(e) of the proposal) from common
equity tier 1 capital elements because of
the high degree of uncertainty regarding
the ability of the banking organization to
realize value from such DTAs.
DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks net of any
related valuation allowances and net of
DTLs calculated as outlined in section
22(e) of the proposal (for example, DTAs
74 See 54 FR 4186, 4196 (1989) (Board); 54 FR
4168, 4175 (1989) (OCC); 54 FR 11509 (FDIC).
75 12 U.S.C. 1828(n).
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resulting from the banking
organization’s ALLL), would be subject
to strict limitations described in section
22(d) of the proposal because of
concerns regarding a banking
organization’s ability to realize such
DTAs.
DTAs arising from temporary
differences that the banking
organization could realize through net
operating loss carrybacks are not subject
to deduction, and instead receive a 100
percent risk weight. For a banking
organization that is a member of a
consolidated group for tax purposes, the
amount of DTAs that could be realized
through net operating loss carrybacks
may not exceed the amount that the
banking organization could reasonably
expect to have refunded by its parent
holding company.
Gain-on-Sale Associated With a
Securitization Exposure
A banking organization would deduct
from common equity tier 1 capital
elements any after-tax gain-on-sale
associated with a securitization
exposure. Under this proposal, gain-onsale means an increase in the equity
capital of a banking organization
resulting from the consummation or
issuance of a securitization (other than
an increase in equity capital resulting
from the banking organization’s receipt
of cash in connection with the
securitization).
Defined Benefit Pension Fund Assets
As proposed, defined benefit pension
fund liabilities included on the balance
sheet of a banking organization would
be fully recognized in common equity
tier 1 capital (that is, common equity
tier 1 capital cannot be increased via the
de-recognition of these liabilities).
However, under the proposal, defined
benefit pension fund assets (defined as
excess assets of the pension fund that
are reported on the banking
organization’s balance sheet due to its
overfunded status), net of any associated
DTLs, would be deducted in the
calculation of common equity tier 1
capital given the high level of
uncertainty regarding the ability of the
banking organization to realize value
from such assets.
Consistent with Basel III, under the
proposal, with supervisory approval, a
banking organization would not be
required to deduct a defined benefit
fund assets to which the banking
organization has unrestricted and
unfettered access. In this case, the
banking organization would assign to
such assets the risk weight they would
receive if they were directly owned by
the banking organization. Under the
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proposal, unrestricted and unfettered
access would mean that a banking
organization is not required to request
and receive specific approval from
pension beneficiaries each time it would
access excess funds in the plan.
The FDIC has unfettered access to the
excess assets of an insured depository
institution’s pension plan in the event
of receivership. Therefore, the agencies
have determined that generally an
insured depository institution would
not be required to deduct any assets
associated with a defined benefit
pension plan from common equity tier
1 capital. Similarly, a holding company
would not need to deduct any assets
associated with a subsidiary insured
depository institution’s defined benefit
pension plan from capital.
Activities by Savings Association
Subsidiaries That Are Impermissible for
National Banks
As part of the OCC’s overall effort to
integrate the regulatory requirements for
national banks and federal savings
associations, the OCC is proposing to
incorporate in the proposal a deduction
requirement specifically applicable to
federal savings association subsidiaries
that engage in activities impermissible
for national banks. Similarly, the FDIC
is proposing to incorporate in the
proposal a deduction requirement
specifically applicable to state savings
association subsidiaries that engage in
activities impermissible for national
banks. Section 5(t)(5) 76 of HOLA
requires a separate capital calculation
for Federal savings associations for
‘‘investments in and extensions of credit
to any subsidiary engaged in activities
not permissible for a national bank.’’
This statutory provision is implemented
through the definition of ‘‘includable
subsidiary’’ as a deduction from the core
capital of the federal savings association
for those subsidiaries that are not
‘‘includable subsidiaries.’’ 77
Specifically, where a subsidiary of a
federal savings association engages in
activities that are impermissible for
national banks, the rules require the
deconsolidation and deduction of the
federal savings association’s investment
in the subsidiary from the assets and
regulatory capital of the Federal savings
association. If the activities of the
federal savings association subsidiary
are permissible for a national bank, then
consistent with GAAP, the balance sheet
of the subsidiary generally is
consolidated with the balance sheet of
the federal savings association.
76 12
U.S.C. 1464(t)(5).
12 CFR 167.1; 12 CFR 167.5(a)(2)(iv).
77 See
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The OCC is proposing to carry over
the general regulatory treatment of
includable subsidiaries, with some
technical modifications, by adding a
new paragraph to section 22(a) of the
proposal. The OCC notes that such
treatment is consistent with how a
national bank deducts its equity
investments in financial subsidiaries.
Under this proposal, investments (both
debt and equity) by a federal savings
association in a subsidiary that is not an
‘‘includable subsidiary’’ are required to
be deducted (with certain exceptions)
from the common equity tier 1 capital
of the federal savings association.
Among other things, includable
subsidiary is defined as a subsidiary of
a federal savings association that
engages solely in activities not
impermissible for a national bank. Aside
from a few technical modifications, this
proposal is intended to carry over the
current general regulatory treatment of
includable subsidiaries for federal
savings associations into the proposal.
Question 28: The OCC and FDIC
request comments on all aspects of this
proposal to incorporate the current
deduction requirement for federal and
state, savings association subsidiaries
that engage in activities impermissible
for national banks. In particular, the
OCC and FDIC are interested in whether
this statutorily required deduction can
be revised to reduce burden on federal
and state savings associations.
2. Regulatory Adjustments to Common
Equity Tier 1 Capital
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Unrealized Gains and Losses on Certain
Cash Flow Hedges
Consistent with Basel III, the agencies
are proposing that unrealized gains and
losses on cash flow hedges that relate to
the hedging of items that are not
recognized at fair value on the balance
sheet (including projected cash flows)
be excluded from regulatory capital.
That is, if the banking organization has
an unrealized-net-cash-flow-hedge gain,
it would deduct it from common equity
tier 1 capital, and if it has an unrealizednet-cash-flow-hedge loss it would add it
back to common equity tier 1 capital,
net of applicable tax effects. That is, if
the amount of the cash flow hedge is
positive, a banking organization would
deduct such amount from common
equity tier 1 capital elements, and if the
amount is negative, a banking
organization would add such amount to
common equity tier 1 capital elements.
This proposed regulatory adjustment
would reduce the artificial volatility
that can arise in a situation where the
unrealized gain or loss of the cash flow
hedge is included in regulatory capital
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but any change in the fair value of the
hedged item is not. However, the
agencies recognize that in a regulatory
capital framework where unrealized
gains and losses on AFS securities flow
through to common equity tier 1 capital,
the exclusion of unrealized cash flow
hedge gains and losses might have an
adverse effect on banking organizations
that manage their interest rate risk by
using cash flow hedges to hedge items
that are not recognized on the balance
sheet at fair value (for example, floating
rate liabilities) and that are used to fund
the banking organizations’ AFS
investment portfolios. In this scenario, a
banking organization’s regulatory
capital could be adversely affected by
fluctuations in a benchmark interest rate
even if the banking organization’s
interest rate risk is effectively hedged
because its unrealized gains and losses
on the AFS securities would flow
through to regulatory capital while its
unrealized gains and losses on the cash
flow hedges would not, resulting in a
regulatory capital asymmetry.
Question 29: How would a
requirement to exclude unrealized net
gains and losses on cash flow hedges
related to the hedging of items that are
not measured at fair value in the balance
sheet (in the context of a framework
where the unrealized gains and losses
on AFS debt securities would flow
through to regulatory capital) change the
way banking organizations currently
hedge against interest rate risk? Please
explain and provide supporting data
and analysis.
Question 30: Could this adjustment
potentially introduce excessive
volatility in regulatory capital
predominantly as a result of fluctuations
in a benchmark interest rate for
institutions that are effectively hedged
against interest rate risk? Please explain
and provide supporting data and
analysis.
Question 31: What are the pros and
cons of an alternative treatment where
floating rate liabilities are deemed to be
fair valued for purposes of the proposed
adjustment for unrealized gains and
losses on cash flow hedges? Please
explain and provide supporting data
and analysis.
Changes in the Banking Organization’s
Creditworthiness
The agencies believe that it would be
inappropriate to allow banking
organizations to increase their capital
ratios as a result of a deterioration in
their own creditworthiness, and are
therefore proposing, consistent with
Basel III, that banking organizations not
be allowed to include in regulatory
capital any change in the fair value of
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52819
a liability that is due to changes in their
own creditworthiness. Therefore, a
banking organization would be required
to deduct any unrealized gain from and
add back any unrealized loss to
common equity tier 1 capital elements
due to changes in a banking
organization’s own creditworthiness. An
advanced approaches banking
organization would deduct from
common equity tier 1 capital elements
any unrealized gains associated with
derivative liabilities resulting from the
widening of a banking organization’s
credit spread premium over the risk free
rate.
3. Regulatory Deductions Related to
Investments in Capital Instruments
Deduction of Investments in own
Regulatory Capital Instruments
To avoid the double-counting of
regulatory capital, under the proposal a
banking organization would be required
to deduct the amount of its investments
in its own capital instruments, whether
held directly or indirectly, to the extent
such investments are not already
derecognized from regulatory capital.
Specifically, a banking organization
would deduct its investment in its own
common equity tier 1, own additional
tier 1 and own tier 2 capital instruments
from the sum of its common equity tier
1, additional tier 1, and tier 2 capital
elements, respectively. In addition, any
common equity tier 1, additional tier 1
or tier 2 capital instrument issued by a
banking organization which the banking
organization could be contractually
obliged to purchase would also be
deducted from its common equity tier 1,
additional tier 1 or tier 2 capital
elements, respectively. If a banking
organization already deducts its
investment in its own shares (for
example, treasury stock) from its
common equity tier 1 capital elements,
it does not need to make such deduction
twice.
A banking organization would be
required to look through its holdings of
index securities to deduct investments
in its own capital instruments. Gross
long positions in investments in its own
regulatory capital instruments resulting
from holdings of index securities may
be netted against short positions in the
same underlying index. Short positions
in indexes that are hedging long cash or
synthetic positions may be decomposed
to recognize the hedge. More
specifically, the portion of the index
that is composed of the same underlying
exposure that is being hedged may be
used to offset the long position only if
both the exposure being hedged and the
short position in the index are positions
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subject to the market risk rule, the
positions are fair valued on the banking
organization’s balance sheet, and the
hedge is deemed effective by the
banking organization’s internal control
processes, which have been assessed by
the primary supervisor of the banking
organization. If the banking organization
finds it operationally burdensome to
estimate the exposure amount as a result
of an index holding, it may, with prior
approval from the primary federal
supervisor, use a conservative estimate.
In all other cases, gross long positions
would be allowed to be deducted net of
short positions in the same underlying
instrument only if the short positions
involve no counterparty risk (for
example, the position is fully
collateralized or the counterparty is a
qualifying central counterparty).
Definition of Financial Institution
Consistent with Basel III, the proposal
would require banking organizations to
deduct investments in the capital of
unconsolidated financial institutions
where those investments exceed certain
thresholds, as described further below.
These deduction requirements are one
of the measures included in Basel III
designed to address systemic risk
arising out of interconnectedness
between banking organizations.
Under the proposal, ‘‘financial
institution’’ would mean bank holding
companies, savings and loan holding
companies, non-bank financial
institutions supervised by the Board
under Title I of the Dodd-Frank Act,
depository institutions, foreign banks,
credit unions, insurance companies,
securities firms, commodity pools (as
defined in the Commodity Exchange
Act), covered funds under section 619 of
the Dodd-Frank Act (and regulations
issued thereunder), benefit plans, and
other companies predominantly
engaged in certain financial activities, as
set forth in the proposal. See the
definition of ‘‘financial institution’’ in
section 2 of the proposed rules.
The proposed definition is designed
to include entities whose primary
business is financial activities and
therefore could contribute to risk in the
financial system, including entities
whose primary business is banking,
insurance, investing, and trading, or a
combination thereof. The proposed
definition is also designed to align with
similar definitions and concepts
included in other rulemakings,
including those funds that are covered
by the restrictions of section 13 of the
Bank Holding Company Act. The
proposed definition also includes a
standard for ‘‘predominantly engaged’’
in financial activities similar to the
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standard from the Board’s proposed rule
to define ‘‘predominantly engaged in
financial activities’’ for purposes of Title
I of the Dodd-Frank Act.78 Likewise, the
proposed definition seeks to exclude
firms that are predominantly engaged in
activities that have a financial nature
but are focused on community
development, public welfare projects,
and similar objectives.
Question 32: The agencies seek
comment on the proposed definition of
financial institution. The agencies have
sought to achieve consistency in the
definition of financial institution with
similar definitions proposed in other
proposed regulations. The agencies seek
comment on the appropriateness of this
standard for purposes of the proposal
and whether a different threshold, such
as greater than 50 percent, would be
more appropriate. The agencies ask that
commenters provide detailed
explanations in their responses.
The Corresponding Deduction
Approach
The proposal incorporates the Basel
III corresponding deduction approach
for the deductions from regulatory
capital related to reciprocal cross
holdings, non-significant investments in
the capital of unconsolidated financial
institutions, and non-common stock
significant investments in the capital of
unconsolidated financial institutions.
Under this approach a banking
organization would be required to make
any such deductions from the same
component of capital for which the
underlying instrument would qualify if
it were issued by the banking
organization itself. If a banking
organization does not have a sufficient
amount of a specific regulatory capital
component to effect the deduction, the
shortfall would be deducted from the
next higher (that is, more subordinated)
regulatory capital component. For
example, if a banking organization does
not have enough additional tier 1 capital
to satisfy the required deduction from
additional tier 1 capital, the shortfall
would be deducted from common
equity tier 1 capital.
If the banking organization invests in
an instrument issued by a non-regulated
financial institution, the banking
organization would treat the instrument
as common equity tier 1 capital if the
instrument is common stock (or if it is
otherwise the most subordinated form of
capital of the financial institution) and
as additional tier 1 capital if the
instrument is subordinated to all
creditors of the financial institution
78 76 FR 7731 (February 11, 2011) and 77 FR
21494 (April 10, 2012).
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except common shareholders. If the
investment is in the form of an
instrument issued by a regulated
financial institution and the instrument
does not meet the criteria for any of the
regulatory capital components for
banking organizations, the banking
organization would treat the instrument
as (1) Common equity tier 1 capital if
the instrument is common stock
included in GAAP equity or represents
the most subordinated claim in
liquidation of the financial institution;
(2) additional tier 1 capital if the
instrument is GAAP equity and is
subordinated to all creditors of the
financial institution and is only senior
in liquidation to common shareholders;
and (3) tier 2 capital if the instrument
is not GAAP equity but it is considered
regulatory capital by the primary
regulator of the financial institution.
Deduction of Reciprocal Cross Holdings
in the Capital Instruments of Financial
Institutions
A reciprocal cross holding results
from a formal or informal arrangement
between two financial institutions to
swap, exchange, or otherwise intend to
hold each other’s capital instruments.
The use of reciprocal cross holdings of
capital instruments to artificially inflate
the capital positions of each of the
banking organizations involved would
undermine the purpose of regulatory
capital, potentially affecting the stability
of such banking organizations as well as
the financial system.
Under the agencies’ general risk-based
capital rules, reciprocal holdings of
capital instruments of banking
organizations are deducted from
regulatory capital. Consistent with Basel
III, the proposal would require a
banking organization to deduct
reciprocal holdings of capital
instruments of other financial
institutions, where these investments
are made with the intention of
artificially inflating the capital positions
of the banking organizations involved.
The deductions would be made by using
the corresponding deduction approach.
Determining the Exposure Amount for
Investments in the Capital of
Unconsolidated Financial Institutions
Under the proposal, the exposure
amount of an investment in the capital
of an unconsolidated financial
institution would refer to a net long
position in an instrument that is
recognized as capital for regulatory
purposes by the primary supervisor of
an unconsolidated regulated financial
institution or in an instrument that is
part of the GAAP equity of an
unconsolidated unregulated financial
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institution. It would include direct,
indirect, and synthetic exposures to
capital instruments, and exclude
underwriting positions held by the
banking organization for five business
days or less. It would be equivalent to
the banking organization’s potential loss
on such exposure should the underlying
capital instrument have a value of zero.
The net long position would be the
gross long position in the exposure
(including covered positions under the
market risk capital rules) net of short
positions in the same exposure where
the maturity of the short position either
matches the maturity of the long
position or has a residual maturity of at
least one year. The long and short
positions in the same index without a
maturity date would be considered to
have matching maturities. For covered
positions under the market risk capital
rules, if a banking organization has a
contractual right or obligation to sell a
long position at a specific point in time,
and the counterparty in the contract has
an obligation to purchase the long
position if the banking organization
exercises its right to sell, this point in
time may be treated as the maturity of
the long position. Therefore, if these
conditions are met, the maturity of the
long position and the short position
would be deemed to be matched even if
the maturity of the short position is less
than one year.
Gross long positions in investments in
the capital instruments of
unconsolidated financial institutions
resulting from holdings of index
securities may be netted against short
positions in the same underlying index.
However, short positions in indexes that
are hedging long cash or synthetic
positions may be decomposed to
recognize the hedge. More specifically,
the portion of the index that is
composed of the same underlying
exposure that is being hedged may be
used to offset the long position as long
as both the exposure being hedged and
the short position in the index are
positions subject to the market risk rule,
the positions are fair valued on the
banking organization’s balance sheet,
and the hedge is deemed effective by the
banking organization’s internal control
processes assessed by the primary
supervisor of the banking organization.
Also, instead of looking through and
monitoring its exact exposure to the
capital of other financial institutions
included in an index security, a banking
organization may be permitted, with the
prior approval of its primary federal
supervisor, to use a conservative
estimate of the amount of its
investments in the capital instruments
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of other financial institutions through
the index security.
An indirect exposure would result
from the banking organization’s
investment in an unconsolidated entity
that has an exposure to a capital
instrument of a financial institution. A
synthetic exposure results from the
banking organization’s investment in an
instrument where the value of such
instrument is linked to the value of a
capital instrument of a financial
institution. Examples of indirect and
synthetic exposures would include: (1)
An investment in the capital of an
unconsolidated entity that has an
investment in the capital of an
unconsolidated financial institution; (2)
a total return swap on a capital
instrument of another financial
institution; (3) a guarantee or credit
protection, provided to a third party,
related to the third party’s investment in
the capital of another financial
institution; (4) a purchased call option
or a written put option on the capital
instrument of another financial
institution; and (5) a forward purchase
agreement on the capital of another
financial institution.
Investments, including indirect and
synthetic exposures, in the capital of
unconsolidated financial institutions
would be subject to the corresponding
deduction approach if they surpass
certain thresholds described below.
With the prior written approval of the
primary federal supervisor, for the
period of time stipulated by the
supervisor, a banking organization
would not be required to deduct
investments in the capital of
unconsolidated financial institutions
described in this section if the
investment is made in connection with
the banking organization providing
financial support to a financial
institution in distress. Likewise, a
banking organization that is an
underwriter of a failed underwriting can
request approval from its primary
federal supervisor to exclude
underwriting positions related to such
failed underwriting for a longer period
of time.
Question 33: The agencies solicit
comments on the scope of indirect
exposures for purposes of determining
the exposure amount for investments in
the capital of unconsolidated financial
institutions. Specifically, what
parameters (for example, a specific
percentage of the issued and
outstanding common shares of the
unconsolidated financial institution)
would be appropriate for purposes of
limiting the scope of indirect exposures
in this context and why?
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Question 34: What are the pros and
cons of the proposed exclusion from the
exposure amount of an investment in
the capital of an unconsolidated
financial institution for underwriting
positions held by the banking
organization for 5 business days or
fewer? Would limiting the exemption to
5 days affect banking organizations’
willingness to underwrite stock
offerings by smaller banking
organizations? Please provide data to
support your answer.
Deduction of Non-Significant
Investments in the Capital of
Unconsolidated Financial Institutions
Under the proposal, non-significant
investments in the capital of
unconsolidated financial institutions
would be investments where a banking
organization owns 10 percent or less of
the issued and outstanding common
shares of an unconsolidated financial
institution.
Under the proposal, if the aggregate
amount of a banking organization’s nonsignificant investments in the capital of
unconsolidated financial institutions
exceeds 10 percent of the sum of the
banking organization’s common equity
tier 1 capital elements, minus certain
applicable deductions and other
regulatory adjustments to common
equity tier 1 capital (the 10 percent
threshold for non-significant
investments), the banking organization
would have to deduct the amount of the
non-significant investments that are
above the 10 percent threshold for nonsignificant investments, applying the
corresponding deduction approach.79
The amount to be deducted from a
specific capital component would be
equal to the amount of a banking
organization’s non-significant
investments in the capital of
unconsolidated financial institutions
exceeding the 10 percent threshold for
non-significant investments multiplied
by the ratio of (1) the amount of nonsignificant investments in the capital of
79 The regulatory adjustments and deductions
applied in the calculation of the 10 percent
threshold for non-significant investments are those
required under sections 22(a) through 22(c)(3) of the
proposal. That is, the required deductions and
adjustments for goodwill and other intangibles
(other than MSAs) net of associated DTLs, DTAs
that arise from operating loss and tax credit
carryforwards net of related valuation allowances
and DTLs (as described below), cash flow hedges
associated with items that are not reported at fair
value, excess ECLs (for advanced approaches
banking organizations only), gains-on-sale on
securitization exposures, gains and losses due to
changes in own credit risk on fair valued financial
liabilities, defined benefit pension fund net assets
for banking organizations that are not insured by
the FDIC (net of associated DTLs), investments in
own regulatory capital instruments (not deducted as
treasury stock), and reciprocal cross holdings.
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unconsolidated financial institutions in
the form of such capital component to
(2) the amount of the banking
organization’s total non-significant
investments in the capital of
unconsolidated financial institutions.
The amount of a banking organization’s
non-significant investments in the
capital of unconsolidated financial
institutions that does not exceed the 10
percent threshold for non-significant
investments would generally be
assigned the applicable risk weight
under sections 32 (in the case of noncommon stock instruments), 52 (in the
case of common stock instruments), or
53 (in the case of indirect investments
via a mutual fund) of the proposal, as
appropriate.
For example, if a banking organization
has a total of $200 in non-significant
investments in the capital of
unconsolidated financial institutions (of
which 50 percent is in the form of
common stock, 30 percent is in the form
of an additional tier 1 capital
instrument, and 20 percent is in the
form of tier 2 capital subordinated debt)
and $100 of these investments exceed
the 10 percent threshold for nonsignificant investments, the banking
organization would need to deduct $50
from its common equity tier 1 capital
elements, $30 from its additional tier 1
capital elements and $20 from its tier 2
capital elements.
Deduction of Significant Investments in
the Capital of Unconsolidated Financial
Institutions That Are Not in the Form of
Common Stock
Under the proposal, a significant
investment of a banking organization in
the capital of an unconsolidated
financial institution would be an
investment where the banking
organization owns more than 10 percent
of the issued and outstanding common
shares of the unconsolidated financial
institution. Significant investments in
the capital of unconsolidated financial
institutions that are not in the form of
common stock would be deducted
applying the corresponding deduction
approach described previously.
Significant investments in the capital of
unconsolidated financial institutions
that are in the form of common stock
would be subject to the common equity
deduction threshold approach described
in section III.B.4 of this preamble.
Section 121 of the Graham-LeachBliley Act (GLBA) allows national banks
and insured state banks to establish
entities known as financial
subsidiaries.80 One of the statutory
80 Public Law 106–102, 113 Stat. 1338, 1373 (Nov.
12, 1999).
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requirements for establishing a financial
subsidiary is that a national bank or
insured state bank must deduct any
investment in a financial subsidiary
from the bank’s capital.81 The agencies
implemented this statutory requirement
through regulation at 12 CFR 5.39(h)(1)
(OCC), 12 CFR 208.73 (Board), and 12
CFR 362.18 (FDIC). Under the agencies’
current rules, a bank must deduct the
aggregate amount of its outstanding
equity investment, including retained
earnings, in its financial subsidiaries
from its total assets and tangible equity,
and deduct such investment from its
total risk-based capital (made equally
from tier 1 and tier 2 capital).
Under the NPR, investments by a
national bank or insured state bank in
financial subsidiaries would be
deducted entirely from the bank’s
common equity tier 1 capital.82 Because
common equity tier 1 capital is a
component of tangible equity, the
proposed deduction from common
equity tier 1 would automatically result
in a deduction from tangible equity. The
agencies believe that the more
conservative treatment is appropriate for
financial subsidiaries, given the risks
associated with nonbanking activities.
4. Items Subject to the 10 and 15 Percent
Common Equity Tier 1 Capital
Threshold Deductions
Under the proposal, a banking
organization would deduct from the
sum of its common equity tier 1 capital
elements the amount of each of the
following items that individually
exceeds the 10 percent common equity
tier 1 capital deduction threshold
described below: (1) DTAs arising from
temporary differences that could not be
realized through net operating loss
carrybacks (net of any related valuation
allowances and net of DTLs, as
described in section 22(e) of the
proposal); (2) MSAs net of associated
DTLs; and (3) significant investments in
the capital of financial institutions in
the form of common stock (referred to
herein as items subject to the threshold
deductions).
A banking organization would
calculate the 10 percent common equity
tier 1 capital deduction threshold by
taking 10 percent of the sum of a
banking organization’s common equity
tier 1 elements, less adjustments to, and
deductions from common equity tier 1
capital required under sections 22(a)
through (c) of the proposal.83
81 12
U.S.C. 24a(c); 12 U.S.C. 1831w(a)(2).
deduction provided for in the agencies’
existing regulations would be removed.
83 The regulatory adjustments and deductions
applied in the calculation of the 10 percent
82 The
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As mentioned above, banking
organizations would deduct from
common equity tier 1 capital elements
any goodwill embedded in the valuation
of significant investments in the capital
of unconsolidated financial institutions
in the form of common stock. Therefore,
a banking organization would be
allowed to net such embedded goodwill
against the exposure amount of such
significant investment. For example, if a
banking organization has deducted $10
of goodwill embedded in a $100
significant investment in the capital of
an unconsolidated financial institution
in the form of common stock, the
banking organization would be allowed
to net such embedded goodwill against
the exposure amount of such significant
investment (that is, the value of the
investment would be $90 for purposes
of the calculation of the amount that
would be subject to deduction under
this part of the proposal).
In addition, the aggregate amount of
the items subject to the threshold
deductions that are not deducted as a
result of the 10 percent common equity
tier 1 capital deduction threshold
described above would not be permitted
to exceed 15 percent of a banking
organization’s common equity tier 1
capital, as calculated after applying all
regulatory adjustments and deductions
required under the proposal (the 15
percent common equity tier 1 capital
deduction threshold). That is, a banking
organization would be required to
deduct the amounts of the items subject
to the threshold deductions that exceed
17.65 percent (the proportion of 15
percent to 85 percent) of common equity
tier 1 capital elements, less all
regulatory adjustments and deductions
required for the calculation of the 10
percent common equity tier 1 capital
deduction threshold mentioned above,
and less the items subject to the 10 and
15 percent common equity tier 1 capital
common equity deduction threshold are those
required under sections 22(a) through (c) of the
proposal. That is, the required deductions and
adjustments for goodwill and other intangibles
(other than MSAs) net of associated DTLs, DTAs
that arise from operating loss and tax credit
carryforwards net of related valuation allowances
and DTLs (as described below), cash flow hedges
associated with items that are not reported at fair
value, excess ECLs (for advanced approaches
banking organizations only), gains-on-sale on
securitization exposures, gains and losses due to
changes in own credit risk on fair valued financial
liabilities, defined benefit pension fund net assets
for banking organizations that are not insured by
the FDIC (net of associated DTLs), investments in
own regulatory capital instruments (not deducted as
treasury stock), reciprocal cross holdings, nonsignificant investments in the capital of
unconsolidated financial institutions, and, if
applicable, significant investments in the capital of
unconsolidated financial institutions that are not in
the form of common stock.
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deduction thresholds in full. As
described below, banking organization
would be required to include the
amounts of these three items that are not
deducted from common equity tier 1
capital in its risk-weighted assets and
assign a 250 percent risk weight to
them.
Under section 475 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C.
1828 note), the amount of readily
marketable MSAs that a banking
organization may include in regulatory
capital cannot be valued at more than 90
percent of their fair market value 84 and
the fair market value of such MSAs
must be determined at least on a
quarterly basis. Therefore, if the amount
of MSAs a banking organization deducts
after the application of the 10 percent
and 15 percent common equity tier 1
deduction threshold is less than 10
percent of the fair value of its MSAs, the
banking organization must deduct an
additional amount of MSAs so that the
total amount of MSAs deducted is at
least 10 percent of the fair value of its
MSAs.
Question 35: The agencies solicit
comments and supporting data on the
additional regulatory capital deductions
outlined in this section above.
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5. Netting of DTLs Against DTAs and
Other Deductible Assets
Under the proposal, the netting of
DTLs against assets (other than DTAs)
that are subject to deduction under
section 22 of the proposal would be
permitted provided the DTL is
associated with the asset and the DTL
would be extinguished if the associated
asset becomes impaired or is
derecognized under GAAP. Likewise,
banking organizations would be
prohibited from using the same DTL for
netting purposes more than once. This
practice would be generally consistent
with the approach that the agencies
currently take with respect to the
netting of DTLs against goodwill.
With respect to the netting of DTLs
against DTAs, the amount of DTAs that
arise from operating loss and tax credit
carryforwards, net of any related
valuation allowances, and the amount of
DTAs arising from temporary
differences that the banking
organization could not realize through
84 Section 475 also provides that mortgage
servicing rights may be valued at more than 90
percent of their fair market value but no more than
100 percent of such value, if the agencies jointly
make a finding that such valuation would not have
an adverse effect on the deposit insurance funds or
the safety and soundness of insured depository
institutions. The agencies have not made such a
finding.
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net operating loss carrybacks, net of any
related valuation allowances, would be
allowed to be netted against DTLs if the
following conditions are met. First, only
the DTAs and DTLs that relate to taxes
levied by the same taxation authority
and that are eligible for offsetting by that
authority would be offset for purposes
of this deduction. And second, the
amount of DTLs that the banking
organization would be able to net
against DTAs that arise from operating
loss and tax credit carryforwards, net of
any related valuation allowances, and
against DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks, net of any
related valuation allowances, would be
allocated in proportion to the amount of
DTAs that arise from operating loss and
tax credit carryforwards (net of any
related valuation allowances, but before
any offsetting of DTLs) and of DTAs
arising from temporary differences that
the banking organization could not
realize through net operating loss
carrybacks (net of any related valuation
allowances, but before any offsetting of
DTLs), respectively.
6. Deduction From Tier 1 Capital of
Investments in Hedge Funds and Private
Equity Funds Pursuant to Section 619 of
the Dodd-Frank Act
Section 619 of the Dodd-Frank Act
(the Volcker Rule) contains a number of
restrictions and other prudential
requirements applicable to any
‘‘banking entity’’ 85 that engages in
proprietary trading or has certain
interests in, or relationships with, a
hedge fund or a private equity fund.86
Section 13(d)(3) of the Bank Holding
Company Act, as added by the Volcker
Rule, provides that the agencies ‘‘shall
* * * adopt rules imposing additional
capital requirements and quantitative
limitations, including diversification
requirements, regarding activities
85 The term ‘‘banking entity’’ is defined in section
13(h)(1) of the Bank Holding Company Act (BHC
Act), as amended by section 619 of the Dodd-Frank
Act. See 12 U.S.C. 1851(h)(1). The statutory
definition includes any insured depository
institution (other than certain limited purpose trust
institutions), any company that controls an insured
depository institution, any company that is treated
as a bank holding company for purposes of section
8 of the International Banking Act of 1978 (12
U.S.C. 3106), and any affiliate or subsidiary of any
of the foregoing.
86 Section 13 of the BHC Act defines the terms
‘‘hedge fund’’ and ‘‘private equity fund’’ as ‘‘an
issuer that would be an investment company, as
defined in the Investment Company Act of 1940 (15
U.S.C. 80a–1 et seq.), but for section 3(c)(1) or
3(c)(7) of that Act, or such similar funds as the
appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodities
Futures Trading Commission may, by rule, * * *
determine.’’ See 12 U.S.C. 1851(h)(2).
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52823
permitted under the Volcker Rule if the
appropriate Federal banking agencies,
the Securities and Exchange
Commission, and the Commodity
Future Trading Commission determine
that additional capital and quantitative
limitations are appropriate to protect the
safety and soundness of banking entities
engaged in such activities.’’
The Volcker Rule also added section
13(d)(4)(B)(iii) to the Bank Holding
Company Act, which pertains to
ownership interests in a hedge fund or
private equity fund organized and
offered by a banking entity (or an
affiliate or subsidiary thereof) and
provides, ‘‘For the purposes of
determining compliance with the
applicable capital standards under
paragraph (3), the aggregate amount of
the outstanding investments by a
banking entity under this paragraph,
including retained earnings, shall be
deducted from the assets and tangible
equity of the banking entity, and the
amount of the deduction shall increase
commensurate with the leverage of the
hedge fund or private equity fund.’’
In October 2011, the agencies and the
SEC issued a proposal to implement the
Volcker Rule (the Volcker Rule
proposal).87 Section 12(d) of the Volcker
Rule proposal included a provision that
would require a ‘‘banking entity’’ to
deduct from tier 1 capital its
investments in a hedge fund or a private
equity fund that the banking entity
organizes and offers pursuant to the
Volcker rule as provided by section
13(d)(3) and (4)(B)(iii) of the Bank
Holding Company Act.
Under the Volcker Rule proposal, a
banking organization subject to the
Volcker Rule 88 would be required to
deduct from tier 1 capital the aggregate
value of its investments in hedge funds
and private equity funds that the
banking organization organizes and
offers pursuant to section 13(d)(1)(G) of
the Bank Holding Company Act. As
proposed, the Volcker Rule deduction
would not apply to an ownership
interest in a hedge fund or private
87 The agencies sought public comment on the
Volcker Rule proposal on October 11, 2011, and the
Securities and Exchange Commission sought public
comment on the same proposal on October 12,
2011. See 76 FR 68846 (Nov. 7, 2011). On January
11, 2012, the Commodities Futures Trading
Commission requested comment on a substantively
similar proposed rule implementing section 13 of
the BHC Act. See 77 FR 8332 (Feb. 14, 2012).
88 The Volcker rule regulations apply to ‘‘banking
entities,’’ as defined in section 13(h)(1) of the Bank
Holding Company Act (BHC Act), as amended by
section 619 of the Dodd-Frank Act. This term
generally includes all banking organizations subject
to the Federal banking agencies’ capital regulations
with the exception of limited purpose trust
institutions that are not affiliated with a depository
institution or bank holding company.
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equity fund held by a banking entity
pursuant to any of the exemption
activity categories in section 13(d)(1) of
the Bank Holding Company Act. For
instance, a banking entity that acquires
or retains an investment in a small
business investment company or an
investment designed to promote the
public welfare of the type permitted
under 12 U.S.C. 24 (Eleventh), which
are specifically permitted under section
13(d)(1)(E) of the Bank Holding
Company Act, would not be required to
deduct the value of such ownership
interest from its tier 1 capital.
The agencies believe that this
proposed capital requirement, as it
applies to banking organizations, should
be considered within the context of the
agencies’ entire regulatory capital
framework, so that its potential
interaction with all other regulatory
capital requirements is assessed fully.
The agencies intend to avoid prescribing
overlapping regulatory capital
requirements for the same exposures.
Therefore, once the regulatory capital
requirements prescribed by the Volcker
Rule are finalized, the Federal banking
agencies expect to amend the regulatory
capital treatment for investments in the
capital of an unconsolidated financial
institution—currently set forth in
section 22 of the proposal—to include
the deduction that would be required
under the Volcker Rule. Exposures
subject to that deduction would not also
be subject to the capital requirements
for investments in the capital of an
unconsolidated financial institution nor
would they be considered for the
purpose of determining the relevant
thresholds for the deductions from
regulatory capital required for
investments in the capital of an
unconsolidated financial institution.
IV. Denominator Changes Related to the
Proposed Regulatory Changes
Consistent with Basel III, for purposes
of calculating total risk-weighted assets,
the proposal would require a banking
organization to assign a 250 percent risk
weight to (1) MSAs, (2) DTAs arising
from temporary differences that a
banking organization could not realize
through net operating loss carrybacks
(net of any related valuation allowances
and net of DTLs, as described in section
22(e) of the proposal), and (3) significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock that are not
deducted from tier 1 capital pursuant to
section 22 of the proposal.
Basel III also requires banking
organizations to apply a 1,250 percent
risk weight to certain exposures that are
deducted from total capital under the
general risk-based capital rules.
Accordingly, for purposes of calculating
total risk-weighted assets, the proposal
would require a banking organization to
apply a 1,250 percent risk weight to the
portion of a credit-enhancing interestonly strips that does not constitute an
after-tax-gain-on-sale. A banking
organization would not be required to
deduct such exposures from regulatory
capital.
V. Transitions Provisions
The main goal of the transition
provisions is to give banking
organizations sufficient time to adjust to
the proposal while minimizing the
potential impact that implementation
could have on their ability to lend. The
proposed transition provisions have
been designed to ensure compliance
with the Dodd-Frank Act. As a result,
they could, in certain circumstances, be
more stringent than the transitional
arrangements proposed in Basel III.
The transition provisions would
apply to the following areas: (1) The
minimum regulatory capital ratios; (2)
the capital conservation and
countercyclical capital buffers; (3) the
regulatory capital adjustments and
deductions; and (4) non-qualifying
capital instruments. In the Standardized
Approach NPR, the agencies are
proposing changes to the calculation of
risk-weighted assets that would be
effective January 1, 2015, with an option
to early adopt.
A. Minimum Regulatory Capital Ratios
The transition period for the
minimum common equity tier 1 and tier
1 capital ratios is from January 1, 2013
to December 31, 2014 as set forth below.
TABLE 9—TRANSITION FOR MINIMUM CAPITAL RATIOS
Transition Minimum Common Equity Tier 1 and Tier 1 Capital Ratios
Common equity
tier 1 capital
ratio
Transition period
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Calendar year 2013 .............................................................................................................................................
Calendar year 2014 .............................................................................................................................................
Calendar year 2015 and thereafter .....................................................................................................................
The minimum common equity tier 1
and tier 1 capital ratios, as well as the
minimum total capital ratio, will be
calculated during the transition period
using the definitions for the respective
capital components in section 20 of the
proposed rule and using the proposed
transition provisions for the regulatory
adjustments and deductions and for the
non-qualifying capital instruments
described in this section.
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B. Capital Conservation and
Countercyclical Capital Buffer
As explained in more detail in section
11 of the proposed rule, a banking
organization’s applicable capital
conservation buffer would be the lowest
of the following three ratios: the banking
organization’s common equity tier 1, tier
1 and total capital ratio less its
minimum common equity tier 1, tier 1
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3.5
4.0
4.5
Tier 1 capital
ratio
4.5
5.5
6.0
and total capital ratio requirement,
respectively. Table 10 shows the
regulatory capital levels banking
organizations would generally need to
meet during the transition period to
avoid becoming subject to limitations on
capital distributions and discretionary
bonus payments from January 1, 2016
until January 1, 2019.
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TABLE 10—PROPOSED REGULATORY CAPITAL LEVELS
Jan. 1,
2013
(percent)
Capital conservation buffer ....................................
Minimum common equity tier 1 capital ratio +
capital conservation buffer .................................
Minimum tier 1 capital ratio + capital conservation
buffer ..................................................................
Minimum total capital ratio + capital conservation
buffer ..................................................................
Maximum potential countercyclical capital buffer ..
Banking organizations would not be
subject to the capital conservation and
the countercyclical capital buffer until
January 1, 2016. From January 1, 2016
Jan. 1,
2014
(percent)
Jan. 1,
2015
(percent)
Jan. 1,
2016
(percent)
..................
..................
..................
0.625
1.25
1.875
2.5
3.5
4.0
4.5
5.125
5.75
6.375
7.0
4.5
5.5
6.0
6.625
7.25
7.875
8.5
8.0
..................
8.0
..................
8.0
..................
8.625
0.625
9.25
1.25
9.875
1.875
10.5
2.5
through December 31, 2018, banking
organizations would be subject to
transitional arrangements with respect
to the capital conservation and
Jan. 1,
2017
(percent)
Jan. 1,
2018
(percent)
Jan. 1,
2019
(percent)
countercyclical capital buffers as
outlined in more detail in table 11.
TABLE 11—TRANSITION PROVISION FOR THE CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFER
Maximum payout ratio
(as a percentage of eligible retained income)
Capital conservation buffer
(assuming a countercyclical capital buffer of zero)
Calendar year 2016 ........................
Greater than 0.625 percent ...................................................................
Less than or equal to 0.625 percent, and greater than 0.469 percent
Less than or equal to 0.469 percent, and greater than 0.313 percent
Less than or equal to 0.313 percent, and greater than 0.156 percent
Less than or equal to 0.156 percent .....................................................
No payout ratio limitation applies
60 percent
40 percent
20 percent
0 percent
Calendar year 2017 ........................
Greater than 1.25 percent .....................................................................
Less than or equal to 1.25 percent, and greater than 0.938 percent ...
Less than or equal to 0.938 percent, and greater than 0.625 percent
Less than or equal to 0.625 percent, and greater than 0.313 percent
Less than or equal to 0.313 percent .....................................................
No payout ratio limitation applies
60 percent
40 percent
20 percent
0 percent
Calendar year 2018 ........................
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Transition period
Greater than 1.875 percent ...................................................................
Less than or equal to 1.875 percent, and greater than 1.406 percent
Less than or equal to 1.406 percent, and greater than 0.938 percent
Less than or equal to 0.938 percent, and greater than 0.469 percent
Less than or equal to 0.469 percent .....................................................
No payout ratio limitation applies
60 percent
40 percent
20 percent
0 percent
As illustrated in table 11, from
January 1, 2016 through December 31,
2016, a banking organization would be
able to make capital distributions and
discretionary bonus payments without
limitation under this section as long as
it maintains a capital conservation
buffer greater than 0.625 percent (plus
for an advanced approaches banking
organization, any applicable
countercyclical capital buffer amount).
From January 1, 2017 through December
31, 2017, a banking organization would
be able to make capital distributions and
discretionary bonus payments without
limitation under this section as long as
it maintains a capital conservation
buffer greater than 1.25 percent (plus for
an advanced approaches banking
organization, any applicable
countercyclical capital buffer amount).
From January 1, 2018 through December
31, 2018, a banking organization would
be able to make capital distributions and
discretionary bonus payments without
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limitation under this section as long as
it maintains a capital conservation
buffer greater than 1.875 percent (plus
for an advanced approaches banking
organization, any applicable
countercyclical capital buffer amount).
From January 1, 2019 onward, a banking
organization would be able to make
capital distributions and discretionary
bonus payments without limitation
under this section as long as it
maintains a capital conservation buffer
greater than 2.5 percent (plus for an
advanced approaches banking
organization, 100 percent of the
applicable countercyclical capital buffer
amount).
For example, if a banking
organization’s capital conservation
buffer is 1.0 percent (for example, its
common equity tier 1 capital ratio is 5.5
percent or its tier 1 capital ratio is 7.0
percent) as of December 31, 2017, the
banking organization’s maximum
payout ratio during the first quarter of
2018 would be 60 percent. If a banking
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organization has a capital conservation
buffer of 0.25 percent as of December
31, 2017, the banking organization
would not be allowed to make capital
distributions and discretionary bonus
payments during the first quarter of
2018 under the proposed transition
provisions. If a banking organization has
a capital conservation buffer of 1.5
percent as of December 31, 2017, it
would not have any restrictions under
this section on the amount of capital
distributions and discretionary bonus
payments during the first quarter of
2018.
If applicable, the countercyclical
capital buffer would be phased-in
according to the transition schedule
described in table 11 by proportionately
expanding each of the quartiles in the
table by the countercyclical capital
buffer amount. The maximum
countercyclical capital buffer amount
would be 0.625 percent on January 1,
2016 and would increase each
subsequent year by an additional 0.625
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percentage points, to reach its fully
phased-in maximum of 2.5 percent on
January 1, 2019.
C. Regulatory Capital Adjustments and
Deductions
Banking organizations are currently
subject to a series of deductions from
and adjustments to regulatory capital,
most of which apply at the tier 1 capital
level, including deductions for
goodwill, MSAs, certain DTAs, and
adjustments for net unrealized gains and
losses on AFS securities and for
accumulated net gains and losses on
cash flow hedges and defined benefit
pension obligations. Under section 22 of
the proposed rule, banking
organizations would become subject to
a series of deductions and adjustments,
the bulk of which will be applied at the
common equity tier 1 capital level. In
order to give sufficient time to banking
organizations to adapt to the new
regulatory capital adjustments and
deductions, the proposed rule
incorporates transition provisions for
such adjustments and deductions. From
January 1, 2013 through December 31,
2017, a banking organization would be
required to make the regulatory capital
adjustments to and deductions from
regulatory capital in section 22 of the
proposed rule in accordance with the
proposed transition provisions for such
adjustments and deductions outlined
below. Starting on January 1, 2018,
banking organizations would apply all
regulatory capital adjustments and
deductions as outlined in section 22 of
the proposed rule.
Deductions for Certain Items in Section
22(a) of the Proposed Rule
From January 1, 2013 through
December 31, 2017, a banking
organization would deduct from
common equity tier 1 or from tier 1
capital elements goodwill (section
22(a)(1)), DTAs that arise from operating
loss and tax credit carryforwards
(section 22(a)(3)), gain-on-sale
associated with a securitization
exposure (section 22(a)(4)), defined
benefit pension fund assets (section
22(a)(5)), and expected credit loss that
exceeds eligible credit reserves for the
case of banking organizations subject to
subpart E of the proposed rule (section
22(a)(6)), in accordance with table 12
below. During this period, any of these
items that are not deducted from
common equity tier 1 capital, are
deducted from tier 1 capital instead.
TABLE 12—PROPOSED TRANSITION DEDUCTIONS UNDER SECTION 22(a)(1) AND SECTIONS 22(a)(3)–(a)(6) OF THE
PROPOSAL
Transition deductions
under section 22(a)(1)
Transition period
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Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
2013
2014
2015
2016
2017
2018
Percentage of the
deductions from
common equity tier 1
capital
Percentage of the
deductions from
common equity tier 1
capital
Percentage of the
deductions from tier 1
capital
100
100
100
100
100
100
0
20
40
60
80
100
100
80
60
40
20
0
.................................................................................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
and thereafter .........................................................
In accordance with table 12, starting
in 2013, banking organizations would be
required to deduct the full amount of
goodwill (net of any associated DTLs),
including any goodwill embedded in
the valuation of significant investments
in the capital of unconsolidated
financial institutions, from common
equity tier 1 capital elements. This
approach is stricter than that under
Basel III, which transitions the goodwill
deduction from common equity tier 1
capital in line with the rest of the
deductible items. Under U.S. law,
goodwill cannot be included in a
banking organization’s regulatory
capital. Additionally, the agencies
believe that fully deducting goodwill
from common equity tier 1 capital
Transition deductions under sections
22(a)(3)–(a)(6)
elements starting on January 1, 2013
would result in a more meaningful
common equity tier 1 capital ratio from
a supervisory and market perspective.
For example, from January 1, 2014
through December 31, 2014, a banking
organization would deduct 100 percent
of goodwill from common equity tier 1
capital elements. However, during that
same period, only 20 percent of the
aggregate amount of DTAs that arise
from operating loss and tax credit
carryforwards, gain-on-sale associated
with a securitization exposure, defined
benefit pension fund assets, and
expected credit loss that exceeds
eligible credit reserves (for a banking
organization subject to subpart E of the
proposed rule), would be deducted from
common equity tier 1 capital elements
while 80 percent of such aggregate
amount would be deducted from tier 1
capital elements. Starting on January 1,
2018, 100 percent of the items in section
22(a) of the proposed rule would be
fully deducted from common equity tier
1 capital elements.
Deductions for Intangibles Other Than
Goodwill and MSAs
For intangibles other than goodwill
and MSAs, including PCCRs (section
22(a)(2) of the proposal), the transition
arrangement is outlined in table 13.
During this transition period, any of
these items that are not deducted would
be subject to a risk weight of 100
percent.
TABLE 13—PROPOSED TRANSITION DEDUCTIONS UNDER SECTION 22(a)(2) OF THE PROPOSAL
Transition period
Transition deductions under section
22(a)(2)—Percentage of the deductions
from common equity tier 1 capital
Calendar year 2013 ...................................................................................................................................
Calendar year 2014 ...................................................................................................................................
0
20
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TABLE 13—PROPOSED TRANSITION DEDUCTIONS UNDER SECTION 22(a)(2) OF THE PROPOSAL—Continued
Transition deductions under section
22(a)(2)—Percentage of the deductions
from common equity tier 1 capital
Transition period
Calendar
Calendar
Calendar
Calendar
year
year
year
year
2015
2016
2017
2018
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
For example, from January 1, 2014
through December 31, 2014, 20 percent
of the aggregate amount of the
deductions that would be required
under section 22(a)(2) of the proposed
rule for intangibles other than goodwill
and MSAs would be applied to common
equity tier 1 capital, while any such
intangibles that are not deducted from
capital during the transition period
would be risk-weighted at 100 percent.
Regulatory Adjustments Under Section
22(b)(2) of the Proposed Rule
From January 1, 2013 through
December 31, 2017, banking
organizations would apply the
regulatory adjustments under section
22(b)(2) of the proposed rule related to
40
60
80
100
changes in the fair value of liabilities
due to changes in the banking
organization’s own credit risk to
common equity tier 1 or tier 1 capital in
accordance with table 14. During this
period, any of the adjustments related to
this item that are not applied to
common equity tier 1 capital are applied
to tier 1 capital instead.
TABLE 14—PROPOSED TRANSITION ADJUSTMENTS UNDER SECTION 22(b)(2)
Transition adjustments under section 22(b)(2)
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
2013
2014
2015
2016
2017
2018
Percentage of the adjustment
applied to common equity tier 1
capital
Percentage of the adjustment
applied to tier 1
capital
0
20
40
60
80
100
100
80
60
40
20
0
.................................................................................
.................................................................................
.................................................................................
.................................................................................
.................................................................................
and thereafter .........................................................
For example, from January 1, 2013
through December 31, 2013, no
regulatory adjustments to common
equity tier 1 capital related to changes
in the fair value of liabilities due to
changes in the banking organization’s
own credit risk would be applied to
common equity tier 1 capital, but 100
percent of such adjustments would be
applied to tier 1 capital (that is, if the
aggregate amount of these adjustments
is positive, 100 percent would be
deducted from tier 1 capital elements
and if such aggregate amount is
negative, 100 percent would be added
back to tier 1 capital elements).
Likewise, from January 1, 2014 through
December 31, 2014, 20 percent of the
aggregate amount of the regulatory
adjustments to common equity tier 1
capital related to this item would be
applied to common equity tier 1 capital
and 80 percent would be applied to tier
1 capital. Starting on January 1, 2018,
100 percent of the regulatory capital
adjustments related to changes in the
fair value of liabilities due to changes in
the banking organization’s own credit
risk would be applied to common equity
tier 1 capital.
Phase Out of Current AOCI Regulatory
Capital Adjustments
Until December 31, 2017, the
aggregate amount of net unrealized
gains and losses on AFS debt securities,
accumulated net gains and losses
related to defined benefit pension
obligations, unrealized gains on AFS
equity securities, and accumulated net
gains and losses on cash flow hedges
related to items that are reported on the
balance sheet at fair value included in
AOCI (transition AOCI adjustment
amount) is treated as set forth in table
15 below. Specifically, if a banking
organization’s transition AOCI
adjustment amount is positive, it would
need to adjust its common equity tier 1
capital by deducting the appropriate
percentage of such aggregate amount in
accordance with table 15 below and if
such amount is negative, it would need
to adjust its common equity tier 1
capital by adding back the appropriate
percentage of such aggregate amount in
accordance with table 15 below.
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TABLE 15—PROPOSED PERCENTAGE OF THE TRANSITION AOCI ADJUSTMENT AMOUNT
Percentage of the transition AOCI
adjustment amount to be applied to
common equity tier 1 capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
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2013
2014
2015
2016
2017
2018
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
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80
60
40
20
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For example, if during calendar year
2013 a banking organization’s transition
AOCI adjustment amount is positive 100
percent would be deducted from
common equity tier 1 capital elements
and if such aggregate amount is negative
100 percent would be added back to
common equity tier 1 capital elements.
Starting on January 1, 2018, there would
be no adjustment for net unrealized
gains and losses on AFS securities or for
accumulated net gains and losses on
cash flow hedges related to items that
are reported on the balance sheet at fair
value included in AOCI.
Phase Out of Unrealized Gains on AFS
Equity Securities in Tier 2 Capital
A banking organization would
gradually decrease the amount of
unrealized gains on AFS equity
securities it currently holds in tier 2
capital during the transition period in
accordance with table 16.
TABLE 16—PROPOSED PERCENTAGE OF UNREALIZED GAINS ON AFS EQUITY SECURITIES THAT MAY BE INCLUDED IN
TIER 2 CAPITAL
Percentage of unrealized gains on AFS
equity securities that may be included in
tier 2 capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
2013
2014
2015
2016
2017
2018
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
For example, during calendar year
2014, banking organizations would
include up to 36 percent (80 percent of
45 percent) of unrealized gains on AFS
equity securities in tier 2 capital; during
calendar years 2015, 2016, 2017, and
2018 (and thereafter) these percentages
would go down to 27, 18, 9 and zero,
respectively.
Deductions Under Sections 22(c) and
22(d) of the Proposed Rule
From January 1, 2013 through
December 31, 2017, a banking
organization would calculate the
appropriate deductions under sections
22(c) and 22(d) of the proposed rule
related to investments in capital
instruments and to the items subject to
the 10 and 15 percent common equity
tier 1 capital deduction thresholds (that
is, MSAs, DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks, and
significant investments in the capital of
unconsolidated financial institutions in
the form of common stock) as set forth
in table 17. Specifically, during such
transition period, the banking
organization would make the percentage
45
36
27
18
9
0
of the aggregate common equity tier 1
capital deductions related to these items
in accordance with the percentages
outlined in table 17 and would apply a
100 percent risk-weight to the aggregate
amount of such items that are not
deducted under this section. Beginning
on January 1, 2018, a banking
organization would be required to apply
a 250 percent risk-weight to the
aggregate amount of the items subject to
the 10 and 15 percent common equity
tier 1 capital deduction thresholds that
are not deducted from common equity
tier 1 capital.
TABLE 17—PROPOSED TRANSITION DEDUCTIONS UNDER SECTIONS 22(c) AND 22(d) OF THE PROPOSAL
Transition deductions under sections
22(c) and 22(d)—Percentage of the
deductions from common equity tier 1
capital elements
Transition period
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Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
2013
2014
2015
2016
2017
2018
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
However, banking organizations
would not be subject to the
methodology to calculate the 15 percent
common equity deduction threshold for
DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks, MSAs,
and significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock described in section 22(d) of the
proposed rule from January 1, 2013
through December 31, 2017. During this
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transition period, a banking
organization would be required to
deduct from its common equity tier 1
capital elements a specified percentage
of the amount by which the aggregate
sum of the items subject to the 10 and
15 percent common equity tier 1 capital
deduction thresholds exceeds 15
percent of the sum of the banking
organization’s common equity tier 1
capital elements after making the
deductions required under sections
22(a) through (c) of the proposed rule.
These deductions include goodwill,
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0
20
40
60
80
100
intangibles other than goodwill and
MSAs, DTAs that arise from operating
loss and tax credit carryforwards cash
flow hedges associated with items that
are not fair valued, excess ECLs (for
advanced approaches banking
organizations), gains-on-sale on certain
securitization exposures, defined benefit
pension fund net assets for banks that
are not insured by the FDIC, and
reciprocal cross holdings, gains (or
adding back losses) due to changes in
own credit risk on fair valued financial
liabilities, and after applying the
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appropriate common equity tier 1
capital deductions related to nonsignificant investments in the capital of
unconsolidated financial institutions
(the 15 percent common equity
deduction threshold for transition
purposes).
Notwithstanding the transition
provisions for the items under sections
22(c) and 22(d) of the proposed rule
described above, if the amount of MSAs
a banking organization deducts after the
application of the appropriate
thresholds is less than 10 percent of the
fair value of its MSAs, the banking
organization must deduct an additional
amount of MSAs so that the total
amount of MSAs deducted is at least 10
percent of the fair value of its MSAs.
Beginning January 1, 2018, the
aggregate amount of the items subject to
the 10 and 15 percent common equity
tier 1 capital deduction thresholds
would not be permitted to exceed 15
percent of the banking organization’s
common equity tier 1 capital after all
deductions. That is, as of January 1,
2018, the banking organization would
be required to deduct, from common
equity tier 1 capital elements the items
subject to the 10 and 15 percent
common equity tier 1 capital deduction
thresholds that exceed 17.65 percent of
common equity tier 1 capital elements
less the regulatory adjustments and
deductions mentioned in the previous
paragraph and less the aggregate amount
of the items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds in full.
For example, during calendar year
2014, 20 percent of the aggregate
amount of the deductions required for
the items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds would be applied
to common equity tier 1 capital, while
any such items not deducted would be
risk weighted at 100 percent. Starting on
January 1, 2018, 100 percent of the
appropriate aggregate deductions
described in sections 22(c) and 22(d) of
the proposed rule would be fully
applied, while any of the items subject
to the 10 and 15 percent common equity
tier 1 capital deduction thresholds that
are not deducted would be risk
weighted at 250 percent.
Numerical Example for the Transition
Provisions
The following example illustrates the
potential impact from regulatory capital
adjustments and deductions on the
common equity tier 1 capital ratios of a
banking organization. As outlined in
table 18, the banking organization in
this example has common equity tier 1
capital elements (before any deductions)
and total risk weighted assets of $200
and $1000 respectively, and also has
goodwill, DTAs that arise from
operating loss and tax credit
carryforwards, non-significant
investments in the capital of
unconsolidated financial institutions,
DTAs arising from temporary
differences that could not be realized
through net operating loss carrybacks,
MSAs, and significant investments in
the capital of unconsolidated financial
institutions in the form of common
stock of $40, $30, $10, $30, $20, and
$10, respectively. For simplicity, this
example only focuses on common
equity tier 1 capital and assumes that
the risk weight applied to all assets is
100 percent (the only exception being
the 250 percent risk weight applied in
2018 to the ‘‘items subject to an
aggregate 15% threshold’’).
TABLE 18—EXAMPLE—IMPACT OF REGULATORY DEDUCTIONS DURING TRANSITION PERIOD
Common equity tier 1 capital elements, net of treasury stock (CET1) elements (before deductions) ...........................................................
Items subject to full deduction:
Goodwill ....................................................................................................................................................................................................
Deferred tax assets (DTAs) that arise from operating loss and tax credit carryforwards (DTAs from operating loss carryforwards) ...
Items subject to threshold deductions:
Non-significant investments in the capital of unconsolidated financial institutions (non-significant investments) ..................................
Items subject to aggregate 15% threshold:
DTAs arising from temporary differences that the banking organization could not realize through net operating loss carrybacks
(temporary differences DTAs) ...............................................................................................................................................................
MSAs ...............................................................................................................................................................................................................
Significant investments in the capital of unconsolidated financial institutions in the form of common stock (significant investments) .........
Risk-weighted assets (RWAs) .........................................................................................................................................................................
Table 19 below illustrates the process
to calculate the deductions while
showing the potential impact of the
deductions on the common equity tier 1
200
40
30
10
30
20
10
1000
capital ratio of the banking organization
during the transition period.
TABLE 19—EXAMPLE—IMPACT OF REGULATORY DEDUCTIONS DURING TRANSITION PERIOD
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Transition calendar years
Base
case
2013
Percentage of deduction ....................................................................
CET1 before deductions ....................................................................
Deduction of goodwill .........................................................................
Deduction of DTAs from operating loss carryforwards .....................
CET1 after non-threshold deductions ................................................
10% limit for non-significant investments ..........................................
Deduction of non-significant investments ..........................................
CET1 after non-threshold deductions and deduction of non-significant investments ............................................................................
10% CET1 limit for items subject to 15% threshold ..........................
Deduction of significant investments due to 10% limit ......................
Deduction of temporary differences DTAs due to 10% limit .............
Deduction of MSAs due to 10% limit .................................................
CET1 after deductions related to 10% limit .......................................
Outstanding significant investments ..................................................
..............
200
40
30
130
13.0
0
..............
200
40
0
160
16.0
0
20%
200
40
6
154
15.4
0
40%
200
40
12
148
14.8
0
60%
200
40
18
142
14.2
0
80%
200
40
24
136
13.6
0
100%
200
40
30
130
13.0
0
130
13.0
0
17.0
7.0
106
10
160
16.0
0
0
0
160
10
154
15.4
0
3.4
1.4
149.2
10
148
14.8
0
6.8
2.8
138.4
10
142
14.2
0
10.2
4.2
127.6
10
136
13.6
0
13.6
5.6
116.8
10
130
13.0
0
17.0
7.0
106.0
10
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2018
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TABLE 19—EXAMPLE—IMPACT OF REGULATORY DEDUCTIONS DURING TRANSITION PERIOD—Continued
Base
case
Transition calendar years
2014
2015
2016
2017
2018
13
13
36
19.5
30
20
60
24.0
27
19
55
23.1
23
17
50
22.2
20
16
46
21.3
16
14
41
20.4
13
13
36
19.5
16.5
0.0
3.3
6.6
9.9
13.2
..............
0
89.5
889.5
..............
2
158.0
928.0
..............
0
145.9
921.9
..............
0
131.8
913.8
..............
0
117.7
905.7
..............
0
103.6
897.6
..............
0
..............
..............
12
..............
..............
..............
..............
..............
..............
24
CET1 after all deductions—starting 2018 ..........................................
2018 RWAs ........................................................................................
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
82.4
901
CET1 ratio ..........................................................................................
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Outstanding temporary differences DTAs .........................................
Outstanding MSAs .............................................................................
Sum of outstanding items subject to 15% threshold .........................
15% CET1 limit (for items subject to 15% threshold) (pre-2018) .....
Deduction of outstanding items subject to 15% threshold due to
15% limit (pre-2018) .......................................................................
Additional MSA deduction as of the statutory limit (i.e., 10% of FV
of MSAs) .........................................................................................
CET1 after all deductions (pre-2018) ................................................
Total New RWAs (pre-2018) .............................................................
15% CET1 limit (for items subject to 15% threshold) (2018) ............
Deduction of outstanding items subject to 15% threshold due to
15% limit (2018) .............................................................................
2013
..............
17.0%
15.8%
14.4%
13.0%
11.5%
9.1%
To establish the starting point (or
‘‘base case’’) for the deductions, the
banking organization calculates the fully
phased-in deductions, except in the case
of the 15 percent deduction threshold,
which is calculated during the
transition period as described above.
Common equity tier 1 capital elements,
after the deduction of items that are not
subject to the threshold deductions are
$160, $154, $148, $142, and $136, and
$130 as of January 1, 2013, January 1,
2014, January 1, 2015, January 1, 2016,
January 1, 2017, and January 1, 2018,
respectively. In this particular example,
these numbers are obtained after fully
deducting goodwill, and after deducting
the base case deduction for DTAs that
arise from operating loss and tax credit
carryforwards multiplied by the
appropriate percentage under the
transition arrangement for deductions
outlined in table 12 of this section. That
is, after deducting from common equity
tier 1 capital elements 100 percent of
goodwill and 20 percent of the base case
deduction for DTAs that arise from
operating loss and tax credit
carryforwards during 2014, 40 percent
during 2015, 60 percent during 2016, 80
percent during 2017, and 100 percent
during 2018).89
After applying the required deduction
as a result of the 10 and 15 percent
common equity tier 1 deduction
thresholds outlined in table 17 of this
section and after making the additional
$2 deduction of MSAs during 2013 as a
result of the MSA minimum statutory
deduction (that is, 10 percent of the fair
89 As outlined in table 12, the amount of DTAs
that arise from operating loss and tax credit
carryforwards that are not deducted from common
equity tier 1 capital during the transition period are
deducted from tier 1 capital instead.
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value of the MSAs), the common equity
tier 1 capital elements would be $158,
$146, $132, $118, $104, and $82 as of
January 1, 2013, January 1, 2014,
January 1, 2015, January 1, 2016,
January 1, 2017, and January 1, 2018,
respectively. After adjusting the total
risk weighted assets measure as a result
of the numerator deductions, the
common equity tier 1 capital ratios
would be 17.0 percent, 15.8 percent,
14.4 percent, 13.0 percent, 11.5 percent
and 9.1 percent as of January 1, 2013,
January 1, 2014, January 1, 2015,
January 1, 2016, January 1, 2017, and
January 1, 2018, respectively. Any DTAs
arising from temporary differences that
could not be realized through net
operating loss carrybacks, MSAs, or
significant investments in the capital of
unconsolidated financial institutions in
the form of common stock that are not
deducted from common equity tier 1
capital elements as a result of the
transitional arrangements would be risk
weighted at 100 percent during the
transition period and would be risk
weighted at 250 percent starting on
2018.
D. Non-Qualifying Capital Instruments
Under the NPR, non-qualifying capital
instruments, including instruments that
are part of minority interest, would be
phased out from regulatory capital
depending on the size of the issuing
banking organization and the type of
capital instrument involved. Under the
proposed rule, and in line with the
requirements under the Dodd-Frank
Act, instruments like cumulative
perpetual preferred stock and trust
preferred securities, which bank holding
companies have historically included
(subject to limits) in tier 1 capital under
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the ‘‘restricted core capital elements’’
bucket generally would not comply with
either the eligibility criteria for
additional tier 1 capital instruments
outlined in section 20 of the proposed
rule or the general risk-based capital
rules for depository institutions and
therefore would be phased out from tier
1 capital as outlined in more detail
below. However, these instruments
would generally be included without
limits in tier 2 capital if they meet the
eligibility criteria for tier 2 capital
instruments outlined in section 20 of
the proposed rule.
Phase-Out Schedule for Non-Qualifying
Capital Instruments of Depository
Institution Holding Companies of $15
Billion or More in Total Consolidated
Assets
Under section 171 of the Dodd-Frank
Act, depository institution holding
companies with total consolidated
assets greater than or equal to $15
billion as of December 31, 2009
(depository institution holding
companies of $15 billion or more)
would be required to phase out their
non-qualifying capital instruments as
set forth in table 20 below. In the case
of depository institution holding
companies of $15 billion or more, nonqualifying capital instruments are debt
or equity instruments issued before May
19, 2010, that do not meet the criteria
in section 20 of the proposed rule and
were included in tier 1 or tier 2 capital
as of May 19, 2010. Table 20 would
apply separately to additional tier 1 and
tier 2 non-qualifying capital instruments
but the amount of non-qualifying capital
instruments that would be excluded
from additional tier 1 capital under this
section would be included in tier 2
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capital without limitation if they meet
the eligibility criteria for tier 2 capital
instruments under section 20 of the
proposed rule. If a depository institution
holding company of $15 billion or more
acquires a depository institution
holding company with total
consolidated assets of less than $15
billion as of December 31, 2009
(depository institution holding company
under $15 billion) or a depository
institution holding company that was a
mutual holding company as of May 19,
2010 (2010 MHC), the non-qualifying
capital instruments of the resulting
organization would be subject to the
phase-out schedule outlined in table 20.
Likewise, if a depository institution
52831
holding company under $15 billion
makes an acquisition and the resulting
organization has total consolidated
assets of $15 billion or more, its nonqualifying capital instruments would
also be subject to the phase-out
schedule outlined in table 20.
TABLE 20—PROPOSED PERCENTAGE OF NON-QUALIFYING CAPITAL INSTRUMENTS INCLUDED IN ADDITIONAL TIER 1 OR
TIER 2 CAPITAL
Percentage of non-qualifying capital
instruments included in additional tier 1
or tier 2 capital for depository institution
holding companies of $15 billion or more
Transition period (calendar year)
Calendar
Calendar
Calendar
Calendar
year
year
year
year
2013
2014
2015
2016
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
Accordingly, under the proposed rule
a depository institution holding
company of $15 billion or more would
be allowed to include only 75 percent
of non-qualifying capital instruments in
regulatory capital as of January 1, 2013,
50 percent as of January 1, 2014, 25
percent as of January 1, 2015, and zero
percent as of January 1, 2016 and
thereafter.
Phase-Out Schedule for Non-Qualifying
Capital Instruments of Depository
Institution Holding Companies Under
$15 Billion, 2010 MHCs, and Depository
Institutions
Under the proposed rule, nonqualifying capital instruments of
depository institutions and of
depository institution holding
companies under $15 billion and 2010
MHCs (issued before September 12,
2010), that were outstanding as of
January 1, 2013 would be included in
capital up to the percentage of the
75
50
25
0
outstanding principal amount of such
non-qualifying capital instruments as of
December 31, 2013 indicated in table
21. Table 21 applies separately to
additional tier 1 and tier 2 nonqualifying capital instruments but the
amount of non-qualifying capital
instruments that would be excluded
from additional tier 1 capital under this
section would be included in the tier 2
capital, provided the instruments meet
the eligibility criteria for tier 2 capital
instruments under section 20 of the
proposed rule.
TABLE 21—PROPOSED PERCENTAGE OF NON-QUALIFYING CAPITAL INSTRUMENTS INCLUDED IN ADDITIONAL TIER 1 OR
TIER 2 CAPITAL
Percentage of non-qualifying capital
instruments included in additional tier 1
or tier 2 capital for depository institution
holding companies under $15 billion,
depository institutions, and 2010 MHCs
Transition period (calendar year)
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Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
year
year
year
year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
For example, a banking organization
that issued a tier 1 non-qualifying
capital instrument in August 2010
would be able to count 90 percent of the
notional outstanding amount of the
instrument as of January 1, 2013 during
calendar year 2013 and 80 percent
during calendar year 2014. As of
January 1, 2022, no tier 1 non-qualifying
capital instruments would be
recognized in tier 1 capital.
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Phase-Out Schedule for Surplus and
Non-Qualifying Minority Interest
From January 1, 2013 through
December 31, 2018, a banking
organization would be allowed to
include in regulatory capital a portion of
the common equity tier 1, tier 1, or total
capital minority interest that would be
disqualified from regulatory capital as a
result of the requirements and
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90
80
70
60
50
40
30
20
10
0
limitations outlined in section 21
(surplus minority interest). If a banking
organization has surplus minority
interest outstanding as of January 1,
2013, such surplus minority interest
would be subject to the phase-out
schedule outlined in table 22. For
example, if a banking organization has
$10 of surplus common equity tier 1
minority interest as of January 1, 2013,
it would be allowed to include all such
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surplus in its common equity tier 1
capital during calendar year 2013, $8
during calendar year 2014, $6 during
calendar year 2015, $4 during calendar
year 2016, $2 during calendar year 2017
and $0 starting in January 1, 2018.
Likewise, from January 1, 2013 through
December 31, 2018, a banking
organization would be able to include in
tier 1 or total capital a portion of the
instruments issued by a consolidated
subsidiary that qualified as tier 1 or total
capital of the banking organization as of
December 31, 2012 but that would not
qualify as tier 1 or total minority interest
as of January 1, 2013 (non-qualifying
minority interest) in accordance with
Table 22. For example, if a banking
organization has $10 of non-qualifying
minority interest that previously
qualified as tier 1 capital, it would be
allowed to include $10 in its tier 1
capital during calendar year 2013, $8
during calendar year 2014, $6 during
calendar year 2015, $4 during calendar
year 2016, $2 during calendar year 2017
and $0 starting in January 1, 2018.
TABLE 22—PERCENTAGE OF THE AMOUNT OF SURPLUS OR NON-QUALIFYING MINORITY INTEREST INCLUDABLE IN
REGULATORY CAPITAL DURING TRANSITION PERIOD
Percentage of the amount of surplus or
non-qualifying minority interest that can
be included in regulatory capital during
the transition period
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
year
2013
2014
2015
2015
2016
2017
2018
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
...................................................................................................................................
and thereafter ...........................................................................................................
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Transition Provisions for Standardized
Approach NPR
In addition, under the Standardized
Approach NPR, beginning on January 1,
2015, a banking organization would be
required to calculate risk-weighted
assets using the proposed new
approaches described in that NPR. The
Standardized Approach NPR proposes
that until then, the banking organization
may calculate risk-weighted assets using
the current methodologies unless it
decides to early adopt the proposed
changes. Notwithstanding the transition
provisions in the Standardized
Approach NPR, the banking
organization would be subject to the
transition provisions described in this
Basel III NPR.
Question 36: The agencies solicit
comments on the transition
arrangements outlined previously. In
particular, what specific regulatory
reporting burden or complexities would
result from the application of the
transition arrangements described in
this section of the preamble, and what
specific alternatives exist to deal with
such burden or complexity while still
adhering to the general transitional
provisions required under the DoddFrank Act?
Question 37: What are the pros and
cons of a potentially stricter (but less
complex) alternative transitions
approach for the regulatory adjustments
and deductions outlined in this section
C under which banking organizations
would be required to (1) apply all the
regulatory adjustments and deductions
currently applicable to tier 1 capital
under the general risk-based capital
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rules to common equity tier 1 capital
from January 1, 2013 through December
31, 2015; and (2) fully apply all the
regulatory adjustments and deductions
proposed in section 22 of the proposed
rule starting on January 1, 2016? Please
provide data to support your views.
E. Leverage Ratio
The agencies are proposing to apply
the supplementary leverage ratio
beginning in 2018. However, beginning
on January 1, 2015, advanced
approaches banking organizations
would be required to calculate and
report the supplementary leverage ratio
using the proposed definition of tier 1
capital and total exposure measure.
Question 38: The agencies solicit
comment on the proposed transition
arrangements for the supplementary
leverage ratio. In particular, what
specific challenges do banking
organizations anticipate with regard to
the proposed arrangements and what
specific alternative arrangements would
address these challenges?
VI. Additional OCC Technical
Amendments
In addition to the changes described
above, the OCC is proposing to
redesignate subpart C, Establishment of
Minimum Capital Ratios for an
Individual Bank, subpart D,
Enforcement, and subpart E, Issuance of
a Directive, as subparts H, I, and J,
respectively. The OCC is also proposing
to redesignate section 3.100, Capital and
Surplus, as subpart K, Capital and
Surplus. The OCC is carrying over
redesignated subpart K, which includes
definitions of the terms ‘‘capital’’ and
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100
80
60
60
40
20
0
‘‘surplus’’ and related definitions that
are used for determining statutory limits
applicable to national banks that are
based on capital and surplus. The
agencies have systematically adopted a
definition of capital and surplus that is
based on tier 1 and tier 2 capital. The
OCC believes that the definitions in
redesignated subpart K may no longer
be necessary and is considering whether
to delete these definitions in the final
rule. Finally, as part of the integration
of the rules governing national banks
and federal savings associations, the
OCC proposes to make part 3 applicable
to federal savings associations, make
other non-substantive, technical
amendments, and rescind part 167,
Capital.
In the final rule, the OCC may need
to make additional technical and
conforming amendments to other OCC
rules, such as § 5.46, subordinated debt,
which contains cross references to Part
3 that we propose to change pursuant to
this rule. Cross references to appendices
A, B, or C will also need to be amended
because we propose to replace those
appendices with subparts A through H.
Question 39: The OCC requests
comment on all aspects of these
proposed changes, but is specifically
interested in whether it is necessary to
retain the definitions of capital and
surplus and related terms in
redesignated subpart K.
VII. Abbreviations
ABCP Asset-Backed Commercial Paper
ABS Asset Backed Security
AD.C. Acquisition, Development, or
Construction
AFS Available For Sale
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AOCI Accumulated Other Comprehensive
Income
BCBS Basel Committee on Banking
Supervision
BHC Bank Holding Company
BIS Bank for International Settlements
CAMELS Capital Adequacy, Asset Quality,
Management, Earnings, Liquidity, and
Sensitivity to Market Risk
CCF Credit Conversion Factor
CCP Central Counterparty
CD.C. Community Development
Corporation
CDFI Community Development Financial
Institution
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CF Conversion Factor
CFR Code of Federal Regulations
CFTC Commodity Futures Trading
Commission
CMBS Commercial Mortgage Backed
Security
CPSS Committee on Payment and
Settlement Systems
CRC Country Risk Classifications
CRAM Country Risk Assessment Model
CRM Credit Risk Mitigation
CUSIP Committee on Uniform Securities
Identification Procedures
D.C.O Derivatives Clearing Organizations
DFA Dodd-Frank Act
DI Depository Institution
DPC Debts Previously Contracted
DTA Deferred Tax Asset
DTL Deferred Tax Liability
DVA Debit Valuation Adjustment
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure at Default
ECL Expected Credit Loss
EE Expected Exposure
E.O. Executive Order
EPE Expected Positive Exposure
FASB Financial Accounting Standards
Board
FDIC Federal Deposit Insurance
Corporation
FFIEC Federal Financial Institutions
Examination Council
FHLMC Federal Home Loan Mortgage
Corporation
FMU Financial Market Utility
FNMA Federal National Mortgage
Association
FR Federal Register
GAAP Generally Accepted Accounting
Principles
GDP Gross Domestic Product
GLBA Gramm-Leach-Bliley Act
GSE Government-Sponsored Entity
HAMP Home Affordable Mortgage Program
HELOC Home Equity Line of Credit
HOLA Home Owners’ Loan Act
HVCRE High-Volatility Commercial Real
Estate
IFRS International Reporting Standards
IMM Internal Models Methodology
I/O Interest-Only
IOSCO International Organization of
Securities Commissions
LTV Loan-to-Value Ratio
M Effective Maturity
MDB Multilateral Development Banks
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MSA Mortgage Servicing Assets
NGR Net-to-Gross Ratio
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical
Rating Organization
OCC Office of the Comptroller of the
Currency
OECD Organization for Economic Cooperation and Development
OIRA Office of Information and Regulatory
Affairs
OMB Office of Management and Budget
OTC Over-the-Counter
PCA Prompt Corrective Action
PCCR Purchased Credit Card Receivables
PFE Potential Future Exposure
PMI Private Mortgage Insurance
PSE Public Sector Entities
PvP Payment-versus-Payment
QCCP Qualifying Central Counterparty
RBA Ratings-Based Approach
REIT Real Estate Investment Trust
RFA Regulatory Flexibility Act
RMBS Residential Mortgage Backed
Security
RTCRRI Act Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991
RVC Ratio of Value Change
RWA Risk-Weighted Asset
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SFT Securities Financing Transactions
SBLF Small Business Lending Facility
SLHC Savings and Loan Holding Company
SPE Special Purpose Entity
SPV Special Purpose Vehicle
SR Supervision and Regulation Letter
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula
Approach
UMRA Unfunded Mandates Reform Act of
1995
U.S. United States
U.S.C. United States Code
VaR Value-at-Risk
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA) requires an
agency to provide an initial regulatory
flexibility analysis with a proposed rule
or to certify that the rule will not have
a significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA to
include banking entities with assets less
than or equal to $175 million) and
publish its certification and a short,
explanatory statement in the Federal
Register along with the proposed rule.
The agencies are separately
publishing initial regulatory flexibility
analyses for the proposals as set forth in
this NPR.
Board
A. Statement of the Objectives of the
Proposal; Legal Basis
As discussed previously in the
Supplementary Information, the Board
is proposing in this NPR to revise its
capital requirements to promote safe
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52833
and sound banking practices,
implement Basel III, and codify its
capital requirements. The proposals also
satisfy certain requirements under the
Dodd-Frank Act by imposing new or
revised minimum capital requirements
on certain depository institution
holding companies.90 Under section
38(c)(1) of the Federal Deposit Insurance
Act, the agencies may prescribe capital
standards for depository institutions
that they regulate.91 In addition, among
other authorities, the Board may
establish capital requirements for state
member banks under the Federal
Reserve Act,92 for state member banks
and bank holding companies under the
International Lending Supervision Act
and Bank Holding Company Act,93 and
for savings and loan holding companies
under the Home Owners Loan Act.94
B. Small Entities Potentially Affected by
the Proposal
Under regulations issued by the Small
Business Administration,95 a small
entity includes a depository institution
or bank holding company with total
assets of $175 million or less (a small
banking organization). As of March 31,
2012 there were 373 small state member
banks. As of December 31, 2011, there
were approximately 128 small savings
and loan holding companies and 2,385
small bank holding companies.96
The proposal would not apply to
small bank holding companies that are
not engaged in significant nonbanking
activities, do not conduct significant offbalance sheet activities, and do not have
a material amount of debt or equity
securities outstanding that are registered
with the SEC. These small bank holding
companies remain subject to the Board’s
Small Bank Holding Company Policy
Statement (Policy Statement).97
Small state member banks and small
savings and loan holding companies
(covered small banking organizations)
would be subject to the proposals in this
NPR.
90 See
12 U.S.C. 5371.
12 U.S.C. 1831o(c)(1).
92 See 12 CFR 208.43.
93 See 12 U.S.C. 3907; 12 U.S.C. 1844.
94 See 12 U.S.C. 1467a(g)(1).
95 See 13 CFR 121.201.
96 The December 31, 2011 data are the most recent
available data on small savings and loan holding
companies and small bank holding companies.
97 See 12 CFR part 225, appendix C. Section 171
of the Dodd-Frank provides an exemption from its
requirements for bank holding companies subject to
the Policy Statement (as in effect on May 19, 2010).
Section 171 does not provide a similar exemption
for small savings and loan holding companies and
they are therefore subject to the proposals. 12 U.S.C.
5371(b)(5)(C).
91 See
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
C. Impact on Covered Small Banking
Organizations
The proposals may impact covered
small banking organizations in several
ways. The proposals would affect
covered small banking organizations’
regulatory capital requirements. They
would change the qualifying criteria for
regulatory capital, including required
deductions and adjustments, and
modify the risk weight treatment for
some exposures. They also would
require covered small banking
organizations to meet new minimum
common equity tier 1 to risk-weighted
assets ratio of 4.5 percent and an
increased minimum tier 1 capital to
risk-weighted assets risk-based capital
ratio of 6 percent. Under the proposals,
all banking organizations would remain
subject to a 4 percent minimum tier 1
leverage ratio.98
In addition, as described above, the
proposals would impose limitations on
capital distributions and discretionary
bonus payments for covered small
banking organizations that do not hold
a buffer of common equity tier 1 capital
above the minimum ratios. As a result
of these new requirements, some
covered small banking organizations
may have to alter their capital structure
(including by raising new capital or
increasing retention of earnings) in
order to achieve compliance.
Most small state member banks
already hold capital in excess of the
proposed minimum risk-based
regulatory ratios. Therefore, the
proposed requirements are not expected
to significantly impact the capital
structure of most covered small state
member banks. Comparing the capital
requirements proposed in this NPR and
the Standardized Approach NPR on a
fully phased-in basis to minimum
requirements of the current rules, the
capital ratios of approximately 1–2
percent of small state member banks
would fall below at least one of the
proposed minimum risk-based capital
requirements. Thus, the Board believes
that the proposals in this NPR and the
Standardized NPR would affect an
insubstantial number of small state
member banks.
Because the Board has not fully
implemented reporting requirements for
savings and loan holding companies, it
is unable to determine the impact of the
98 Banking organizations subject to the advanced
approaches rules also would be required in 2018 to
achieve a minimum tier 1 capital to total leverage
exposure ratio (the supplementary leverage ratio) of
3 percent. Advanced approaches banking
organizations should refer to section 10 of subpart
B of the proposed rule and section II.B of the
preamble for a more detailed discussion of the
applicable minimum capital ratios.
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proposed requirements on small savings
and loan holding companies. The Board
seeks comment on the potential impact
of the proposed requirements on small
savings and loan holding companies.
Covered small banking organizations
that would have to raise additional
capital to comply with the requirements
of the proposals may incur certain costs,
including costs associated with issuance
of regulatory capital instruments. The
Board has sought to minimize the
burden of raising additional capital by
providing for transitional arrangements
that phase-in the new capital
requirements over several years,
allowing banking organizations time to
accumulate additional capital through
retained earnings as well as raising
capital in the market. While the
proposals would establish a narrower
definition of capital, a minimum
common equity tier 1 capital ratio and
a minimum tier 1 capital ratio that is
higher than under the general risk-based
capital rules, the majority of capital
instruments currently held by small
covered banking organizations under
existing capital rules, such as common
stock and noncumulative perpetual
preferred stock, would remain eligible
as regulatory capital instruments under
the proposed requirements.
As discussed above, the proposals
would modify criteria for regulatory
capital, deductions and adjustments to
capital, and risk weights for exposures,
as well as calculation of the leverage
ratio. Accordingly, covered small
banking organizations would be
required to change their internal
reporting processes to comply with
these changes. These changes may
require some additional personnel
training and expenses related to new
systems (or modification of existing
systems) for calculating regulatory
capital ratios.
For small savings and loan holding
companies, the compliance burdens
described above may be greater than for
those of other covered small banking
organizations. Small savings and loan
holding companies previously were not
subject to regulatory capital
requirements and reporting
requirements tied regulatory capital
requirements. Small savings and loan
holding companies may therefore need
to invest additional resources in
establishing internal systems (including
purchasing software or hiring
personnel) or raising capital to come
into compliance with the proposed
requirements.
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D. Transitional Arrangements To Ease
Compliance Burden
For those covered small banking
organizations that would not
immediately meet the proposed
minimum requirements, this NPR
provides transitional arrangements for
banking organizations to make
adjustments and to come into
compliance. Small covered banking
organizations would be required to meet
the proposed minimum capital ratio
requirements beginning on January 1,
2013 thorough to December 31, 2014.
On January 1, 2015, small covered
banking organizations would be
required to comply with the proposed
minimum capital ratio requirements.
E. Identification of Duplicative,
Overlapping, or Conflicting Federal
Rules
The Board is unaware of any
duplicative, overlapping, or conflicting
federal rules. As noted above, the Board
anticipates issuing a separate proposal
to implement reporting requirements
that are tied to (but do not overlap or
duplicate) the proposed requirements.
The Board seeks comments and
information regarding any such rules
that are duplicative, overlapping, or
otherwise in conflict with the proposed
requirements.
F. Discussion of Significant Alternatives
The Board has sought to incorporate
flexibility and provide alternative
treatments in this NPR and the
Standardized NPR to lessen burden and
complexity for smaller banking
organizations wherever possible,
consistent with safety and soundness
and applicable law, including the DoddFrank Act. These alternatives and
flexibility features include the
following:
• Covered small banking
organizations would not be subject to
the proposed enhanced disclosure
requirements.
• Covered small banking
organizations would not be subject to
possible increases in the capital
conservation buffer through the
countercyclical buffer.
• Covered small banking
organizations would not be subject to
the new supplementary leverage ratio.
• Covered small institutions that have
issued capital instruments to the U.S.
Treasury through the Small Business
Lending Fund (a program for banking
organizations with less than $10 billion
in consolidated assets) or under the
Emergency Economic Stabilization Act
of 2008 prior to October 4, 2010, would
be able to continue to include those
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instruments in tier 1 or tier 2 capital (as
applicable) even if not all criteria for
inclusion under the proposed
requirements are met.
• Covered small banking
organizations that issued capital
instruments that could no longer be
included in tier 1 capital or tier 2 capital
under the proposed requirements would
have a longer transition period for
removing the instruments from tier 1 or
tier 2 capital (as applicable).
The Board welcomes comment on any
significant alternatives to the proposed
requirements applicable to covered
small banking organizations that would
minimize their impact on those entities,
as well as on all other aspects of its
analysis. A final regulatory flexibility
analysis will be conducted after
consideration of comments received
during the public comment period.
OCC
In accordance with section 3(a) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.) (RFA), the OCC is publishing
this summary of its Initial Regulatory
Flexibility Analysis (IRFA) for this NPR.
The RFA requires an agency to publish
in the Federal Register its IRFA or a
summary of its IRFA at the time of the
publication of its general notice of
proposed rulemaking 99 or to certify that
the proposed rule will not have a
significant economic impact on a
substantial number of small entities.100
For its IRFA, the OCC analyzed the
potential economic impact of this NPR
on the small entities that it regulates.
The OCC welcomes comment on all
aspects of the summary of its IRFA. A
final regulatory flexibility analysis will
be conducted after consideration of
comments received during the public
comment period.
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A. Reasons Why the Proposed Rule Is
Being Considered by the Agencies;
Statement of the Objectives of the
Proposed Rule; and Legal Basis
As discussed in the Supplementary
Information section above, the agencies
are proposing to revise their capital
requirements to promote safe and sound
banking practices, implement Basel III,
and harmonize capital requirements
across charter type. Federal law
authorizes each of the agencies to
prescribe capital standards for the
banking organizations that it
regulates.101
99 5
U.S.C. 603(a).
U.S.C. 605(b).
101 See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C.
1831o(c)(1); 12 U.S.C. 1844; 12 U.S.C. 3907; and 12
U.S.C. 5371.
100 5
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B. Small Entities Affected by the
Proposal
Under regulations issued by the Small
Business Administration,102 a small
entity includes a depository institution
or bank holding company with total
assets of $175 million or less (a small
banking organization). As of March 31,
2012, there were approximately 599
small national banks and 284 small
federally chartered savings associations.
C. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
This NPR includes changes to the
general risk-based capital requirements
that affect small banking organizations.
Under this NPR, the changes to
minimum capital requirements that
would impact small national banks and
federal savings associations include a
more conservative definition of
regulatory capital, a new common
equity tier 1 capital ratio, a higher
minimum tier 1 capital ratio, new
thresholds for prompt corrective action
purposes, and a new capital
conservation buffer. To estimate the
impact of this NPR on national banks’
and federal savings associations’ capital
needs, the OCC estimated the amount of
capital the banks will need to raise to
meet the new minimum standards
relative to the amount of capital they
currently hold. To estimate new capital
ratios and requirements, the OCC used
currently available data from banks’
quarterly Consolidated Report of
Condition and Income (Call Reports) to
approximate capital under the proposed
rule, which shows that most banks have
raised their capital levels well above the
existing minimum requirements. After
comparing existing levels with the
proposed new requirements, the OCC
has determined that 28 small
institutions that it regulates would fall
short of the proposed increased capital
requirements. Together, those
institutions would need to raise
approximately $82 million in regulatory
capital to meet the proposed minimum
requirements. The OCC estimates that
the cost of lost tax benefits associated
with increasing total capital by $82
million will be approximately $0.5
million per year. Averaged across the 28
affected institutions, the cost is
approximately $18,000 per institution
per year.
To determine if a proposed rule has
a significant economic impact on small
entities, we compared the estimated
annual cost with annual noninterest
expense and annual salaries and
employee benefits for each small entity.
102 See
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Based on this analysis, the OCC has
concluded for purposes of this IRFA
that the changes described in this NPR,
when considered without regard to
other changes to the capital
requirements that the agencies
simultaneously are proposing, would
not result in a significant economic
impact on a substantial number of small
entities.
However, as discussed in the
Supplementary Information section
above, the changes proposed in this
NPR also should be considered together
with changes proposed in the separate
Standardized Approach NPR also
published in today’s Federal Register.
The changes described in the
Standardized NPR include:
1. Changing the denominator of the
risk-based capital ratios by revising the
asset risk weights;
2. Revising the treatment of
counterparty credit risk;
3. Replacing references to credit
ratings with alternative measures of
creditworthiness;
4. Providing more comprehensive
recognition of collateral and guarantees;
and
5. Providing a more favorable capital
treatment for transactions cleared
through qualifying central
counterparties.
These changes are designed to
enhance the risk-sensitivity of the
calculation of risk-weighted assets.
Therefore, capital requirements may go
down for some assets and up for others.
For those assets with a higher risk
weight under this NPR, however, that
increase may be large in some instances,
e.g., requiring the equivalent of a dollarfor-dollar capital charge for some
securitization exposures.
The Basel Committee on Banking
Supervision has been conducting
periodic reviews of the potential
quantitative impact of the Basel III
framework.103 Although these reviews
monitor the impact of implementing the
Basel III framework rather than the
proposed rule, the OCC is using
estimates consistent with the Basel
Committee’s analysis, including a
conservative estimate of a 20 percent
increase in risk-weighted assets, to
gauge the impact of the Standardized
Approach NPR on risk-weighted assets.
Using this assumption, the OCC
estimates that a total of 56 small
national banks and federally chartered
savings associations will need to raise
additional capital to meet their
regulatory minimums. The OCC
103 See, ‘‘Update on Basel III Implementation
Monitoring,’’ Quantitative Impact Study Working
Group, (January 28, 2012).
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estimates that this total projected
shortfall will be $143 million and that
the cost of lost tax benefits associated
with increasing total capital by $143
million will be approximately $0.8
million per year. Averaged across the 56
affected institutions, the cost is
approximately $14,000 per institution
per year.
To comply with the proposed rules in
the Standardized Approach NPR,
covered small banking organizations
would be required to change their
internal reporting processes. These
changes would require some additional
personnel training and expenses related
to new systems (or modification of
existing systems) for calculating
regulatory capital ratios.
Additionally, covered small banking
organizations that hold certain
exposures would be required to obtain
additional information under the
proposed rules in order to determine the
applicable risk weights. Covered small
banking organizations that hold
exposures to sovereign entities other
than the United States, foreign
depository institutions, or foreign public
sector entities would have to acquire
Country Risk Classification ratings
produced by the OECD to determine the
applicable risk weights. Covered small
banking organizations that hold
residential mortgage exposures would
need to have and maintain information
about certain underwriting features of
the mortgage as well as the LTV ratio in
order to determine the applicable risk
weight. Generally, covered small
banking organizations that hold
securitization exposures would need to
obtain sufficient information about the
underlying exposures to satisfy due
diligence requirements and apply either
the simplified supervisory formula or
the gross-up approach described in
section l.43 of the Standardized
Approach NPR to calculate the
appropriate risk weight, or be required
to assign a 1,250 percent risk weight to
the exposure.
Covered small banking organizations
typically do not hold significant
exposures to foreign entities or
securitization exposures, and the
agencies expect any additional burden
related to calculating risk weights for
these exposures, or holding capital
against these exposures, would be
relatively modest. The OCC estimates
that, for small national banks and
federal savings associations, the cost of
implementing the alternative measures
of creditworthiness will be
approximately $36,125 per institution.
Some covered small banking
organizations may hold significant
residential mortgage exposures.
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However, if the small banking
organization originated the exposure, it
should have sufficient information to
determine the applicable risk weight
under the proposed rule. If the small
banking organization acquired the
exposure from another institution, the
information it would need to determine
the applicable risk weight is consistent
with information that it should
normally collect for portfolio
monitoring purposes and internal risk
management.
Covered small banking organizations
would not be subject to the disclosure
requirements in subpart D of the
proposed rule. However, the agencies
expect to modify regulatory reporting
requirements that apply to covered
small banking organizations to reflect
the changes made to the agencies’
capital requirements in the proposed
rules. The agencies expect to propose
these changes to the relevant reporting
forms in a separate notice.
To determine if a proposed rule has
a significant economic impact on small
entities the OCC compared the
estimated annual cost with annual
noninterest expense and annual salaries
and employee benefits for each small
entity. If the estimated annual cost was
greater than or equal to 2.5 percent of
total noninterest expense or 5 percent of
annual salaries and employee benefits
the OCC classified the impact as
significant. As noted above, the OCC has
concluded for purposes of this IRFA
that the proposed rules in this NPR,
when considered without regard to
changes in the Standardized NPR,
would not exceed these thresholds and
therefore would not result in a
significant economic impact on a
substantial number of small entities.
However, the OCC has concluded that
the proposed rules in the Standardized
Approach NPR would have a significant
impact on a substantial number of small
entities. The OCC estimates that
together, the changes proposed in this
NPR and the Standardized Approach
NPR will exceed these thresholds for
500 small national banks and 253 small
federally chartered private savings
institutions. Accordingly, when
considered together, this NPR and the
Standardized Approach NPR appear to
have a significant economic impact on
a substantial number of small entities.
D. Identification of Duplicative,
Overlapping, or Conflicting Federal
Rules
The OCC is unaware of any
duplicative, overlapping, or conflicting
federal rules. As noted previously, the
OCC anticipates issuing a separate
proposal to implement reporting
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requirements that are tied to (but do not
overlap or duplicate) the requirements
of the proposed rules. The OCC seeks
comments and information regarding
any such federal rules that are
duplicative, overlapping, or otherwise
in conflict with the proposed rule.
E. Discussion of Significant Alternatives
to the Proposed Rule
The agencies have sought to
incorporate flexibility into the proposed
rule and lessen burden and complexity
for smaller banking organizations
wherever possible, consistent with
safety and soundness and applicable
law, including the Dodd-Frank Act. The
agencies are requesting comment on
potential options for simplifying the
rule and reducing burden, including
whether to permit certain small banking
organizations to continue using portions
of the current general risk-based capital
rules to calculate risk-weighted assets.
Additionally, the agencies proposed the
following alternatives and flexibility
features:
• Covered small banking
organizations are not subject to the
enhanced disclosure requirements of the
proposed rules.
• Covered small banking
organizations would continue to apply a
100 percent risk weight to corporate
exposures (as described in section l.32
of the Standardized Approach NPR).
• Covered small banking
organizations may choose to apply the
simpler gross-up method for
securitization exposures rather than the
Simplified Supervisory Formula
Approach (SSFA) (as described in
section l.43 of the Standardized
Approach NPR).
• The proposed rule offers covered
small banking organizations a choice
between a simpler and more complex
methods of risk weighting equity
exposures to investment funds (as
described in section l.53 of the
Standardized Approach NPR).
The agencies welcome comment on
any significant alternatives to the
proposed rules applicable to covered
small banking organizations that would
minimize their impact on those entities.
FDIC
Regulatory Flexibility Act
Summary of the FDIC’s Initial
Regulatory Flexibility Analysis (IRFA)
In accordance with section 3(a) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.) (RFA), the FDIC is publishing
this summary of the IRFA for this NPR.
The RFA requires an agency to publish
in the Federal Register an IRFA or a
summary of its IRFA at the time of the
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publication of its general notice of
proposed rulemaking 104 or to certify
that the proposed rule will not have a
significant economic impact on a
substantial number of small entities.105
For purposes of this IRFA, the FDIC
analyzed the potential economic impact
of this NPR on the small entities that it
regulates.
The FDIC welcomes comment on all
aspects of the summary of its IRFA. A
final regulatory flexibility analysis will
be conducted after consideration of
comments received during the public
comment period.
A. Reasons Why the Proposed Rule Is
Being Considered by the Agencies;
Statement of the Objectives of the
Proposed Rule; and Legal Basis
As discussed in the Supplementary
Information section above, the agencies
are proposing to revise their capital
requirements to promote safe and sound
banking practices, implement Basel III
and certain aspects of the Dodd-Frank
Act, and harmonize capital
requirements across charter type.
Federal law authorizes each of the
agencies to prescribe capital standards
for the banking organizations that it
regulates.106
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B. Small Entities Affected by the
Proposal
Under regulations issued by the Small
Business Administration,107 a small
entity includes a depository institution
or bank holding company with total
assets of $175 million or less (a small
banking organization). As of March 31,
2012, there were approximately 2,433
small state nonmember banks, 115 small
state savings banks, and 45 small state
savings associations (collectively, small
banks and savings associations).
C. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
This NPR includes changes to the
general risk-based capital requirements
that affect small banking organizations.
Under this NPR, the changes to
minimum capital requirements that
would impact small banks and savings
associations include a more
conservative definition of regulatory
capital, a new common equity tier 1
capital ratio, a higher minimum tier 1
capital ratio, new thresholds for prompt
corrective action purposes, and a new
capital conservation buffer. To estimate
the impact of this NPR on the capital
104 5
U.S.C. 603(a).
U.S.C. 605(b).
106 See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C.
1831o(c)(1); 12 U.S.C. 1844; 12 U.S.C. 3907; and 12
U.S.C. 5371.
107 See 13 CFR 121.201.
105 5
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needs of small banks and savings
associations, the FDIC estimated the
amount of capital such institutions will
need to raise to meet the new minimum
standards relative to the amount of
capital they currently hold. To estimate
new capital ratios and requirements, the
FDIC used currently available data from
the quarterly Consolidated Report of
Condition and Income (Call Reports)
filed by small banks and savings
associations to approximate capital
under the proposed rule. The Call
Reports show that most small banks and
savings associations have raised their
capital to levels well above the existing
minimum requirements. After
comparing existing levels with the
proposed new requirements, the FDIC
has determined that 62 small banks and
savings associations that it regulates
would fall short of the proposed
increased capital requirements.
Together, those institutions would need
to raise approximately $164 million in
regulatory capital to meet the proposed
minimum requirements. The FDIC
estimates that the cost of lost tax
benefits associated with increasing total
capital by $164 million will be
approximately $0.9 million per year.
Averaged across the 62 affected
institutions, the cost is approximately
$15,000 per institution per year.
To determine if the proposed rule has
a significant economic impact on small
entities we compared the estimated
annual cost with annual noninterest
expense and annual salaries and
employee benefits for each small entity.
Based on this analysis, the FDIC has
concluded for purposes of this IRFA
that the changes described in this NPR,
when considered without regard to
other changes to the capital
requirements that the agencies
simultaneously are proposing, would
not result in a significant economic
impact on a substantial number of small
entities.
However, as discussed in the
Supplementary Information section
above, the changes proposed in this
NPR also should be considered together
with changes proposed in the separate
Standardized Approach NPR also
published in today’s Federal Register.
The changes described in the
Standardized NPR include:
1. Changing the denominator of the
risk-based capital ratios by revising the
asset risk weights;
2. Revising the treatment of
counterparty credit risk;
3. Replacing references to credit
ratings with alternative measures of
creditworthiness;
PO 00000
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52837
4. Providing more comprehensive
recognition of collateral and guarantees;
and
5. Providing a more favorable capital
treatment for transactions cleared
through qualifying central
counterparties.
These changes are designed to
enhance the risk-sensitivity of the
calculation of risk-weighted assets.
Therefore, capital requirements may go
down for some assets and up for others.
For those assets with a higher risk
weight under this NPR, however, that
increase may be large in some instances,
for example, the equivalent of a dollarfor-dollar capital charge for some
securitization exposures.
In order to estimate the impact of the
Standardized Approach NPR on small
banks and savings associations, the
FDIC used currently available data from
the quarterly Consolidated Report of
Condition and Income (Call Reports)
filed by small banks and savings
associations to approximate the change
in capital under the proposed rule. After
comparing the existing risk-based
capital rules with the proposed rule, the
FDIC estimates that risk-weighted assets
may increase by 10 percent under the
proposed rule. Using this assumption,
the FDIC estimates that a total of 76
small national banks and federally
chartered savings associations will need
to raise additional capital to meet their
regulatory minimums. The FDIC
estimates that this total projected
shortfall will be $34 million and that the
cost of lost tax benefits associated with
increasing total capital by $34 million
will be approximately $0.2 million per
year. Averaged across the 76 affected
institutions, the cost is approximately
$2,500 per institution per year.
To comply with the proposed rules in
the Standardized Approach NPR,
covered small banking organizations
would be required to change their
internal reporting processes. These
changes would require some additional
personnel training and expenses related
to new systems (or modification of
existing systems) for calculating
regulatory capital ratios.
Additionally, small banks and savings
associations that hold certain exposures
would be required to obtain additional
information under the proposed rules in
order to determine the applicable risk
weights. For example, small banks and
savings associations that hold exposures
to sovereign entities other than the
United States, foreign depository
institutions, or foreign public sector
entities would have to acquire Country
Risk Classification ratings produced by
the OECD to determine the applicable
risk weights. Small banks and savings
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associations that hold residential
mortgage exposures would need to have
and maintain information about certain
underwriting features of the mortgage as
well as the LTV ratio to determine the
applicable risk weight. Generally, small
banks and savings associations that hold
securitization exposures would need to
obtain sufficient information about the
underlying exposures to satisfy due
diligence requirements and apply either
the simplified supervisory formula or
the gross-up approach described in
section l.43 of the Standardized
Approach NPR to calculate the
appropriate risk weight, or be required
to assign a 1,250 percent risk weight to
the exposure.
Small banks and savings associations
typically do not hold significant
exposures to foreign entities or
securitization exposures, and the
agencies expect any additional burden
related to calculating risk weights for
these exposures, or holding capital
against these exposures, would be
relatively modest. The FDIC estimates
that, for small banks and savings
associations, the cost of implementing
the alternative measures of
creditworthiness will be approximately
$39,000 per institution.
Small banks and savings associations
may hold significant residential
mortgage exposures. If the institution
originated the exposure, it should have
sufficient information to determine the
applicable risk weight under the
proposed rule. However, if the exposure
is acquired from another institution, the
information that would be needed to
determine the applicable risk weight is
consistent with information that should
normally be collected for portfolio
monitoring purposes and internal risk
management.
Small banks and savings associations
would not be subject to the disclosure
requirements in subpart D of the
proposed rule. However, the agencies
expect to modify regulatory reporting
requirements that apply to such
institutions to reflect the changes made
to the agencies’ capital requirements in
the proposed rules. The agencies expect
to propose these changes to the relevant
reporting forms in a separate notice.
To determine if a proposed rule has
a significant economic impact on small
entities the FDIC compared the
estimated annual cost with annual
noninterest expense and annual salaries
and employee benefits for each small
bank and savings association. If the
estimated annual cost was greater than
or equal to 2.5 percent of total
noninterest expense or 5 percent of
annual salaries and employee benefits
the FDIC classified the impact as
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significant. As noted above, the FDIC
has concluded for purposes of this IRFA
that the proposed rules in this NPR,
when considered without regard to
changes in the Standardized NPR,
would not exceed these thresholds and
therefore would not result in a
significant economic impact on a
substantial number of small banks and
savings associations. However, the FDIC
has concluded that the proposed rules
in the Standardized Approach NPR
would have a significant impact on a
substantial number of small banks and
savings associations. The FDIC
estimates that together, the changes
proposed in this NPR and the
Standardized Approach NPR will
exceed these thresholds for 2,413 small
state nonmember banks, 114 small
savings banks, and 45 small savings
associations. Accordingly, when
considered together, this NPR and the
Standardized Approach NPR appear to
have a significant economic impact on
a substantial number of small entities.
D. Identification of Duplicative,
Overlapping, or Conflicting Federal
Rules
The FDIC is unaware of any
duplicative, overlapping, or conflicting
federal rules. As noted previously, the
FDIC anticipates issuing a separate
proposal to implement reporting
requirements that are tied to (but do not
overlap or duplicate) the requirements
of the proposed rules. The FDIC seeks
comments and information regarding
any such federal rules that are
duplicative, overlapping, or otherwise
in conflict with the proposed rule.
E. Discussion of Significant Alternatives
to the Proposed Rule
The agencies have sought to
incorporate flexibility into the proposed
rule and lessen burden and complexity
for small bank and savings associations
wherever possible, consistent with
safety and soundness and applicable
law, including the Dodd-Frank Act. The
agencies are requesting comment on
potential options for simplifying the
rule and reducing burden, including
whether to permit certain small banking
organizations to continue using portions
of the current general risk-based capital
rules to calculate risk-weighted assets.
Additionally, the agencies proposed the
following alternatives and flexibility
features:
• Small banks and savings
associations are not subject to the
enhanced disclosure requirements of the
proposed rules.
• Small banks and savings
associations would continue to apply a
100 percent risk weight to corporate
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exposures (as described in section l.32
of the Standardized Approach NPR).
• Small banks and savings
associations may choose to apply the
simpler gross-up method for
securitization exposures rather than the
SSFA (as described in section l.43 of
the Standardized Approach NPR).
• The proposed rule offers small
banks and savings associations a choice
between a simpler and more complex
methods of risk weighting equity
exposures to investment funds (as
described in section l.53 of the
Standardized Approach NPR).
The agencies welcome comment on
any significant alternatives to the
proposed rules applicable to small
banks and savings associations that
would minimize their impact on those
entities.
IX. Paperwork Reduction Act
Paperwork Reduction Act
A. Request for Comment on Proposed
Information Collection
In accordance with the requirements
of the Paperwork Reduction Act (PRA)
of 1995, the agencies may not conduct
or sponsor, and the respondent is not
required to respond to, an information
collection unless it displays a currently
valid Office of Management and Budget
(OMB) control number. The agencies are
requesting comment on a proposed
information collection.
The information collection
requirements contained in this joint
notice of proposed rulemaking (NPR)
have been submitted by the OCC and
FDIC to OMB for review under the PRA,
under OMB Control Nos. 1557–0234
and 3064–0153. In accordance with the
PRA (44 U.S.C. 3506; 5 CFR part 1320,
Appendix A.1), the Board has reviewed
the NPR under the authority delegated
by OMB. The Board’s OMB Control No.
is 7100–0313. The requirements are
found in §§ l.2.
The agencies have published two
other NPRs in this issue of the Federal
Register. Please see the NPRs entitled
‘‘Regulatory Capital Rules: Standardized
Approach for Risk-Weighted Assets;
Market Discipline and Disclosure
Requirements’’ and ‘‘Regulatory Capital
Rules: Advanced Approaches Riskbased Capital Rules; Market Risk Capital
Rule.’’ While the three NPRs together
comprise an integrated capital
framework, the PRA burden has been
divided among the three NPRs and a
PRA statement has been provided in
each.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the Agencies’ functions,
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including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Comments should be
addressed to:
OCC: Communications Division,
Office of the Comptroller of the
Currency, Public Information Room,
Mail Stop 1–5, Attention: 1557–0234,
250 E Street SW., Washington, DC
20219. In addition, comments may be
sent by fax to (202) 874–4448, or by
electronic mail to
regs.comments@occ.treas.gov. You can
inspect and photocopy the comments at
the OCC’s Public Information Room, 250
E Street, SW., Washington, DC 20219.
You can make an appointment to
inspect the comments by calling (202)
874–5043.
Board: You may submit comments,
identified by R–1442, by any of the
following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments
on the https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• Fax: 202–452–3819 or 202–452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551. All public comments are
available from the Board’s Web site at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, your comments
will not be edited to remove any
identifying or contact information.
Public comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
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18:36 Aug 29, 2012
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and C Streets NW.) between 9 a.m. and
5 p.m. on weekdays.
FDIC: You may submit written
comments, which should refer to RIN
3064–AD95 Implementation of Basel III
0153, by any of the following methods:
• Agency Web Site: https://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow the instructions
for submitting comments on the FDIC
Web site.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: Comments@FDIC.gov.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, FDIC,
550 17th Street NW., Washington, DC
20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
Public Inspection: All comments
received will be posted without change
to https://www.fdic.gov/regulations/laws/
federal/propose/html including any
personal information provided.
Comments may be inspected at the FDIC
Public Information Center, Room 100,
801 17th Street NW., Washington, DC,
between 9 a.m. and 4:30 p.m. on
business days.
B. Proposed Information Collection
Title of Information Collection: Basel
III.
Frequency of Response: On occasion.
Affected Public:
OCC: National banks and federally
chartered savings associations.
Board: State member banks, bank
holding companies, and savings and
loan holding companies.
FDIC: Insured state nonmember
banks, state savings associations, and
certain subsidiaries of these entities.
Abstract: Section l.2 allows the use
of a conservative estimate of the amount
of a bank’s investment in the capital of
unconsolidated financial institutions
held through the index security with
prior approval by the appropriate
agency. It also provides for termination
and close-out netting across multiple
types of transactions or agreements if
the bank obtains a written legal opinion
verifying the validity and enforceability
of the agreement under certain
circumstances and maintains sufficient
written documentation of this legal
review.
Estimated Burden: The burden
estimates below exclude any regulatory
reporting burden associated with
changes to the Consolidated Reports of
Income and Condition for banks (FFIEC
031 and FFIEC 041; OMB Nos. 7100–
0036, 3064–0052, 1557–0081), the
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52839
Financial Statements for Bank Holding
Companies (FR Y–9; OMB No. 7100–
0128), and the Capital Assessments and
Stress Testing information collection
(FR Y–14A/Q/M; OMB No. 7100–0341).
The agencies are still considering
whether to revise these information
collections or to implement a new
information collection for the regulatory
reporting requirements. In either case, a
separate notice would be published for
comment on the regulatory reporting
requirements.
OCC
Estimated Number of Respondents:
Independent national banks, 172;
federally chartered savings banks, 603.
Estimated Burden per Respondent: 16
hours.
Total Estimated Annual Burden:
12,400 hours.
Board
Estimated Number of Respondents:
SMBs, 831; BHCs, 933; SLHCs, 438.
Estimated Burden per Respondent: 16
hours.
Total Estimated Annual Burden:
35,232 hours.
FDIC
Estimated Number of Respondents:
4,571.
Estimated Burden per Respondent: 16
hours.
Total Estimated Annual Burden:
73,136 hours.
X. Plain Language
Section 722 of the Gramm-LeachBliley Act requires the Federal banking
agencies to use plain language in all
proposed and final rules published after
January 1, 2000. The agencies have
sought to present the proposed rule in
a simple and straightforward manner,
and invite comment on the use of plain
language.
XI. OCC Unfunded Mandates Reform
Act of 1995 Determinations
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
(2 U.S.C. 1532 et seq.) requires that an
agency prepare a written statement
before promulgating a rule that includes
a Federal mandate that may result in the
expenditure by State, local, and Tribal
governments, in the aggregate, or by the
private sector of $100 million or more
(adjusted annually for inflation) in any
one year. If a written statement is
required, the UMRA (2 U.S.C. 1535) also
requires an agency to identify and
consider a reasonable number of
regulatory alternatives before
promulgating a rule and from those
alternatives, either select the least
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costly, most cost-effective or least
burdensome alternative that achieves
the objectives of the rule, or provide a
statement with the rule explaining why
such an option was not chosen.
Under this NPR, the changes to
minimum capital requirements include
a new common equity tier 1 capital
ratio, a higher minimum tier 1 capital
ratio, a supplementary leverage ratio for
advanced approaches banks, new
thresholds for prompt corrective action
purposes, a new capital conservation
buffer, and a new countercyclical
capital buffer for advanced approaches
banks. To estimate the impact of this
NPR on bank capital needs, the OCC
estimated the amount of capital banks
will need to raise to meet the new
minimum standards relative to the
amount of capital they currently hold.
To estimate new capital ratios and
requirements, the OCC used currently
available data from banks’ quarterly
Consolidated Report of Condition and
Income (Call Reports) to approximate
capital under the proposed rule. Most
banks have raised their capital levels
well above the existing minimum
requirements and, after comparing
existing levels with the proposed new
requirements, the OCC has determined
that its proposed rule will not result in
expenditures by State, local, and Tribal
governments, or by the private sector, of
$100 million or more. Accordingly, the
UMRA does not require that a written
statement accompany this NPR.
Addendum 1: Summary of This NPR for
Community Banking Organizations
Overview
The agencies are issuing a notice of
proposed rulemaking (NPR, proposal, or
proposed rule) to revise the general riskbased capital rules to incorporate certain
revisions by the Basel Committee on Banking
Supervision to the Basel capital framework
(Basel III). The proposed rule would:
• Revise the definition of regulatory
capital components and related calculations;
• Add a new regulatory capital
component: common equity tier 1 capital;
• Increase the minimum tier 1 capital ratio
requirement;
• Impose different limitations to qualifying
minority interest in regulatory capital than
those currently applied;
• Incorporate the new and revised
regulatory capital requirements into the
Prompt Corrective Action (PCA) capital
categories;
• Implement a new capital conservation
buffer framework that would limit payment
of capital distributions and certain
discretionary bonus payments to executive
officers and key risk takers if the banking
organization does not hold certain amounts
of common equity tier 1 capital in addition
to those needed to meet its minimum riskbased capital requirements; and
• Provide for a transition period for several
aspects of the proposed rule, including a
phase-out period for certain non-qualifying
capital instruments, the new minimum
capital ratio requirements, the capital
conservation buffer, and the regulatory
capital adjustments and deductions.
This addendum presents a summary of the
proposed rule that is more relevant for
smaller, non-complex banking organizations
that are not subject to the market risk rule or
the advanced approaches capital rule. The
agencies intend for this addendum to act as
a guide for these banking organizations,
helping them to navigate the proposed rule
and identify the changes most relevant to
them. The addendum does not, however, by
itself provide a complete understanding of
the proposed rules and the agencies expect
and encourage all institutions to review the
proposed rule in its entirety.
1. Revisions to the Minimum Capital
Requirements
The NPR proposes definitions of common
equity tier 1 capital, additional tier 1 capital,
and total capital. These proposed definitions
would alter the existing definition of capital
by imposing, among other requirements,
additional constraints on including minority
interests, mortgage servicing assets (MSAs),
deferred tax assets (DTAs) and certain
investments in unconsolidated financial
institutions in regulatory capital. In addition,
the NPR would require that most regulatory
capital deductions be made from common
equity tier 1 capital. The NPR would also
require that most of a banking organization’s
accumulated other comprehensive income
(AOCI) be included in regulatory capital.
Under the NPR, a banking organization
would maintain the following minimum
capital requirements:
(1) A ratio of common equity tier 1capital
to total risk-weighted assets of 4.5 percent.
(2) A ratio of tier 1 capital to total riskweighted assets of 6 percent.
(3) A ratio of total capital to total riskweighted assets of 8 percent.
(4) A ratio of tier 1 capital to adjusted
average total assets of 4 percent.108
The new minimum capital requirements
would be implemented over a transition
period, as outlined in the proposed rule. For
a summary of the transition period, refer to
section 7 of this Addendum. As noted in the
NPR, banking organizations are generally
expected, as a prudential matter, to operate
well above these minimum regulatory ratios,
with capital commensurate with the level
and nature of the risks they hold.
2. Capital Conservation Buffer
In addition to these minimum capital
requirements, the NPR would establish a
capital conservation buffer. Specifically,
banking organizations would need to hold
common equity tier 1 capital in excess of
their minimum risk-based capital ratios by at
least 2.5 percent of risk-weighted assets in
order to avoid limits on capital distributions
(including dividend payments, discretionary
payments on tier 1 instruments, and share
buybacks) and certain discretionary bonus
payments to executive officers, including
heads of major business lines and similar
employees.
Under the NPR, a banking organization’s
capital conservation buffer would be the
smallest of the following ratios: a) its
common equity tier 1 capital ratio (in
percent) minus 4.5 percent; b) its tier 1
capital ratio (in percent) minus 6 percent;or
c) its total capital ratio (in percent) minus 8
percent.
To the extent a banking organization’s
capital conservation buffer falls short of 2.5
percent of risk-weighted assets, the banking
organization’s maximum payout amount for
capital distributions and discretionary bonus
payments (calculated as the maximum
payout ratio multiplied by the sum of eligible
retained income, as defined in the NPR)
would decline. The following table shows the
maximum payout ratio, depending on the
banking organization’s capital conservation
buffer.
TABLE 1—CAPITAL CONSERVATION BUFFER
Maximum payout ratio (as a
percentage or eligible retained
income)
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Capital Conservation Buffer (as a percentage of risk-weighted assets)
Greater than 2.5 percent .........................................................................................................................................
Less than or equal to 2.5 percent and greater than 1.875 percent ........................................................................
Less than or equal to 1.875 percent and greater than 1.25 percent ......................................................................
Less than or equal to 1.25 percent and greater than 0.625 percent ......................................................................
Less than or equal to 0.625 percent .......................................................................................................................
108 Banking organizations should be aware that
their leverage ratio requirements would be affected
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by the new definition of tier 1 capital under this
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No payout limitation applies.
60 percent.
40 percent.
20 percent.
0 percent.
proposal. See section 4 of this addendum on the
definition of capital.
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Eligible retained income for purposes of
the proposed rule would mean a banking
organization’s net income for the four
calendar quarters preceding the current
calendar quarter, based on the banking
organization’s most recent quarterly
regulatory reports, net of any capital
distributions and associated tax effects not
already reflected in net income.
Under the NPR, the maximum payout
amount for the current calendar quarter
would be equal to the banking organization’s
eligible retained income, multiplied by the
applicable maximum payout ratio in Table 1.
reflect the new capital ratio requirements.
The NPR also proposes to introduce the
common equity tier 1 capital ratio as a PCA
capital category threshold. In addition, the
NPR proposes to revise the existing
definition of tangible equity. Under the NPR,
tangible equity would be defined as tier 1
capital (composed of common equity tier 1
and additional tier 1 capital) plus any
outstanding perpetual preferred stock
(including related surplus) that is not already
included in tier 1 capital.
The proposed rule would prohibit a
banking organization from making capital
distributions or certain discretionary bonus
payments during the current calendar quarter
if: (A) its eligible retained income is negative;
and (B) its capital conservation buffer ratio
is less than 2.5 percent as of the end of the
previous quarter.
The NPR does not diminish the agencies’
authority to place additional limitations on
capital distributions.
3. Adjustments to Prompt Corrective Action
(PCA) Thresholds
The NPR proposes to revise the PCA
capital category thresholds to levels that
TABLE 2—PROPOSED PCA THRESHOLD REQUIREMENTS *
Threshold ratios
PCA capital category
Total
risk-based
capital ratio
Well capitalized ........................................................................................................
Adequately capitalized .............................................................................................
Undercapitalized ......................................................................................................
Significantly undercapitalized ..................................................................................
Tier 1
risk-based
capital ratio
10%
8%
<8%
<6%
Critically undercapitalized ........................................................................................
Common
equity tier 1
risk-based
capital ratio
8%
6%
<6%
<4%
Tier 1
leverage ratio
6.5%
4.5%
<4.5%
<3%
5%
4%
<4%
<3%
Tangible Equity/Total Assets < / = 2%
* Proposed effective date: January 1, 2015. This date coincides with the phasing in of the new minimum capital requirements, which would be
implemented over a transition period.
4. Definition of Capital
The NPR proposes to revise the definition
of capital to include the following regulatory
capital components: common equity tier 1
capital, additional tier 1 capital, and tier 2
capital. These are summarized below (see
summary table attached). Section 20 of the
proposed rule describes the capital
components and eligibility criteria for
regulatory capital instruments. Section 20
also describes the criteria that each primary
federal supervisor would consider when
determining whether a capital instrument
should be included in a specific regulatory
capital component.
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a. Common Equity Tier 1 Capital
The NPR defines common equity tier 1
capital as the sum of the common equity tier
1 elements, less applicable regulatory
adjustments and deductions. Common equity
tier 1 capital elements would include:
1. Common stock instruments (that satisfy
specified criteria in the proposed rule) and
related surplus (net of any treasury stock);
2. Retained earnings;
3. Accumulated other comprehensive
income (AOCI); and
4. Common equity minority interest (as
defined in the proposed rule) subject to the
limitations outlined in section 21 of the
proposed rule.
b. Additional Tier 1 Capital
The NPR would define additional tier 1
capital as the sum of additional tier 1 capital
elements and related surplus, less applicable
regulatory adjustments and deductions.
Additional tier 1 capital elements would
include:
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1. Noncumulative perpetual preferred
stock (that satisfy specified criteria in the
proposed rule) and related surplus;
2. Tier 1 minority interest (as defined in
the proposed rule), subject to limitations
described in section 21 of the proposed rule,
not included in the banking organization’s
common equity tier 1 capital; and
3. Instruments that currently qualify as tier
1 capital under the agencies’ general riskbased capital rules and that were issued
under the Small Business Job’s Act of 2010,
or, prior to October 4, 2010, under the
Emergency Economic Stabilization Act of
2008.
c. Tier 2 Capital
The proposed rule would define tier 2
capital as the sum of tier 2 capital elements
and related surplus, less regulatory
adjustments and deductions. The tier 2
capital elements would include:
1. Subordinated debt and preferred stock
(that satisfy specified criteria in the proposed
rule). This will include most of the
subordinated debt currently included in tier
2 capital according to the agencies’ existing
risk-based capital rules;
2. Total capital minority interest (as
defined in the proposed rule), subject to the
limitations described in section 21 of the
proposed rule, and not included in the
banking organization’s tier 1 capital;
3. Allowance for loan and lease losses
(ALLL) not exceeding 1.25 percent of the
banking organization’s total risk-weighted
assets; and
4. Instruments that currently qualify as tier
2 capital under the agencies’ general riskbased capital rules and that were issued
under the Small Business Job’s Act of 2010,
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or, prior to October 4, 2010, under the
Emergency Economic Stabilization Act of
2008.
d. Minority Interest
The NPR proposes a calculation method
that limits the amount of minority interest in
a subsidiary that is not owned by the banking
organization that may be included in
regulatory capital.
Under the NPR, common equity tier 1
minority interest would mean any minority
interest arising from the issuance of common
shares by a fully consolidated subsidiary.
Common equity tier 1 minority interest may
be recognized in common equity tier 1 only
if both of the following are true:
1. The instrument giving rise to the
minority interest would, if issued by the
banking organization itself, meet all of the
criteria for common stock instruments.
2. The subsidiary is itself a depository
institution.
If not recognized in common equity tier 1,
the minority interest may be eligible for
inclusion in additional tier 1 capital or tier
2 capital.
For a capital instrument that meets all of
the criteria for common stock instruments,
the amount of common equity minority
interest includable in the banking
organization’s common equity tier 1 capital
is equal to:
The common equity tier 1 minority interest
of the subsidiary minus
(The percentage of the subsidiary’s common
equity tier 1 capital that is not owned by
the banking organization)
multiplied by the difference between
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(common equity tier 1 capital of the
subsidiary
and the lower of:
• 7% of the risk weighted assets of the
banking organization that relate to the
subsidiary, or
7% of the risk weighted assets of the
subsidiary)
For tier 1 minority interest, the NPR
proposes the same calculation method, but
substitutes tier 1 capital in place of common
equity tier 1 capital and 8.5 percent in place
of 7 percent in the illustration above (and
assuming the banking organization has a
common equity tier 1 capital ratio of at least
7 percent). In the case of tier 1 minority
interest, there is no requirement that the
subsidiary be a depository institution.
However, the NPR would require that any
instrument giving rise to the minority interest
must meet all of the criteria for either a
common stock instrument or an additional
tier 1 capital instrument.
For total capital minority interest, the NPR
proposes an equivalent calculation method
(by substituting total capital in place of
common equity tier 1 capital and 10.5
percent in place of 7 percent in the
illustration above; and assuming the banking
organization has a common equity tier 1
capital ratio of at least 7 percent). In the case
of total capital minority interest, there is no
requirement that the subsidiary be a
depository institution. However, the NPR
would require that any instrument giving rise
to the minority interest must meet all of the
criteria for either a common stock
instrument, an additional tier 1 capital
instrument, or a tier 2 capital instrument.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
e. Regulatory Capital Adjustments and
Deductions
A. Regulatory Deductions From Common
Equity Tier 1 Capital
The NPR would require that a banking
organization deduct the following from the
sum of its common equity tier 1 capital
elements:
Æ Goodwill and all other intangible assets
(other than MSAs), net of any associated
deferred tax liabilities (DTLs). Goodwill for
purposes of this deduction includes any
goodwill embedded in the valuation of a
significant investment in the capital of an
unconsolidated financial institution in the
form of common stock.
Æ DTAs that arise from operating loss and
tax credit carryforwards net of any valuation
allowance and net of DTLs (see section 22 of
the proposed rule for the requirements on the
netting of DTLs).
Æ Any gain-on-sale associated with a
securitization exposure.
Æ Any defined benefit pension fund net
asset109, net of any associated deferred tax
109 With prior approval of the primary federal
supervisor, the banking organization may reduce
the amount to be deducted by the amount of assets
of the defined benefit pension fund to which it has
unrestricted and unfettered access, provided that
the banking organization includes such assets in its
risk-weighted assets as if the banking organization
held them directly. For this purpose, unrestricted
and unfettered access means that the excess assets
of the defined pension fund would be available to
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liability.110 (The pension deduction does not
apply to insured depository institutions that
have their own defined benefit pension plan.)
B. Regulatory Adjustments to Common
Equity Tier 1 Capital
The NPR would require that for the
following items, a banking organization
deduct any associated unrealized gain and
add any associated unrealized loss to the sum
of common equity tier 1 capital elements:
Æ Unrealized gains and losses on cash flow
hedges included in AOCI that relate to the
hedging of items that are not recognized at
fair value on the balance sheet.
Æ Unrealized gains and losses that have
resulted from changes in the fair value of
liabilities that are due to changes in the
banking organization’s own credit risk.
C. Additional Deductions From Regulatory
Capital
Under the NPR, a banking organization
would be required to make the following
deductions with respect to investments in its
own capital instruments:
Æ Deduct from common equity tier 1
elements investments in the banking
organization’s own common stock
instruments (including any contractual
obligation to purchase), whether held
directly or indirectly.
Æ Deduct from additional tier 1 capital
elements, investments in (including any
contractual obligation to purchase) the
banking organization’s own additional tier 1
capital instruments, whether held directly or
indirectly.
Æ Deduct from tier 2 capital elements,
investments in (including any contractual
obligation to purchase) the banking
organization’s own tier 2 capital instruments,
whether held directly or indirectly.
D. Corresponding Deduction Approach
Under the NPR, a banking organization
would use the corresponding deduction
approach to calculate the required
deductions from regulatory capital for:
Æ Reciprocal cross-holdings;
Æ Non-significant investments in the
capital of unconsolidated financial
institutions; and
Æ Non-common stock significant
investments in the capital of unconsolidated
financial institutions.
Under the corresponding deduction
approach, a banking organization would be
required to make any such deductions from
the same component of capital for which the
underlying instrument would qualify if it
were issued by the banking organization
itself. In addition, if the banking organization
does not have a sufficient amount of such
component of capital to effect the deduction,
the shortfall will be deducted from the next
higher (that is, more subordinated)
component of regulatory capital (for example,
if the exposure may be deducted from
additional tier 1 capital but the banking
organization does not have sufficient
protect depositors or creditors of the banking
organization in a receivership, insolvency,
liquidation, or similar proceeding.
110 The deferred tax liabilities for this deduction
exclude those deferred tax liabilities that have
already been netted against DTAs.
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additional tier 1 capital, it would take the
deduction from common equity tier 1
capital). The NPR provides additional
information regarding the corresponding
deduction approach for those banking
organizations with such holdings and
investments.
Reciprocal crossholdings in the capital of
financial institutions: The NPR would
require a banking organization to deduct
investments in the capital of other financial
institutions it holds reciprocally.111
Non-significant investments in the capital
of unconsolidated financial institutions112:
The proposed rule would require a banking
organization to deduct any non-significant
investments in the capital of unconsolidated
financial institutions that, in the aggregate,
exceed 10 percent of the sum of the banking
organization’s common equity tier 1 capital
elements less all deductions and other
regulatory adjustments required under
sections 22(a) through 22(c)(3) of the
proposed rule (the 10 percent threshold for
non-significant investments in
unconsolidated financial institutions).
Æ The amount to be deducted from a
specific capital component is equal to (i) the
amount of a banking organization’s nonsignificant investments exceeding the 10
percent threshold for non-significant
investments multiplied by (ii) the ratio of the
non-significant investments in
unconsolidated financial institutions in the
form of such capital component to the
amount of the banking organization’s total
non-significant investments in
unconsolidated financial institutions.
Æ The banking organization’s nonsignificant investments in the capital of
unconsolidated financial institutions not
exceeding the 10 percent threshold for nonsignificant investments must be assigned the
appropriate risk weight under the
Standardized Approach NPR.
Significant investments in the capital of
unconsolidated financial institutions that are
not in the form of common stock: A banking
organization must deduct its significant
investments in the capital of unconsolidated
financial institutions not in the form of
common stock.
E. Threshold Deductions
The NPR would require a banking
organization to deduct from common equity
tier 1 capital elements each of the following
assets (together, the threshold deduction
items) that, individually, are above 10
percent of the sum of the banking
organization’s common equity tier 1 capital
elements, less all required adjustments and
deductions required under sections 22(a)
through 22(c) of the proposed rule (the 10
111 An instrument is held reciprocally if the
instrument is held pursuant to a formal or informal
arrangement to swap, exchange, or otherwise intend
to hold each other’s capital instruments.
112 With prior written approval of the primary
federal supervisor, for the period of time stipulated
by the primary federal supervisor, a banking
organization would not be required to deduct
exposures to the capital instruments of
unconsolidated financial institutions if the
investment is made in connection with the banking
organization providing financial support to a
financial institution in distress.
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percent common equity deduction
threshold):
Æ DTAs arising from temporary differences
that the banking organization could not
realize through net operating loss carrybacks,
net of any associated valuation allowance,
and DTLs, subject to the following
limitations:
D Only the DTAs and DTLs that relate to
taxes levied by the same taxation authority
and that are eligible for offsetting by that
authority may be offset for purposes of this
deduction.
D The DTLs offset against DTAs must
exclude amounts that have already been
netted against other items that are either fully
deducted (such as goodwill) or subject to
deduction (such as MSA).
Æ MSAs, net of associated DTLs.
Æ Significant investments in the capital of
unconsolidated financial institutions in the
form of common stock.
In addition, the aggregate amount of the
threshold deduction items in this section
cannot exceed 15 percent of the banking
organization’s common equity tier 1 capital
net of all deductions (the 15 percent common
equity deduction threshold). That is, the
banking organization must deduct from
common equity tier 1 capital elements, the
amount of the threshold deduction items that
are not deducted after the application of the
10 percent common equity deduction
threshold, and that, in aggregate, exceed
17.65 percent of the sum of the banking
organization’s common equity tier 1 capital
elements, less all required adjustments and
deductions required under sections 22(a)
through 22(c) of the proposed rule and less
the threshold deduction items in full.
5. Changes in Risk-weighted Assets
The amounts of the threshold deduction
items within the limits and not deducted, as
described above, would be included in the
risk-weighted assets of the banking
organization and assigned a risk weight of
250 percent. In addition, certain exposures
that are currently deducted under the general
risk-based capital rules, for example certain
credit enhancing interest-only strips, would
receive a 1,250% risk weight.
6. Timeline and Transition Period
The NPR would provide for a multi-year
implementation as summarized in the table
below:
TABLE 3—PHASE-IN SCHEDULE
Year (as of Jan. 1)
2013
(percent)
2014
(percent)
2015
(percent)
Minimum common equity tier 1 ratio .....................
Common equity tier 1 capital conservation buffer
Common equity tier 1 plus capital conservation
buffer ..................................................................
Phase-in of deductions from common equity tier 1
(including threshold deduction items that are
over the limits) ....................................................
Minimum tier 1 capital ............................................
Minimum tier 1 capital plus capital conservation
buffer ..................................................................
Minimum total capital .............................................
Minimum total capital plus conservation buffer .....
3.5
..................
4.0
..................
4.5
..................
4.5
0.625
4.5
1.25
4.5
1.875
4.5
2.50
3.5
4.0
4.5
5.125
5.75
6.375
7.0
..................
4.5
20
5.5
40
6.0
60
6.0
80
6.0
100
6.0
100
6.0
..................
8.0
8.0
..................
8.0
8.0
..................
8.0
8.0
6.625
8.0
8.625
7.25
8.0
9.25
7.875
8.0
9.875
8.5
8.0
10.5
As provided in Basel III, capital
instruments that no longer qualify as
additional tier 1 or tier 2 capital will be
phased out over a 10 year horizon beginning
in 2013. However, trust preferred securities
are phased out as required under the DoddFrank Act.
2016
(percent)
2017
(percent)
2018
(percent)
2019
(percent)
Attached to this Addendum I is a summary
of the proposed revision to the components
of capital introduced by the NPR.
Components and tiers
Explanation
(1) COMMON EQUITY TIER 1 CAPITAL:
(a) + Qualifying common stock instruments .............................................
(b) + Retained earnings.
(c) + AOCI .................................................................................................
Instruments must meet all of the common equity tier 1 criteria (Note 1)
(d) + Qualifying common equity tier 1 minority interest ...........................
(e) ¥ Regulatory deductions from common equity tier 1 capital .............
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(f) +/¥ Regulatory adjustments to common equity tier 1 capital .............
(g) ¥ common equity tier 1 capital deductions per the corresponding
deduction approach.
(h) ¥ Threshold deductions .....................................................................
= common equity tier 1 capital.
(2) ADDITIONAL TIER 1 CAPITAL:
(a) + additional tier 1 capital instruments .................................................
(b) + Tier 1 minority interest that is not included in common equity tier 1
capital.
(c) + Non-qualifying tier 1 capital instruments subject to transition
phase-out and SBLF related instruments.
(d) ¥ Investments in a banking organization’s own additional tier 1
capital instruments.
(e) ¥ Additional tier 1 capital deductions per the corresponding deduction approach.
= Additional tier 1 capital.
(3) TIER 2 CAPITAL:
(a) + Tier 2 capital instruments .................................................................
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With the exception in Note 2 below, AOCI flows through to common
equity tier 1 capital.
Subject to specific calculation method and limitation.
Deduct: Goodwill and intangible assets (other than MSAs); DTAs that
arise from operating loss and tax credit carryforwards; any gain on
sale from a securitization; investments in the banking organization’s
own common stock instruments.
See explanation below (Note 2).
See section 4.e.D above.
Deduct amount of threshold items that are above the 10 and 15 percent common equity tier 1 thresholds. (See section 4.e. above).
Instruments must meet all of the additional tier 1 criteria (Note 1).
Subject to specific calculation and limitation.
(Note 3)
See section 4.e.D above.
Instruments must meet all of the tier 2 criteria (Note 1).
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Components and tiers
Explanation
(b) + Total capital minority interest that is not included in tier 1 ..............
(c) + ALLL .................................................................................................
(d) ¥ Investments in a banking organization’s own tier 2 capital instruments.
(e) ¥ Tier 2 capital deductions per the Corresponding Deduction Approach.
(f) + Non-qualifying tier 2 capital instruments subject to transition
phase-out and SBLF related instruments.
= Tier 2 capital.
TOTAL CAPITAL = common equity tier 1 + additional tier 1 + tier 2.
Subject to specific calculation and limitation.
Up to 1.25% of risk weighted assets.
See section 4.e.D above.
(Note 3)
Notes to Table:
Note 1:Includes surplus related to the instruments.
Note 2: Regulatory adjustments: A banking organization must deduct any unrealized gain and add any unrealized loss for cash flow hedges
included in AOCI relating to hedging of items not fair valued on the balance sheet and for unrealized gains and losses that have resulted from
changes in the fair value of liabilities that are due to changes in the banking organization’s own credit risk.
Note 3: Grandfathered SBLF related instruments: These are instruments issued under the Small Business Lending Facility (SBLF); or prior
October 4, 2010 under the Emergency Economic Stabilization Act of 2008. If the instrument qualified as tier 1 capital under rules at the time of
issuance, it would count as additional tier 1 under this proposal. If the instrument qualified as tier 2 under the rules at that time, it would count as
tier 2 under this proposal.
ATTACHMENT 2: COMPARISON OF CURRENT RULES VS. PROPOSAL
Minimum regulatory capital requirements
Current minimum ratios
Common equity tier 1 capital/
risk weighted assets.
Tier 1 capital/risk weighted assets.
Total capital/risk weighted assets.
Leverage ratio ............................
Proposed minimum ratios
N/A .............................................
4.5%
4% ..............................................
6%
8% ..............................................
8%
≥4% (or ≥3%) .............................
≥4%
Comments
Minimum required level will not vary depending on the supervisory rating.
Capital buffers
Current treatment
Capital conservation buffer ........
Proposed treatment
Comment
N/A .............................................
Capital
conservation
buffer
equivalent to 2.5% of riskweighted assets; composed of
common equity tier 1 capital.
Not holding the capital conservation
buffer may result in restrictions on
capital distributions and certain discretionary bonus payments.
Prompt corrective action
Current PCA levels
Proposed PCA levels
Comment
Common equity tier 1 capital .....
N/A .............................................
Proposed adequately capitalized PCA
level aligned to new minimum ratio.
Tier 1 capital ..............................
Well capitalized: ≥6%; Adequately
capitalized:
≥4%;
Undercapitalized <4%; Significantly undercapitalized: <3%.
Well capitalized: ≥10%; Adequately
capitalized:
≥8%;
Undercapitalized <8%; Significantly undercapitalized: <6%.
Well capitalized: ≥5%; Adequately capitalized: ≥4% (or
≥3%); Undercapitalized <4%
(or <3%); Significantly undercapitalized: <3%.
Tangible equity to total assets
ratio ≤2.
Well capitalized: ≥6.5%; Adequately capitalized: ≥4.5%;
Undercapitalized: <4.5%; Significantly
undercapitalized:
<3%.
Well capitalized: ≥8%; Adequately
capitalized:
≥6%;
Undercapitalized <6%; Significantly undercapitalized: <4%.
Well capitalized: ≥10%; Adequately
capitalized:
≥8%;
Undercapitalized <8%; Significantly undercapitalized: <6%.
Well capitalized: ≥5%; Adequately
capitalized:
≥4%;
Undercapitalized <4%; Significantly undercapitalized: <3%.
Tangible equity to total assets
≤2.
Tangible equity under the proposal
would be defined as tier 1 capital plus
non-tier 1 perpetual preferred stock.
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Total capital ...............................
Leverage ratio ............................
Critically undercapitalized category.
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Proposed adequately capitalized PCA
level aligned to new minimum ratio.
PCA adequately capitalized level will not
vary depending on the supervisory
rating.
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ATTACHMENT 2: COMPARISON OF CURRENT RULES VS. PROPOSAL—CONTINUED
Regulatory capital components
Current definition/instruments
Proposed definition/
instruments
Comments
Common equity tier 1 capital .....
No specific definition .................
Common stock instruments traditionally
issued by U.S. banking organizations
expected generally to qualify as common equity tier 1 capital.
Additional tier 1 capital ..............
No specific definition .................
Mostly retained earnings and
common stock that meet
specified eligibility criteria
(plus limited amounts of minority interest in the form of
common stock) less the majority of the regulatory deductions.
Equity capital instruments that
meet specified eligibility criteria (plus limited amounts of
minority interest in the form of
tier 1 capital instruments).
Tier 2 capital ..............................
Certain capital instruments (e.g.,
subordinated debt) and limited
amounts of ALLL.
Capital instruments that meet
specified eligibility criteria
(e.g., subordinated debt) and
limited amounts of ALLL.
Non-cumulative
perpetual
preferred
stock traditionally issued by U.S.
banking organizations expected to
generally qualify; trust preferred instruments traditionally issued by certain bank holding companies would
not qualify.
Traditional subordinated debt instruments are expected to remain tier 2
eligible; there is no specific limitation
on the amount of tier 2 capital that
can be included in total capital under
the proposal.
Regulatory deductions and adjustments
Current treatment
Proposed treatment
Comment
Regulatory deductions ...............
Current deductions from regulatory capital include goodwill
and other intangibles, DTAs
(above certain levels), and
MSAs (above certain levels).
Vast majority of regulatory deductions
are made at the common equity tier 1
capital level (as opposed to the tier 1
level); the proposed deductions for
MSAs and DTAs in the proposed rule
are significantly more stringent than
the current deductions.
Regulatory adjustments .............
Current adjustments include the
neutralization of unrealized
gains and losses on available
for sale debt securities for
regulatory capital purposes.
MSAs and DTAs that are not
deducted are subject to a 100
percent risk weight.
Proposed deductions from common equity tier 1 capital include goodwill and other intangibles, DTAs (above certain levels), MSAs (above certain levels) and investments in
unconsolidated financial institutions (above certain levels).
Under the proposal, AOCI would
generally flow through to regulatory capital.
MSAs, certain DTAs arising
from temporary differences,
and certain significant investments in the common stock of
unconsolidated financial institutions.
The portion of a CEIO that does
not constitute an after-taxgain-on-sale.
Dollar-for-dollar capital requirement for amounts not deducted based on a concentration limit.
Items that are not deducted are
subject to a 250 percent risk
weight.
Subject to a 1250 percent risk
weight.
Text of Common Rule
§ l.11 Capital conservation buffer and
countercyclical capital buffer amount.
PART [l] CAPITAL ADEQUACY OF
[BANK]s
Subpart C—Definition of Capital
§ l.20 Capital components and eligibility
criteria for regulatory capital
instruments. § l.21 Minority interest.
§ l.22 Regulatory capital adjustments and
deductions.
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Sec.
Subpart A—General
§ l.1 Purpose, applicability, and
reservations of authority.
§ l.2 Definitions.
Subpart G—Transition Provisions
Subpart B—Minimum Capital Requirements
and Buffers
§ l.10
§ l.300
Transitions.
Minimum capital requirements.
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Under the proposed treatment unrealized gains and losses on available for
sale debt securities would not be neutralized for regulatory capital purposes.
Under the proposal, these items are
subject to deduction if they exceed
certain specified common equity deduction thresholds.
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Subpart A—General Provisions
§ l.1 Purpose, applicability, and
reservations of authority
(a) Purpose. This [PART] establishes
minimum capital requirements and
overall capital adequacy standards for
[BANK]s. This [PART] includes
methodologies for calculating minimum
capital requirements, public disclosure
requirements related to the capital
requirements, and transition provisions
for the application of this [PART].
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(b) Limitation of authority. Nothing in
this [PART] shall be read to limit the
authority of the [AGENCY] to take
action under other provisions of law,
including action to address unsafe or
unsound practices or conditions,
deficient capital levels, or violations of
law or regulation, under section 8 of the
Federal Deposit Insurance Act.
(c) Applicability. (1) Minimum capital
requirements and overall capital
adequacy standards. Each [BANK] must
calculate its minimum capital
requirements and meet the overall
capital adequacy standards in subpart B
of this part.
(2) Regulatory capital. Each [BANK]
must calculate its regulatory capital in
accordance with subpart C.
(3) Risk-weighted assets. (i) Each
[BANK] must use the methodologies in
subpart D (and subpart F for a market
risk [BANK]) to calculate standardized
total risk-weighted assets.
(ii) Each advanced approaches
[BANK] must use the methodologies in
subpart E (and subpart F of this part for
a market risk [BANK]) to calculate
advanced approaches total riskweighted assets.
(4) Disclosures. (i) A [BANK] with
total consolidated assets of $50 billion
or more that is not an advanced
approaches [BANK] must make the
public disclosures described in subpart
D of this part.
(ii) Each market risk [BANK] must
make the public disclosures described
in subparts D and F of this part.
(iii) Each advanced approaches
[BANK] must make the public
disclosures described in subpart E of
this part.
(d) Reservation of authority. (1)
Additional capital in the aggregate. The
[AGENCY] may require a [BANK] to
hold an amount of regulatory capital
greater than otherwise required under
this part if the [AGENCY] determines
that the [BANK]’s capital requirements
under this part are not commensurate
with the [BANK]’s credit, market,
operational, or other risks.
(2) Regulatory capital elements. If the
[AGENCY] determines that a particular
common equity tier 1, additional tier 1,
or tier 2 capital element has
characteristics or terms that diminish its
ability to absorb losses, or otherwise
present safety and soundness concerns,
the [AGENCY] may require the [BANK]
to exclude all or a portion of such
element from common equity tier 1
capital, additional tier 1 capital, or tier
2 capital, as appropriate.
(3) Risk-weighted asset amounts. If
the [AGENCY] determines that the riskweighted asset amount calculated under
this part by the [BANK] for one or more
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exposures is not commensurate with the
risks associated with those exposures,
the [AGENCY] may require the [BANK]
to assign a different risk-weighted asset
amount to the exposure(s) or to deduct
the amount of the exposure(s) from its
regulatory capital.
(4) Total leverage. If the [AGENCY]
determines that the leverage exposure
amount, or the amount reflected in the
[BANK]’s reported average consolidated
assets, for an on- or off-balance sheet
exposure calculated by a [BANK] under
§ l.10 is inappropriate for the
exposure(s) or the circumstances of the
[BANK], the [AGENCY] may require the
[BANK] to adjust this exposure amount
in the numerator and the denominator
for purposes of the leverage ratio
calculations.
(5) Consolidation of certain
exposures. The [AGENCY] may
determine that the risk-based capital
treatment for an exposure or the
treatment provided to an entity that is
not consolidated on the [BANK]’s
balance sheet is not commensurate with
the risk of the exposure and the
relationship of the [BANK] to the entity.
Upon making this determination, the
[AGENCY] may require the [BANK] to
treat the entity as if it were consolidated
on the balance sheet of the [BANK] for
purposes of determining its regulatory
capital requirements and calculate the
regulatory capital ratios accordingly.
The [AGENCY] will look to the
substance of, and risk associated with,
the transaction, as well as other relevant
factors the [AGENCY] deems
appropriate in determining whether to
require such treatment.
(6) Other reservation of authority.
With respect to any deduction or
limitation required under this [PART],
the [AGENCY] may require a different
deduction or limitation, provided that
such alternative deduction or limitation
is commensurate with the [BANK]’s risk
and consistent with safety and
soundness.
(e) Notice and response procedures.
In making a determination under this
section, the [AGENCY] will apply notice
and response procedures in the same
manner as the notice and response
procedures in 12 CFR 3.12, 12 CFR
167.3(d) (OCC); 12 CFR 263.202 (Board);
12 CFR 325.6(c), 12 CFR 390.463(d)
(FDIC).
§ l.2
Definitions.
Additional tier 1 capital is defined in
§ l.20 of subpart C of this part.
Advanced approaches [BANK] means
a [BANK] that is described in
§ l.100(b)(1) of subpart E of this part.
Advanced approaches total riskweighted assets means:
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(1) The sum of:
(i) Credit-risk-weighted assets;
(ii) Credit Valuation Adjustment
(CVA) risk-weighted assets;
(iii) Risk-weighted assets for
operational risk; and
(iv) For a market risk [BANK] only,
advanced market risk-weighted assets;
minus
(2) Excess eligible credit reserves not
included in the [BANK]’s tier 2 capital.
Advanced market risk-weighted assets
means the advanced measure for market
risk calculated under § l.204 of subpart
F of this part multiplied by 12.5.
Affiliate with respect to a company
means any company that controls, is
controlled by, or is under common
control with, the company.
Allocated transfer risk reserves means
reserves that have been established in
accordance with section 905(a) of the
International Lending Supervision Act,
against certain assets whose value U.S.
supervisory authorities have found to be
significantly impaired by protracted
transfer risk problems.
Allowances for loan and lease losses
(ALLL) means reserves that have been
established through a charge against
earnings to absorb future losses on
loans, lease financing receivables or
other extensions of credit. ALLL
excludes ‘‘allocated transfer risk
reserves.’’ For purposes of this [PART],
ALLL includes reserves that have been
established through a charge against
earnings to absorb future credit losses
associated with off-balance sheet
exposures.
Asset-backed commercial paper
(ABCP) program means a program
established primarily for the purpose of
issuing commercial paper that is
investment grade and backed by
underlying exposures held in a
bankruptcy-remote special purpose
entity (SPE).
Asset-backed commercial paper
(ABCP) program sponsor means a
[BANK] that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to
participate in an ABCP program;
(3) Approves the exposures to be
purchased by an ABCP program; or
(4) Administers the ABCP program by
monitoring the underlying exposures,
underwriting or otherwise arranging for
the placement of debt or other
obligations issued by the program,
compiling monthly reports, or ensuring
compliance with the program
documents and with the program’s
credit and investment policy.
Bank holding company means a bank
holding company as defined in section
2 of the Bank Holding Company Act.
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Bank Holding Company Act means
the Bank Holding Company Act of 1956,
as amended (12 U.S.C. 1841).
Bankruptcy remote means, with
respect to an entity or asset, that the
entity or asset would be excluded from
an insolvent entity’s estate in
receivership, insolvency, liquidation, or
similar proceeding.
Capital distribution means:
(1) A reduction of tier 1 capital
through the repurchase of a tier 1 capital
instrument or by other means;
(2) A reduction of tier 2 capital
through the repurchase, or redemption
prior to maturity, of a tier 2 capital
instrument or by other means;
(3) A dividend declaration on any tier
1 capital instrument;
(4) A dividend declaration or interest
payment on any tier 2 capital
instrument if such dividend declaration
or interest payment may be temporarily
or permanently suspended at the
discretion of the [BANK]; or
(5) Any similar transaction that the
[AGENCY] determines to be in
substance a distribution of capital.
Carrying value means, with respect to
an asset, the value of the asset on the
balance sheet of the [BANK],
determined in accordance with
generally accepted accounting
principles (GAAP).
Category 1 residential mortgage
exposure means a residential mortgage
exposure with the following
characteristics:
(1) The duration of the mortgage
exposure does not exceed 30 years;
(2) The terms of the mortgage
exposure provide for regular periodic
payments that do not:
(i) Result in an increase of the
principal balance;
(ii) Allow the borrower to defer
repayment of principal of the residential
mortgage exposure; or
(iii) Result in a balloon payment;
(3) The standards used to underwrite
the residential mortgage exposure:
(i) Took into account all of the
borrower’s obligations, including for
mortgage obligations, principal, interest,
taxes, insurance (including mortgage
guarantee insurance), and assessments;
and
(ii) Resulted in a conclusion that the
borrower is able to repay the exposure
using:
(A) The maximum interest rate that
may apply during the first five years
after the date of the closing of the
residential mortgage exposure
transaction; and
(B) The amount of the residential
mortgage exposure is the maximum
possible contractual exposure over the
life of the mortgage as of the date of the
closing of the transaction;
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(4) The terms of the residential
mortgage exposure allow the annual rate
of interest to increase no more than two
percentage points in any twelve-month
period and no more than six percentage
points over the life of the exposure;
(5) For a first-lien home equity line of
credit (HELOC), the borrower must be
qualified using the principal and
interest payments based on the
maximum contractual exposure under
the terms of the HELOC;
(6) The determination of the
borrower’s ability to repay is based on
documented, verified income;
(7) The residential mortgage exposure
is not 90 days or more past due or on
non-accrual status; and
(8) The residential mortgage exposure
is
(i) Not a junior-lien residential
mortgage exposure, and
(ii) If the residential mortgage
exposure is a first-lien residential
mortgage exposure held by a single
banking organization and secured by
first and junior lien(s) where no other
party holds an intervening lien, each
residential mortgage exposure must
have the characteristics of a category 1
residential mortgage exposure as set
forth in this definition. Notwithstanding
paragraphs (1) through (8) of this
definition, the [AGENCY] may
determine that a residential mortgage
exposure that is not prudently
underwritten does not qualify as a
category 1 residential mortgage
exposure.
Category 2 residential mortgage
exposure means a residential mortgage
exposure that is not a Category 1
residential mortgage exposure.
Central counterparty (CCP) means a
counterparty (for example, a clearing
house) that facilitates trades between
counterparties in one or more financial
markets by either guaranteeing trades or
novating contracts.
CFTC means the U.S. Commodity
Futures Trading Commission.
Clean-up call means a contractual
provision that permits an originating
[BANK] or servicer to call securitization
exposures before their stated maturity or
call date.
Cleared transaction means an
outstanding derivative contract or repostyle transaction that a [BANK] or
clearing member has entered into with
a central counterparty (that is, a
transaction that a central counterparty
has accepted). A cleared transaction
includes:
(1) A transaction between a CCP and
a [BANK] that is a clearing member of
the CCP where the [BANK] enters into
the transaction with the CCP for the
[BANK]’s own account;
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52847
(2) A transaction between a CCP and
a [BANK] that is a clearing member of
the CCP where the [BANK] is acting as
a financial intermediary on behalf of a
clearing member client and the
transaction offsets a transaction that
satisfies the requirements of paragraph
(3) of this definition.
(3) A transaction between a clearing
member client [BANK] and a clearing
member where the clearing member acts
as a financial intermediary on behalf of
the clearing member client and enters
into an offsetting transaction with a CCP
provided that:
(i) The offsetting transaction is
identified by the CCP as a transaction
for the clearing member client;
(ii) The collateral supporting the
transaction is held in a manner that
prevents the [BANK] from facing any
loss due to the default, receivership, or
insolvency of either the clearing
member or the clearing member’s other
clients;
(iii) The [BANK] has conducted
sufficient legal review to conclude with
a well-founded basis (and maintains
sufficient written documentation of that
legal review) that in the event of a legal
challenge (including one resulting from
a default or receivership, insolvency,
liquidation, or similar proceeding) the
relevant court and administrative
authorities would find the arrangements
of paragraph (3)(ii) of this definition to
be legal, valid, binding and enforceable
under the law of the relevant
jurisdictions; and
(iv) The offsetting transaction with a
clearing member is transferable under
the transaction documents or applicable
laws in the relevant jurisdiction(s) to
another clearing member should the
clearing member default, become
insolvent, or enter receivership,
insolvency, liquidation, or similar
proceeding.
(4) A transaction between a clearing
member client and a CCP where a
clearing member guarantees the
performance of the clearing member
client to the CCP and the transaction
meets the requirements of paragraphs
(3)(ii) and (iii) of this definition.
(5) A cleared transaction does not
include the exposure of a [BANK] that
is a clearing member to its clearing
member client where the [BANK] is
either acting as a financial intermediary
and enters into an offsetting transaction
with a CCP or where the [BANK]
provides a guarantee to the CCP on the
performance of the client.
Clearing member means a member of,
or direct participant in, a CCP that is
entitled to enter into transactions with
the CCP.
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Clearing member client means a party
to a cleared transaction associated with
a CCP in which a clearing member acts
either as a financial intermediary with
respect to the party or guarantees the
performance of the party to the CCP.
Collateral agreement means a legal
contract that specifies the time when,
and circumstances under which, a
counterparty is required to pledge
collateral to a [BANK] for a single
financial contract or for all financial
contracts in a netting set and confers
upon the [BANK] a perfected, firstpriority security interest
(notwithstanding the prior security
interest of any custodial agent), or the
legal equivalent thereof, in the collateral
posted by the counterparty under the
agreement. This security interest must
provide the [BANK] with a right to close
out the financial positions and liquidate
the collateral upon an event of default
of, or failure to perform by, the
counterparty under the collateral
agreement. A contract would not satisfy
this requirement if the [BANK]’s
exercise of rights under the agreement
may be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs.
Commitment means any legally
binding arrangement that obligates a
[BANK] to extend credit or to purchase
assets.
Commodity derivative contract means
a commodity-linked swap, purchased
commodity-linked option, forward
commodity-linked contract, or any other
instrument linked to commodities that
gives rise to similar counterparty credit
risks.
Common equity tier 1 capital is
defined in § ll.20 of subpart C of this
part.
Common equity tier 1 minority
interest means the common equity tier
1 capital of a depository institution or
foreign bank that is:
(1) A consolidated subsidiary of a
[BANK]; and
(2) Not owned by the [BANK].
Company means a corporation,
partnership, limited liability company,
depository institution, business trust,
special purpose entity, association, or
similar organization.
Control. A person or company
controls a company if it:
(1) Owns, controls, or holds with
power to vote 25 percent or more of a
class of voting securities of the
company; or
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(2) Consolidates the company for
financial reporting purposes.
Corporate exposure means an
exposure to a company that is not:
(1) An exposure to a sovereign, the
Bank for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, a multi-lateral development bank
(MDB), a depository institution, a
foreign bank, a credit union, or a public
sector entity (PSE);
(2) An exposure to a governmentsponsored entity (GSE);
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real
estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
Country risk classification (CRC) with
respect to a sovereign means the most
recent consensus CRC published by the
Organization for Economic Cooperation
and Development (OECD) as of
December 31st of the prior calendar year
that provides a view of the likelihood
that the sovereign will service its
external debt.
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(s)) to another party
(the protection provider) for a certain
period of time.
Credit-enhancing interest-only strip
(CEIO) means an on-balance sheet asset
that, in form or in substance:
(1) Represents a contractual right to
receive some or all of the interest and
no more than a minimal amount of
principal due on the underlying
exposures of a securitization; and
(2) Exposes the holder of the CEIO to
credit risk directly or indirectly
associated with the underlying
exposures that exceeds a pro rata share
of the holder’s claim on the underlying
exposures, whether through
subordination provisions or other
credit-enhancement techniques.
Credit-enhancing representations and
warranties means representations and
warranties that are made or assumed in
connection with a transfer of underlying
exposures (including loan servicing
assets) and that obligate a [BANK] to
protect another party from losses arising
from the credit risk of the underlying
exposures. Credit enhancing
representations and warranties include
provisions to protect a party from losses
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resulting from the default or
nonperformance of the counterparties of
the underlying exposures or from an
insufficiency in the value of the
collateral backing the underlying
exposures. Credit enhancing
representations and warranties do not
include warranties that permit the
return of underlying exposures in
instances of misrepresentation, fraud, or
incomplete documentation.
Credit risk mitigant means collateral,
a credit derivative, or a guarantee.
Credit-risk-weighted assets means
1.06 multiplied by the sum of:
(1) Total wholesale and retail riskweighted assets;
(2) Risk-weighted assets for
securitization exposures; and
(3) Risk-weighted assets for equity
exposures.
Credit union means an insured credit
union as defined under the Federal
Credit Union Act (12 U.S.C. 1752).
Current exposure means, with respect
to a netting set, the larger of zero or the
market value of a transaction or
portfolio of transactions within the
netting set that would be lost upon
default of the counterparty, assuming no
recovery on the value of the
transactions. Current exposure is also
called replacement cost.
Custodian means a financial
institution that has legal custody of
collateral provided to a CCP.
Debt-to-assets ratio means the ratio
calculated by dividing a public
company’s total liabilities by its equity
market value (as defined herein) plus
total liabilities as reported as of the end
of the most recently reported calendar
quarter.
Default fund contribution means the
funds contributed or commitments
made by a clearing member to a CCP’s
mutualized loss sharing arrangement.
Depository institution means a
depository institution as defined in
section 3 of the Federal Deposit
Insurance Act.
Depository institution holding
company means a bank holding
company or savings and loan holding
company.
Derivative contract means a financial
contract whose value is derived from
the values of one or more underlying
assets, reference rates, or indices of asset
values or reference rates. Derivative
contracts include interest rate derivative
contracts, exchange rate derivative
contracts, equity derivative contracts,
commodity derivative contracts, credit
derivative contracts, and any other
instrument that poses similar
counterparty credit risks. Derivative
contracts also include unsettled
securities, commodities, and foreign
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exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument or five business days.
Discretionary bonus payment means a
payment made to an executive officer of
a [BANK], where:
(1) The [BANK] retains discretion as
to whether to make, and the amount of,
the payment until the payment is
awarded to the executive officer;
(2) The amount paid is determined by
the [BANK] without prior promise to, or
agreement with, the executive officer;
and
(3) The executive officer has no
contractual right, whether express or
implied, to the bonus payment.
Dodd-Frank Act means the DoddFrank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111–203,
124 Stat. 1376).
Early amortization provision means a
provision in the documentation
governing a securitization that, when
triggered, causes investors in the
securitization exposures to be repaid
before the original stated maturity of the
securitization exposures, unless the
provision:
(1) Is triggered solely by events not
directly related to the performance of
the underlying exposures or the
originating [BANK] (such as material
changes in tax laws or regulations); or
(2) Leaves investors fully exposed to
future draws by borrowers on the
underlying exposures even after the
provision is triggered.
Effective notional amount means for
an eligible guarantee or eligible credit
derivative, the lesser of the contractual
notional amount of the credit risk
mitigant and the exposure amount of the
hedged exposure, multiplied by the
percentage coverage of the credit risk
mitigant.
Eligible asset-backed commercial
paper (ABCP) liquidity facility means a
liquidity facility supporting ABCP, in
form or in substance, that is subject to
an asset quality test at the time of draw
that precludes funding against assets
that are 90 days or more past due or in
default. Notwithstanding the preceding
sentence, a liquidity facility is an
eligible ABCP liquidity facility if the
assets or exposures funded under the
liquidity facility that do not meet the
eligibility requirements are guaranteed
by a sovereign that qualifies for a 20
percent risk weight or lower.
Eligible clean-up call means a cleanup call that:
(1) Is exercisable solely at the
discretion of the originating [BANK] or
servicer;
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(2) Is not structured to avoid
allocating losses to securitization
exposures held by investors or
otherwise structured to provide credit
enhancement to the securitization; and
(3)(i) For a traditional securitization,
is only exercisable when 10 percent or
less of the principal amount of the
underlying exposures or securitization
exposures (determined as of the
inception of the securitization) is
outstanding; or
(ii) For a synthetic securitization, is
only exercisable when 10 percent or less
of the principal amount of the reference
portfolio of underlying exposures
(determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a
credit derivative in the form of a credit
default swap, nth-to-default swap, total
return swap, or any other form of credit
derivative approved by the [AGENCY],
provided that:
(1) The contract meets the
requirements of an eligible guarantee
and has been confirmed by the
protection purchaser and the protection
provider;
(2) Any assignment of the contract has
been confirmed by all relevant parties;
(3) If the credit derivative is a credit
default swap or nth-to-default swap, the
contract includes the following credit
events:
(i) 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
(ii) Receivership, insolvency,
liquidation, conservatorship or inability
of the reference exposure issuer 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;
(4) The terms and conditions dictating
the manner in which the contract is to
be settled are incorporated into the
contract;
(5) If the contract allows for cash
settlement, the contract incorporates a
robust valuation process to estimate loss
reliably and specifies a reasonable
period for obtaining post-credit event
valuations of the reference exposure;
(6) If the 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 provide
that any required consent to transfer
may not be unreasonably withheld;
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(7) If the credit derivative is a credit
default swap or nth-to-default swap, the
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; and
(8) If the credit derivative is a total
return swap and the [BANK] records net
payments received on the swap as net
income, the [BANK] records offsetting
deterioration in the value of the hedged
exposure (either through reductions in
fair value or by an addition to reserves).
Eligible credit reserves means all
general allowances that have been
established through a charge against
earnings to absorb credit losses
associated with on- or off-balance sheet
wholesale and retail exposures,
including the allowance for loan and
lease losses (ALLL) associated with such
exposures but excluding allocated
transfer risk reserves established
pursuant to 12 U.S.C. 3904 and other
specific reserves created against
recognized losses.
Eligible guarantee means a guarantee
from an eligible guarantor that:
(1) Is written;
(2) Is either:
(i) Unconditional, or
(ii) A contingent obligation of the U.S.
government or its agencies, the
enforceability of which is dependent
upon some affirmative action on the
part of the beneficiary of the guarantee
or a third party (for example, meeting
servicing requirements);
(3) Covers all or a pro rata portion of
all contractual payments of the
obligated party on the reference
exposure;
(4) Gives the beneficiary a direct
claim against the protection provider;
(5) Is not unilaterally cancelable by
the protection provider for reasons other
than the breach of the contract by the
beneficiary;
(6) Except for a guarantee by a
sovereign, 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;
(7) Requires the protection provider to
make payment to the beneficiary on the
occurrence of a default (as defined in
the guarantee) of the obligated party on
the reference exposure in a timely
manner without the beneficiary first
having to take legal actions to pursue
the obligor for payment;
(8) Does not increase the beneficiary’s
cost of credit protection on the
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guarantee in response to deterioration in
the credit quality of the reference
exposure; and
(9) Is not provided by an affiliate of
the [BANK], unless the affiliate is an
insured depository institution, foreign
bank, securities broker or dealer, or
insurance company that:
(i) Does not control the [BANK]; and
(ii) Is subject to consolidated
supervision and regulation comparable
to that imposed on depository
institutions, U.S. securities brokerdealers, or U.S. insurance companies (as
the case may be).
Eligible guarantor means:
(1) A sovereign, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, a Federal Home Loan
Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), a multilateral
development bank (MDB), a depository
institution, a bank holding company, a
savings and loan holding company, a
credit union, or a foreign bank; or
(2) An entity (other than a special
purpose entity):
(i) That at the time the guarantee is
issued or anytime thereafter, has issued
and outstanding an unsecured debt
security without credit enhancement
that is investment grade;
(ii) Whose creditworthiness is not
positively correlated with the credit risk
of the exposures for which it has
provided guarantees; and
(iii) That is not an insurance company
engaged predominately in the business
of providing credit protection (such as
a monoline bond insurer or re-insurer).
Eligible margin loan means an
extension of credit where:
(1) The extension of credit is
collateralized exclusively by liquid and
readily marketable debt or equity
securities, or gold;
(2) The collateral is marked-to-market
daily, and the transaction is subject to
daily margin maintenance requirements;
(3) The extension of credit is
conducted under an agreement that
provides the [BANK] the right to
accelerate and terminate the extension
of credit and to liquidate or set-off
collateral promptly upon an event of
default (including upon an event of
receivership, insolvency, liquidation,
conservatorship, 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; 1 and
1 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
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(4) 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 paragraph (3) of this
definition and is legal, valid, binding,
and enforceable under applicable law in
the relevant jurisdictions, other than in
receivership, conservatorship,
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs.
Eligible servicer cash advance facility
means a servicer cash advance facility
in which:
(1) The servicer is entitled to full
reimbursement of advances, except that
a servicer may be obligated to make
non-reimbursable advances for a
particular underlying exposure if any
such advance is contractually limited to
an insignificant amount of the
outstanding principal balance of that
exposure;
(2) The servicer’s right to
reimbursement is senior in right of
payment to all other claims on the cash
flows from the underlying exposures of
the securitization; and
(3) The servicer has no legal
obligation to, and does not make
advances to the securitization if the
servicer concludes the advances are
unlikely to be repaid.
Equity derivative contract means an
equity-linked swap, purchased equitylinked option, forward equity-linked
contract, or any other instrument linked
to equities that gives rise to similar
counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether
voting or non-voting) that represents a
direct or an indirect ownership interest
in, and is a residual claim on, the assets
and income of a company, unless:
(i) The issuing company is
consolidated with the [BANK] under
GAAP;
(ii) The [BANK] is required to deduct
the ownership interest from tier 1 or tier
2 capital under this [PART];
(iii) The ownership interest
incorporates a payment or other similar
obligation on the part of the issuing
company (such as an obligation to make
periodic payments); or
(iv) The ownership interest is a
securitization exposure;
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act, or netting
contracts between or among financial institutions
under sections 401–407 of the Federal Deposit
Insurance Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE (12 CFR part
231).
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(2) A security or instrument that is
mandatorily convertible into a security
or instrument described in paragraph (1)
of this definition;
(3) An option or warrant that is
exercisable for a security or instrument
described in paragraph (1) of this
definition; or
(4) Any other security or instrument
(other than a securitization exposure) to
the extent the return on the security or
instrument is based on the performance
of a security or instrument described in
paragraph (1) of this definition.
ERISA means the Employee
Retirement Income and Security Act of
1974 (29 U.S.C. 1002).
Exchange rate derivative contract
means a cross-currency interest rate
swap, forward foreign-exchange
contract, currency option purchased, or
any other instrument linked to exchange
rates that gives rise to similar
counterparty credit risks.
Executive officer means a person who
holds the title or, without regard to title,
salary, or compensation, performs the
function of one or more of the following
positions: president, chief executive
officer, executive chairman, chief
operating officer, chief financial officer,
chief investment officer, chief legal
officer, chief lending officer, chief risk
officer, or head of a major business line,
and other staff that the board of
directors of the [BANK] deems to have
equivalent responsibility.
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a nondefaulted obligor or segment of nondefaulted retail exposures that is carried
at fair value with gains and losses
flowing through earnings or that is
classified as held-for-sale and is carried
at the lower of cost or fair value with
losses flowing through earnings, zero.
(2) For all other wholesale exposures
to non-defaulted obligors or segments of
non-defaulted retail exposures, the
product of the probability of default
(PD) times the loss given default (LGD)
times the exposure at default (EAD) for
the exposure or segment.
(3) For a wholesale exposure to a
defaulted obligor or segment of
defaulted retail exposures, the [BANK]’s
impairment estimate for allowance
purposes for the exposure or segment.
(4) Total ECL is the sum of expected
credit losses for all wholesale and retail
exposures other than exposures for
which the [BANK] has applied the
double default treatment in § ll.135 of
subpart E of this part.
Exposure amount means:
(1) For the on-balance sheet
component of an exposure (other than
an OTC derivative contract; a repo-style
transaction or an eligible margin loan
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for which the [BANK] determines the
exposure amount under § ll.37 of
subpart D of this part; cleared
transaction; default fund contribution;
or a securitization exposure), exposure
amount means the [BANK]’s carrying
value of the exposure.
(2) For the off-balance sheet
component of an exposure (other than
an OTC derivative contract; a repo-style
transaction or an eligible margin loan
for which the [BANK] calculates the
exposure amount under § ll.37 of
subpart D of this part; cleared
transaction, default fund contribution or
a securitization exposure), exposure
amount means the notional amount of
the off-balance sheet component
multiplied by the appropriate credit
conversion factor (CCF) in § ll.33 of
subpart D of this part.
(3) If the exposure is an OTC
derivative contract or derivative
contract that is a cleared transaction, the
exposure amount determined under
§ ll.34 of subpart D of this part.
(4) If the exposure is an eligible
margin loan or repo-style transaction
(including a cleared transaction) for
which the [BANK] calculates the
exposure amount as provided in
§ ll.37 of subpart D of this part, the
exposure amount determined under
§ ll.37 of subpart D.
(5) If the exposure is a securitization
exposure, the exposure amount
determined under § ll.42 of subpart D
of this part.
Federal Deposit Insurance Act means
the Federal Deposit Insurance Act (12
U.S.C. 1813). Federal Deposit Insurance
Corporation Improvement Act means
the Federal Deposit Insurance
Corporation Improvement Act of 1991
(12 U.S.C. 4401).
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the [BANK]
(including cash held for the [BANK] by
a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are
not resecuritization exposures and that
are investment grade;
(iv) Short-term debt instruments that
are not resecuritization exposures and
that are investment grade;
(v) Equity securities that are publiclytraded;
(vi) Convertible bonds that are
publicly-traded; or
(vii) Money market fund shares and
other mutual fund shares if a price for
the shares is publicly quoted daily; and
(2) In which the [BANK] has a
perfected, first-priority security interest
or, outside of the United States, the legal
equivalent thereof (with the exception
of cash on deposit and notwithstanding
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the prior security interest of any
custodial agent).
Financial institution means:
(1)(i) A bank holding company,
savings and loan holding company,
nonbank financial institution
supervised by the Board under Title I of
the Dodd-Frank Act, depository
institution, foreign bank, credit union,
insurance company, or securities firm;
(ii) A commodity pool as defined in
section 1a(10) of the Commodity
Exchange Act (7 U.S.C. 1a(10));
(iii) An entity that is a covered fund
for purposes of section 13 of the Bank
Holding Company Act (12 U.S.C.
1851(h)(2)) and regulations issued
thereunder;
(iv) An employee benefit plan as
defined in paragraphs (3) and (32) of
section 3 of the Employee Retirement
Income and Security Act of 1974 (29
U.S.C. 1002) (other than an employee
benefit plan established by [BANK] for
the benefit of its employees or the
employees of its affiliates);
(v) Any other company
predominantly engaged in the following
activities:
(A) Lending money, securities or
other financial instruments, including
servicing loans;
(B) Insuring, guaranteeing,
indemnifying against loss, harm,
damage, illness, disability, or death, or
issuing annuities;
(C) Underwriting, dealing in, making
a market in, or investing as principal in
securities or other financial instruments;
(D) Asset management activities (not
including investment or financial
advisory activities); or
(E) Acting as a futures commission
merchant.
(vi) Any entity not domiciled in the
United States (or a political subdivision
thereof) that would be covered by any
of paragraphs (1)(i) through (v) of this
definition if such entity were domiciled
in the United States; or
(vii) Any other company that the
[AGENCY] may determine is a financial
institution based on the nature and
scope of its activities.
(2) For the purposes of this definition,
a company is ‘‘predominantly engaged’’
in an activity or activities if:
(i) 85 percent or more of the total
consolidated annual gross revenues (as
determined in accordance with
applicable accounting standards) of the
company in either of the two most
recent calendar years were derived,
directly or indirectly, by the company
on a consolidated basis from the
activities; or
(ii) 85 percent or more of the
company’s consolidated total assets (as
determined in accordance with
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52851
applicable accounting standards) as of
the end of either of the two most recent
calendar years were related to the
activities.
(3) For the purpose of this [PART],
‘‘financial institution’’ does not include
the following entities:
(i) GSEs;
(ii) Entities described in section
13(d)(1)(E) of the Bank Holding
Company Act (12 U.S.C. 1851(d)(1)(E))
and regulations issued thereunder
(exempted entities) and entities that are
predominantly engaged in providing
advisory and related services to
exempted entities; and
(iii) Entities designated as Community
Development Financial Institutions
(CDFIs) under 12 U.S.C. 4701 et seq. and
12 CFR part 1805.
First-lien residential mortgage
exposure means a residential mortgage
exposure secured by a first lien or a
residential mortgage exposure secured
by first and junior lien(s) where no other
party holds an intervening lien.
Foreign bank means a foreign bank as
defined in § 211.2 of the Federal Reserve
Board’s Regulation K (12 CFR 211.2)
(other than a depository institution).
Forward agreement means a legally
binding contractual obligation to
purchase assets with certain drawdown
at a specified future date, not including
commitments to make residential
mortgage loans or forward foreign
exchange contracts.
GAAP means generally accepted
accounting principles as used in the
United States.
Gain-on-sale means an increase in the
equity capital of a [BANK] (as reported
on Schedule RC of the Call Report or
Schedule HC of the FR Y–9C) resulting
from a securitization (other than an
increase in equity capital resulting from
the [BANK]’s receipt of cash in
connection with the securitization).
General obligation means a bond or
similar obligation that is backed by the
full faith and credit of a public sector
entity (PSE).
Government-sponsored entity (GSE)
means an entity established or chartered
by the U.S. government to serve public
purposes specified by the U.S. Congress
but whose debt obligations are not
explicitly guaranteed by the full faith
and credit of the U.S. government.
Guarantee means a financial
guarantee, letter of credit, insurance, or
other similar financial instrument (other
than a credit derivative) that allows one
party (beneficiary) to transfer the credit
risk of one or more specific exposures
(reference exposure) to another party
(protection provider).
High volatility commercial real estate
(HVCRE) exposure means a credit
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facility that finances or has financed the
acquisition, development, or
construction (ADC) of real property,
unless the facility finances:
(1) One- to four-family residential
properties; or
(2) Commercial real estate projects in
which:
(i) The loan-to-value ratio is less than
or equal to the applicable maximum
supervisory loan-to-value ratio in the
[AGENCY]’s real estate lending
standards at 12 CFR part 34, subpart D
and 12 CFR part 160, subparts A and B
(OCC); 12 CFR part 208, Appendix C
(Board); 12 CFR part 365, subpart D and
12 CFR 390.264 and 390.265 (FDIC);
(ii) The borrower has contributed
capital to the project in the form of cash
or unencumbered readily marketable
assets (or has paid development
expenses out-of-pocket) of at least 15
percent of the real estate’s appraised ‘‘as
completed’’ value; and
(iii) The borrower contributed the
amount of capital required by paragraph
(2)(ii) of this definition before the
[BANK] advances funds under the credit
facility, and the capital contributed by
the borrower, or internally generated by
the project, is contractually required to
remain in the project throughout the life
of the project. The life of a project
concludes only when the credit facility
is converted to permanent financing or
is sold or paid in full. Permanent
financing may be provided by the
[BANK] that provided the ADC facility
as long as the permanent financing is
subject to the [BANK]’s underwriting
criteria for long-term mortgage loans.
Home country means the country
where an entity is incorporated,
chartered, or similarly established.
Interest rate derivative contract means
a single-currency interest rate swap,
basis swap, forward rate agreement,
purchased interest rate option, whenissued securities, or any other
instrument linked to interest rates that
gives rise to similar counterparty credit
risks.
International Lending Supervision Act
means the International Lending
Supervision Act of 1983 (12 U.S.C.
3907).
Investing bank means, with respect to
a securitization, a [BANK] that assumes
the credit risk of a securitization
exposure (other than an originating
[BANK] of the securitization). In the
typical synthetic securitization, the
investing [BANK] sells credit protection
on a pool of underlying exposures to the
originating [BANK].
Investment fund means a company:
(1) Where all or substantially all of the
assets of the company are financial
assets; and
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(2) That has no material liabilities.
Investment grade means that the
entity to which the [BANK] is exposed
through a loan or security, or the
reference entity with respect to a credit
derivative, has adequate capacity to
meet financial commitments for the
projected life of the asset or exposure.
Such an entity or reference entity has
adequate capacity to meet financial
commitments if the risk of its default is
low and the full and timely repayment
of principal and interest is expected.
Investment in the capital of an
unconsolidated financial institution
means a net long position in an
instrument that is recognized as capital
for regulatory purposes by the primary
supervisor of an unconsolidated
regulated financial institutions and in
an instrument that is part of the GAAP
equity of an unconsolidated unregulated
financial institution, including direct,
indirect, and synthetic exposures to
capital instruments, excluding
underwriting positions held by the
[BANK] for five business days or less.2
An indirect exposure results from the
[BANK]’s investment in an
unconsolidated entity that has an
exposure to a capital instrument of a
financial institution. A synthetic
exposure results from the [BANK]’s
investment in an instrument where the
value of such instrument is linked to the
value of a capital instrument of a
financial institution. For purposes of
this definition, the amount of the
exposure resulting from the investment
in the capital of an unconsolidated
financial institution is the [BANK]’s loss
on such exposure should the underlying
capital instrument have a value of zero.
In addition, for purposes of this
definition:
(1) The net long position is the gross
long position in the exposure to the
capital of the financial institution
(including covered positions under
subpart F of this part) net of short
positions in the same exposure where
the maturity of the short position either
matches the maturity of the long
position or has a residual maturity of at
least one year;
(2) Long and short positions in the
same index without a maturity date are
considered to have matching maturity.
Gross long positions in investments in
the capital instruments of
unconsolidated financial institutions
resulting from holdings of index
securities may be netted against short
positions in the same underlying index.
2 If the [BANK] is an underwriter of a failed
underwriting, the [BANK] can request approval
from its primary federal supervisor to exclude
underwriting positions related to such failed
underwriting for a longer period of time.
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However, short positions in indexes that
are hedging long cash or synthetic
positions can be decomposed to provide
recognition of the hedge. More
specifically, the portion of the index
that is composed of the same underlying
exposure that is being hedged may be
used to offset the long position as long
as both the exposure being hedged and
the short position in the index are
positions subject to the market risk rule,
the positions are fair valued on the
banking organization’s balance sheet,
and the hedge is deemed effective by the
banking organization’s internal control
processes assessed by the primary
supervisor of the banking organization;
and
(3) Instead of looking through and
monitoring its exact exposure to the
capital of unconsolidated financial
institutions included in an index
security, a [BANK] may, with the prior
approval of the [AGENCY], use a
conservative estimate of the amount of
its investment in the capital of
unconsolidated financial institutions
held through the index security.
Junior-lien residential mortgage
exposure means a residential mortgage
exposure that is not a first-lien
residential mortgage exposure.
Main index means the Standard &
Poor’s 500 Index, the FTSE All-World
Index, and any other index for which
the [BANK] can demonstrate to the
satisfaction of the [AGENCY] that the
equities represented in the index have
comparable liquidity, depth of market,
and size of bid-ask spreads as equities
in the Standard & Poor’s 500 Index and
FTSE All-World Index.
Market risk [BANK] means a [BANK]
that is described in § ll.201(b) of
subpart F of this part.
Money market fund means an
investment fund that is subject to 17
CFR 270.2a–7 or any foreign equivalent
thereof.
Mortgage servicing assets (MSAs)
means the contractual rights owned by
a [BANK] to service for a fee mortgage
loans that are owned by others.
Multilateral development bank (MDB)
means the International Bank for
Reconstruction and Development, the
Multilateral Investment Guarantee
Agency, the International Finance
Corporation, the Inter-American
Development Bank, the Asian
Development Bank, the African
Development Bank, the European Bank
for Reconstruction and Development,
the European Investment Bank, the
European Investment Fund, the Nordic
Investment Bank, the Caribbean
Development Bank, the Islamic
Development Bank, the Council of
Europe Development Bank, and any
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other multilateral lending institution or
regional development bank in which the
U.S. government is a shareholder or
contributing member or which the
[AGENCY] determines poses
comparable credit risk.
National Bank Act means the
National Bank Act (12 U.S.C. 24).
Netting set means a group of
transactions with a single counterparty
that are subject to a qualifying master
netting agreement or a qualifying crossproduct master netting agreement. For
purposes of calculating risk-based
capital requirements using the internal
models methodology in subpart E, a
transaction—
(1) That is not subject to such a master
netting agreement or
(2) Where the [BANK] has identified
specific wrong-way risk is its own
netting set.
Non-significant investment in the
capital of an unconsolidated financial
institution means an investment where
the [BANK] owns 10 percent or less of
the issued and outstanding common
shares of the unconsolidated financial
institution.
Nth-to-default credit derivative means
a credit derivative that provides credit
protection only for the nth-defaulting
reference exposure in a group of
reference exposures.
Operating entity means a company
established to conduct business with
clients with the intention of earning a
profit in its own right.
Original maturity with respect to an
off-balance sheet commitment means
the length of time between the date a
commitment is issued and:
(1) For a commitment that is not
subject to extension or renewal, the
stated expiration date of the
commitment; or
(2) For a commitment that is subject
to extension or renewal, the earliest date
on which the [BANK] can, at its option,
unconditionally cancel the
commitment.
Originating [BANK], with respect to a
securitization, means a [BANK] that:
(1) Directly or indirectly originated or
securitized the underlying exposures
included in the securitization; or
(2) Serves as an ABCP program
sponsor to the securitization.
Over-the-counter (OTC) derivative
contract means a derivative contract
that is not a cleared transaction. An
OTC derivative includes a transaction:
(1) Between a [BANK] that is a
clearing member and a counterparty
where the [BANK] is acting as a
financial intermediary and enters into a
cleared transaction with a CCP that
offsets the transaction with the
counterparty; or
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(2) In which a [BANK] that is a
clearing member provides a CCP a
guarantee on the performance of the
counterparty to the transaction.
Performance standby letter of credit
(or performance bond) means an
irrevocable obligation of a [BANK] to
pay a third-party beneficiary when a
customer (account party) fails to
perform on any contractual nonfinancial
or commercial obligation. To the extent
permitted by law or regulation,
performance standby letters of credit
include arrangements backing, among
other things, subcontractors’ and
suppliers’ performance, labor and
materials contracts, and construction
bids.
Pre-sold construction loan means any
one-to-four family residential
construction loan to a builder that meets
the requirements of section 618(a)(1) or
(2) of the Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991 and the
following criteria:
(1) The loan is made in accordance
with prudent underwriting standards;
(2) The purchaser is an individual(s)
that intends to occupy the residence and
is not a partnership, joint venture, trust,
corporation, or any other entity
(including an entity acting as a sole
proprietorship) that is purchasing one or
more of the residences for speculative
purposes;
(3) The purchaser has entered into a
legally binding written sales contract for
the residence;
(4) The purchaser has not terminated
the contract; however, if the purchaser
terminates the sales contract the [BANK]
must immediately apply a 100 percent
risk weight to the loan and report the
revised risk weight in [BANK]’s next
quarterly [REGULATORY REPORT];
(5) The purchaser of the residence has
a firm written commitment for
permanent financing of the residence
upon completion;
(6) The purchaser has made a
substantial earnest money deposit of no
less than 3 percent of the sales price,
which is subject to forfeiture if the
purchaser terminates the sales contract;
provided that, the earnest money
deposit shall not be subject to forfeiture
by reason of breach or termination of the
sales contract on the part of the builder;
(7) The earnest money deposit must
be held in escrow by the [BANK] or an
independent party in a fiduciary
capacity, and the escrow agreement
must provide that in the event of default
the escrow funds shall be used to defray
any cost incurred by [BANK] relating to
any cancellation of the sales contract by
the purchaser of the residence;
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(8) The builder must incur at least the
first 10 percent of the direct costs of
construction of the residence (that is,
actual costs of the land, labor, and
material) before any drawdown is made
under the loan;
(9) The loan may not exceed 80
percent of the sales price of the presold
residence; and
(10) The loan is not more than 90 days
past due, or on nonaccrual.
Private company means a company
that is not a public company.
Private sector credit exposure means
an exposure to a company or an
individual that is included in credit
risk-weighted assets and is not an
exposure to a sovereign, the Bank for
International Settlements, the European
Central Bank, the European
Commission, the International Monetary
Fund, a MDB, a PSE, or a GSE.
Protection amount (P) means, with
respect to an exposure hedged by an
eligible guarantee or eligible credit
derivative, the effective notional amount
of the guarantee or credit derivative,
reduced to reflect any currency
mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in
§ ll.36 of subpart D of this part or
§ ll.134 of subpart E, as appropriate).
Public company means a company
that has issued publicly-traded debt or
equity.
Publicly-traded means traded on:
(1) Any exchange registered with the
SEC as a national securities exchange
under section 6 of the Securities
Exchange Act; or
(2) Any non-U.S.-based securities
exchange that:
(i) Is registered with, or approved by,
a national securities regulatory
authority; and
(ii) Provides a liquid, two-way market
for the instrument in question.
Public sector entity (PSE) means a
state, local authority, or other
governmental subdivision below the
sovereign level.
Qualifying central counterparty
(QCCP) means a central counterparty
that:
(1) Is a designated financial market
utility (FMU) under Title VIII of the
Dodd-Frank Act;
(2) If not located in the United States,
is regulated and supervised in a manner
equivalent to a designated FMU; or
(3) Meets the following standards:
(i) The central counterparty requires
all parties to contracts cleared by the
counterparty to be fully collateralized
on a daily basis;
(ii) The [BANK] demonstrates to the
satisfaction of the [AGENCY] that the
central counterparty:
(A) Is in sound financial condition;
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(B) Is subject to supervision by the
Board, the CFTC, or the Securities
Exchange Commission (SEC), or if the
central counterparty is not located in
the United States, is subject to effective
oversight by a national supervisory
authority in its home country; and
(C) Meets or exceeds:
(1) The risk-management standards
for central counterparties set forth in
regulations established by the Board, the
CFTC, or the SEC under Title VII or
Title VIII of the Dodd-Frank Act; or
(2) If the central counterparty is not
located in the United States, similar
risk-management standards established
under the law of its home country that
are consistent with international
standards for central counterparty risk
management as established by the
relevant standard setting body of the
Bank of International Settlements;
(4) Provides the [BANK] with the
central counterparty’s hypothetical
capital requirement or the information
necessary to calculate such hypothetical
capital requirement, and other
information the [BANK] is required to
obtain under § ll.35(d)(3) of this part;
(5) Makes available to the [AGENCY]
and the CCP’s regulator the information
described in paragraph (4) of this
definition; and
(6) Has not otherwise been
determined by the [AGENCY] to not be
QCCP due to its financial condition, risk
profile, failure to meet supervisory risk
management standards, or other
weaknesses or supervisory concerns that
are inconsistent with the risk weight
assigned to qualifying central
counterparties under § ll.35 of
subpart D of this part; and
(7) If a [BANK] determines that a CCP
ceases to be a QCCP due to the failure
of the CCP to satisfy one or more of the
requirements set forth at paragraphs (1)
through (6) of this definition, the
[BANK] may continue to treat the CCP
as a QCCP for up to three months
following the determination. If the CCP
fails to remedy the relevant deficiency
within three months after the initial
determination, or the CCP fails to satisfy
the requirements set forth in paragraphs
(1) through (6) of this definition
continuously for a three month period
after remedying the relevant deficiency,
a [BANK] may not treat the CCP as a
QCCP for the purposes of this [PART]
until after the [BANK] has determined
that the CCP has satisfied the
requirements in paragraphs (1) through
(6) of this definition for three
continuous months.
Qualifying master netting agreement
means any written, legally enforceable
agreement provided that:
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(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default, including
receivership, insolvency, liquidation, or
similar proceeding, of the counterparty;
(2) 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 receivership,
insolvency, liquidation, 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, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs;
(3) The [BANK] has conducted
sufficient legal review to conclude with
a well-founded basis (and maintains
sufficient written documentation of that
legal review) that:
(i) The agreement meets the
requirements of paragraph (2) of this
definition; and
(ii) In the event of a legal challenge
(including one resulting from default or
from receivership, insolvency,
liquidation, 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;
(4) 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
(5) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make 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).
Regulated financial institution means
a financial institution subject to
consolidated supervision and regulation
comparable to that imposed on the
following U.S. financial institutions:
depository institutions, depository
institution holding companies, nonbank
financial companies supervised by the
Board, designated financial market
utilities, securities broker-dealers, credit
unions, or insurance companies.
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Repo-style transaction means a
repurchase or reverse repurchase
transaction, or a securities borrowing or
securities lending transaction, including
a transaction in which the [BANK] acts
as agent for a customer and indemnifies
the customer against loss, provided that:
(1) The transaction is based solely on
liquid and readily marketable securities,
cash, or gold;
(2) The transaction is marked-tomarket daily and subject to daily margin
maintenance requirements;
(3)(i) The transaction is a ‘‘securities
contract’’ or ‘‘repurchase agreement’’
under section 555 or 559, respectively,
of the Bankruptcy Code (11 U.S.C. 555
or 559), a qualified financial contract
under section 11(e)(8) of the Federal
Deposit Insurance Act, or a netting
contract between or among financial
institutions under sections 401–407 of
the Federal Deposit Insurance
Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE
(12 CFR part 231); or
(ii) If the transaction does not meet
the criteria set forth in paragraph (3)(i)
of this definition, then either:
(A) The transaction is executed under
an agreement that provides the [BANK]
the right to accelerate, terminate, and
close-out the transaction on a net basis
and to liquidate or set-off collateral
promptly upon an event of default
(including upon an event of
receivership, insolvency, liquidation, 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, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs; or
(B) The transaction is:
(1) Either overnight or
unconditionally cancelable at any time
by the [BANK]; and
(2) Executed under an agreement that
provides the [BANK] the right to
accelerate, terminate, and close-out the
transaction on a net basis and to
liquidate or set-off collateral promptly
upon an event of counterparty default;
and
(4) 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 paragraph (3) of this
definition and is legal, valid, binding,
and enforceable under applicable law in
the relevant jurisdictions.
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Resecuritization means a
securitization in which one or more of
the underlying exposures is a
securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet
exposure to a resecuritization;
(2) An exposure that directly or
indirectly references a resecuritization
exposure.
(3) An exposure to an asset-backed
commercial paper program is not a
resecuritization exposure if either:
(i) The program-wide credit
enhancement does not meet the
definition of a resecuritization exposure;
or
(ii) The entity sponsoring the program
fully supports the commercial paper
through the provision of liquidity so
that the commercial paper holders
effectively are exposed to the default
risk of the sponsor instead of the
underlying exposures.
Residential mortgage exposure means
an exposure (other than a securitization
exposure, equity exposure, statutory
multifamily mortgage, or presold
construction loan) that is:
(1) An exposure that is primarily
secured by a first or subsequent lien on
one-to-four family residential property;
or
(2)(i) An exposure with an original
and outstanding amount of $1 million or
less that is primarily secured by a first
or subsequent lien on residential
property that is not one-to-four family;
and
(ii) For purposes of calculating capital
requirements under subpart E, is
managed as part of a segment of
exposures with homogeneous risk
characteristics and not on an individualexposure basis.
Revenue obligation means a bond or
similar obligation that is an obligation of
a PSE, but which the PSE is committed
to repay with revenues from the specific
project financed rather than general tax
funds.
Savings and loan holding company
means a savings and loan holding
company as defined in section 10 of the
Home Owners’ Loan Act (12 U.S.C.
1467a).
Securities and Exchange Commission
(SEC) means the U.S. Securities and
Exchange Commission.
Securities Exchange Act means the
Securities Exchange Act of 1934 (15
U.S.C. 78).
Securitization exposure means:
(1) An on-balance sheet or off-balance
sheet credit exposure (including creditenhancing representations and
warranties) that arises from a traditional
securitization or synthetic securitization
(including a resecuritization), or
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(2) An exposure that directly or
indirectly references a securitization
exposure described in paragraph (1) of
this definition.
Securitization special purpose entity
(securitization SPE) means a
corporation, trust, or other entity
organized for the specific purpose of
holding underlying exposures of a
securitization, the activities of which
are limited to those appropriate to
accomplish this purpose, and the
structure of which is intended to isolate
the underlying exposures held by the
entity from the credit risk of the seller
of the underlying exposures to the
entity.
Servicer cash advance facility means
a facility under which the servicer of the
underlying exposures of a securitization
may advance cash to ensure an
uninterrupted flow of payments to
investors in the securitization, including
advances made to cover foreclosure
costs or other expenses to facilitate the
timely collection of the underlying
exposures.
Significant investment in the capital
of unconsolidated financial institutions
means an investment where the [BANK]
owns more than 10 percent of the issued
and outstanding common shares of the
unconsolidated financial institution.
Small Business Act means the Small
Business Act (15 U.S.C. 632).
Small Business Investment Act means
the Small Business Investment Act of
1958 (15 U.S.C. 682).
Sovereign means a central government
(including the U.S. government) or an
agency, department, ministry, or central
bank of a central government.
Sovereign default means
noncompliance by a sovereign with its
external debt service obligations or the
inability or unwillingness of a sovereign
government to service an existing loan
according to its original terms, as
evidenced by failure to pay principal
and interest timely and fully, arrearages,
or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign;
or
(2) An exposure directly and
unconditionally backed by the full faith
and credit of a sovereign.
Specific wrong-way risk means wrongway risk that arises when either:
(1) The counterparty and issuer of the
collateral supporting the transaction; or
(2) The counterparty and the reference
asset of the transaction, are affiliates or
are the same entity.
Standardized market risk-weighted
assets means the standardized measure
for market risk calculated under
§ ll.204 of subpart F of this part
multiplied by 12.5.
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52855
Standardized total risk-weighted
assets means:
(1) The sum of:
(i) Total risk-weighted assets for
general credit risk as calculated under
§ ll.31 of subpart D of this part;
(ii) Total risk-weighted assets for
cleared transactions and default fund
contributions as calculated under
§ ll.35 of subpart D of this part;
(iii) Total risk-weighted assets for
unsettled transactions as calculated
under § ll.38 of subpart D of this part;
(iv) Total risk-weighted assets for
securitization exposures as calculated
under § ll.42 of subpart D of this part;
(v) Total risk-weighted assets for
equity exposures as calculated under
§ ll.52 and § ll.53 of subpart D of
this part; and
(vi) For a market risk [BANK] only,
standardized market risk-weighted
assets; minus
(2) Any amount of the [BANK]’s
allowance for loan and lease losses that
is not included in tier 2 capital.
Statutory multifamily mortgage means
a loan secured by a multifamily
residential property that meets the
requirements under section 618(b)(1) of
the Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991, and that
meets the following criteria:
(1) The loan is made in accordance
with prudent underwriting standards;
(2) The loan-to-value (LTV) ratio of
the loan, calculated in accordance with
§ ll.32(g)(3) of subpart D of this part,
does not exceed 80 percent (or 75
percent if the loan is based on an
interest rate that changes over the term
of the loan);
(3) All principal and interest
payments on the loan must have been
made on time for at least one year prior
to applying a 50 percent risk weight to
the loan, or in the case where an
existing owner is refinancing a loan on
the property, all principal and interest
payments on the loan being refinanced
must have been made on time for at
least one year prior to applying a 50
percent risk weight to the loan;
(4) Amortization of principal and
interest on the loan must occur over a
period of not more than 30 years and the
minimum original maturity for
repayment of principal must not be less
than 7 years;
(5) Annual net operating income
(before debt service on the loan)
generated by the property securing the
loan during its most recent fiscal year
must not be less than 120 percent of the
loan’s current annual debt service (or
115 percent of current annual debt
service if the loan is based on an interest
rate that changes over the term of the
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loan) or, in the case of a cooperative or
other not-for-profit housing project, the
property must generate sufficient cash
flow to provide comparable protection
to the [BANK]; and
(6) The loan is not more than 90 days
past due, or on nonaccrual.
Subsidiary means, with respect to a
company, a company controlled by that
company.
Synthetic securitization means a
transaction in which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
transferred to one or more third parties
through the use of one or more credit
derivatives or guarantees (other than a
guarantee that transfers only the credit
risk of an individual retail exposure);
(2) The credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
(3) Performance of the securitization
exposures depends upon the
performance of the underlying
exposures; and
(4) All or substantially all of the
underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities).
Tier 1 capital means the sum of
common equity tier 1 capital and
additional tier 1 capital.
Tier 1 minority interest means the tier
1 capital of a consolidated subsidiary of
a [BANK] that is not owned by the
[BANK].
Tier 2 capital is defined in § ll.20
of subpart C of this part.
Total capital means the sum of tier 1
capital and tier 2 capital.
Total capital minority interest means
the total capital of a consolidated
subsidiary of a [BANK] that is not
owned by the [BANK].
Total leverage exposure means the
sum of the following:
(1) The balance sheet carrying value
of all of the [BANK]’s on-balance sheet
assets, less amounts deducted from tier
1 capital;
(2) The potential future exposure
amount for each derivative contract to
which the [BANK] is a counterparty (or
each single-product netting set of such
transactions) determined in accordance
with § ll.34 of this part;
(3) 10 percent of the notional amount
of unconditionally cancellable
commitments made by the [BANK]; and
(4) The notional amount of all other
off-balance sheet exposures of the
[BANK] (excluding securities lending,
securities borrowing, reverse repurchase
transactions, derivatives and
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unconditionally cancellable
commitments).
Traditional securitization means a
transaction in which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
transferred to one or more third parties
other than through the use of credit
derivatives or guarantees;
(2) The credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
(3) Performance of the securitization
exposures depends upon the
performance of the underlying
exposures;
(4) All or substantially all of the
underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities);
(5) The underlying exposures are not
owned by an operating company;
(6) The underlying exposures are not
owned by a small business investment
company described in section 302 of the
Small Business Investment Act;
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act;
(8) The [AGENCY] may determine
that a transaction in which the
underlying exposures are owned by an
investment firm that exercises
substantially unfettered control over the
size and composition of its assets,
liabilities, and off-balance sheet
exposures is not a traditional
securitization based on the transaction’s
leverage, risk profile, or economic
substance;
(9) The [AGENCY] may deem a
transaction that meets the definition of
a traditional securitization,
notwithstanding paragraph (5), (6), or
(7) of this definition, to be a traditional
securitization based on the transaction’s
leverage, risk profile, or economic
substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as
defined in 12 CFR 208.34 (Board), 12
CFR 9.18 (OCC), and 12 CFR 344.3
(FDIC));
(iii) A pension fund regulated under
the ERISA or a foreign equivalent
thereof; or
(iv) Regulated under the Investment
Company Act of 1940 (15 U.S.C. 80a–1)
or a foreign equivalent thereof.
Tranche means all securitization
exposures associated with a
securitization that have the same
seniority level.
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Two-way market means a market
where there are independent bona fide
offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a relatively short time frame
conforming to trade custom.
Unconditionally cancelable means
with respect to a commitment, that a
[BANK] may, at any time, with or
without cause, refuse to extend credit
under the commitment (to the extent
permitted under applicable law).
Underlying exposures means one or
more exposures that have been
securitized in a securitization
transaction.
U.S. Government agency means an
instrumentality of the U.S. Government
whose obligations are fully and
explicitly guaranteed as to the timely
payment of principal and interest by the
full faith and credit of the U.S.
Government.
Value-at-Risk (VaR) means the
estimate of the maximum amount that
the value of one or more exposures
could decline due to market price or
rate movements during a fixed holding
period within a stated confidence
interval.
Wrong-way risk means the risk that
arises when an exposure to a particular
counterparty is positively correlated
with the probability of default of such
counterparty itself.
Subpart B—Capital Ratio
Requirements and Buffers
§ ll.10
Minimum capital requirements.
(a) Minimum capital requirements. A
[BANK] must maintain the following
minimum capital ratios:
(1) A common equity tier 1 capital
ratio of 4.5 percent.
(2) A tier 1 capital ratio of 6 percent.
(3) A total capital ratio of 8 percent.
(4) A leverage ratio of 4 percent.
(5) For advanced approaches
[BANK]s, a supplementary leverage
ratio of 3 percent.
(b) Standardized capital ratio
calculations. All [BANK]s must
calculate standardized capital ratios as
follows:
(1) Common equity tier 1 capital ratio.
A [BANK]’s common equity tier 1
capital ratio is the ratio of the [BANK]’s
common equity tier 1 capital to
standardized total risk-weighted assets.
(2) Tier 1 capital ratio. A [BANK]’s
tier 1 capital ratio is the ratio of the
[BANK]’s tier 1 capital to standardized
total risk-weighted assets.
(3) Total capital ratio. A [BANK]’s
total capital ratio is the ratio of the
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requirements in this [PART] a [BANK]
must maintain capital commensurate
with the level and nature of all risks to
which the [BANK] is exposed. The
supervisory evaluation of a [BANK]’s
capital adequacy is based on an
individual assessment of numerous
factors, including those listed at 12 CFR
3.10 (for national banks), 12 CFR
167.3(c) (for Federal savings
associations) and 12 CFR 208.4 (for state
member banks).
(2) A [BANK] must have a process for
assessing its overall capital adequacy in
relation to its risk profile and a
comprehensive strategy for maintaining
an appropriate level of capital.
[BANK]’s total capital to standardized
total risk-weighted assets.
(4) Leverage ratio. A [BANK]’s
leverage ratio is the ratio of the
[BANK]’s tier 1 capital to the [BANK]’s
average consolidated assets as reported
on the [BANK]’s [REGULATORY
REPORT] minus amounts deducted
from tier 1 capital.
(c) Advanced approaches capital ratio
calculations. (1) Common equity tier 1
capital ratio. An advanced approaches
[BANK]’s common equity tier 1 capital
ratio is the lower of:
(i) The ratio of the [BANK]’s common
equity tier 1 capital to standardized total
risk-weighted assets; and
(ii) The ratio of the [BANK]’s common
equity tier 1 capital to advanced
approaches total risk-weighted assets.
(2) Tier 1 capital ratio. An advanced
approaches [BANK]’s tier 1 capital ratio
is the lower of:
(i) The ratio of the [BANK]’s tier 1
capital to standardized total riskweighted assets; and
(ii) The ratio of the [BANK]’s tier 1
capital to advanced approaches total
risk-weighted assets.
(3) Total capital ratio. An advanced
approaches [BANK]’s total capital ratio
is the lower of:
(i) The ratio of the [BANK]’s total
capital to standardized total riskweighted assets; and
(ii) The ratio of the [BANK]’s
advanced-approaches-adjusted total
capital to advanced approaches total
risk-weighted assets. A [BANK]’s
advanced-approaches-adjusted total
capital is the [BANK]’s total capital after
being adjusted as follows:
(A) An advanced approaches [BANK]
must deduct from its total capital any
allowance for loan and lease losses
included in its tier 2 capital in
accordance with § ll.20(d)(3) of
subpart C of this part; and
(B) An advanced approaches [BANK]
must add to its total capital any eligible
credit reserves that exceed the [BANK]’s
total expected credit losses to the extent
that the excess reserve amount does not
exceed 0.6 percent of the [BANK]’s
credit risk-weighted assets.
(4) Supplementary leverage ratio. An
advanced approaches [BANK]’s
supplementary leverage ratio is the
simple arithmetic mean of the ratio of
its tier 1 capital to total leverage
exposure calculated as of the last day of
each month in the reporting quarter.
(d) Capital adequacy. (1)
Notwithstanding the minimum
(a) Capital conservation buffer. (1)
Composition of the capital conservation
buffer. The capital conservation buffer is
composed solely of common equity tier
1 capital.
(2) Definitions. For purposes of this
section, the following definitions apply:
(i) Eligible retained income. The
eligible retained income of a [BANK] is
the [BANK]’s net income for the four
calendar quarters preceding the current
calendar quarter, based on the [BANK]’s
most recent quarterly [REGULATORY
REPORT], net of any capital
distributions and associated tax effects
not already reflected in net income.1
(ii) Maximum payout ratio. The
maximum payout ratio is the percentage
of eligible retained income that a
[BANK] can pay out in the form of
capital distributions and discretionary
bonus payments during the current
calendar quarter. The maximum payout
ratio is based on the [BANK]’s capital
conservation buffer, calculated as of the
last day of the previous calendar
quarter, as set forth in Table 1.
(iii) Maximum payout amount. A
[BANK]’s maximum payout amount for
the current calendar quarter is equal to
the [BANK]’s eligible retained income,
multiplied by the applicable maximum
payout ratio, as set forth in Table 1.
(3) Calculation of capital conservation
buffer.2 A [BANK]’s capital conservation
buffer is equal to the lowest of the
following ratios, calculated as of the last
day of the previous calendar quarter
based on the [BANK]’s most recent
[REGULATORY REPORT]:
(i) The [BANK]’s common equity tier
1 capital ratio minus the [BANK]’s
minimum common equity tier 1 capital
1 Net income, as reported in the [REGULATORY
REPORT], reflects discretionary bonus payments
and certain capital distributions that are expense
items (and their associated tax effects).
2 For purposes of the capital conservation buffer
calculations, a [BANK] must use standardized total
risk weighted assets if it is a standardized approach
[BANK] and it must use advanced total risk
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§ ll.11 Capital conservation buffer and
countercyclical capital buffer amount.
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ratio requirement under § ll.10 of this
part;
(ii) The [BANK]’s tier 1 capital ratio
minus the [BANK]’s minimum tier 1
capital ratio requirement under
§ ll.10 of this part; and
(iii) The [BANK]’s total capital ratio
minus the [BANK]’s minimum total
capital ratio requirement under
§ ll.10 of this part.
(iv) If the [BANK]’s common equity
tier 1, tier 1 or total capital ratio is less
than or equal to the [BANK]’s minimum
common equity tier 1, tier 1 or total
capital ratio requirement under
§ ll.10 of this part, respectively, the
[BANK]’s capital conservation buffer is
zero.
(4) Limits on capital distributions and
discretionary bonus payments. (i) A
[BANK] shall not make capital
distributions or discretionary bonus
payments or create an obligation to
make such distributions or payments
during the current calendar quarter that,
in the aggregate, exceed the maximum
payout amount.
(ii) A [BANK] with a capital
conservation buffer that is greater than
2.5 percent plus 100 percent of its
applicable countercyclical buffer, in
accordance with paragraph (b) of this
section, is not subject to a maximum
payout amount under this section.
(iii) Negative eligible retained income.
Except as provided in paragraph
(a)(4)(iv), a [BANK] may not make
capital distributions or discretionary
bonus payments during the current
calendar quarter if the [BANK]’s:
(A) Eligible retained income is
negative; and
(B) Capital conservation buffer was
less than 2.5 percent as of the end of the
previous calendar quarter.
(iv) Prior approval. Notwithstanding
the limitations in paragraphs (a)(4)(i)
through (iii) of this section the
[AGENCY] may permit a [BANK] to
make a capital distribution or
discretionary bonus payment upon a
request of the [BANK], if the [AGENCY]
determines that the capital distribution
or discretionary bonus payment would
not be contrary to the purposes of this
section, or the safety and soundness of
the [BANK]. In making such a
determination, the [AGENCY] will
consider the nature and extent of the
request and the particular circumstances
giving rise to the request.
weighted assets if it is an advanced approaches
[BANK].
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TABLE TO § ll.11—CALCULATION OF MAXIMUM PAYOUT AMOUNT
Capital conservation buffer (as a percentage of total risk-weighted assets)
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Greater than 2.5 percent plus 100 percent of the [BANK]’s applicable countercyclical capital
buffer amount.
Less than or equal to 2.5 percent plus 100 percent of the [BANK]’s applicable countercyclical
capital buffer amount, and greater than 1.875 percent plus 75 percent of the [BANK]’s applicable countercyclical capital buffer amount.
Less than or equal to 1.875 percent plus 75 percent of the [BANK]’s applicable countercyclical
capital buffer amount, and greater than 1.25 percent plus 50 percent of the [BANK]’s applicable countercyclical capital buffer amount.
Less than or equal to 1.25 percent plus 50 percent of the [BANK]’s applicable countercyclical
capital buffer amount, and greater than 0.625 percent plus 25 percent of the [BANK]’s applicable countercyclical capital buffer amount.
Less than or equal to 0.625 percent plus 25 percent of the [BANK]’s applicable countercyclical
capital buffer amount.
(v) Other limitations on capital
distributions. Additional limitations on
capital distributions may apply to a
[BANK] under 12 CFR 225.4; 12 CFR
225.8; and 12 CFR 263.202.
(b) Countercyclical capital buffer
amount. (1) General. An advanced
approaches [BANK] must apply,
calculate, and maintain a
countercyclical capital buffer amount in
accordance with the following
paragraphs.
(i) Composition. The countercyclical
capital buffer amount is composed
solely of common equity tier 1 capital.
(ii) Amount. An advanced approaches
[BANK] has a countercyclical capital
buffer amount determined by
calculating the weighted average of the
countercyclical capital buffer amounts
established for the national jurisdictions
where the [BANK]’s private sector credit
exposures are located, as specified in
paragraphs (b)(2) and (3) of this section.
(iii) Weighting. The weight assigned to
a jurisdiction’s countercyclical capital
buffer amount is calculated by dividing
the total risk-weighted assets for the
[BANK]’s private sector credit exposures
located in the jurisdiction by the total
risk-weighted assets for all of the
[BANK]’s private sector credit
exposures.
(iv) Location. (A) Except as provided
in paragraph (b)(1)(iv)(B) of this section,
the location of a private sector credit
exposure (other than a securitization
exposure) is the national jurisdiction
where the borrower is located (that is,
where it is incorporated, chartered, or
similarly established or, if the borrower
is an individual, where the borrower
resides).
(B) If, in accordance with subpart D or
subpart E of this part, the [BANK] has
assigned to a private sector credit
exposure a risk weight associated with
a protection provider on a guarantee or
credit derivative, the location of the
exposure is the national jurisdiction
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where the protection provider is
located.
(C) The location of a securitization
exposure is the location of the
borrowers of underlying exposures in a
single jurisdiction with the largest
aggregate unpaid principal balance.
(2) Countercyclical capital buffer
amount for credit exposures in the
United States. (i) Initial countercyclical
buffer amount with respect to credit
exposures in the United States. The
initial countercyclical capital buffer
amount in the United States is zero.
(ii) Adjustment of the countercyclical
buffer amount. The [AGENCY] will
adjust the countercyclical capital buffer
amount for credit exposures in the
United States in accordance with
applicable law.3
(iii) Range of countercyclical buffer
amount. The [AGENCY] will adjust the
countercyclical capital buffer amount
for credit exposures in the United States
between zero percent and 2.5 percent of
total risk-weighted assets. Generally, a
zero percent countercyclical capital
buffer amount will reflect an assessment
that economic and financial conditions
are consistent with a period of little or
no excessive ease in credit markets
associated with no material increase in
system-wide credit risk. A 2.5 percent
countercyclical capital buffer amount
will reflect an assessment that financial
markets are experiencing a period of
excessive ease in credit markets
associated with a material increase in
credit system-wide risk.
(iv) Adjustment Determination. The
[AGENCY] will base its decision to
adjust the countercyclical capital buffer
amount under this section on a range of
macroeconomic, financial, and
supervisory information indicating an
increase in systemic risk including, but
3 The [AGENCY] expects that any adjustment will
be based on a determination made jointly by the
Board, OCC, and FDIC.
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Maximum payout ratio (as a percentage of
eligible retained income)
No payout ratio limitation applies.
60 percent.
40 percent.
20 percent.
0 percent.
not limited to, the ratio of credit to gross
domestic product, a variety of asset
prices, other factors indicative of
relative credit and liquidity expansion
or contraction, funding spreads, credit
condition surveys, indices based on
credit default swap spreads, options
implied volatility, and measures of
systemic risk.
(v) Effective date of adjusted
countercyclical capital buffer amount.
(A) Increase adjustment. A
determination by the [AGENCY] under
paragraph (b)(2)(ii) of this section to
increase the countercyclical capital
buffer amount will be effective 12
months from the date of announcement,
unless the [AGENCY] establishes an
earlier effective date and includes a
statement articulating the reasons for
the earlier effective date.
(B) Decrease adjustment. A
determination by the [AGENCY] to
decrease the established countercyclical
capital buffer amount under paragraph
(b)(2)(ii) of this section will be effective
at the later of the day following
announcement of the final
determination or the earliest date
permissible under applicable law or
regulation.
(vi) Twelve month sunset. The
countercyclical capital buffer amount
will return to zero percent 12 months
after the effective date of the adjusted
countercyclical capital buffer amount
announced, unless the [AGENCY]
announces a decision to maintain the
adjusted countercyclical capital buffer
amount or adjust it again before the
expiration of the 12-month period.
(3) Countercyclical capital buffer
amount for foreign jurisdictions. The
[AGENCY] will adjust the
countercyclical capital buffer amount
for private sector credit exposures to
reflect decisions made by foreign
jurisdictions consistent with due
process requirements described in
paragraph (b)(2) of this section.
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Subpart C—Definition of Capital
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§ ll.20 Capital components and
eligibility criteria for regulatory capital
instruments.
(a) Regulatory capital components. A
[BANK]’s regulatory capital components
are: (1) Common equity tier 1 capital;
(2) Additional tier 1 capital; and
(3) Tier 2 capital.
(b) Common equity tier 1 capital.
Common equity tier 1 capital is the sum
of the common equity tier 1 capital
elements as set forth in paragraph (b) of
this section, minus regulatory
adjustments and deductions as set forth
in § ll.22 of this part.1 The common
equity tier 1 capital elements are:
(1) Any common stock instruments
(plus any related surplus) issued by the
[BANK], net of treasury stock, that meet
all the following criteria: 2
(i) The instrument is paid-in, issued
directly by the [BANK], and represents
the most subordinated claim in a
receivership, insolvency, liquidation, or
similar proceeding of the [BANK].
(ii) The holder of the instrument is
entitled to a claim on the residual assets
of the [BANK] that is proportional with
the holder’s share of the [BANK]’s
issued capital after all senior claims
have been satisfied in a receivership,
insolvency, liquidation, or similar
proceeding.
(iii) The instrument has no maturity
date, can only be redeemed via
discretionary repurchases with the prior
approval of the [AGENCY], and does not
contain any term or feature that creates
an incentive to redeem.
(iv) The [BANK] did not create at
issuance of the instrument through any
action or communication an expectation
that it will buy back, cancel, or redeem
the instrument, and the instrument does
not include any term or feature that
might give rise to such an expectation.
(v) Any cash dividend payments on
the instrument are paid out of the
[BANK]’s net income and retained
earnings and are not subject to a limit
imposed by the contractual terms
governing the instrument.
(vi) The [BANK] has full discretion at
all times to refrain from paying any
dividends and making any other capital
distributions on the instrument without
triggering an event of default, a
requirement to make a payment-in-kind,
1 Voting common stockholders’ equity, which is
the most desirable capital element from a
supervisory standpoint, generally should be the
dominant element within common equity tier 1
capital.
2 Capital instruments issued by mutual banking
organizations may qualify as common equity tier 1
capital provided that the instruments meet all of the
criteria in this section.
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or an imposition of any other
restrictions on the [BANK].
(vii) Dividend payments and any
other capital distributions on the
instrument may be paid only after all
legal and contractual obligations of the
[BANK] have been satisfied, including
payments due on more senior claims.
(viii) The holders of the instrument
bear losses as they occur equally,
proportionately, and simultaneously
with the holders of all other common
stock instruments before any losses are
borne by holders of claims on the
[BANK] with greater priority in a
receivership, insolvency, liquidation, or
similar proceeding.
(ix) The paid-in amount is classified
as equity under GAAP.
(x) The [BANK], or an entity that the
[BANK] controls, did not purchase or
directly or indirectly fund the purchase
of the instrument.
(xi) The instrument is not secured, not
covered by a guarantee of the [BANK] or
of an affiliate of the [BANK], and is not
subject to any other arrangement that
legally or economically enhances the
seniority of the instrument.
(xii) The instrument has been issued
in accordance with applicable laws and
regulations.
(xiii) The instrument is reported on
the [BANK]’s regulatory financial
statements separately from other capital
instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive
income.
(4) Common equity tier 1 minority
interest subject to the limitations in
§ ll.21(a) of this part.
(c) Additional tier 1 capital.
Additional tier 1 capital is the sum of
additional tier 1 capital elements and
any related surplus, minus the
regulatory adjustments and deductions
in § ll.22 of this part. Additional tier
1 capital elements are:
(1) Instruments (plus any related
surplus) that meet the following criteria:
(i) The instrument is issued and paid
in.
(ii) The instrument is subordinated to
depositors, general creditors, and
subordinated debt holders of the
[BANK] in a receivership, insolvency,
liquidation, or similar proceeding.
(iii) The instrument is not secured,
not covered by a guarantee of the
[BANK] or of an affiliate of the [BANK],
and not subject to any other
arrangement that legally or
economically enhances the seniority of
the instrument.
(iv) The instrument has no maturity
date and does not contain a dividend
step-up or any other term or feature that
creates an incentive to redeem.
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(v) If callable by its terms, the
instrument may be called by the [BANK]
only after a minimum of five years
following issuance, except that the
terms of the instrument may allow it to
be called earlier than five years upon
the occurrence of a regulatory event that
precludes the instrument from being
included in additional tier 1 capital or
a tax event. In addition:
(A) The [BANK] must receive prior
approval from the [AGENCY] to exercise
a call option on the instrument.
(B) The [BANK] does not create at
issuance of the instrument, through any
action or communication, an
expectation that the call option will be
exercised.
(C) Prior to exercising the call option,
or immediately thereafter, the [BANK]
must either:
(1) Replace the instrument to be
called with an equal amount of
instruments that meet the criteria under
paragraph (b) or (c) of this section; 3 or
(2) Demonstrate to the satisfaction of
the [AGENCY] that following
redemption, the [BANK] will continue
to hold capital commensurate with its
risk.
(vi) Redemption or repurchase of the
instrument requires prior approval from
the [AGENCY].
(vii) The [BANK] has full discretion at
all times to cancel dividends or other
capital distributions on the instrument
without triggering an event of default, a
requirement to make a payment-in-kind,
or an imposition of other restrictions on
the [BANK] except in relation to any
capital distributions to holders of
common stock.
(viii) Any capital distributions on the
instrument are paid out of the [BANK]’s
net income and retained earnings.
(ix) The instrument does not have a
credit-sensitive feature, such as a
dividend rate that is reset periodically
based in whole or in part on the
[BANK]’s credit quality, but may have a
dividend rate that is adjusted
periodically independent of the
[BANK]’s credit quality, in relation to
general market interest rates or similar
adjustments.
(x) The paid-in amount is classified as
equity under GAAP.
(xi) The [BANK], or an entity that the
[BANK] controls, did not purchase or
directly or indirectly fund the purchase
of the instrument.
(xii) The instrument does not have
any features that would limit or
discourage additional issuance of
capital by the [BANK], such as
3 Replacement can be concurrent with
redemption of existing additional tier 1 capital
instruments.
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provisions that require the [BANK] to
compensate holders of the instrument if
a new instrument is issued at a lower
price during a specified time frame.
(xiii) If the instrument is not issued
directly by the [BANK] or by a
subsidiary of the [BANK] that is an
operating entity, the only asset of the
issuing entity is its investment in the
capital of the [BANK], and proceeds
must be immediately available without
limitation to the [BANK] or to the
[BANK]’s top-tier holding company in a
form which meets or exceeds all of the
other criteria for additional tier 1 capital
instruments.4
(xiv) For an advanced approaches
[BANK], the governing agreement,
offering circular, or prospectus of an
instrument issued after January 1, 2013
must disclose that the holders of the
instrument may be fully subordinated to
interests held by the U.S. government in
the event that the [BANK] enters into a
receivership, insolvency, liquidation, or
similar proceeding.
(2) Tier 1 minority interest, subject to
the limitations in § ll.21(b) of this
part, that is not included in the
[BANK]’s common equity tier 1 capital.
(3) Any and all instruments that
qualified as tier 1 capital under the
[AGENCY]’s general risk-based capital
rules under 12 CFR part 3, appendix A,
12 CFR 167 (OCC); 12 CFR part 208,
appendix A, 12 CFR part 225, appendix
A (Board); and 12 CFR part 325,
appendix A, 12 CFR part 390, subpart Z
(FDIC) as then in effect, that were issued
under the Small Business Jobs Act of
2010 5 or prior to October 4, 2010, under
the Emergency Economic Stabilization
Act of 2008.6
(d) Tier 2 Capital. Tier 2 capital is the
sum of tier 2 capital elements and any
related surplus, minus regulatory
adjustments and deductions in § ll.22
of this part. Tier 2 capital elements are:
(1) Instruments (plus related surplus)
that meet the following criteria:
(i) The instrument is issued and paid
in.
(ii) The instrument is subordinated to
depositors and general creditors of the
[BANK].
(iii) The instrument is not secured,
not covered by a guarantee of the
[BANK] or of an affiliate of the [BANK],
and not subject to any other
arrangement that legally or
economically enhances the seniority of
the instrument in relation to more
senior claims.
4 De minimis assets related to the operation of the
issuing entity can be disregarded for purposes of
this criterion.
5 Public Law 111–240; 124 Stat. 2504 (2010).
6 Public Law 110–343, 122 Stat. 3765 (2008).
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(iv) The instrument has a minimum
original maturity of at least five years.
At the beginning of each of the last five
years of the life of the instrument, the
amount that is eligible to be included in
tier 2 capital is reduced by 20 percent
of the original amount of the instrument
(net of redemptions) and is excluded
from regulatory capital when remaining
maturity is less than one year. In
addition, the instrument must not have
any terms or features that require, or
create significant incentives for, the
[BANK] to redeem the instrument prior
to maturity.
(v) The instrument, by its terms, may
be called by the [BANK] only after a
minimum of five years following
issuance, except that the terms of the
instrument may allow it to be called
sooner upon the occurrence of an event
that would preclude the instrument
from being included in tier 2 capital, or
a tax event. In addition:
(A) The [BANK] must receive the
prior approval of the [AGENCY] to
exercise a call option on the instrument.
(B) The [BANK] does not create at
issuance, through action or
communication, an expectation the call
option will be exercised.
(C) Prior to exercising the call option,
or immediately thereafter, the [BANK]
must either:
(1) Replace any amount called with an
equivalent amount of an instrument that
meets the criteria for regulatory capital
under this section,7 or
(2) Demonstrate to the satisfaction of
the [AGENCY] that following
redemption, the [BANK] would
continue to hold an amount of capital
that is commensurate with its risk.
(vi) The holder of the instrument must
have no contractual right to accelerate
payment of principal or interest on the
instrument, except in the event of a
receivership, insolvency, liquidation, or
similar proceeding of the [BANK].
(vii) The instrument has no creditsensitive feature, such as a dividend or
interest rate that is reset periodically
based in whole or in part on the
[BANK]’s credit standing, but may have
a dividend rate that is adjusted
periodically independent of the
[BANK]’s credit standing, in relation to
general market interest rates or similar
adjustments.
(viii) The [BANK], or an entity that
the [BANK] controls, has not purchased
and has not directly or indirectly
funded the purchase of the instrument.
(ix) If the instrument is not issued
directly by the [BANK] or by a
subsidiary of the [BANK] that is an
operating entity, the only asset of the
issuing entity is its investment in the
capital of the [BANK], and proceeds
must be immediately available without
limitation to the [BANK] or the
[BANK]’s top-tier holding company in a
form that meets or exceeds all the other
criteria for tier 2 capital instruments
under this section.8
(x) Redemption of the instrument
prior to maturity or repurchase requires
the prior approval of the [AGENCY].
(xi) For an advanced approaches
[BANK], the governing agreement,
offering circular, or prospectus of an
instrument issued after January 1, 2013
must disclose that the holders of the
instrument may be fully subordinated to
interests held by the U.S. government in
the event that the [BANK] enters into a
receivership, insolvency, liquidation, or
similar proceeding.
(2) Total capital minority interest,
subject to the limitations set forth in
§ ll.21(c) of this part, that is not
included in the [BANK]’s tier 1 capital.
(3) Allowance for loan and lease
losses (ALLL) up to 1.25 percent of the
[BANK]’s standardized total riskweighted assets not including any
amount of the ALLL (and excluding in
the case of a market risk [BANK], its
standardized market risk-weighted
assets).
(4) Any instrument that qualified as
tier 2 capital under the [AGENCY]’s
general risk-based capital rules under 12
CFR part 3, appendix A, 12 CFR 167
(OCC); 12 CFR part 208, appendix A, 12
CFR part 225, appendix A (Board); 12
CFR part 325, appendix A, 12 CFR part
390 (FDIC) as then in effect, that were
issued under the Small Business Jobs
Act of 2010 (Pub. L. 111–240; 124 Stat.
2504 (2010)) or prior to October 4, 2010,
under the Emergency Economic
Stabilization Act of 2008 (Pub. L. 110–
343, 122 Stat. 3765 (2008)).
(e) [AGENCY] approval of a capital
element. (1) Notwithstanding the
criteria for regulatory capital
instruments set forth in this section, the
[AGENCY] may find that a capital
element may be included in a [BANK]’s
common equity tier 1 capital, additional
tier 1 capital, or tier 2 capital on a
permanent or temporary basis.
(2) A [BANK] must receive [AGENCY]
prior approval to include a capital
element (as listed in this section) in its
common equity tier 1 capital, additional
tier 1 capital, or tier 2 capital unless the
element:
(i) Was included in a [BANK]’s tier 1
capital or tier 2 capital as of May 19,
7 Replacement of tier 2 capital instruments can be
concurrent with redemption of existing tier 2
capital instruments.
8 De minimis assets related to the operation of the
issuing entity can be disregarded for purposes of
this criterion.
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2010 in accordance with the
[AGENCY]’s risk-based capital rules that
were effective as of that date and the
underlying instrument continues to be
includable under the criteria set forth in
this section; or
(ii) Is equivalent in terms of capital
quality and ability to absorb credit
losses with respect to all material terms
to a regulatory capital element described
in a decision made publicly available
under paragraph (e)(3) of this section by
the [AGENCY].
(3) When considering whether a
[BANK] may include a regulatory
capital element in its common equity
tier 1 capital, additional tier 1 capital,
or tier 2 capital, the [AGENCY] will
consult with the other federal banking
agencies.
(4) After determining that a regulatory
capital element may be included in a
[BANK]’s common equity tier 1 capital,
additional tier 1 capital, or tier 2 capital,
the [AGENCY] will make its decision
publicly available, including a brief
description of the material terms of the
regulatory capital element and the
rationale for the determination.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
§ ll.21
Minority interest.
(a) Common equity tier 1 minority
interest 9 includable in the common
equity tier 1 capital of the [BANK]. For
each consolidated subsidiary of a
[BANK], the amount of common equity
tier 1 minority interest the [BANK] may
include in common equity tier 1 capital
is equal to:
(1) The common equity tier 1 minority
interest of the subsidiary; minus
(2) The percentage of the subsidiary’s
common equity tier 1 capital that is not
owned by the [BANK], multiplied by the
difference between the common equity
tier 1 capital of the subsidiary and the
lower of:
(i) The amount of common equity tier
1 capital the subsidiary must hold to not
be subject to restrictions on capital
distributions and discretionary bonus
payments under § ll.11 of subpart B
of this part or equivalent regulations
established by the subsidiary’s home
country supervisor, or
(ii)(A) The standardized total riskweighted assets of the [BANK] that
relate to the subsidiary multiplied by
(B) The common equity tier 1 capital
ratio the subsidiary must maintain to
not be subject to restrictions on capital
9 For purposes of the minority interest
calculations, if the consolidated subsidiary issuing
the capital is not subject to the same minimum
capital requirements or capital conservation buffer
framework of the [BANK], the [BANK] must assume
that the minimum capital requirements and capital
conservation buffer framework of the [BANK] apply
to the subsidiary.
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distributions and discretionary bonus
payments under § ll.11 of subpart B
of this part or equivalent regulations
established by the subsidiary’s home
country supervisor.
(b) Tier 1 minority interest includable
in the tier 1 capital of the [BANK]. For
each consolidated subsidiary of the
[BANK], the amount of tier 1 minority
interest the [BANK] may include in tier
1 capital is equal to:
(1) The tier 1 minority interest of the
subsidiary; minus
(2) The percentage of the subsidiary’s
tier 1 capital that is not owned by the
[BANK] multiplied by the difference
between the tier 1 capital of the
subsidiary and the lower of:
(i) The amount of tier 1 capital the
subsidiary must hold to not be subject
to restrictions on capital distributions
and discretionary bonus payments
under § ll.11 of subpart B of this part
or equivalent standards established by
the subsidiary’s home country
supervisor, or
(ii)(A) The standardized total riskweighted assets of the [BANK] that
relate to the subsidiary multiplied by
(B) The tier 1 capital ratio the
subsidiary must maintain to avoid
restrictions on capital distributions and
discretionary bonus under § ll.11 of
subpart B of this part or equivalent
standards established by the
subsidiary’s home country supervisor.
(c) Total capital minority interest
includable in the total capital of the
[BANK]. For each consolidated
subsidiary of the [BANK], the amount of
total capital minority interest the
[BANK] may include in total capital is
equal to:
(1) The total capital minority interest
of the subsidiary; minus
(2) The percentage of the subsidiary’s
total capital that is not owned by the
[BANK] multiplied by the difference
between the total capital of the
subsidiary and the lower of:
(i) The amount of total capital the
subsidiary must hold to not be subject
to restrictions on capital distributions
and discretionary bonus payments
under § ll.11 of subpart B of this part
or equivalent standards established by
the subsidiary’s home country
supervisor, or
(ii)(A) The standardized total riskweighted assets of the [BANK] that
relate to the subsidiary multiplied by
(B) The total capital ratio the
subsidiary must maintain to avoid
restrictions on capital distributions and
discretionary bonus payments under
§ ll.11 of subpart B of this part or
equivalent standards established by the
subsidiary’s home country supervisor.
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52861
§ ll.22 Regulatory capital adjustments
and deductions.
(a) Regulatory capital deductions from
common equity tier 1 capital. A [BANK]
must deduct the following items from
the sum of its common equity tier 1
capital elements:
(1) Goodwill, net of associated
deferred tax liabilities (DTLs), in
accordance with paragraph (e) of this
section, and goodwill embedded in the
valuation of a significant investment in
the capital of an unconsolidated
financial institution in the form of
common stock, in accordance with
paragraph (d) of this section.
(2) Intangible assets, other than MSAs,
net of associated DTLs, in accordance
with paragraph (e) of this section.
(3) Deferred tax assets (DTAs) that
arise from operating loss and tax credit
carryforwards net of any related
valuation allowances and net of DTLs,
in accordance with paragraph (e) of this
section.
(4) Any gain-on-sale associated with a
securitization exposure.
(5) For a [BANK] that is not an
insured depository institution, any
defined benefit pension fund asset, net
of any associated DTL, in accordance
with paragraph (e) of this section. With
the prior approval of the [AGENCY], the
[BANK] may reduce the amount to be
deducted by the amount of assets of the
defined benefit pension fund to which
it has unrestricted and unfettered
access, provided that the [BANK]
includes such assets in its risk-weighted
assets as if the [BANK] held them
directly.10
(6) For a [BANK] subject to subpart E
of this [PART], the amount of expected
credit loss that exceeds its eligible credit
reserves.
(7) Financial subsidiaries:
(i) A [BANK] must deduct the
aggregate amount of its outstanding
equity investment, including retained
earnings, in its financial subsidiaries (as
defined in 12 CFR 5.39 (OCC); 12 CFR
208.77 (Board); and 12 CFR 362.17
(FDIC)) and may not consolidate the
assets and liabilities of a financial
subsidiary with those of the national
bank.
(ii) No other deduction is required
under paragraph (c) of this section for
investments in the capital instruments
of financial subsidiaries.
(b) Regulatory adjustments to
common equity tier 1 capital. A [BANK]
must make the following adjustments to
10 For this purpose, unrestricted and unfettered
access means that the excess assets of the defined
benefit pension fund would be available to protect
depositors or creditors of the [BANK] in the event
of receivership, insolvency, liquidation, or similar
proceeding.
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the sum of common equity tier 1 capital
elements:
(1) Deduct any unrealized gain and
add any unrealized loss on cash flow
hedges included in accumulated other
comprehensive income (AOCI), net of
applicable tax effects, that relate to the
hedging of items that are not recognized
at fair value on the balance sheet.
(2) Deduct any unrealized gain and
add any unrealized loss related to
changes in the fair value of liabilities
that are due to changes in the [BANK]’s
own credit risk. Advanced approaches
[BANK]s must deduct the credit spread
premium over the risk free rate for
derivatives that are liabilities.
(c) Deductions from regulatory capital
related to investments in capital
instruments. (1) Investments in the
[BANK]’s own capital instruments.
(i) A [BANK] must deduct
investments in (including any
contractual obligation to purchase) its
own common stock instruments,
whether held directly or indirectly, from
its common equity tier 1 capital
elements to the extent such instruments
are not excluded from regulatory capital
under § ll.20(b)(1) of this part.
(ii) A [BANK] must deduct
investments in (including any
contractual obligation to purchase) its
own additional tier 1 capital
instruments, whether held directly or
indirectly, from its additional tier 1
capital elements.
(iii) A [BANK] must deduct
investments in (including any
contractual obligation to purchase) its
own tier 2 capital instruments, whether
held directly or indirectly, from its tier
2 capital elements.
(iv) For any deduction required under
this section, gross long positions may be
deducted net of short positions in the
same underlying instrument only if the
short positions involve no counterparty
risk.
(v) For any deduction required under
this section, a [BANK] must look
through any holdings of index securities
to deduct investments in its own capital
instruments. In addition:
(A) Gross long positions in
investments in a [BANK]’s own
regulatory capital instruments resulting
from holdings of index securities may
be netted against short positions in the
same index;
(B) Short positions in index securities
that are hedging long cash or synthetic
positions can be decomposed to
recognize the hedge; and
(C) The portion of the index that is
composed of the same underlying
exposure that is being hedged may be
used to offset the long position if both
the exposure being hedged and the short
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position in the index are covered
positions under subpart F of this part,
and the hedge is deemed effective by the
banking organization’s internal control
processes.
(2) Corresponding deduction
approach. For purposes of this subpart,
the corresponding deduction approach
is the methodology used for the
deductions from regulatory capital
related to reciprocal cross holdings,
non-significant investments in the
capital of unconsolidated financial
institutions, and non-common stock
significant investments in the capital of
unconsolidated financial institutions.
Under the corresponding deduction
approach, a [BANK] must make any
such deductions from the component of
capital for which the underlying
instrument would qualify if it were
issued by the [BANK] itself. In addition:
(i) If the [BANK] does not have a
sufficient amount of a specific
component of capital to effect the
required deduction, the shortfall must
be deducted from the next higher (that
is, more subordinated) component of
regulatory capital.
(ii) If the investment is in the form of
an instrument issued by a non-regulated
financial institution, the [BANK] must
treat the instrument as:
(A) A common equity tier 1 capital
instrument if it is common stock or
represents the most subordinated claim
in liquidation of the financial
institution; and
(B) An additional tier 1 capital
instrument if it is subordinated to all
creditors of the financial institution and
is only senior in liquidation to common
shareholders.
(iii) If the investment is in the form of
an instrument issued by a regulated
financial institution and the instrument
does not meet the criteria for common
equity tier 1, additional tier 1 or tier 2
capital instruments under § ll.20 of
this part, the [BANK] must treat the
instrument as:
(A) A common equity tier 1 capital
instrument if it is common stock
included in GAAP equity or represents
the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital
instrument if it is included in GAAP
equity, subordinated to all creditors of
the financial institution, and senior in a
receivership, insolvency, liquidation, or
similar proceeding only to common
shareholders; and
(C) A tier 2 capital instrument if it is
not included in GAAP equity but
considered regulatory capital by the
primary regulator of the financial
institution.
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(3) Reciprocal crossholdings in the
capital of financial institutions. A
[BANK] must deduct investments in the
capital of other financial institutions it
holds reciprocally, where such
reciprocal crossholdings result from a
formal or informal arrangement to swap,
exchange, or otherwise intend to hold
each other’s capital instruments, by
applying the corresponding deduction
approach.
(4) Non-significant investments in the
capital of unconsolidated financial
institutions. (i) A [BANK] must deduct
its non-significant investments in the
capital of unconsolidated financial
institutions that, in the aggregate,
exceed 10 percent of the sum of the
[BANK]’s common equity tier 1 capital
elements minus all deductions from and
adjustments to common equity tier 1
capital elements required under
paragraphs (a) through (c)(3) of this
section (the 10 percent threshold for
non-significant investments) by
applying the corresponding deduction
approach.11
(ii) The amount to be deducted under
this section from a specific capital
component is equal to:
(A) The amount of a [BANK]’s nonsignificant investments exceeding the 10
percent threshold for non-significant
investments multiplied by
(B) The ratio of the non-significant
investments in unconsolidated financial
institutions in the form of such capital
component to the amount of the
[BANK]’s total non-significant
investments in unconsolidated financial
institutions.
(iii) Any non-significant investments
in the capital of unconsolidated
financial institutions that do not exceed
the 10 percent threshold for nonsignificant investments under this
section must be assigned the
appropriate risk weight under subpart
D, E, or F of this part, as applicable.
(5) Significant investments in the
capital of unconsolidated financial
institutions that are not in the form of
common stock. The [BANK] must
deduct its significant investments in the
capital of unconsolidated financial
institutions that are not in the form of
common stock by applying the
corresponding deduction approach.12
11 With prior written approval of the [AGENCY],
for the period of time stipulated by the [AGENCY],
a [BANK] is not required to deduct exposures to the
capital instruments of unconsolidated financial
institutions pursuant to this section if the
investment is made in connection with the [BANK]
providing financial support to a financial
institution in distress.
12 With prior written approval of the [AGENCY],
for the period of time stipulated by the [AGENCY],
a [BANK] is not required to deduct exposures to the
capital instruments of unconsolidated financial
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(d) Items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds. (1) A [BANK]
must deduct from common equity tier 1
capital elements the amount of each of
the following items that, individually,
exceeds 10 percent of the sum of the
[BANK]’s common equity tier 1 capital
elements, less adjustments to and
deductions from common equity tier 1
capital required under paragraphs (a)
through (c) of this section (the 10
percent common equity tier 1 capital
deduction threshold): 13
(i) DTAs arising from temporary
differences that the [BANK] could not
realize through net operating loss
carrybacks, net of any related valuation
allowances and net of DTLs, in
accordance with paragraph (e) of this
section.14
(ii) MSAs net of associated DTLs, in
accordance with paragraph (e) of this
section.
(iii) Significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock net of associated DTLs, in
accordance with paragraph (e) of this
section.15
(2) A [BANK] must deduct from
common equity tier 1 capital elements
the amount of the items listed in
paragraph (d)(1) of this section that are
not deducted as a result of the
application of the 10 percent common
equity tier 1 capital deduction
threshold, and that, in aggregate,
exceeds 17.65 percent of the sum of the
[BANK]’s common equity tier 1 capital
elements, minus adjustments to and
deductions from common equity tier 1
capital required under paragraphs (a)
through (c) of this section, minus the
items listed in paragraph (d)(1) of this
section (the 15 percent common equity
tier 1 capital deduction threshold).16
(3) If the total amount of MSAs
deducted under paragraphs (d)(1) and
(2) of this section is less than 10 percent
of the fair value of MSAs, a [BANK]
must deduct an additional amount of
MSAs equal to the difference between
10 percent of the fair value of MSAs and
the amount of MSAs deducted under
paragraphs (d)(1) and (2).
(4) The amount of the items in
paragrapn (d)(1) of this section that is
not deducted from common equity tier
1 capital pursuant to this section must
be included in the risk-weighted assets
of the [BANK] and assigned a 250
percent risk weight.
(e) Netting of DTLs against assets
subject to deduction. (1) Except as
described in paragraph (e)(3) of this
section, netting of DTLs against assets
that are subject to deduction under
§ ll.22 is permitted if the following
conditions are met:
(i) The DTL is associated with the
asset.
(ii) The DTL would be extinguished if
the associated asset becomes impaired
or is derecognized under GAAP.
(2) A DTL can only be netted against
a single asset.
(3) The amount of DTAs that arise
from operating loss and tax credit
carryforwards, net of any related
valuation allowances, and of DTAs
arising from temporary differences that
the [BANK] could not realize through
net operating loss carrybacks, net of any
related valuation allowances, may be
netted against DTLs (that have not been
netted against assets subject to
deduction pursuant to paragraph (e)(1)
of this section subject to the following
conditions:
52863
(i) Only the DTAs and DTLs that
relate to taxes levied by the same
taxation authority and that are eligible
for offsetting by that authority may be
offset for purposes of this deduction.
(ii) The amount of DTLs that the
[BANK] nets against DTAs that arise
from operating loss and tax credit
carryforwards, net of any related
valuation allowances, and against DTAs
arising from temporary differences that
the [BANK] could not realize through
net operating loss carrybacks, net of any
related valuation allowances, must be
allocated in proportion to the amount of
DTAs that arise from operating loss and
tax credit carryforwards (net of any
related valuation allowances, but before
any offsetting of DTLs) and of DTAs
arising from temporary differences that
the [BANK] could not realize through
net operating loss carrybacks (net of any
related valuation allowances, but before
any offsetting of DTLs), respectively.
(f) Treatment of assets that are
deducted. A [BANK] need not include
in risk-weighted assets any asset that is
deducted from regulatory capital under
this section.
(g) Items subject to a 1250 percent risk
weight. A [BANK] must apply a 1250
percent risk weight to the portion of a
CEIO that does not constitute an aftertax-gain-on-sale.
Subpart G—Transition Provisions
§ ll.300
Transitions.
(a) Common equity tier 1 and tier 1
capital minimum ratios. From January
1, 2013 through December 31, 2015, a
[BANK] must calculate its capital ratios
in accordance with this subpart and
maintain at least the transition
minimum capital ratios set forth in
Table 1.
TABLE 1 TO § ll.300
Transition Minimum Common Equity Tier 1 and Tier 1 Capital Ratios
Common equity
tier 1 capital ratio
Transition period
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Calendar year 2013 .........................................................................................................................................
Calendar year 2014 .........................................................................................................................................
Calendar year 2015 .........................................................................................................................................
institutions pursuant to this section if the
investment is made in connection with the [BANK]
providing financial support to a financial
institution in distress.
13 For purposes of calculating the 10 and 15
percent common equity tier 1 capital deduction
thresholds, any goodwill embedded in the valuation
of a significant investments in the capital of
unconsolidated financial institutions in the form of
common stock that is deducted under
§ ll.22(a)(1) can be excluded.
14 A [BANK] is not required to deduct from the
sum of its common equity tier 1 capital elements
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net DTAs arising from timing differences that the
[BANK] could realize through net operating loss
carrybacks. The [BANK] must risk weight these
assets at 100 percent. Likewise, for a [BANK] that
is a member of a consolidated group for tax
purposes, the amount of DTAs that could be
realized through net operating loss carrybacks may
not exceed the amount that the [BANK] could
reasonably expect to have refunded by its parent
holding company.
15 With the prior written approval of the
[AGENCY], for the period of time stipulated by the
[AGENCY], a [BANK] is not required to deduct
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3.5
4.0
4.5
Tier 1 capital
ratio
4.5
5.5
6.0
exposures to the capital instruments of
unconsolidated financial institutions pursuant to
this section if the investment is made in connection
with the [BANK] providing financial support to a
financial institution in distress.
16 For purposes of calculating the 15 percent
common equity tier 1 capital deduction threshold,
any goodwill that has already been deducted under
§ ll.22(a)(1) can be excluded from the amount of
the significant investments in the capital of
unconsolidated financial institutions in the form of
common stock.
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(b) Capital conservation and
countercyclical capital buffer. From
January 1, 2013 through December 31,
2018, a [BANK] is subject to limitations
on capital distributions and
discretionary bonus payments with
respect to its capital conservation buffer
and any applicable countercyclical
capital buffer amount, as set forth in this
section.
(1) From January 1, 2013 through
December 31, 2015, a [BANK] is not
subject to limits on capital distributions
bonus payments under § ll.11 of
subpart B.
(ii) A [BANK] that maintains a capital
conservation buffer that is less than
0.625 percent during calendar year
2016, less than 1.25 percent during
calendar year 2017, and less than 1.875
percent during calendar year 2018
cannot make capital distributions and
discretionary bonus payments above the
maximum payout amount (as defined
under § ll.11 of subpart B of this part)
as described in Table 2.
and discretionary bonus payments
under § ll.11 of subpart B of this part
notwithstanding the amount of its
capital conservation buffer.
(2) From January 1, 2016 through
December 31, 2018:
(i) A [BANK] that maintains a capital
conservation buffer above 0.625 percent
during calendar year 2016, above 1.25
percent during calendar year 2017, and
above 1.875 percent during calendar
year 2018 is not subject to limits on
capital distributions and discretionary
TABLE 2 TO § ll.300
Transition period
Capital conservation buffer (assuming a countercyclical capital buffer amount of zero)
Maximum payout ratio (as a percentage of
eligible retained income)
Calendar year 2016 .................................
Greater than 0.625 percent ...................................
Calendar year 2017 .................................
Less than or equal to 0.625 percent, and greater
than 0.469 percent.
Less than or equal to 0.469 percent, and greater
than 0.313 percent.
Less than or equal to 0.313 percent, and greater
than 0.156 percent.
Less than or equal to 0.156 percent .....................
Greater than 1.25 percent .....................................
No payout ratio limitation applies under this section.
60 percent.
Calendar year 2018 .................................
Less than or equal to 1.25 percent, and greater
than 0.938 percent.
Less than or equal to 0.938 percent, and greater
than 0.625 percent.
Less than or equal to 0.625 percent, and greater
than 0.313 percent.
Less than or equal to 0.313 percent .....................
Greater than 1.875 percent ...................................
Less than or equal to 1.875 percent, and greater
than 1.406 percent.
Less than or equal to 1.406 percent, and greater
than 0.938 percent.
Less than or equal to 0.938 percent, and greater
than 0.469 percent.
Less than or equal to 0.469 percent .....................
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(c) Regulatory capital adjustments
and deductions. From January 1, 2013
through December 31, 2017, a [BANK]
must make the capital adjustments and
deductions in § ll.22 of subpart C of
this part in accordance with the
transition requirements in paragraph (c)
of this part. Beginning on January 1,
2018, a [BANK] must make all
regulatory capital adjustments and
deductions in accordance with
§ lll.22 of subpart C of this part.
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40 percent.
20 percent.
0 percent.
No payout ratio limitation applies under this section.
60 percent.
40 percent.
20 percent.
0 percent.
No payout ratio limitation applies under this section.
60 percent.
40 percent.
20 percent.
0 percent.
(1) Transition deductions from
common equity tier 1 capital. From
January 1, 2013 through December 31,
2017, a [BANK] must allocate the
deductions required under § ll.22(a)
of subpart C of this part from common
equity tier 1 or tier 1 capital elements
as described below.
(i) A [BANK] must deduct goodwill
(§ ll.22(a)(1) of subpart C of this part),
DTAs that arise from operating loss and
tax credit carryforwards (§ ll.22(a)(3)
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of subpart C), gain-on-sale associated
with a securitization exposure
(§ ll.22(a)(4) of subpart C), defined
benefit pension fund assets
(§ ll.22(a)(5) of subpart C), and
expected credit loss that exceeds
eligible credit reserves (for [BANK]s
subject to subpart E of this [PART])
(§ ll.22(a)(6) of subpart C), from
common equity tier 1 and additional tier
1 capital in accordance with the
percentages set forth in Table 3.
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TABLE 3 TO § ll.300
Transition deductions
under § ll.22(a)(1) of
subpart C of this part
Percentage of the deductions from common
equity tier 1
capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
Transition deductions under
§ ll.22(a)(3)–(6) of subpart C of
this part
Percentage of
the deductions
from common
equity tier 1
capital
2013 .............................................................................................
2014 .............................................................................................
2015 .............................................................................................
2016 .............................................................................................
2017 .............................................................................................
2018, and thereafter ....................................................................
100
100
100
100
100
100
TABLE 4 TO § ll.300
(ii) A [BANK] must deduct from
common equity tier 1 capital any
intangible assets other than goodwill
and MSAs in accordance with the
percentages set forth in Table 4.
(iii) A [BANK] must apply a 100
percent risk-weight to the aggregate
amount of intangible assets other than
goodwill and MSAs that are not
required to be deducted from common
equity tier 1 capital under this section.
Transition deductions under
§ ll.22(a)(2) of
subpart C—Percentage of the
deductions from
common equity
tier 1 capital
Transition period
Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 and
thereafter .......................
0
20
40
60
80
100
(2) Transition adjustments to common
equity tier 1 capital. From January 1,
0
20
40
60
80
100
Percentage of
the deductions
from tier 1 capital
100
80
60
40
20
0
2013 through December 31, 2017, a
[BANK] must allocate the regulatory
adjustments related to changes in the
fair value of liabilities due to changes in
the [BANK]’s own credit risk (§ ll
22(b)(2) of subpart C of this part)
between common equity tier 1 capital
and tier 1 capital in accordance with the
percentages described in Table 5.
(i) If the aggregate amount of the
adjustment is positive, the [BANK] must
allocate the deduction between common
equity tier 1 and tier 1 capital in
accordance with Table 5.
(ii) If the aggregate amount of the
adjustment is negative, the [BANK]
must add back the adjustment to
common equity tier 1 capital or to tier
1 capital, in accordance with Table 5.
TABLE 5 TO § ll.300
Transition period
Transition adjustments under
§ ll.22(b)(2) of subpart C of this
part
Percentage of
the adjustment
applied to
common equity
tier 1 capital
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
2013 .........................................................................................................................................
2014 .........................................................................................................................................
2015 .........................................................................................................................................
2016 .........................................................................................................................................
2017 .........................................................................................................................................
2018, and thereafter ................................................................................................................
(3) Transition adjustments to AOCI.
From January 1, 2013 through December
31, 2017, a [BANK] must adjust
common equity tier 1 capital with
respect to the aggregate amount of:
(i) Unrealized gains on AFS equity
securities, plus
(ii) Net unrealized gains or losses on
AFS debt securities, plus
(iii) Accumulated net unrealized gains
and losses on defined benefit pension
obligations, plus
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(iv) Accumulated net unrealized gains
or losses on cash flow hedges related to
items that are reported on the balance
sheet at fair value included in AOCI (the
transition AOCI adjustment amount) as
reported on the [BANK’s]
[REGULATORY REPORT] as follows:
(A) If the transition AOCI adjustment
amount is positive, the appropriate
amount must be deducted from common
equity tier 1 capital in accordance with
Table 6.
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0
20
40
60
80
100
Percentage of
the adjustment
applied to tier 1
capital
100
80
60
40
20
0
(B) If the transition AOCI adjustment
amount is negative, the appropriate
amount must be added back to common
equity tier 1 capital in accordance with
Table 6.
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TABLE 6 TO § ll.300
Transition period
deducted from common equity tier 1
capital.
Percentage of
the transition
AOCI adjustment
amount to be applied to common
equity tier 1
capital
Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 and
thereafter .......................
0
TABLE 7 TO § ll.300
Percentage of
unrealized gains
on AFS equity
securities that
may be included
in tier 2 capital
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Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 and
thereafter .......................
45
36
27
18
9
0
(4) Additional deductions from
regulatory capital. (i) From January 1,
2013 through December 31, 2017, a
[BANK] must use Table 8 to determine
the amount of investments in capital
instruments and the items subject to the
10 and 15 percent common equity tier
1 capital deduction thresholds
(§ ll.22(d) of subpart C of this part)
(that is, MSAs, DTAs arising from
temporary differences that the [BANK]
could not realize through net operating
loss carrybacks, and significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock) that must be
deducted from common equity tier 1.
(ii) From January 1, 2013 through
December 31, 2017, a [BANK] must
apply a 100 percent risk-weight to the
aggregate amount of the items subject to
the 10 and 15 percent common equity
tier 1 capital deduction thresholds that
are not deducted under this section. As
set forth in § ll.22(d)(4) of subpart C
of this part, beginning on January 1,
2018, a [BANK] must apply a 250
percent risk-weight to the aggregate
amount of the items subject to the 10
and 15 percent common equity tier 1
capital deduction thresholds that are not
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Transition deductions under
§ ll.22(c) and
(d) of subpart C
of this part—Percentage of the
deductions from
common equity
tier 1 capital
Transition period
100
80
60
40
20
(iii) A [BANK] may include a certain
amount of unrealized gains on AFS
equity securities in tier 2 capital during
the transition period in accordance with
Table 7.
Transition period
TABLE 8 TO § ll. 300
Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 and
thereafter .......................
0
20
40
60
80
100
(iii) For purposes of calculating the
transition deductions in this section,
from January 1, 2013 through December
31, 2017, a [BANK]’s 15 percent
common equity tier 1 capital deduction
threshold for MSAs, DTAs arising from
temporary differences that the [BANK]
could not realize through net operating
loss carrybacks, and significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock is equal to 15
percent of the sum of the [BANK]’s
common equity tier 1 elements, after
deductions required under § ll.22(a)
through (c) of subpart C of this part
(transition 15 percent common equity
tier 1 capital deduction threshold).
(iv) If the amount of MSAs the
[BANK] deducts after the application of
the appropriate thresholds is less than
10 percent of the fair value of the
[BANK]’s MSAs, the [BANK] must
deduct an additional amount of MSAs
so that the total amount of MSAs
deducted is at least 10 percent of the fair
value of the [BANK]’s MSAs.
(v) Beginning on January 1, 2018, a
[BANK] must calculate the 15 percent
common equity tier 1 capital deduction
threshold in accordance with
§ ll.22(d) of subpart C of this part.
(d) Transition arrangements for
capital instruments. (1) A depository
institution holding company with total
consolidated assets greater than or equal
to $15 billion as of December 31, 2009
(depository institution holding company
of $15 billion or more) may include in
capital the percentage indicated in
Table 9 of the aggregate outstanding
principal amount of debt or equity
instruments issued before May 19, 2010,
that do not meet the criteria in § ll.20
of subpart C of this part for additional
tier 1 or tier 2 capital instruments (nonqualifying capital instruments), but that
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Sfmt 4702
were included in tier 1 or tier 2 capital,
respectively, as of May 19, 2010.
(i) The [BANK] must apply Table 9
separately to additional tier 1 and tier 2
non-qualifying capital instruments.
(ii) The amount of non-qualifying
capital instruments that may not be
included in additional tier 1 capital
under this section may be included in
tier 2 capital without limitation,
provided the instrument meets the
criteria for tier 2 capital under
§ ll.20(d) of subpart C of this part.
(iii) A depository institution holding
company of $15 billion or more that
acquires either a depository institution
holding company with total
consolidated assets of less than $15
billion as of December 31, 2009
(depository institution holding company
under $15 billion) or a depository
institution holding company that was a
mutual holding company as of May 19,
2010, may include in regulatory capital
non-qualifying capital instruments
issued prior to May 19, 2010, by the
acquired organization only to the extent
provided in Table 9.
(iv) If a depository institution holding
company under $15 billion acquires a
depository institution holding company
under $15 billion or a 2010 MHC and
the resulting organization has total
consolidated assets of $15 billion or
more as reported on the resulting
organization’s FR Y–9C for the period in
which the transaction occurred, the
resulting organization may include in
regulatory capital non-qualifying capital
instruments issued prior to May 19,
2010 (2010 MHC) to the extent provided
in Table 9.
TABLE 9 TO § ll. 300
Transition period
(Calendar year)
Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 and
thereafter .......................
Percentage of
non-qualifying
capital instruments included
in additional tier
1 or tier 2 capital
for depository institution holding
companies of
$15 billion or
more
75
50
25
0
(2) Depository institution holding
companies under $15 billion, depository
institutions, and 2010 MHCs that are not
subject to paragraph (d)(1)(iii) of this
section may include in regulatory
capital non-qualifying capital
instruments issued prior to May 19,
2010 subject to the transition
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arrangements described in paragraph
(d)(2).
(i) Non-qualifying capital instruments
issued before September 12, 2010, that
were outstanding as of January 1, 2013
may be included in a [BANK]’s capital
up to the percentage of the outstanding
principal amount of such non-qualifying
capital instruments as of January 1, 2013
in accordance with Table 10.
(ii) Table 10 applies separately to
additional tier 1 and tier 2 nonqualifying capital instruments.
(iii) The amount of non-qualifying
capital instruments that cannot be
included in additional tier 1 capital
under this section may be included in
the tier 2 capital, provided the
instruments meet the criteria for tier 2
capital instruments under § ll.20(d)
of subpart C of this part.
TABLE 10 TO § ll. 300
Transition period
(Calendar year)
Percentage of
non-qualifying
capital instruments included
in additional tier
1 or tier 2 capital
for depository institution holding
companies under
$15 billion, depository institutions, and 2010
MHCs
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Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 ..........
Calendar year 2019 ..........
Calendar year 2020 ..........
Calendar year 2021 ..........
Calendar year 2022 and
thereafter .......................
90
80
70
60
50
40
30
20
10
18:36 Aug 29, 2012
Percentage of
the amount of
surplus or nonqualifying minority interest that
can be included
in regulatory capital during the
transition period
Transition period
Calendar year 2013 ..........
Calendar year 2014 ..........
Calendar year 2015 ..........
Calendar year 2016 ..........
Calendar year 2017 ..........
Calendar year 2018 and
thereafter .......................
100
80
60
40
20
0
12 CFR Part 325
Administrative practice and
procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping
requirements, Savings associations,
State non-member banks.
12 CFR Part 362
Administrative practice and
procedure, Authority delegations
(Government agencies), Bank deposit
insurance, Banks, banking, Investments,
Reporting and recordkeeping
requirements.
The adoption of the final common
rules by the agencies, as modified by the
agency-specific text, is set forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
End of Common Rule
12 CFR Chapter I
List of Subjects
Authority and Issuance
12 CFR Part 3
Administrative practice and
procedure, Capital, National banks,
Reporting and recordkeeping
requirements, Risk.
For the reasons set forth in the
common preamble and under the
authority of 12 U.S.C. 93a and
5412(b)(2)(B), the Office of the
Comptroller of the Currency proposes to
amend part 3 of chapter I of title 12,
Code of Federal Regulations as follows:
12 CFR Part 5
Administrative practice and
procedure, National banks, Reporting
and recordkeeping requirements,
Securities.
12 CFR Part 165
Administrative practice and
procedure, Savings associations.
0
Jkt 226001
TABLE 11 TO § ll. 300
12 CFR Part 6
National banks.
(3) Transitional arrangements for
minority interest. (i) Surplus minority
interest. From January 1, 2013 through
December 31, 2018, a [BANK] may
include in common equity tier 1 capital,
tier 1 capital, or total capital the portion
of the common equity tier 1, tier 1 and
total capital minority interest
outstanding as of January 1, 2013 that
exceeds any common equity tier 1, tier
1 or total capital minority interest
includable under section 21 (surplus
minority interest), respectively, in
accordance with Table 11.
(ii) Non-qualifying minority interest.
From January 1, 2013 through December
31, 2018, a [BANK] may include in tier
1 capital or total capital the portion of
the instruments issued by a
consolidated subsidiary that qualified as
tier 1 capital or total capital of the
[BANK] as of December 31, 2012 but
VerDate Mar<15>2010
that do not qualify as tier 1 capital or
total capital minority interest as of
January 1, 2013 (non-qualifying
minority interest) in accordance with
Table 11.
52867
12 CFR Part 167
Capital, Reporting and recordkeeping
requirements, Risk, Savings
associations.
12 CFR Part 208
Confidential business information,
Crime, Currency, Federal Reserve
System, Mortgages, reporting and
recordkeeping requirements, Securities.
12 CFR Part 217
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
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PART 3—CAPITAL ADEQUACY
STANDARDS
1. The authority citation for part 3 is
revised to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a,
1463, 1464, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, 3909, and 5412(b)(2)(B).
2a. Revise the heading of part 3 to
read as set forth above.
Subpart A [Removed]
2b. Remove subpart A, consisting of
§§ 3.1 through 3.4.
Subpart B [Removed]
2c. Remove subpart B, consisting of
§§ 3.5 through 3.8.
Subparts C through E [Redesignated
as Subparts H through J]
3. Redesignate subparts C through E
as subparts H through J.
4. Add subparts A through C and G
as set forth at the end of the common
preamble.
§ 3.100
[Redesignated as § 3.600]
5a. Redesignate § 3.100 in newly
redesignated subpart J as § 3.600.
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Subpart K—Definition of Capital for
Other Statutory Purposes
5b. Add subpart K, consisting of
newly redesignated § 3.600, with the
heading set forth above.
Appendices A, B, and C to Part 3
[Removed]
6. Remove appendices A through C.
Subparts A through C and G
[Amended]
7. Subparts A through C and G, as set
forth at the end of the common
preamble, are amended as set follows:
i. Remove ‘‘[AGENCY]’’ and add
‘‘OCC’’ in its place, wherever it appears;
ii. Remove ‘‘[BANK]’’ and add
‘‘national bank or Federal savings
association’’ in its place, wherever it
appears;
iii. Remove ‘‘[BANKS]’’ and
‘‘[BANK]s’’ and add ‘‘national banks
and Federal savings associations’’ in
their places, wherever they appear;
iv. Remove ‘‘[BANK]’s’’ and
‘‘[BANK’S]’’ and add ‘‘national bank’s
and Federal savings association’s’’ in
their places, wherever they appear;
v. Remove ‘‘[PART]’’ and add ‘‘Part 3’’
in its place, wherever it appears; and
vi. Remove ‘‘[REGULATORY
REPORT]’’ and add ‘‘Call Report’’ in its
place, wherever it appears.
8. Section 3.2, as set forth at the end
of the common preamble, is amended by
adding the following definitions in
alphabetical order:
§ 3.2
Definitions.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
*
*
*
*
*
Core capital means Tier 1 capital, as
calculated in accordance with § XX of
subpart XX.
*
*
*
*
*
Federal savings association means an
insured Federal savings association or
an insured Federal savings bank
chartered under section 5 of the Home
Owners’ Loan Act of 1933.
*
*
*
*
*
Tangible capital means the amount of
core capital (Tier 1 capital), as
calculated in accordance with subpart B
of this part, plus the amount of
outstanding perpetual preferred stock
(including related surplus) not included
in Tier 1 capital.
*
*
*
*
*
9. Section 3.10, as set forth at the end
of the common preamble, is amended by
adding paragraphs (a)(6), (b)(5), and
(c)(5) to read as follows:
§ 3.10
Minimum Capital Requirements.
(a) * * *
(6) For Federal savings associations, a
tangible capital ratio of 1.5 percent.
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(b) * * *
(5) Federal savings association
tangible capital ratio. A Federal savings
association’s tangible capital ratio is the
ratio of the Federal savings association’s
core capital (Tier 1 capital) to total
adjusted assets as calculated under
subpart B of this part.
(c) * * *
(5) Federal savings association
tangible capital ratio. A Federal savings
association’s tangible capital ratio is the
ratio of the Federal savings association’s
core capital (Tier 1 capital) to total
adjusted assets as calculated under
subpart B of this part.
*
*
*
*
*
10. Section 3.22, as set forth at the
end of the common preamble, is
amended by adding paragraph (a)(8) to
read as follows:
§ 3.22 Regulatory capital adjustments and
deductions.
(a) * * *
(8)(i) A Federal savings association
must deduct the aggregate amount of its
outstanding investments, (both equity
and debt) as well as retained earnings in
subsidiaries that are not includable
subsidiaries as defined in paragraph
(a)(8)(iv) of this section (including those
subsidiaries where the Federal savings
association has a minority ownership
interest) and may not consolidate the
assets and liabilities of the subsidiary
with those of the Federal savings
association. Any such deductions shall
be deducted from common equity tier 1
except as provided in paragraphs
(a)(8)(ii) and (iii) of this section.
(ii) If a Federal savings association has
any investments (both debt and equity)
in one or more subsidiaries engaged in
any activity that would not fall within
the scope of activities in which
includable subsidiaries as defined in
paragraph (a)(8)(iv) of this section may
engage, it must deduct such investments
from assets and, thus, common equity
tier 1 in accordance with paragraph
(a)(8)(i) of this section. The Federal
savings association must first deduct
from assets and, thus, common equity
tier 1 the amount by which any
investments in such subsidiary(ies)
exceed the amount of such investments
held by the Federal savings association
as of April 12, 1989. Next the Federal
savings association must deduct from
assets and, thus, common equity tier 1
the Federal savings association’s
investments in and extensions of credit
to the subsidiary on the date as of which
the savings association’s capital is being
determined.
(iii) If a Federal savings association
holds a subsidiary (either directly or
through a subsidiary) that is itself a
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domestic depository institution, the
OCC may, in its sole discretion upon
determining that the amount of
Common Equity Tier 1 that would be
required would be higher if the assets
and liabilities of such subsidiary were
consolidated with those of the parent
Federal savings association than the
amount that would be required if the
parent Federal savings association’s
investment were deducted pursuant to
paragraphs (a)(8)(i) and (ii) of this
section, consolidate the assets and
liabilities of that subsidiary with those
of the parent Federal savings association
in calculating the capital adequacy of
the parent Federal savings association,
regardless of whether the subsidiary
would otherwise be an includable
subsidiary as defined in paragraph
(a)(8)(iv) of this section.
(iv) For purposes of this section, the
term includable subsidiary means a
subsidiary of a Federal savings
association that is:
(A) Engaged solely in activities not
impermissible for a national bank;
(B) Engaged in activities not
permissible for a national bank, but only
if acting solely as agent for its customers
and such agency position is clearly
documented in the Federal savings
association’s files;
(C) Engaged solely in mortgagebanking activities;
(D)(1) Itself an insured depository
institution or a company the sole
investment of which is an insured
depository institution, and
(2) Was acquired by the parent
Federal savings association prior to May
1, 1989; or
(E) A subsidiary of any Federal
savings association existing as a Federal
savings association on August 9, 1989
that
(1) Was chartered prior to October 15,
1982, as a savings bank or a cooperative
bank under state law, or
(2) Acquired its principal assets from
an association that was chartered prior
to October 15, 1982, as a savings bank
or a cooperative bank under state law.
*
*
*
*
*
Subpart H—Establishment of Minimum
Capital Ratios for an Individual
National Bank or Individual Federal
Savings Association
11. Revise the heading of newly
redesignated subpart H as set forth
above.
§ 3.300
[Amended]
12. Amend § 3.300, as set forth at the
end of the common preamble, by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
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place the phrase ‘‘national bank or
Federal savings association’’; and
b. Removing ‘‘§ 3.6’’, wherever it
appears, and adding in its place the
phrase ‘‘subpart B of this part’’.
§ 3.301
[Amended]
13. Amend § 3.301, as set forth at the
end of the common preamble, by
removing the word ‘‘bank’’, wherever it
appears, and adding in its place the
phrase ‘‘national bank or Federal
savings association’’.
b. In the second sentence, by
removing the phrase ‘‘subpart E’’ and
adding in its place the phrase ‘‘subpart
J’’; and
c. In the third sentence by adding the
phrase ‘‘or Federal savings
association’s’’ after the word ‘‘bank’s’’,
and removing the phrase ‘‘§ 3.6(a) or
(b)’’ and adding in its place ‘‘subpart B
of this part’’.
§ 3.500
[Amended]
14. Amend § 3.302, as set forth at the
end of the common preamble, by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’; and
b. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’.
18. Amending § 3.500, as set forth at
the end of the common preamble, by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’;
b. Removing the word ‘‘Office’’,
wherever it appears, and adding in its
place the word ‘‘OCC’’; and
c. In the introductory text, removing
the phrase ‘‘subpart C’’ and adding in its
place the phrase ‘‘subpart H’’.
§ 3.303
§ 3.501
§ 3.302
[Amended]
[Amended]
[Amended]
15. Amend § 3.303, as set forth at the
end of the common preamble, by:
a. Removing from paragraph (a)’’§ 3.6’’
and adding in its place ‘‘subpart B of
this part’’;
b. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’;
c. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’;
d. Removing the word ‘‘Office’’,
wherever it appears, and adding in its
place the word ‘‘OCC’’;
e. Removing the word ‘‘Office’s’’,
wherever it appears, and adding in its
place the word ‘‘OCC’s’’; and
19. Amending, as set forth at the end
of the common preamble, § 3.501 by:
a. Removing the word ‘‘bank’’, and
adding in its place the phrase ‘‘national
bank or Federal savings association’’;
and
b. Removing the word ‘‘Office’’, and
adding in its place the word ‘‘OCC’’.
§ 3.304
21. Amending, as set forth at the end
of the common preamble, § 3.503 by:
a. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’; and
b. Removing the word ‘‘Office’’, and
adding in its place the word ‘‘OCC’’.
[Amended]
16. Amend § 3.304, as set forth at the
end of the common preamble, by:
a. Removing the word ‘‘bank’’ and
adding in its place the phrase ‘‘national
bank or Federal savings association’’;
and
b. Adding the phrase ‘‘for national
banks and 12 CFR 109.1 through 109.21
for Federal savings associations’’ after
‘‘19.21’’.
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§ 3.400
[Amended]
17. Section 3.400, as set forth at the
end of the common preamble, is
amended:
a. In the first sentence, by removing
the word ‘‘bank’’, wherever it appears,
and adding in its place the phrase
‘‘national bank or Federal savings
association’’, and removing the phrase
‘‘subpart C’’ and adding in its place the
phrase ‘‘subpart H’’; and
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§ 3.502
[Amended]
20. Amending, as set forth at the end
of the common preamble, § 3.502 by:
a. Removing the word ‘‘bank’’, and
adding in its place the phrase ‘‘national
bank or Federal savings association’’;
and
b. Removing the word ‘‘Office’’, and
adding in its place the word ‘‘OCC’’.
§ 3.503
§ 3.504
[Amended]
[Amended]
22a. Amend, as set forth at the end of
the common preamble, § 3.504 by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’;
b. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’; and
c. Removing the word ‘‘Office’’,
wherever it appears, and adding in its
place the word ‘‘OCC’’.
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§ 3.505
52869
[Amended]
22b. Amend § 3.505, as set forth at the
end of the common preamble, by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’;
b. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’; and
c. Removing the word ‘‘Office’’,
wherever it appears, and adding in its
place the word ‘‘OCC’’.
§ 3.506
[Amended]
22c. Amend, as set forth at the end of
the common preamble, § 3.506 by:
a. Removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank or
Federal savings association’’;
b. Removing the word ‘‘bank’s’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’s or
Federal savings association’s’’; and
c. Removing the word ‘‘Office’’,
wherever it appears, and adding in its
place the word ‘‘OCC’’.
§ 3.600
[Amended]
23. Amend newly redesignated
§ 3.600:
a. In paragraphs (a) through (d), by
removing the phrase ‘‘national banking
associations’’, wherever it appears, and
adding in its place the phrase ‘‘national
banks’’;
b. By removing the word ‘‘bank’’,
wherever it appears, and adding in its
place the phrase ‘‘national bank’’;
c. In paragraph (a), by removing the
word ‘‘bank’s’’ and adding in its place
the phrase ‘‘national bank’s’’, and
removing ‘‘§ 3.2’’ and adding in its place
the phrase ‘‘subparts A–J of this part’’;
and
d. In paragraph (e)(7), by removing the
word ‘‘bank-owned’’ and adding in its
place the word ‘‘national bank-owned’’.
PART 5—RULES, POLICIES, AND
PROCEDURES FOR CORPORATE
ACTIVITIES
24. The authority citation for part 5
continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 215a–
2, 215a–3, 481, and section 5136A of the
Revised Statutes (12 U.S.C. 24a).
20. Section 5.39 is amended by
revising paragraph (h)(1) and
republishing paragraph (h)(2) for reader
reference to read as follows:
§ 5.39
Financial subsidiaries.
*
*
*
*
*
(h) * * *
(1) For purposes of determining
regulatory capital the national bank may
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not consolidate the assets and liabilities
of a financial subsidiary with those of
the bank and must deduct the aggregate
amount of its outstanding equity
investment, including retained earnings,
in its financial subsidiaries from
regulatory capital as provided by
§ 3.22(a)(7);
(2) Any published financial statement
of the national bank shall, in addition to
providing information prepared in
accordance with generally accepted
accounting principles, separately
present financial information for the
bank in the manner provided in
paragraph (h)(1) of this section;
*
*
*
*
*
21. Part 6 is revised to read as follows:
PART 6—PROMPT CORRECTIVE
ACTION
Subpart A—Capital Categories
Sec.
6.1 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
6.2 Definitions.
6.3 Notice of capital category.
6.4 Capital measures and capital category
definition.
6.5 Capital restoration plan
6.6 Mandatory and discretionary
supervisory actions.
Subpart B—Directives To Take Prompt
Corrective Action
6.20 Scope.
6.21 Notice of intent to issue a directive.
6.22 Response to notice.
6.23 Decision and issuance of a prompt
corrective action directive.
6.24 Request for modification or rescission
of directive.
6.25 Enforcement of directive.
Authority: 12 U.S.C. 93a, 1831o,
5412(b)(2)(B).
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§ 6.1 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
(a) Authority. This part is issued by
the Office of the Comptroller of the
Currency (OCC) pursuant to section 38
(section 38) of the Federal Deposit
Insurance Act (FDI Act) as added by
section 131 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (Pub. L. 102–242, 105 Stat. 2236
(1991)) (12 U.S.C. 1831o).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for insured
national banks and insured Federal
savings associations, the capital
measures and capital levels, and for
insured federal branches, comparable
asset-based measures and levels, that are
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used for determining the supervisory
actions authorized under section 38 of
the FDI Act. This part 6 also establishes
procedures for submission and review
of capital restoration plans and for
issuance and review of directives and
orders pursuant to section 38.
(c) Scope. This subpart implements
the provisions of section 38 of the FDI
Act as they apply to insured national
banks, insured federal branches, and
insured Federal savings associations.
Certain of these provisions also apply to
officers, directors and employees of
these insured institutions. Other
provisions apply to any company that
controls an insured national bank,
insured Federal branch or insured
Federal savings association and to the
affiliates of an insured national bank,
insured Federal branch, or insured
Federal savings association.
(d) Other supervisory authority.
Neither section 38 nor this part in any
way limits the authority of the OCC
under any other provision of law to take
supervisory actions to address unsafe or
unsound practices, deficient capital
levels, violations of law, unsafe or
unsound conditions, or other practices.
Action under section 38 of the FDI Act
and this part may be taken
independently of, in conjunction with,
or in addition to any other enforcement
action available to the OCC, including
issuance of cease and desist orders,
capital directives, approval or denial of
applications or notices, assessment of
civil money penalties, or any other
actions authorized by law.
(e) Disclosure of capital categories.
The assignment of an insured national
bank, insured federal branch, or insured
Federal savings association under this
subpart within a particular capital
category is for purposes of
implementing and applying the
provisions of section 38. Unless
permitted by the OCC or otherwise
required by law, no national bank or
Federal savings association may state in
any advertisement or promotional
material its capital category under this
subpart or that the OCC or any other
federal banking agency has assigned the
national bank or Federal savings
association to a particular capital
category.
§ 6.2
Definitions.
For purposes of section 38 and this
part, the definitions in part 3 of this
chapter shall apply. In addition, except
as modified in this section or unless the
context otherwise requires, the terms
used in this subpart have the same
meanings as set forth in section 38 and
section 3 of the FDI Act.
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Advanced approaches national bank
or advanced approaches Federal
savings association means a national
bank or Federal savings association that
is subject to subpart E of part 3 of this
chapter.
Common equity Tier 1 capital means
common equity Tier 1 capital, as
defined in accordance with the OCC’s
definition in § 3.2 of this chapter.
Common equity tier 1 risk-based
capital ratio means the ratio of common
equity tier 1 capital to total riskweighted assets, as calculated in
accordance with subpart B of part 3, as
applicable.
Control. (1) Control has the same
meaning assigned to it in section 2 of
the Bank Holding Company Act (12
U.S.C. 1841), and the term controlled
shall be construed consistently with the
term control.
(2) Exclusion for fiduciary ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect thereto.
(3) Exclusion for debts previously
contracted. No insured depository
institution or company controls another
insured depository institution or
company by virtue of its ownership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, until two years after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate federal banking agency for
up to three one-year periods.
Controlling person means any person
having control of an insured depository
institution and any company controlled
by that person.
Federal savings association means an
insured Federal savings association or
an insured Federal savings bank
chartered under section 5 of the Home
Owners’ Loan Act of 1933.
Leverage ratio means the ratio of Tier
1 capital to average total consolidated
assets, as calculated in accordance with
subpart B of part 3.
Management fee means any payment
of money or provision of any other thing
of value to a company or individual for
the provision of management services or
advice to the national bank or Federal
savings association or related overhead
expenses, including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
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individual’s capacity as an officer or
employee of the national bank or
Federal savings association.
National bank means all insured
national banks and all insured federal
branches, except where otherwise
provided in this subpart.
Supplementary leverage ratio means
the ratio of Tier 1 capital to total
leverage exposure, as calculated in
accordance with subpart B of part 3.
Tangible equity means the amount of
Tier 1 capital, as calculated in
accordance with subpart B of part 3,
plus the amount of outstanding
perpetual preferred stock (including
related surplus) not included in Tier 1
capital.
Tier 1 capital means the amount of
Tier 1 capital as defined in subpart B of
this chapter.
Tier 1 risk-based capital ratio means
the ratio of Tier 1 capital to risk
weighted assets, as calculated in
accordance with subpart B of part 3.
Total assets means quarterly average
total assets as reported in a national
bank’s or Federal savings association’s
Consolidated Reports of Condition and
Income (Call Report), minus any
deduction of assets as provided in the
definition of tangible equity. The OCC
reserves the right to require a national
bank or Federal savings association to
compute and maintain its capital ratios
on the basis of actual, rather than
average, total assets when computing
tangible equity.
Total leverage exposure means the
total leverage exposure, as calculated in
accordance with subpart B of part 3.
Total risk-based capital ratio means
the ratio of total capital to total riskweighted assets, as calculated in
accordance with subpart B of part 3.
Total risk-weighted assets means
standardized total risk-weighted assets,
and for an advanced approaches bank or
advanced approaches Federal savings
association also includes advanced
approaches total risk-weighted assets, as
defined in subpart B of part 3.
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§ 6.3
Notice of capital category.
(a) Effective date of determination of
capital category. A national bank or
Federal savings association shall be
deemed to be within a given capital
category for purposes of section 38 of
the FDI Act and this part as of the date
the national bank or Federal savings
association is notified of, or is deemed
to have notice of, its capital category
pursuant to paragraph (b) of this section.
(b) Notice of capital category. A
national bank or Federal savings
association shall be deemed to have
been notified of its capital levels and its
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capital category as of the most recent
date:
(1) A Consolidated Report of
Condition and Income (Call Report) is
required to be filed with the OCC;
(2) A final report of examination is
delivered to the national bank or
Federal savings association; or
(3) Written notice is provided by the
OCC to the national bank or Federal
savings association of its capital
category for purposes of section 38 of
the FDI Act and this part or that the
national bank’s or Federal savings
association’s capital category has
changed as provided in paragraph (c) of
this section or § 6.1 of this subpart and
subpart M of part 19 of this chapter with
respect to national banks and § 165.8
with respect to Federal savings
associations.
(c) Adjustments to reported capital
levels and capital category. (1) Notice of
adjustment by national bank or Federal
savings association. A national bank or
Federal savings association shall
provide the OCC with written notice
that an adjustment to the national
bank’s or Federal savings association’s
capital category may have occurred no
later than 15 calendar days following
the date that any material event has
occurred that would cause the national
bank or Federal savings association to
be placed in a lower capital category
from the category assigned to the
national bank or Federal savings
association for purposes of section 38
and this part on the basis of the national
bank’s or Federal savings association’s
most recent Call Report or report of
examination.
(2) Determination to change capital
category. After receiving notice
pursuant to paragraph (c)(1) of this
section, the OCC shall determine
whether to change the capital category
of the national bank or Federal savings
association and shall notify the national
bank or Federal savings association of
the OCC’s determination.
§ 6.4 Capital measures and capital
category definition.
(a) Capital measures. (1) Capital
measures applicable before January 1,
2015. On or before December 31, 2014,
for purposes of section 38 and this part,
the relevant capital measures for all
national banks and Federal savings
associations are:
(i) Total Risk-Based Capital Measure:
the total risk-based capital ratio;
(ii) Tier 1 Risk-Based Capital Measure:
the tier 1 risk-based capital ratio; and
(iii) Leverage Measure: the leverage
ratio.
(2) Capital measures applicable on
and after January 1, 2015. On January 1,
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2015 and thereafter, for purposes of
section 38 and this part, the relevant
capital measures are:
(i) Total Risk-Based Capital Measure:
the total risk-based capital ratio;
(ii) Tier 1 Risk-Based Capital Measure:
the tier 1 risk-based capital ratio;
(iii) Common Equity Tier 1 Capital
Measure: the common equity tier 1 riskbased capital ratio; and
(iv) The Leverage Measure: (A) the
leverage ratio, and (B) with respect to an
advanced approaches national bank or
advanced approaches Federal savings
association, on January 1, 2018, and
thereafter, the supplementary leverage
ratio.
(b) Capital categories applicable
before January 1, 2015. On or before
December 31, 2014, for purposes of the
provisions of section 38 and this part, a
national bank or Federal savings
association shall be deemed to be:
(1) ‘‘Well capitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of 10.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
the bank or Federal savings association
has a tier 1 risk-based capital ratio of 6.0
percent or greater;
(iii) Leverage Measure: the national
bank or Federal savings association has
a leverage ratio of 5.0 percent or greater;
and
(iv) The national bank or Federal
savings association is not subject to any
written agreement, order or capital
directive, or prompt corrective action
directive issued by the OCC pursuant to
section 8 of the FDI Act, the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), the Home
Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the
FDI Act, or any regulation thereunder,
to meet and maintain a specific capital
level for any capital measure.
(2) ‘‘Adequately capitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of 8.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of 4.0 percent or greater;
(iii) Leverage Measure:
(A) The national bank or Federal
savings association has a leverage ratio
of 4.0 percent or greater; or
(B) The national bank or Federal
savings association has a leverage ratio
of 3.0 percent or greater if the national
bank or Federal savings association is
rated composite 1 under the CAMELS
rating system in the most recent
examination of the national bank and or
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Federal savings association is not
experiencing or anticipating any
significant growth; and
(iv) Does not meet the definition of a
‘‘well capitalized’’ national bank or
Federal savings association.
(3) ‘‘Undercapitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of less than 8.0 percent; or
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of less than 4.0 percent; or
(iii) Leverage Measure:
(A) Except as provided in paragraph
(b)(2)(iii)(B) of this section, the national
bank or Federal savings association has
a leverage ratio of less than 4.0 percent;
or
(iv) The national bank or Federal
savings association has a leverage ratio
of less than 3.0 percent, if the national
bank or Federal savings association is
rated composite 1 under the CAMELS
rating system in the most recent
examination of the national bank or
Federal savings association and is not
experiencing or anticipating significant
growth.
(4) ‘‘Significantly undercapitalized’’
if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of less than 6.0 percent; or
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of less than 3.0 percent; or
(iii) Leverage Measure: the national
bank or Federal savings association has
a leverage ratio of less than 3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
national bank or Federal savings
association has a ratio of tangible equity
to total assets that is equal to or less
than 2.0 percent.
(c) Capital categories applicable on
and after January 1, 2015. On January 1,
2015, and thereafter, for purposes of the
provisions of section 38 and this part, a
national bank or Federal savings
association shall be deemed to be:
(1) ‘‘Well capitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of 10.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of 8.0 percent or greater;
(iii) Common Equity Tier 1 Capital
Measure: the national bank or Federal
savings association has a common
equity tier 1 risk-based capital ratio of
6.5 percent or greater;
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(iv) Leverage Measure: the national
bank or Federal savings association has
a leverage ratio of 5.0 or greater; and
(iv) The national bank or Federal
savings association is not subject to any
written agreement, order or capital
directive, or prompt corrective action
directive issued by the OCC pursuant to
section 8 of the FDI Act, the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), the Home
Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the
FDI Act, or any regulation thereunder,
to meet and maintain a specific capital
level for any capital measure.
(2) ‘‘Adequately capitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of 8.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of 6.0 percent or greater;
(iii) Common Equity Tier 1 Capital
Measure: the national bank or Federal
savings association has a common
equity tier 1 risk-based capital ratio of
4.5 percent or greater;
(iv) Leverage Measure:
(A) The national bank or Federal
savings association has a leverage ratio
of 4.0 percent or greater; and
(B) With respect to an advanced
approaches national bank or advanced
approaches Federal savings association,
on January 1, 2018 and thereafter, the
national bank or Federal savings
association has a supplementary
leverage ratio of 3.0 percent or greater;
and
(v) The national bank or Federal
savings association does not meet the
definition of a ‘‘well capitalized’’
national bank or Federal savings
association.
(3) ‘‘Undercapitalized’’ if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of less than 8.0 percent;
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of less than 6.0 percent;
(iii) Common Equity Tier 1 Capital
Measure: the national bank or Federal
savings association has a common
equity tier 1 risk-based capital ratio of
less than 4.5 percent; or
(iv) Leverage Measure: (A) The
national bank or Federal savings
association has a leverage ratio of less
than 4.0 percent; or
(B) With respect to an advanced
approaches national bank or advanced
approaches Federal savings association,
on January 1, 2018, and thereafter, the
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national bank or Federal savings
association has a supplementary
leverage ratio of less than 3.0 percent.
(4) ‘‘Significantly undercapitalized’’
if:
(i) Total Risk-Based Capital Measure:
the national bank or Federal savings
association has a total risk-based capital
ratio of less than 6.0 percent;
(ii) Tier 1 Risk-Based Capital Measure:
the national bank or Federal savings
association has a tier 1 risk-based
capital ratio of less than 4.0 percent;
(iii) Common Equity Tier 1 Capital
Measure: the national bank or Federal
savings association has a common
equity tier 1 risk-based capital ratio of
less than 3.0 percent; or
(iv) Leverage Measure: the national
bank or Federal savings association has
a leverage ratio of less than 3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
national bank or Federal savings
association has a ratio of tangible equity
to total assets that is equal to or less
than 2.0 percent.
(d) Capital categories for insured
federal branches. For purposes of the
provisions of section 38 of the FDI Act
and this part, an insured federal branch
shall be deemed to be:
(1) Well capitalized if the insured
federal branch:
(i) Maintains the pledge of assets
required under 12 CFR 347.209; and
(ii) Maintains the eligible assets
prescribed under 12 CFR 347.210 at 108
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities;
and
(iii) Has not received written
notification from:
(A) The OCC to increase its capital
equivalency deposit pursuant to § 28.15
of this chapter, or to comply with asset
maintenance requirements pursuant to
§ 28.20 of this chapter; or
(B) The FDIC to pledge additional
assets pursuant to 12 CFR 346.209 or to
maintain a higher ratio of eligible assets
pursuant to 12 CFR 346.210.
(2) Adequately capitalized if the
insured federal branch:
(i) Maintains the pledge of assets
prescribed under 12 CFR 346.209; and
(ii) Maintains the eligible assets
prescribed under 12 CFR 346.210 at 106
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities;
and
(iii) Does not meet the definition of a
well capitalized insured federal branch.
(3) Undercapitalized if the insured
federal branch:
(i) Fails to maintain the pledge of
assets required under 12 CFR 346.209;
or
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(ii) Fails to maintain the eligible
assets prescribed under 12 CFR 346.210
at 106 percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities.
(4) Significantly undercapitalized if it
fails to maintain the eligible assets
prescribed under 12 CFR 346.210 at 104
percent or more of the preceding
quarter’s average book value of the
insured federal branch’s third-party
liabilities.
(5) Critically undercapitalized if it
fails to maintain the eligible assets
prescribed under 12 CFR 346.210 at 102
percent or more of the preceding
quarter’s average book value of the
insured federal branch’s third-party
liabilities.
(e) Reclassification based on
supervisory criteria other than capital.
The OCC may reclassify a well
capitalized national bank or Federal
savings association as adequately
capitalized and may require an
adequately capitalized or an
undercapitalized national bank or
Federal savings association to comply
with certain mandatory or discretionary
supervisory actions as if the national
bank or Federal savings association
were in the next lower capital category
(except that the OCC may not reclassify
a significantly undercapitalized national
bank or Federal savings association as
critically undercapitalized) (each of
these actions are hereinafter referred to
generally as reclassifications) in the
following circumstances:
(1) Unsafe or unsound condition. The
OCC has determined, after notice and
opportunity for hearing pursuant to
subpart M of part 19 of this chapter with
respect to national banks and § 165.8
with respect to Federal savings
associations, that the national bank or
Federal savings association is in unsafe
or unsound condition; or
(2) Unsafe or unsound practice. The
OCC has determined, after notice and
opportunity for hearing pursuant to
subpart M of part 19 of this chapter with
respect to national banks and § 165.8
with respect to Federal savings
associations, that in the most recent
examination of the national bank or
Federal savings association, the national
bank or Federal savings association
received, and has not corrected a lessthan-satisfactory rating for any of the
categories of asset quality, management,
earnings, or liquidity.
§ 6.5
Capital restoration plan.
(a) Schedule for filing plan. (1) In
general. A national bank or Federal
savings association shall file a written
capital restoration plan with the OCC
within 45 days of the date that the
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national bank or Federal savings
association receives notice or is deemed
to have notice that the national bank or
Federal savings association is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, unless the OCC
notifies the national bank or Federal
savings association in writing that the
plan is to be filed within a different
period. An adequately capitalized
national bank or Federal savings
association that has been required
pursuant to § 6.4 and subpart M of part
19 of this chapter with respect to
national banks and § 165.8 with respect
to Federal savings associations to
comply with supervisory actions as if
the national bank or Federal savings
association were undercapitalized is not
required to submit a capital restoration
plan solely by virtue of the
reclassification.
(2) Additional capital restoration
plans. Notwithstanding paragraph (a)(1)
of this section, a national bank or
Federal savings association that has
already submitted and is operating
under a capital restoration plan
approved under section 38 and this
subpart is not required to submit an
additional capital restoration plan based
on a revised calculation of its capital
measures or a reclassification of the
institution under § 6.4 and subpart M of
part 19 of this chapter with respect to
national banks and §§ 6.4 and 165.8
with respect to Federal savings
associations unless the OCC notifies the
national bank or Federal savings
association that it must submit a new or
revised capital plan. A national bank or
Federal savings association that is
notified that it must submit a new or
revised capital restoration plan shall file
the plan in writing with the OCC within
45 days of receiving such notice, unless
the OCC notifies the national bank or
Federal savings association in writing
that the plan must be filed within a
different period.
(b) Contents of plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the Call Report, unless the
OCC instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI Act. A
national bank or Federal savings
association that is required to submit a
capital restoration plan as the result of
a reclassification of the national bank or
Federal savings association, pursuant to
§ 6.4 for both national banks and
Federal savings associations and subpart
M of part 19 of this chapter with respect
to national banks and § 165.8 with
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respect to Federal savings associations,
shall include a description of the steps
the national bank or Federal savings
association will take to correct the
unsafe or unsound condition or
practice. No plan shall be accepted
unless it includes any performance
guarantee described in section
38(e)(2)(C) of that Act by each company
that controls the national bank or
Federal savings association.
(c) Review of capital restoration plans.
Within 60 days after receiving a capital
restoration plan under this subpart, the
OCC shall provide written notice to the
national bank or Federal savings
association of whether the plan has been
approved. The OCC may extend the
time within which notice regarding
approval of a plan shall be provided.
(d) Disapproval of capital restoration
plan. If a capital restoration plan is not
approved by the OCC, the national bank
or Federal savings association shall
submit a revised capital restoration plan
within the time specified by the OCC.
Upon receiving notice that its capital
restoration plan has not been approved,
any undercapitalized national bank or
Federal savings association (as defined
in § 6.4) shall be subject to all of the
provisions of section 38 and this part
applicable to significantly
undercapitalized institutions. These
provisions shall be applicable until such
time as a new or revised capital
restoration plan submitted by the
national bank or Federal savings
association has been approved by the
OCC.
(e) Failure to submit a capital
restoration plan. A national bank or
Federal savings association that is
undercapitalized (as defined in § 6.4)
and that fails to submit a written capital
restoration plan within the period
provided in this section shall, upon the
expiration of that period, be subject to
all of the provisions of section 38 and
this part applicable to significantly
undercapitalized national banks or
Federal savings associations.
(f) Failure to implement a capital
restoration plan. Any undercapitalized
national bank or Federal savings
association that fails, in any material
respect, to implement a capital
restoration plan shall be subject to all of
the provisions of section 38 and this
part applicable to significantly
undercapitalized national banks or
Federal savings associations.
(g) Amendment of capital restoration
plan. A national bank or Federal savings
association that has submitted an
approved capital restoration plan may,
after prior written notice to and
approval by the OCC, amend the plan to
reflect a change in circumstance. Until
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such time as a proposed amendment has
been approved, the national bank or
Federal savings association shall
implement the capital restoration plan
as approved prior to the proposed
amendment.
(h) Notice to FDIC. Within 45 days of
the effective date of OCC approval of a
capital restoration plan, or any
amendment to a capital restoration plan,
the OCC shall provide a copy of the plan
or amendment to the Federal Deposit
Insurance Corporation.
(i) Performance guarantee by
companies that control a bank or
Federal savings association. (1)
Limitation on liability.(i) Amount
limitation. The aggregate liability under
the guarantee provided under section 38
and this subpart for all companies that
control a specific national bank or
Federal savings association that is
required to submit a capital restoration
plan under this subpart shall be limited
to the lesser of:
(A) An amount equal to 5.0 percent of
the national bank’s or Federal savings
association’s total assets at the time the
national bank or Federal savings
association was notified or deemed to
have notice that the national bank or
Federal savings association was
undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
national bank or Federal savings
association to the levels required for the
national bank or Federal savings
association to be classified as
adequately capitalized, as those capital
measures and levels are defined at the
time that the national bank or Federal
savings association initially fails to
comply with a capital restoration plan
under this subpart.
(ii) Limit on duration. The guarantee
and limit of liability under section 38
and this subpart shall expire after the
OCC notifies the national bank or
Federal savings association that it has
remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same national bank or
Federal savings association after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given national
bank or Federal savings association
shall be jointly and severally liable for
the guarantee for such national bank or
Federal savings association as required
under section 38 and this subpart, and
the OCC may require payment of the full
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amount of that guarantee from any or all
of the companies issuing the guarantee.
(2) Failure to provide guarantee. In
the event that a national bank or Federal
savings association that is controlled by
any company submits a capital
restoration plan that does not contain
the guarantee required under section
38(e)(2) of the FDI Act, the national
bank or Federal savings association
shall, upon submission of the plan, be
subject to the provisions of section 38
and this part that are applicable to
national banks or Federal savings
associations that have not submitted an
acceptable capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
national bank or Federal savings
association to perform fully its
guarantee of any capital plan shall
constitute a material failure to
implement the plan for purposes of
section 38(f) of the FDI Act. Upon such
failure, the national bank or Federal
savings association shall be subject to
the provisions of section 38 and this
part that are applicable to national
banks or Federal savings associations
that have failed in a material respect to
implement a capital restoration plan.
(j) Enforcement of capital restoration
plan. The failure of a national bank or
Federal savings association to
implement, in any material respect, a
capital restoration plan required under
section 38 and this section shall subject
the national bank or Federal savings
association to the assessment of civil
money penalties pursuant to section
8(i)(2)(A) of the FDI Act.
§ 6.6 Mandatory and discretionary
supervisory actions.
(a) Mandatory supervisory actions. (1)
Provisions applicable to all national
banks and Federal savings associations.
All national banks and Federal savings
associations are subject to the
restrictions contained in section 38(d) of
the FDI Act on payment of capital
distributions and management fees.
(2) Provisions applicable to
undercapitalized, significantly
undercapitalized, and critically
undercapitalized national banks or
Federal savings associations.
Immediately upon receiving notice or
being deemed to have notice, as
provided in § 6.3, that the national bank
or Federal savings association is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, the national bank or
Federal savings association shall
become subject to the provisions of
section 38 of the FDI Act—
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(i) Restricting payment of capital
distributions and management fees
(section 38(d));
(ii) Requiring that the OCC monitor
the condition of the national bank or
Federal savings association (section
38(e)(1));
(iii) Requiring submission of a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2));
(iv) Restricting the growth of the
national bank’s or Federal savings
association’s assets (section 38(e)(3));
and
(v) Requiring prior approval of certain
expansion proposals (section 38(e)(4)).
(3) Additional provisions applicable
to significantly undercapitalized, and
critically undercapitalized national
banks or Federal savings associations.
In addition to the provisions of section
38 of the FDI Act described in paragraph
(a)(2) of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in this subpart,
that the national bank or Federal savings
association is significantly
undercapitalized, or critically
undercapitalized or that the national
bank or Federal savings association is
subject to the provisions applicable to
institutions that are significantly
undercapitalized because it has failed to
submit or implement, in any material
respect, an acceptable capital restoration
plan, the national bank or Federal
savings association shall become subject
to the provisions of section 38 of the FDI
Act that restrict compensation paid to
senior executive officers of the
institution (section 38(f)(4)).
(4) Additional provisions applicable
to critically undercapitalized national
banks or Federal savings associations.
In addition to the provisions of section
38 of the FDI Act described in
paragraphs (a)(2) and (3) of this section,
immediately upon receiving notice or
being deemed to have notice, as
provided in § 6.3, that the national bank
or Federal savings association is
critically undercapitalized, the national
bank or Federal savings association
shall become subject to the provisions of
section 38 of the FDI Act—
(i) Restricting the activities of the
national bank or Federal savings
association (section 38 (h)(1)); and
(ii) Restricting payments on
subordinated debt of the national bank
or Federal savings association (section
38 (h)(2)).
(b) Discretionary supervisory actions.
In taking any action under section 38
that is within the OCC’s discretion to
take in connection with a national bank
or Federal savings association that is
deemed to be undercapitalized,
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significantly undercapitalized, or
critically undercapitalized, or has been
reclassified as undercapitalized or
significantly undercapitalized; an officer
or director of such national bank or
Federal savings association; or a
company that controls such national
bank or Federal savings association, the
OCC shall follow the procedures for
issuing directives under subpart B of
this part for both national banks and
Federal savings associations and subpart
N of part 19 of this chapter with respect
to national banks and subpart B and 12
CFR 165.9 with respect to Federal
savings associations, unless otherwise
provided in section 38 of the FDI Act or
this part.
Subpart B—Directives to Take Prompt
Corrective Action
§ 6.20
Scope.
The rules and procedures set forth in
this subpart apply to insured national
banks, insured federal branches, Federal
savings associations, and senior
executive officers and directors of
national banks and Federal savings
associations that are subject to the
provisions of section 38 of the Federal
Deposit Insurance Act (section 38) and
subpart A of this part.
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§ 6.21
Notice of intent to issue a directive.
(a) Notice of intent to issue a directive.
(1) In general. The OCC shall provide an
undercapitalized, significantly
undercapitalized, or critically
undercapitalized national bank or
Federal savings association prior written
notice of the OCC’s intention to issue a
directive requiring such national bank,
Federal savings association, or company
to take actions or to follow proscriptions
described in section 38 that are within
the OCC’s discretion to require or
impose under section 38 of the FDI Act,
including section 38(e)(5), (f)(2), (f)(3),
or (f)(5). The national bank or Federal
savings association shall have such time
to respond to a proposed directive as
provided under § 6.22.
(2) Immediate issuance of final
directive. If the OCC finds it necessary
in order to carry out the purposes of
section 38 of the FDI Act, the OCC may,
without providing the notice prescribed
in paragraph (a)(1) of this section, issue
a directive requiring a national bank or
Federal savings association immediately
to take actions or to follow proscriptions
described in section 38 that are within
the OCC’s discretion to require or
impose under section 38 of the FDI Act,
including section 38(e)(5), (f)(2), (f)(3),
or (f)(5). A national bank or Federal
savings association that is subject to
such an immediately effective directive
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52875
may submit a written appeal of the
directive to the OCC. Such an appeal
must be received by the OCC within 14
calendar days of the issuance of the
directive, unless the OCC permits a
longer period. The OCC shall consider
any such appeal, if filed in a timely
matter, within 60 days of receiving the
appeal. During such period of review,
the directive shall remain in effect
unless the OCC, in its sole discretion,
stays the effectiveness of the directive.
(b) Contents of notice. A notice of
intention to issue a directive shall
include:
(1) A statement of the national bank’s
or Federal savings association’s capital
measures and capital levels;
(2) A description of the restrictions,
prohibitions or affirmative actions that
the OCC proposes to impose or require;
(3) The proposed date when such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the national
bank or Federal savings association
subject to the directive may file with the
OCC a written response to the notice.
§ 6.23 Decision and issuance of a prompt
corrective action directive.
§ 6.22
(a) Judicial remedies. Whenever a
national bank or Federal savings
association fails to comply with a
directive issued under section 38, the
OCC may seek enforcement of the
directive in the appropriate United
States district court pursuant to section
8(i)(1) of the FDI Act.
(b) Administrative remedies. Pursuant
to section 8(i)(2)(A) of the FDI Act, the
OCC may assess a civil money penalty
against any national bank or Federal
savings association that violates or
otherwise fails to comply with any final
directive issued under section 38 and
against any institution-affiliated party
who participates in such violation or
noncompliance.
(c) Other enforcement action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the OCC may seek enforcement of the
provisions of section 38 or this part
through any other judicial or
administrative proceeding authorized by
law.
Response to notice.
(a) Time for response. A national bank
or Federal savings association may file
a written response to a notice of intent
to issue a directive within the time
period set by the OCC. The date shall be
at least 14 calendar days from the date
of the notice unless the OCC determines
that a shorter period is appropriate in
light of the financial condition of the
national bank or Federal savings
association or other relevant
circumstances.
(b) Content of response. The response
should include:
(1) An explanation why the action
proposed by the OCC is not an
appropriate exercise of discretion under
section 38;
(2) Any recommended modification of
the proposed directive; and
(3) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the national
bank or Federal savings association
regarding the proposed directive.
(c) Failure to file response. Failure by
a national bank or Federal savings
association to file with the OCC, within
the specified time period, a written
response to a proposed directive shall
constitute a waiver of the opportunity to
respond and shall constitute consent to
the issuance of the directive.
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(a) OCC consideration of response.
After considering the response, the OCC
may:
(1) Issue the directive as proposed or
in modified form;
(2) Determine not to issue the
directive and so notify the national bank
or Federal savings association; or
(3) Seek additional information or
clarification of the response from the
national bank or Federal savings
association, or any other relevant
source.
(b) [Reserved]
§ 6.24 Request for modification or
rescission of directive.
Any national bank or Federal savings
association that is subject to a directive
under this subpart may, upon a change
in circumstances, request in writing that
the OCC reconsider the terms of the
directive, and may propose that the
directive be rescinded or modified.
Unless otherwise ordered by the OCC,
the directive shall continue in place
while such request is pending before the
OCC.
§ 6.25
Enforcement of directive.
PART 165—PROMPT CORRECTIVE
ACTION
22. The authority citation for part 165
continues to read as follows:
Authority: 12 U.S.C. 1831o, 5412(b)(2)(B).
§ 165.1—165.7, 165.10
[Removed]
23. Sections 165.1—165.7 and 165.10
are removed.
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[Amended]
24. Section 165.8 is amended in
paragraphs (a)(1)(i)(A) introductory text
and (a)(1)(ii) by removing the phrases
‘‘§ 165.4(c) of this part’’ and
‘‘§ 165.4(c)(1)’’ respectively, and adding
in their place the phrase ‘‘12 CFR
6.4(d)’’.
PART 167—[REMOVED]
25. Under the authority of 12 U.S.C.
93a and 5412(b)(2)(B), part 167 is
removed.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
common preamble, parts 208 and 225 of
chapter II of title 12 of the Code of
Federal Regulations are proposed to be
amended as follows:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
26. The authority citation for part 208
is revised to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a,
248(a), 248(c), 321–338a, 371d, 461, 481–486,
601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p–1,
1831r–1, 1831w, 1831x, 1835a, 1882, 2901–
2907, 3105, 3310, 3331–3351, 3905–3909,
and 5371; 15 U.S.C. 78b, 78I(b), 78l(i), 780–
4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w,
6801, and 6805; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106 and 4128.
Subpart A—General Membership and
Branching Requirements
27. In § 208.2, revise paragraph (d) to
read as follows:
§ 208.2
Definitions.
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*
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(d) Capital stock and surplus means,
unless otherwise provided in this part,
or by statute, tier 1 and tier 2 capital
included in a member bank’s risk-based
capital (as defined in § 217.2 of
Regulation Q) and the balance of a
member bank’s allowance for loan and
lease losses not included in its tier 2
capital for calculation of risk-based
capital, based on the bank’s most recent
Report of Condition and Income filed
under 12 U.S.C. 324.
*
*
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28. Revise § 208.4 to read as follows:
§ 208.4
Capital adequacy.
(a) Adequacy. A member bank’s
capital, calculated in accordance with
Part 217, shall be at all times adequate
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in relation to the character and
condition liabilities and other corporate
responsibilities. If at any time, in light
of all the circumstances, the bank’s
capital appears inadequate in relation to
its assets, liabilities, and
responsibilities, the bank shall increase
the amount of its capital, within such
period as the Board deems reasonable,
to an amount which, in the judgment of
the Board, shall be adequate.
(b) Standards for evaluating capital
adequacy. Standards and measures, by
which the Board evaluates the capital
adequacy of member banks for riskbased capital purposes and for leverage
measurement purposes, are located in
part 217.
Subpart B—Investments and Loans
29. In § 208.23, revise paragraph (c) to
read as follows:
§ 208.23 Agricultural loan loss
amortization.
*
*
*
*
*
(c) Accounting for amortization. Any
bank that is permitted to amortize losses
in accordance with paragraph (b) of this
section may restate its capital and other
relevant accounts and account for future
authorized deferrals and authorization
in accordance with the instructions to
the FFIEC Consolidated Reports of
Condition and Income. Any resulting
increase in the capital account shall be
included in capital pursuant to part 217.
*
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*
Subpart D—Prompt Corrective Action
30. The authority citation for subpart
D continues to read as follows:
Authority: Subpart D of Regulation H (12
CFR part 208, Subpart D) is issued by the
Board of Governors of the Federal Reserve
System (Board) under section 38 (section 38)
of the FDI Act as added by section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (Pub. L. 102–242,
105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
31. Revise § 208.41 to read as follows:
§ 208.41 Definitions for purposes of this
subpart.
For purposes of this subpart, except as
modified in this section or unless the
context otherwise requires, the terms
used have the same meanings as set
forth in section 38 and section 3 of the
FDI Act.
(a) Advanced approaches bank means
a bank that is described in
§ 217.100(b)(1) of Regulation Q (12 CFR
217.100(b)(1)).
(b) Bank means an insured depository
institution as defined in section 3 of the
FDI Act (12 U.S.C. 1813).
(c) Common equity tier 1 capital
means the amount of capital as defined
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in § 217.2 of Regulation Q (12 CFR
217.2).
(d) Common equity tier 1 risk-based
capital ratio means the ratio of common
equity tier 1 capital to total riskweighted assets, as calculated in
accordance with § 217.10(b)(1) or
§ 217.10(c)(1) of Regulation Q (12 CFR
217.10(b)(1), 12 CFR 217.10(c)(1)), as
applicable.
(e) Control—(1) Control has the same
meaning assigned to it in section 2 of
the Bank Holding Company Act (12
U.S.C. 1841), and the term controlled
shall be construed consistently with the
term control.
(2) Exclusion for fiduciary ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect to the shares.
(3) Exclusion for debts previously
contracted. No insured depository
institution or company controls another
insured depository institution or
company by virtue of its ownership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, until two years after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate Federal banking agency for
up to three one-year periods.
(f) Controlling person means any
person having control of an insured
depository institution and any company
controlled by that person.
(g) Leverage ratio means the ratio of
tier 1 capital to average total
consolidated assets, as calculated in
accordance with § 217.10 of Regulation
Q (12 CFR 217.10).
(h) Management fee means any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
bank, or related overhead expenses,
including payments related to
supervisory, executive, managerial, or
policy making functions, other than
compensation to an individual in the
individual’s capacity as an officer or
employee of the bank.
(i) Supplementary leverage ratio
means the ratio of tier 1 capital to total
leverage exposure, as calculated in
accordance with § 217.10 of Regulation
Q (12 CFR 217.10).
(j) Tangible equity means the amount
of tier 1 capital, plus the amount of
outstanding perpetual preferred stock
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(including related surplus) not included
in tier 1 capital.
(k) Tier 1 capital means the amount
of capital as defined in § 217.20 of
Regulation Q (12 CFR 217.20).
(l) Tier 1 risk-based capital ratio
means the ratio of tier 1 capital to total
risk-weighted assets, as calculated in
accordance with § 217.10(b)(2) or
§ 217.10(c)(2) of Regulation Q (12 CFR
217.10(b)(2), 12 CFR 217.10(c)(2)), as
applicable.
(m) Total assets means quarterly
average total assets as reported in a
bank’s Report of Condition and Income
(Call Report), minus items deducted
from tier 1 capital. At its discretion the
Federal Reserve may calculate total
assets using a bank’s period-end assets
rather than quarterly average assets.
(n) Total leverage exposure means the
total leverage exposure, as calculated in
accordance with § 217.11 of Regulation
Q (12 CFR 217.11).
(o) Total risk-based capital ratio
means the ratio of total capital to total
risk-weighted assets, as calculated in
accordance with § 217.10(b)(3) or
§ 217.10(c)(3) of Regulation Q (12 CFR
217.10(b)(3), 12 CFR 217.10(c)(3)), as
applicable.
(p) Total risk-weighted assets means
standardized total risk-weighted assets,
and for an advanced approaches bank
also includes advanced approaches total
risk-weighted assets, as defined in
§ 217.2 of Regulation Q (12 CFR 217.2).
32. In § 208.43, revise paragraphs (a)
and (b), redesignate paragraph (c) as
paragraph (d), and add a new paragraph
(c) to read as follows:
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§ 208.43 Capital measures and capital
category definitions.
(a) Capital measures. (1) Capital
measures applicable before January 1,
2015. On or before December 31, 2014,
for purposes of section 38 and this
subpart, the relevant capital measures
for all banks are:
(i) Total Risk-Based Capital Measure:
The total risk-based capital ratio;
(ii) Tier 1 Risk-Based Capital Measure:
The tier 1 risk-based capital ratio; and
(iii) Leverage Measure: The leverage
ratio.
(2) Capital measures applicable on
and after January 1, 2015. On January 1,
2015 and thereafter, for purposes of
section 38 and this subpart, the relevant
capital measures are:
(i) Total Risk-Based Capital Measure:
The total risk-based capital ratio;
(ii) Tier 1 Risk-Based Capital Measure:
The tier 1 risk-based capital ratio;
(iii) Common Equity Tier 1 Capital
Measure: The common equity tier 1 riskbased capital ratio; and
(iv) Leverage Measure:
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(A) The leverage ratio, and
(B) With respect to an advanced
approaches bank, on January 1, 2018,
and thereafter, the supplementary
leverage ratio.
(b) Capital categories applicable
before January 1, 2015. On or before
December 31, 2014, for purposes of
section 38 of the FDI Act and this
subpart, a member bank is deemed to
be:
(1) ‘‘Well capitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of 10.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of 6.0 percent or greater;
(iii) Leverage Measure: The bank has
a leverage ratio of 5.0 percent or greater;
and
(iv) The bank is not subject to any
written agreement, order, capital
directive, or prompt corrective action
directive issued by the Board pursuant
to section 8 of the FDI Act, the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), or section 38
of the FDI Act, or any regulation
thereunder, to meet and maintain a
specific capital level for any capital
measure.
(2) ‘‘Adequately capitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of 8.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of 4.0 percent or greater;
(iii) Leverage Measure:
(A) The bank has a leverage ratio of
4.0 percent or greater; or
(B) The bank has a leverage ratio of
3.0 percent or greater if the bank is rated
composite 1 under the CAMELS rating
system in the most recent examination
of the bank and is not experiencing or
anticipating any significant growth; and
(iv) Does not meet the definition of a
‘‘well capitalized’’ bank.
(3) ‘‘Undercapitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of less than 8.0 percent; or
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of less than 4.0 percent; or
(iii) Leverage Measure:
(A) Except as provided in paragraph
(b)(2)(iii)(B) of this section, the bank has
a leverage ratio of less than 4.0 percent;
or
(B) The bank has a leverage ratio of
less than 3.0 percent, if the bank is rated
composite 1 under the CAMELS rating
system in the most recent examination
of the bank and is not experiencing or
anticipating significant growth.
(4) ‘‘Significantly undercapitalized’’
if:
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52877
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of less than 6.0 percent; or
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of less than 3.0 percent; or
(iii) Leverage Measure: The bank has
a leverage ratio of less than 3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
(c) Capital categories applicable on
and after January 1, 2015. On January 1,
2015, and thereafter, for purposes of
section 38 and this subpart, a member
bank is deemed to be:
(1) ‘‘Well capitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of 10.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of 8.0 percent or greater;
(iii) Common Equity Tier 1 Capital
Measure: The bank has a common
equity tier 1 risk-based capital ratio of
6.5 percent or greater;
(iv) Leverage Measure: The bank has
a leverage ratio of 5.0 or greater; and
(iv) The bank is not subject to any
written agreement, order, capital
directive, or prompt corrective action
directive issued by the Board pursuant
to section 8 of the FDI Act, the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), or section 38
of the FDI Act, or any regulation
thereunder, to meet and maintain a
specific capital level for any capital
measure.
(2) ‘‘Adequately capitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of 8.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of 6.0 percent or greater;
(iii) Common Equity Tier 1 Capital
Measure: The bank has a common
equity tier 1 risk-based capital ratio of
4.5 percent or greater;
(iv) Leverage Measure:
(A) The bank has a leverage ratio of
4.0 percent or greater; and
(B) With respect to an advanced
approaches bank, on January 1, 2018,
and thereafter, the bank has a
supplementary leverage ratio of 3.0
percent or greater; and
(v) The bank does not meet the
definition of a ‘‘well capitalized’’ bank.
(3) ‘‘Undercapitalized’’ if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of less than 8.0 percent;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of less than 6.0 percent;
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(iii) Common Equity Tier 1 Capital
Measure: The bank has a common
equity tier 1 risk-based capital ratio of
less than 4.5 percent; or
(iv) Leverage Measure:
(A) The bank has a leverage ratio of
less than 4.0 percent; or
(B) With respect to an advanced
approaches bank, on January 1, 2018,
and thereafter, the bank has a
supplementary leverage ratio of less
than 3.0 percent.
(4) ‘‘Significantly undercapitalized’’
if:
(i) Total Risk-Based Capital Measure:
The bank has a total risk-based capital
ratio of less than 6.0 percent;
(ii) Tier 1 Risk-Based Capital Measure:
The bank has a tier 1 risk-based capital
ratio of less than 4.0 percent;
(iii) Common Equity Tier 1 Capital
Measure: The bank has a common
equity tier 1 risk-based capital ratio of
less than 3.0 percent; or
(iv) Leverage Measure: The bank has
a leverage ratio of less than 3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
*
*
*
*
*
Subpart G—Financial Subsidiaries of
State Member Banks
33. In § 208.73, revise paragraph (a)
introductory text to read as follows:
(a) Capital deduction required. A state
member bank that controls or holds an
interest in a financial subsidiary must
comply with the rules set forth in
§ 217.22(a)(7) of Regulation Q (12 CFR
217.22(a)(7)) in determining its
compliance with applicable regulatory
capital standards (including the well
capitalized standard of § 208.71(a)(1)).
*
*
*
*
*
[Amended]
34. In § 208.77, remove and reserve
paragraph (c).
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Appendix A to Part 208—[Amended]
35. Amend appendix A by removing
‘‘appendix E to this part’’ and add ‘‘12
CFR part 217, subpart F’’ in its place
wherever it appears; and by removing
‘‘appendix E of this part’’ and adding in
its place ‘‘12 CFR part 217, subpart F’’
in its place wherever it appears.
36. Effective January 1, 2015,
appendix A to part 208 is removed and
reserved.
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Appendix C to Part 208—Interagency
Guidelines for Real Estate Lending
Policies
*
*
*
*
*
2 For
the state member banks, the term
‘‘total capital’’ refers to that term as defined
in subpart A of 12 CFR part 217. For insured
state nonmember banks and state savings
associations, ‘‘total capital’’ refers to that
term defined in subpart A of 12 CFR part 324.
For national banks and Federal savings
associations, the term ‘‘total capital’’ refers to
that term as defined in subpart A of 12 CFR
part 3.
*
*
*
*
*
Appendix E to Part 208—[Removed and
Reserved]
39. Appendix E to part 208 is
removed and reserved.
Appendix F to Part 208—[Removed and
Reserved]
40. Appendix F to part 208 is
removed and reserved.
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS (REGULATION Q)
41. The authority citation for part 217
shall read as follows:
§ 208.73 What additional provisions are
applicable to state member banks with
financial subsidiaries?
§ 208.77
Appendix B to Part 208—[Removed and
Reserved]
37. Appendix B to part 208 is
removed and reserved.
38. In Appendix C to part 208, Note
2 is revised to read as follows:
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1462a, 1467a, 1818, 1828, 1831n,
1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,
3904, 3906–3909, 4808, 5365, 5371.
42. Part 217 is added as set forth at
the end of the common preamble.
43. Part 217 is amended as set forth
below:
i. Remove ‘‘[AGENCY]’’ and add
‘‘Board’’ in its place wherever it
appears.
ii. Remove ‘‘[BANK]’’ and add
‘‘Board-regulated institution’’ in its
place wherever it appears.
iii. Remove ‘‘[PART]’’ and add ‘‘part’’
wherever it appears.
44. In § 217.1, redesignate paragraphs
(c)(1) through (c)(4) as paragraphs (c)(2)
through (c)(5) respectively, add new
paragraph (c)(1), and revise paragraph
(e) to read as follows:
*
*
*
*
*
§ 217.1 Purpose, applicability, and
reservations of authority.
*
*
*
*
*
(c)(1) Scope. This part applies on a
consolidated basis to every Boardregulated institution that is:
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Fmt 4701
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(i) A state member bank;
(ii) A bank holding company
domiciled in the United States that is
not subject to 12 CFR part 225,
Appendix C, provided that the Board
may by order subject any bank holding
company to this part, in whole or in
part, based on the institution’s size,
level of complexity, risk profile, scope
of operations, or financial condition; or
(iii) A savings and loan holding
company domiciled in the United
States.
*
*
*
*
*
(e) Notice and response procedures.
In making a determination under this
section, the Board will apply notice and
response procedures in the same
manner and to the same extent as the
notice and response procedures in 12
CFR 263.202.
45. In § 217.2:
i. Add definitions of Board, Boardregulated institution, non-guaranteed
separate account, policy loan, separate
account, state bank, and state member
bank or member bank;
ii. Add paragraphs (12) and (13) to the
definition of corporate exposure, and
iii. Revise the definition of gain-onsale, paragraph (2)(i) of the definition of
high volatility commercial real estate
(HVCRE) exposure, paragraph (4) of the
definition of pre-sold construction loan,
and paragraph (1) of the definition of
total leverage exposure, to read as
follows:
*
*
*
*
*
§ 217.2
Definitions.
*
*
*
*
*
Board means the Board of Governors
of the Federal Reserve System.
Board-regulated institution means a
state member bank, bank holding
company, or savings and loan holding
company.
*
*
*
*
*
Corporate exposure * * *
(12) A policy loan; or
(13) A separate account.
*
*
*
*
*
Gain-on-sale means an increase in the
equity capital of a Board-regulated
institution (as reported on Schedule RC
of the Call Report, for a state member
bank, or Schedule HC of the FR Y–9C,
for a bank holding company or savings
and loan holding company,1 as
applicable) resulting from a
securitization (other than an increase in
equity capital resulting from the
[BANK]’s receipt of cash in connection
with the securitization).
*
*
*
*
*
1 Savings and loan holding companies that do not
file the FR Y–9C should follow the instructions to
the FR Y–9C.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
High volatility commercial real estate
(HVCRE) exposure * * *
(2) * * *
(i) The loan-to-value ratio is less than
or equal to the applicable maximum
supervisory loan-to-value ratio in the
Board’s real estate lending standards at
12 CFR part 208, Appendix C;
*
*
*
*
*
Non-guaranteed separate account
means a separate account where the
insurance company:
(1) Does not contractually guarantee
either a minimum return or account
value to the contract holder; and
(2) Is not required to hold reserves (in
the general account) pursuant to its
contractual obligations to a
policyholder.
*
*
*
*
*
Policy loan means a loan by an
insurance company to a policy holder
pursuant to the provisions of an
insurance contract that is secured by the
cash surrender value or collateral
assignment of the related policy or
contract. A policy loan includes:
(1) A cash loan, including a loan
resulting from early payment benefits or
accelerated payment benefits, on an
insurance contract when the terms of
contract specify that the payment is a
policy loan secured by the policy; and
(2) An automatic premium loan,
which is a loan that is made in
accordance with policy provisions
which provide that delinquent premium
payments are automatically paid from
the cash value at the end of the
established grace period for premium
payments.
Pre-sold construction loan means
* * *
(4) The purchaser has not terminated
the contract; however, if the purchaser
terminates the sales contract, the Board
must immediately apply a 100 percent
risk weight to the loan and report the
revised risk weight in the next quarterly
Call Report, for a state member bank, or
the FR Y–9C, for a bank holding
company or savings and loan holding
company, as applicable,
*
*
*
*
*
Separate account means a legally
segregated pool of assets owned and
held by an insurance company and
maintained separately from the
insurance company’s general account
assets for the benefit of an individual
contract holder. To be a separate
account:
(1) The account must be legally
recognized under applicable law;
(2) The assets in the account must be
insulated from general liabilities of the
insurance company under applicable
law in the event of the company’s
insolvency;
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(3) The insurance company must
invest the funds within the account as
directed by the contract holder in
designated investment alternatives or in
accordance with specific investment
objectives or policies, and
(4) All investment gains and losses,
net of contract fees and assessments,
must be passed through to the contract
holder, provided that the contract may
specify conditions under which there
may be a minimum guarantee but must
not include contract terms that limit the
maximum investment return available
to the policyholder.
*
*
*
*
*
State bank means any bank
incorporated by special law of any State,
or organized under the general laws of
any State, or of the United States,
including a Morris Plan bank, or other
incorporated banking institution
engaged in a similar business.
State member bank or member bank
means a state bank that is a member of
the Federal Reserve System.
*
*
*
*
*
Total leverage exposure * * *
(1) The balance sheet carrying value
of all of the Board-regulated institution’s
on-balance sheet assets, as reported on
the Call Report, for a state member bank,
or the FR Y–9C, for a bank holding
company or savings and loan holding
company,2 as applicable, less amounts
deducted from tier 1 capital under
§ 217.22;
*
*
*
*
*
46. In § 217.10, revise paragraph (b)(4)
to read as follows:
§ 217.10
Minimum capital requirements.
*
*
*
*
*
(b) * * *
(4) Leverage ratio. A Board-regulated
institution’s leverage ratio is the ratio of
the Board-regulated institution’s tier 1
capital to its average consolidated assets
as reported on the Call Report, for a
state member bank, or FR Y–9C, for a
bank holding company or savings and
loan holding company 3, as applicable,
less amounts deducted from tier 1
capital.
*
*
*
*
*
47. In § 217.11, revise paragraphs
(a)(2)(i) and (a)(3) as follows
§ 217.11 Capital conservation buffer and
countercyclical capital buffer amount.
*
*
*
(a) * * *
*
*
2 Savings and loan holding companies that do not
file the FR Y–9C should follow the instructions to
the FR Y–9C.
3 Savings and loan holding companies that do not
file the FR Y–9C should follow the instructions to
the FR Y–9C.
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52879
(2) Definitions. * * *
(i) Eligible retained income. The
eligible retained income of a Boardregulated institution is the Boardregulated institution’s net income for
the four calendar quarters preceding the
current calendar quarter, based on the
Board-regulated institution’s most
recent quarterly Call Report, for a state
member bank, or the FR Y–9C, for a
bank holding company or savings and
loan holding company, as applicable,
net of any capital distributions and
associated tax effects not already
reflected in net income.4
*
*
*
*
*
(3) Calculation of capital conservation
buffer. A Board-regulated institution’s
capital conservation buffer is equal to
the lowest of the following ratios,
calculated as of the last day of the
previous calendar quarter based on the
Board-regulated institution’s most
recent Call Report, for a state member
bank, or the FR Y–9C, for a bank
holding company or savings and loan
holding company,5 as applicable:
*
*
*
*
*
48. In § 217.22, revise paragraph (a)(7)
and add paragraph (b)(3) to read as
follows:
§ 217.22 Regulatory capital adjustments
and deductions.
*
*
*
*
*
(a) * * *
(7) Financial subsidiaries. (i) A state
member bank must deduct the aggregate
amount of its outstanding equity
investment, including retained earnings,
in its financial subsidiaries (as defined
in 12 CFR 208.77) and may not
consolidate the assets and liabilities of
a financial subsidiary with those of the
state member bank.
(ii) No other deduction is required
under § 217.22(c) for investments in the
capital instruments of financial
subsidiaries.
(b) * * *
(3) Regulatory capital requirement of
insurance underwriting subsidiary. A
bank holding company or savings and
loan holding company must deduct an
amount equal to the minimum
regulatory capital requirement
established by the regulator of any
insurance underwriting subsidiary of
the holding company. For U.S.-based
4 Savings and loan holding companies that do not
file FR Y–9C should follow the instructions to the
FR Y–9C. Net income, as reported in the Call Report
or the FR Y–9C, as applicable, reflects discretionary
bonus payments and certain capital distributions
that are expense items (and their associated tax
effects).
5 Savings and loan holding companies that do not
file FR Y–9C should follow the instructions to the
FR Y–9C.
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insurance underwriting subsidiaries,
this amount generally would be 200
percent of the subsidiary’s Authorized
Control Level as established by the
appropriate state regulator of the
insurance company. The bank holding
company or savings and loan holding
company must take the deduction 50
percent from tier 1 capital and 50
percent from tier 2 capital. If the amount
deductible from tier 2 capital exceeds
the Board regulated institution’s tier 2
capital, the Board regulated institution
must deduct the excess from tier 1
capital.
*
*
*
*
*
49. In § 217.300, revise paragraph
(c)(3) introductory text and add new
paragraph (e) to read as follows:
§ 217.300
Transitions.
*
*
*
*
*
(3) Transition adjustments to AOCI.
From January 1, 2013 through December
31, 2017, a Board-regulated institution
must adjust common equity tier 1
capital with respect to the aggregate
amount of unrealized gains on AFS
equity securities, plus net unrealized
gains or losses on AFS debt securities,
plus accumulated net unrealized gains
and losses on defined benefit pension
obligations, plus accumulated net
unrealized gains or losses on cash flow
hedges related to items that are reported
on the balance sheet at fair value
included in AOCI (the transition AOCI
adjustment amount) as reported on the
Board-regulated institution’s most
recent Call Report, for a state member
bank, or the FR Y–9C, for a bank
holding company or savings and loan
holding company,6 as applicable, as
follows:
*
*
*
*
*
(e) Until July 21, 2015, this part will
not apply to any bank holding company
subsidiary of a foreign banking
organization that is currently relying on
Supervision and Regulation Letter SR
01–01 issued by the Board (as in effect
on May 19, 2010).
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
42. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),
1972(1), 3106, 3108, 3310, 3331–3351, 3907,
and 3909; 15 U.S.C. 1681s, 1681w, 6801 and
6805.
6 Savings and loan holding companies that do not
file FR Y–9C should follow the instructions to the
FR Y–9C.
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Subpart A—General Provisions
50. In § 225.1, on January 1, 2015,
remove and reserve paragraphs (c)(12),
(c)(13) and (c)(15) to read as follows:
§ 225.1
Authority, purpose, and scope.
*
*
*
*
*
(c) Scope * * *
(12) [Reserved]
*
*
*
*
*
(14) [Reserved]
(15) [Reserved]
*
*
*
*
*
51. In § 225.2, revise paragraphs
(r)(1)(i) and (ii) to read as follows:
§ 225.2
Definitions.
*
*
*
*
*
(r) * * *
(1) * * *
(i) On a consolidated basis, the bank
holding company maintains a total riskbased capital ratio of 10.0 percent or
greater, as defined in 12 CFR 217.10;
(ii) On a consolidated basis, the bank
holding company maintains a tier 1 riskbased capital ratio of 6.0 percent or
greater, as defined in 12 CFR 217.10;
and
*
*
*
*
*
52. In § 225.4, revise paragraph
(b)(4)(ii) to read as follows:
§ 225.4
Corporate practices.
*
*
*
*
*
(b) * * *
(4) * * *
(ii) In determining whether a proposal
constitutes an unsafe or unsound
practice, the Board shall consider
whether the bank holding company’s
financial condition, after giving effect to
the proposed purchase or redemption,
meets the financial standards applied by
the Board under section 3 of the BHC
Act, including 12 CFR part 217 and the
Board’s Policy Statement for Small Bank
Holding Companies (appendix C of this
part).
*
*
*
*
*
53. In § 225.8, revise paragraphs (c)(5)
and (c)(7) through (c)(10) to read as
follows:
§ 225.8
Capital planning.
*
*
*
*
*
(c) * * *
(5) Minimum regulatory capital ratio
means any minimum regulatory capital
ratio that the Federal Reserve may
require of a bank holding company, by
regulation or order, including any
minimum capital ratio required under
12 CFR 217.10(a).
*
*
*
*
*
(7) Tier 1 capital has the same
meaning as under 12 CFR 217.2.
(8) Tier 1 common capital means tier
1 capital less the non-common elements
PO 00000
of tier 1 capital, including perpetual
preferred stock and related surplus,
minority interest in subsidiaries, trust
preferred securities and mandatory
convertible preferred securities.
(9) Tier 1 common ratio means the
ratio of a bank holding company’s tier
1 common capital to total risk-weighted
assets. This definition will remain in
effect until the Board adopts an
alternative tier 1 common ratio
definition as a minimum regulatory
capital ratio.
(10) Total risk-weighted assets has the
same meaning as under 12 CFR 217.2.
*
*
*
*
*
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Subpart B—Acquisition of Bank
Securities or Assets
54. In § 225.12, revise paragraph
(d)(2)(iv) to read as follows:
§ 225.12 Transactions not requiring Board
approval.
*
*
*
*
*
(d) * * *
(2) * * *
(iv) Both before and after the
transaction, the acquiring bank holding
company meets the requirements of 12
CFR part 217;
*
*
*
*
*
Subpart C—Nonbanking Activities and
Acquisitions by Bank Holding
Companies
55. In § 225.22, revise paragraph
(d)(8)(v) to read as follows:
§ 225.22 Exempt nonbanking activities and
acquisitions.
*
*
*
*
*
(d) * * *
(8) * * *
(v) The acquiring company, after
giving effect to the transaction, meets
the requirements of 12 CFR part 217,
and the Board has not previously
notified the acquiring company that it
may not acquire assets under the
exemption in this paragraph (d).
*
*
*
*
*
Subpart J—Merchant Banking
Investments
56. In § 225.172, revise paragraph
(b)(6)(i)(A) to read as follows:
§ 225.22 What are the holding periods
permitted for merchant banking
investments?
*
*
*
*
*
(b) * * *
(6) * * *
(i) * * *
(A) Higher than the maximum
marginal tier 1 capital charge applicable
under part 217 to merchant banking
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investments held by that financial
holding company; and
*
*
*
*
*
Appendix A to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
57. Amend appendix A to remove
‘‘appendix E of this part’’ and add ‘‘12
CFR part 217, subpart F’’ in its place
wherever it appears.
58. On January 1, 2015, appendix A
to part 225 is removed and reserved.
Appendix B to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies and State Member Banks:
Leverage Measure
59. Appendix B to part 225 is
removed and reserved.
Appendix D to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
60. Appendix D to part 225 is
removed and reserved.
Appendix E to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Market Risk Measure
61. Appendix E to part 225 is
removed and reserved.
Appendix G to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Internal-Ratings-Based and
Advanced Measurement Approaches
62. Appendix G to part 225 is
removed and reserved.
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the
common preamble, the Federal Deposit
Insurance Corporation amends chapter
III of title 12 of the Code of Federal
Regulations as follows:
PART 324—CAPITAL ADEQUACY
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63. The authority citation for part 324
is added to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819
(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371;
5412; Pub. L. 102–233, 105 Stat. 1761, 1789,
1790 (12 U.S.C. 1831n note); Pub. L. 102–
242, 105 Stat. 2236, 2355, as amended by
Pub. L. 103–325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.
2236, 2386, as amended by Pub. L. 102–550,
106 Stat. 3672, 4089 (12 U.S.C. 1828 note);
Pub. L. 111–203, 124 Stat. 1376, 1887 (15
U.S.C. 78o–7 note).
64. Subparts A, B, C, and G of part
324 are added as set forth at the end of
the common preamble.
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65. Subparts A, B, C, and G of part
324 are amended as set forth below:
a. Remove ‘‘[AGENCY]’’ and add
‘‘FDIC’’ in its place, wherever it appears;
b. Remove ‘‘[BANK]’’ and add ‘‘bank
and state savings association’’ in its
place, wherever it appears in the phrase
‘‘Each [BANK]’’ or ‘‘each [BANK]’’;
c. Remove ‘‘[BANK]’’ and add ‘‘bank
or state savings association’’ in its place,
wherever it appears in the phrases ‘‘A
[BANK]’’, ‘‘a [BANK]’’, ‘‘The [BANK]’’,
or ‘‘the [BANK]’’;
d. Remove ‘‘[BANKS]’’ and add
‘‘banks and state savings associations’’
in its place, wherever it appears;
e. Remove ‘‘[PART]’’ and add ‘‘Part
324’’ in its place, wherever it appears;
f. Remove ‘‘[AGENCY]’’ and add
‘‘FDIC’’ in its place, wherever it appears;
and
g. Remove ‘‘[REGULATORY
REPORT]’’ and add ‘‘Call Report’’ in its
place, wherever it appears.
66. New § 324.2 is amended by adding
the following definitions in alphabetical
order:
§ 324.2
Definitions.
*
*
*
*
*
Bank means an FDIC-insured, statechartered commercial or savings bank
that is not a member of the Federal
Reserve System and for which the FDIC
is the appropriate federal banking
agency pursuant to section 3(q) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(q)).
*
*
*
*
*
Core capital means Tier 1 capital, as
defined in § 324.2 of subpart A of this
part.
*
*
*
*
*
State savings association means a
State savings association as defined in
section 3(b)(3) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(b)(3)), the
deposits of which are insured by the
Corporation. It includes a building and
loan, savings and loan, or homestead
association, or a cooperative bank (other
than a cooperative bank which is a State
bank as defined in section 3(a)(2) of the
Federal Deposit Insurance Act)
organized and operating according to
the laws of the State in which it is
chartered or organized, or a corporation
(other than a bank as defined in section
3(a)(1) of the Federal Deposit Insurance
Act) that the Board of Directors of the
Federal Deposit Insurance Corporation
determine to be operating substantially
in the same manner as a State savings
association.
*
*
*
*
*
Tangible capital means the amount of
core capital (Tier 1 capital), as defined
in accordance with § 324.2 of subpart A
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of this part, plus the amount of
outstanding perpetual preferred stock
(including related surplus) not included
in Tier 1 capital.
Tangible equity means the amount of
Tier 1 capital, as calculated in
accordance with § 324.2 of subpart A of
this chapter, plus the amount of
outstanding perpetual preferred stock
(including related surplus) not included
in Tier 1 capital.
*
*
*
*
*
67. New § 324.10 is amended by
adding paragraphs (a)(6), (b)(5), and
(c)(5) to read as follows:
§ 324.10
Minimum capital requirements.
(a) * * *
(6) For state savings associations, a
tangible capital ratio of 1.5 percent.
(b) * * *
(5) State savings association tangible
capital ratio. A state savings
association’s tangible capital ratio is the
ratio of the state savings association’s
core capital (Tier 1 capital) to total
adjusted assets as calculated under
§ 390.461.
(c) * * *
(5) State savings association tangible
capital ratio. A state savings
association’s tangible capital ratio is the
ratio of the state savings association’s
core capital (Tier 1 capital) to total
adjusted assets as calculated under
§ 390.461.
*
*
*
*
*
68. New § 324.22 is amended to add
new paragraph (a)(8), to read as follows:
§ 324.22 Regulatory capital adjustments
and deductions.
(a) * * *
(8) (i) A state savings association must
deduct the aggregate amount of its
outstanding investments, (both equity
and debt) as well as retained earnings in
subsidiaries that are not includable
subsidiaries as defined in paragraph
7(iv) of this section (including those
subsidiaries where the state savings
association has a minority ownership
interest) and may not consolidate the
assets and liabilities of the subsidiary
with those of the state savings
association. Any such deductions shall
be deducted from common equity tier 1
capital, except as provided in
paragraphs (a)(7)(ii) and (a)(7)(iii) of this
section.
(ii) If a state savings association has
any investments (both debt and equity)
in one or more subsidiaries engaged in
any activity that would not fall within
the scope of activities in which
includable subsidiaries as defined in
paragraph 7(iv) of this section may
engage, it must deduct such investments
from assets and common equity tier 1
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capital in accordance with paragraph
(c)(7)(i) of this section. The state savings
association must first deduct from assets
and common equity tier 1 capital the
amount by which any investments in
such subsidiary(ies) exceed the amount
of such investments held by the state
savings association as of April 12, 1989.
Next the state savings association must
deduct from assets and common equity
tier 1 the state savings association’s
investments in and extensions of credit
to the subsidiary on the date as of which
the state savings association’s capital is
being determined.
(iii) If a state savings association holds
a subsidiary (either directly or through
a subsidiary) that is itself a [insured]
domestic depository institution, the
FDIC may, in its sole discretion upon
determining that the amount of common
equity tier 1 capital that would be
required would be higher if the assets
and liabilities of such subsidiary were
consolidated with those of the parent
state savings association than the
amount that would be required if the
parent state savings association’s
investment were deducted pursuant to
paragraphs (c)(6)(i) and (c)(6)(ii) of this
section, consolidate the assets and
liabilities of that subsidiary with those
of the parent state savings association in
calculating the capital adequacy of the
parent state savings association,
regardless of whether the subsidiary
would otherwise be an includable
subsidiary as defined in paragraph
(c)(7)(iv) of this section.
(iv) For purposes of this section, the
term includable subsidiary means a
subsidiary of a state savings association
that is:
(A) Engaged solely in activities that
are permissible for a national bank;
(B) Engaged in activities not
permissible for a national bank, but only
if acting solely as agent for its customers
and such agency position is clearly
documented in the state savings
association’s files;
(C) Engaged solely in mortgagebanking activities;
(D)(1) Itself an insured depository
institution or a company the sole
investment of which is an insured
depository institution, and
(2) Was acquired by the parent state
savings association prior to May 1, 1989;
or
(E) A subsidiary of any state savings
association existing as a state savings
association on August 9, 1989 that —
(1) Was chartered prior to October 15,
1982, as a savings bank or a cooperative
bank under state law, or
(2) Acquired its principal assets from
an association that was chartered prior
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to October 15, 1982, as a savings bank
or a cooperative bank under state law.
*
*
*
*
*
69. Subpart H is added to part 324 to
read as follows:
Subpart H—Prompt Corrective Action
Sec.
324.301 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
324.302 Notice of capital category.
324.303 Capital measures and capital
category definitions.
324.304 Capital restoration plans.
324.305 Mandatory and discretionary
supervisory actions.
Subpart H—Prompt Corrective Action
§ 324.301 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
(a) Authority. This subpart is issued
by the FDIC pursuant to section 38 of
the Federal Deposit Insurance Act (FDI
Act), as added by section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (Pub. L. 102–
242, 105 Stat. 2236 (1991)) (12 U.S.C.
1831o).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for FDICinsured state-chartered nonmember
banks and state-chartered savings
associations, the capital measures and
capital levels, and for insured branches
of foreign banks, comparable asset-based
measures and levels, that are used for
determining the supervisory actions
authorized under section 38 of the FDI
Act. This subpart also establishes
procedures for submission and review
of capital restoration plans and for
issuance and review of directives and
orders pursuant to section 38 of the FDI
Act.
(c) Scope. Until January 1, 2015,
subpart B of part 325 of this chapter will
continue to apply to FDIC-insured statechartered nonmember banks and
insured branches of foreign banks for
which the FDIC is the appropriate
Federal banking agency. Until January 1,
2015, subpart Y of part 390 of this
chapter will continue to apply to state
savings associations. As of January 1,
2015, this subpart implements the
provisions of section 38 of the FDI Act
as they apply to FDIC-insured statechartered nonmember banks, state
savings associations, and insured
branches of foreign banks for which the
FDIC is the appropriate Federal banking
agency. Certain of these provisions also
apply to officers, directors and
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employees of those insured institutions.
In addition, certain provisions of this
subpart apply to all insured depository
institutions that are deemed critically
undercapitalized.
(d) Other supervisory authority.
Neither section 38 of the FDI Act nor
this subpart in any way limits the
authority of the FDIC under any other
provision of law to take supervisory
actions to address unsafe or unsound
practices, deficient capital levels,
violations of law, unsafe or unsound
conditions, or other practices. Action
under section 38 of the FDI Act and this
subpart may be taken independently of,
in conjunction with, or in addition to
any other enforcement action available
to the FDIC, including issuance of cease
and desist orders, capital directives,
approval or denial of applications or
notices, assessment of civil money
penalties, or any other actions
authorized by law.
(e) Disclosure of capital categories.
The assignment of a bank, a state
savings association, or an insured
branch under this subpart within a
particular capital category is for
purposes of implementing and applying
the provisions of section 38 of the FDI
Act. Unless permitted by the FDIC or
otherwise required by law, no bank or
state savings association may state in
any advertisement or promotional
material its capital category under this
subpart or that the FDIC or any other
federal banking agency has assigned the
bank or state savings association to a
particular capital category.
§ 324.302
Notice of capital category.
(a) Effective date of determination of
capital category. A bank or state savings
association shall be deemed to be within
a given capital category for purposes of
section 38 of the FDI Act and this
subpart as of the date the bank or state
savings association is notified of, or is
deemed to have notice of, its capital
category, pursuant to paragraph (b) of
this section.
(b) Notice of capital category. A bank
or state savings association shall be
deemed to have been notified of its
capital levels and its capital category as
of the most recent date:
(1) A Consolidated Report of
Condition and Income or Thrift
Financial Report (Call Report) is
required to be filed with the FDIC;
(2) A final report of examination is
delivered to the bank or state savings
association; or
(3) Written notice is provided by the
FDIC to the bank or state savings
association of its capital category for
purposes of section 38 of the FDI Act
and this subpart or that the bank’s or
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state savings association’s capital
category has changed as provided in
§ 324.303(d).
(c) Adjustments to reported capital
levels and capital category—(1) Notice
of adjustment by bank or state savings
association. A bank or state savings
association shall provide the
appropriate FDIC regional director with
written notice that an adjustment to the
bank’s or state savings association’s
capital category may have occurred no
later than 15 calendar days following
the date that any material event has
occurred that would cause the bank or
state savings association to be placed in
a lower capital category from the
category assigned to the bank or state
savings association for purposes of
section 38 of the FDI Act and this
subpart on the basis of the bank’s or
state savings association’s most recent
Call Report or report of examination.
(2) Determination by the FDIC to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the FDIC shall determine
whether to change the capital category
of the bank or state savings association
and shall notify the bank or state
savings association of the FDIC’s
determination.
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§ 324.303 Capital measures and capital
category definitions.
(a) Capital measures. For purposes of
section 38 of the FDI Act and this
subpart, the relevant capital measures
shall be:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio;
and
(3) The common equity tier 1 ratio;
(4) The leverage ratio;
(5) The tangible equity to total assets
ratio; and
(6) Beginning on January 1, 2018, the
supplementary leverage ratio calculated
in accordance with § 324.11 of subpart
B of this part for banks or state savings
associations that are subject to subpart
E of part 324.
(b) Capital categories. For purposes of
section 38 of the FDI Act and this
subpart, a bank or state savings
association shall be deemed to be:
(1) ‘‘Well capitalized’’ if the bank or
state savings association:
(i) Has a total risk-based capital ratio
of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 8.0 percent or greater; and
(iii) Has a common equity tier 1
capital ratio of 6.5 percent or greater;
and
(iv) Has a leverage ratio of 5.0 percent
or greater; and
(v) Is not subject to any written
agreement, order, capital directive, or
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prompt corrective action directive
issued by the FDIC pursuant to section
8 of the FDI Act (12 U.S.C. 1818), the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), or the Home
Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the
FDI Act (12 U.S.C. 1831o), or any
regulation thereunder, to meet and
maintain a specific capital level for any
capital measure.
(2) ‘‘Adequately capitalized’’ if the
bank or state savings association:
(i) Has a total risk-based capital ratio
of 8.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater; and
(iii) Has a common equity tier 1
capital ratio of 4.5 percent or greater;
and
(iv) Has a leverage ratio of 4.0 percent
or greater; and
(v) Does not meet the definition of a
well capitalized bank.
(vi) Beginning January 1, 2018, an
advanced approaches bank or state
savings association will be deemed to be
‘‘adequately capitalized’’ if the bank or
state savings association satisfies
paragraphs (b)(2)(i) through (v) of this
section and has a supplementary
leverage ratio of 3.0 percent or greater,
as calculated in accordance with
§ 324.11 of subpart B of this part.
(3) ‘‘Undercapitalized’’ if the bank or
state savings association:
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 6.0 percent; or
(iii) Has a common equity tier 1
capital ratio that is less than 4.5 percent;
or
(iv) Has a leverage ratio that is less
than 4.0 percent.
(v) Beginning January 1, 2018, an
advanced approaches bank or state
savings association will be deemed to be
‘‘undercapitalized’’ if the bank or state
savings association has a supplementary
leverage ratio of less than 3.0 percent, as
calculated in accordance with § 324.11
of subpart B of this part.
(4) ‘‘Significantly undercapitalized’’ if
the bank or state savings association
has:
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 4.0 percent; or
(iii) A common equity tier 1 capital
ratio that is less than 3.0 percent; or
(iv) A leverage ratio that is less than
3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
insured depository institution has a
ratio of tangible equity to total assets
that is equal to or less than 2.0 percent.
(c) Capital categories for insured
branches of foreign banks. For purposes
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of the provisions of section 38 of the FDI
Act and this subpart, an insured branch
of a foreign bank shall be deemed to be:
(1) ‘‘Well capitalized’’ if the insured
branch:
(i) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(ii) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 108 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities; and
(iii) Has not received written
notification from:
(A) The OCC to increase its capital
equivalency deposit pursuant to 12 CFR
28.15(b), or to comply with asset
maintenance requirements pursuant to
12 CFR 28.20; or
(B) The FDIC to pledge additional
assets pursuant to § 347.209 of this
chapter or to maintain a higher ratio of
eligible assets pursuant to § 347.210 of
this chapter.
(2) ‘‘Adequately capitalized’’ if the
insured branch:
(i) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(ii) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 106 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities; and
(iii) Does not meet the definition of a
well capitalized insured branch.
(3) ‘‘Undercapitalized’’ if the insured
branch:
(i) Fails to maintain the pledge of
assets required under § 347.209 of this
chapter; or
(ii) Fails to maintain the eligible
assets prescribed under § 347.210 of this
chapter at 106 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(4) ‘‘Significantly undercapitalized’’ if
it fails to maintain the eligible assets
prescribed under § 347.210 of this
chapter at 104 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(5) ‘‘Critically undercapitalized’’ if it
fails to maintain the eligible assets
prescribed under § 347.210 of this
chapter at 102 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(d) Reclassifications based on
supervisory criteria other than capital.
The FDIC may reclassify a well
capitalized bank or state savings
association as adequately capitalized
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and may require an adequately
capitalized bank or state savings
association or an undercapitalized bank
or state savings association to comply
with certain mandatory or discretionary
supervisory actions as if the bank or
state savings association were in the
next lower capital category (except that
the FDIC may not reclassify a
significantly undercapitalized bank or
state savings association as critically
undercapitalized) (each of these actions
are hereinafter referred to generally as
‘‘reclassifications’’) in the following
circumstances:
(1) Unsafe or unsound condition. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that the
bank or state savings association is in
unsafe or unsound condition; or
(2) Unsafe or unsound practice. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that, in the
most recent examination of the bank or
state savings association, the bank or
state savings association received and
has not corrected a less-than-satisfactory
rating for any of the categories of asset
quality, management, earnings, or
liquidity.
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§ 324.304
Capital restoration plans.
(a) Schedule for filing plan—(1) In
general. A bank or state savings
association shall file a written capital
restoration plan with the appropriate
FDIC regional director within 45 days of
the date that the bank or state savings
association receives notice or is deemed
to have notice that the bank or state
savings association is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, unless the
FDIC notifies the bank or state savings
association in writing that the plan is to
be filed within a different period. An
adequately capitalized bank or state
savings association that has been
required pursuant to § 324.303(d) of this
subpart to comply with supervisory
actions as if the bank or state savings
association were undercapitalized is not
required to submit a capital restoration
plan solely by virtue of the
reclassification.
(2) Additional capital restoration
plans. Notwithstanding paragraph (a)(1)
of this section, a bank or state savings
association that has already submitted
and is operating under a capital
restoration plan approved under section
38 and this subpart is not required to
submit an additional capital restoration
plan based on a revised calculation of
its capital measures or a reclassification
of the institution under § 324.303 unless
the FDIC notifies the bank or state
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savings association that it must submit
a new or revised capital plan. A bank or
state savings association that is notified
that it must submit a new or revised
capital restoration plan shall file the
plan in writing with the appropriate
FDIC regional director within 45 days of
receiving such notice, unless the FDIC
notifies the bank or state savings
association in writing that the plan must
be filed within a different period.
(b) Contents of plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the Call Report, unless the
FDIC instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI Act. A bank
or state savings association that is
required to submit a capital restoration
plan as a result of a reclassification of
the bank or state savings association
pursuant to § 324.303(d) of this subpart
shall include a description of the steps
the bank or state savings association
will take to correct the unsafe or
unsound condition or practice. No plan
shall be accepted unless it includes any
performance guarantee described in
section 38(e)(2)(C) of the FDI Act by
each company that controls the bank or
state savings association.
(c) Review of capital restoration plans.
Within 60 days after receiving a capital
restoration plan under this subpart, the
FDIC shall provide written notice to the
bank or state savings association of
whether the plan has been approved.
The FDIC may extend the time within
which notice regarding approval of a
plan shall be provided.
(d) Disapproval of capital plan. If a
capital restoration plan is not approved
by the FDIC, the bank or state savings
association shall submit a revised
capital restoration plan within the time
specified by the FDIC. Upon receiving
notice that its capital restoration plan
has not been approved, any
undercapitalized bank or state savings
association (as defined in § 324.303(b) of
this subpart) shall be subject to all of the
provisions of section 38 of the FDI Act
and this subpart applicable to
significantly undercapitalized
institutions. These provisions shall be
applicable until such time as a new or
revised capital restoration plan
submitted by the bank has been
approved by the FDIC.
(e) Failure to submit capital
restoration plan. A bank or state savings
association that is undercapitalized (as
defined in § 324.303(b) of this subpart)
and that fails to submit a written capital
restoration plan within the period
provided in this section shall, upon the
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Sfmt 4702
expiration of that period, be subject to
all of the provisions of section 38 and
this subpart applicable to significantly
undercapitalized institutions.
(f) Failure to implement capital
restoration plan. Any undercapitalized
bank or state savings association that
fails in any material respect to
implement a capital restoration plan
shall be subject to all of the provisions
of section 38 of the FDI Act and this
subpart applicable to significantly
undercapitalized institutions.
(g) Amendment of capital restoration
plan. A bank or state savings association
that has filed an approved capital
restoration plan may, after prior written
notice to and approval by the FDIC,
amend the plan to reflect a change in
circumstance. Until such time as a
proposed amendment has been
approved, the bank or state savings
association shall implement the capital
restoration plan as approved prior to the
proposed amendment.
(h) Performance guarantee by
companies that control a bank or state
savings association—(1) Limitation on
liability—(i) Amount limitation. The
aggregate liability under the guarantee
provided under section 38 and this
subpart for all companies that control a
specific bank or state savings
association that is required to submit a
capital restoration plan under this
subpart shall be limited to the lesser of:
(A) An amount equal to 5.0 percent of
the bank or state savings association’s
total assets at the time the bank or state
savings association was notified or
deemed to have notice that the bank or
state savings association was
undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
bank or state savings association to the
levels required for the bank or state
savings association to be classified as
adequately capitalized, as those capital
measures and levels are defined at the
time that the bank or state savings
association initially fails to comply with
a capital restoration plan under this
subpart.
(ii) Limit on duration. The guarantee
and limit of liability under section 38 of
the FDI Act and this subpart shall expire
after the FDIC notifies the bank or state
savings association that it has remained
adequately capitalized for each of four
consecutive calendar quarters. The
expiration or fulfillment by a company
of a guarantee of a capital restoration
plan shall not limit the liability of the
company under any guarantee required
or provided in connection with any
capital restoration plan filed by the
same bank or state savings association
after expiration of the first guarantee.
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(iii) Collection on guarantee. Each
company that controls a given bank or
state savings association shall be jointly
and severally liable for the guarantee for
such bank or state savings association as
required under section 38 and this
subpart, and the FDIC may require and
collect payment of the full amount of
that guarantee from any or all of the
companies issuing the guarantee.
(2) Failure to provide guarantee. In
the event that a bank or state savings
association that is controlled by any
company submits a capital restoration
plan that does not contain the guarantee
required under section 38(e)(2) of the
FDI Act, the bank or state savings
association shall, upon submission of
the plan, be subject to the provisions of
section 38 and this subpart that are
applicable to banks and state savings
associations that have not submitted an
acceptable capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
bank or state savings association to
perform fully its guarantee of any
capital plan shall constitute a material
failure to implement the plan for
purposes of section 38(f) of the FDI Act.
Upon such failure, the bank or state
savings association shall be subject to
the provisions of section 38 and this
subpart that are applicable to banks and
state savings associations that have
failed in a material respect to implement
a capital restoration plan.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
§ 324.305 Mandatory and discretionary
supervisory actions.
(a) Mandatory supervisory actions—
(1) Provisions applicable to all banks
and state savings associations. All
banks and state savings associations are
subject to the restrictions contained in
section 38(d) of the FDI Act on payment
of capital distributions and management
fees.
(2) Provisions applicable to
undercapitalized, significantly
undercapitalized, and critically
undercapitalized banks and state
savings associations. Immediately upon
receiving notice or being deemed to
have notice, as provided in § 324.302 of
this subpart, that the bank or state
savings association is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, the bank or
state savings association shall become
subject to the provisions of section 38 of
the FDI Act:
(i) Restricting payment of capital
distributions and management fees
(section 38(d) of the FDI Act);
(ii) Requiring that the FDIC monitor
the condition of the bank or state
savings association (section 38(e)(1) of
the FDI Act);
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18:36 Aug 29, 2012
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(iii) Requiring submission of a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2) of the FDI Act);
(iv) Restricting the growth of the bank
or state savings association’s assets
(section 38(e)(3) of the FDI Act); and
(v) Requiring prior approval of certain
expansion proposals (section 38(e)(4) of
the FDI Act).
(3) Additional provisions applicable
to significantly undercapitalized, and
critically undercapitalized banks and
state savings associations. In addition to
the provisions of section 38 of the FDI
Act described in paragraph (a)(2) of this
section, immediately upon receiving
notice or being deemed to have notice,
as provided in § 324.302 of this subpart,
that the bank or state savings association
is significantly undercapitalized, or
critically undercapitalized, or that the
bank or state savings association is
subject to the provisions applicable to
institutions that are significantly
undercapitalized because the bank or
state savings association failed to submit
or implement in any material respect an
acceptable capital restoration plan, the
bank or state savings association shall
become subject to the provisions of
section 38 of the FDI Act that restrict
compensation paid to senior executive
officers of the institution (section
38(f)(4) of the FDI Act).
(4) Additional provisions applicable
to critically undercapitalized
institutions. (i) In addition to the
provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3)
of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in § 324.302 of
this subpart, that the insured depository
institution is critically undercapitalized,
the institution is prohibited from doing
any of the following without the FDIC’s
prior written approval:
(A) Entering into any material
transaction other than in the usual
course of business, including any
investment, expansion, acquisition, sale
of assets, or other similar action with
respect to which the depository
institution is required to provide notice
to the appropriate Federal banking
agency;
(B) Extending credit for any highly
leveraged transaction;
(C) Amending the institution’s charter
or bylaws, except to the extent
necessary to carry out any other
requirement of any law, regulation, or
order;
(D) Making any material change in
accounting methods;
(E) Engaging in any covered
transaction (as defined in section 23A(b)
PO 00000
Frm 00095
Fmt 4701
Sfmt 4702
52885
of the Federal Reserve Act (12 U.S.C.
371c(b)));
(F) Paying excessive compensation or
bonuses;
(G) Paying interest on new or renewed
liabilities at a rate that would increase
the institution’s weighted average cost
of funds to a level significantly
exceeding the prevailing rates of interest
on insured deposits in the institution’s
normal market areas; and
(H) Making any principal or interest
payment on subordinated debt
beginning 60 days after becoming
critically undercapitalized except that
this restriction shall not apply, until
July 15, 1996, with respect to any
subordinated debt outstanding on July
15, 1991, and not extended or otherwise
renegotiated after July 15, 1991.
(ii) In addition, the FDIC may further
restrict the activities of any critically
undercapitalized institution to carry out
the purposes of section 38 of the FDI
Act.
(5) Exception for certain savings
associations. The restrictions in
paragraph (a)(4) of this section shall not
apply, before July 1, 1994, to any
insured savings association if:
(i) The savings association had
submitted a plan meeting the
requirements of section 5(t)(6)(A)(ii) of
the Home Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)) prior to December 19,
1991;
(ii) The Director of Office of Thrift
Supervision (OTS) had accepted the
plan prior to December 19, 1991; and
(iii) The savings association remains
in compliance with the plan or is
operating under a written agreement
with the appropriate federal banking
agency.
(b) Discretionary supervisory actions.
In taking any action under section 38 of
the FDI Act that is within the FDIC’s
discretion to take in connection with:
(1) An insured depository institution
that is deemed to be undercapitalized,
significantly undercapitalized, or
critically undercapitalized, or has been
reclassified as undercapitalized, or
significantly undercapitalized; or
(2) An officer or director of such
institution, the FDIC shall follow the
procedures for issuing directives under
§§ 308.201 and 308.203 of this chapter,
unless otherwise provided in section 38
of the FDI Act or this subpart.
PART 362—ACTIVITIES OF INSURED
STATE BANKS AND INSURED
SAVINGS ASSOCIATIONS
70. The authority citation for part 362
continues to read as follows:
Authority: 12 U.S.C. 1816, 1818,
1819(a)(Tenth), 1828(j), 1828(m), 1828a,
1831a, 1831e, 1831w, 1843(l).
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
71. Revise § 362.18(a)(3) to read as
follows:
§ 362.18 Financial subsidiaries of insured
state nonmember banks
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
(a) * * *
(3) The insured state nonmember
bank will deduct the aggregate amount
of its outstanding equity investment,
including retained earnings, in all
financial subsidiaries that engage in
activities as principal pursuant to
VerDate Mar<15>2010
19:45 Aug 29, 2012
Jkt 226001
section 46(a) of the Federal Deposit Act
(12 U.S.C. 1831w(a)), from the bank’s
total assets and tangible equity and
deduct such investment from common
equity tier 1 capital in accordance with
12 CFR part 324, subpart C.
*
*
*
*
*
Dated: June 11, 2012
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Directors.
PO 00000
Frm 00096
Fmt 4701
Sfmt 9990
Dated at Washington, DC, this 12th day of
June, 2012.
Robert E. Feldman,
Executive Secretary.
Federal Deposit Insurance Corporation.
By order of the Board of Governors of the
Federal Reserve System, July 3, 2012.
Jennifer J. Johnson
Secretary of the Board.
[FR Doc. 2012–16757 Filed 8–10–12; 8:45 am]
BILLING CODE –P
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Agencies
[Federal Register Volume 77, Number 169 (Thursday, August 30, 2012)]
[Proposed Rules]
[Pages 52791-52886]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16757]
[[Page 52791]]
Vol. 77
Thursday,
No. 169
August 30, 2012
Part II
Department of the Treasury
-----------------------------------------------------------------------
Office of the Comptroller of the Currency
12 CFR Parts 3, 5, 6, et al.
-----------------------------------------------------------------------
Federal Reserve System
12 CFR Parts 208, 217, and 225
-----------------------------------------------------------------------
Federal Deposit Insurance Corporation
12 CFR Parts 324, 325, and 362
-----------------------------------------------------------------------
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective Action; Proposed Rule
Federal Register / Vol. 77 , No. 169 / Thursday, August 30, 2012 /
Proposed Rules
[[Page 52792]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3, 5, 6, 165, and 167
[Docket ID OCC-2012-0008]
RIN 1557-AD46
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 217, and 225 Regulations H, Q, and Y
[Docket No. R-1442]
RIN 7100-AD87
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324, 325, and 362
RIN 3064-AD95
Regulatory Capital Rules: Regulatory Capital, Implementation of
Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy,
Transition Provisions, and Prompt Corrective Action
AGENCIES: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; and the Federal
Deposit Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
seeking comment on three Notices of Proposed Rulemaking (NPR) that
would revise and replace the agencies' current capital rules. In this
NPR, the agencies are proposing to revise their risk-based and leverage
capital requirements consistent with agreements reached by the Basel
Committee on Banking Supervision (BCBS) in ``Basel III: A Global
Regulatory Framework for More Resilient Banks and Banking Systems''
(Basel III). The proposed revisions would include implementation of a
new common equity tier 1 minimum capital requirement, a higher minimum
tier 1 capital requirement, and, for banking organizations subject to
the advanced approaches capital rules, a supplementary leverage ratio
that incorporates a broader set of exposures in the denominator
measure. Additionally, consistent with Basel III, the agencies are
proposing to apply limits on a banking organization's capital
distributions and certain discretionary bonus payments if the banking
organization does not hold a specified amount of common equity tier 1
capital in addition to the amount necessary to meet its minimum risk-
based capital requirements. This NPR also would establish more
conservative standards for including an instrument in regulatory
capital. As discussed in the proposal, the revisions set forth in this
NPR are consistent with section 171 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), which requires the
agencies to establish minimum risk-based and leverage capital
requirements.
In connection with the proposed changes to the agencies' capital
rules in this NPR, the agencies are also seeking comment on the two
related NPRs published elsewhere in today's Federal Register. The two
related NPRs are discussed further in the SUPPLEMENTARY INFORMATION.
DATES: Comments must be submitted on or before October 22, 2012.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules: Regulatory Capital, Implementation of
Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy,
Transition Provisions, and Prompt Corrective Action'' to facilitate the
organization and distribution of the comments. You may submit comments
by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to https://www.regulations.gov. Click ``Advanced Search''. Select ``Document
Type'' of ``Proposed Rule'', and in ``By Keyword or ID'' box, enter
Docket ID ``OCC-2012-0008,'' and click ``Search''. If proposed rules
for more than one agency are listed, in the ``Agency'' column, locate
the notice of proposed rulemaking for the OCC. Comments can be filtered
by agency using the filtering tools on the left side of the screen. In
the ``Actions'' column, click on ``Submit a Comment'' or ``Open Docket
Folder'' to submit or view public comments and to view supporting and
related materials for this rulemaking action.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
Email: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2012-0008'' in your comment. In general, the OCC will
enter all comments received into the docket and publish them on
Regulations.gov without change, including any business or personal
information that you provide such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not enclose any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this notice by any of the following methods:
Viewing Comments Electronically: Go to https://www.regulations.gov. Click ``Advanced Search''. Select ``Document
Type'' of ``Public Submission'' and in ``By Keyword or ID'' box enter
Docket ID ``OCC-2012-0008,'' and click ``Search.'' If comments from
more than one agency are listed, the ``Agency'' column will indicate
which comments were received by the OCC. Comments can be filtered by
Agency using the filtering tools on the left side of the screen.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described previously.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC, area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1430; RIN No. 7100-AD87, by any of the
following methods:
[[Page 52793]]
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on
weekdays.
FDIC: You may submit comments by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site: https://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street building (located on F Street), on business days
between 7:00 a.m. and 5:00 p.m.
Email: comments@FDIC.gov.
Instructions: Comments submitted must include ``FDIC'' and
``RIN 3064-AD95.'' Comments received will be posted without change to
https://www.FDIC.gov/regulations/laws/federal/propose.html, including
any personal information provided.
FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Senior Risk
Expert, (202) 874-6022; David Elkes, Risk Expert, (202) 874-3846; Mark
Ginsberg, Risk Expert, (202) 927-4580; or Ron Shimabukuro, Senior
Counsel, Patrick Tierney, Counsel, or Carl Kaminski, Senior Attorney,
Legislative and Regulatory Activities Division, (202) 874-5090, Office
of the Comptroller of the Currency, 250 E Street SW., Washington, DC
20219.
Board: Anna Lee Hewko, Assistant Director, (202) 530-6260, Thomas
Boemio, Manager, (202) 452-2982, Constance M. Horsley, Manager, (202)
452-5239, or Juan C. Climent, Senior Supervisory Financial Analyst,
(202) 872-7526, Capital and Regulatory Policy, Division of Banking
Supervision and Regulation; or Benjamin McDonough, Senior Counsel,
(202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or
Christine Graham, Senior Attorney, (202) 452-3005, Legal Division,
Board of Governors of the Federal Reserve System, 20th and C Streets
NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov; Ryan
Billingsley, Senior Policy Analyst, rbillingsley@fdic.gov; Karl Reitz,
Senior Policy Analyst, kreitz@fdic.gov, Division of Risk Management
Supervision; David Riley, Senior Policy Analyst, dariley@fdic.gov,
Division of Risk Management Supervision, Capital Markets Branch, (202)
898-6888; or Mark Handzlik, Counsel, mhandzlik@fdic.gov, Michael
Phillips, Counsel, mphillips@fdic.gov, Greg Feder, Counsel,
gfeder@fdic.gov, or Ryan Clougherty, Senior Attorney,
rclougherty@fdic.gov; Supervision Branch, Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW., Washington, DC
20429.
SUPPLEMENTARY INFORMATION: In connection with the proposed changes to
the agencies' capital rules in this NPR, the agencies are also seeking
comment on the two related NPRs published elsewhere in today's Federal
Register. In the notice titled ``Regulatory Capital Rules: Standardized
Approach for Risk-Weighted Assets; Market Discipline and Disclosure
Requirements'' (Standardized Approach NPR), the agencies are proposing
to revise and harmonize their rules for calculating risk-weighted
assets to enhance risk sensitivity and address weaknesses identified
over recent years, including by incorporating aspects of the BCBS's
Basel II standardized framework in the ``International Convergence of
Capital Measurement and Capital Standards: A Revised Framework,''
including subsequent amendments to that standard, and recent BCBS
consultative papers. The Standardized Approach NPR also includes
alternatives to credit ratings, consistent with section 939A of the
Dodd-Frank Act. The revisions include methodologies for determining
risk-weighted assets for residential mortgages, securitization
exposures, and counterparty credit risk. The Standardized Approach NPR
also would introduce disclosure requirements that would apply to top-
tier banking organizations domiciled in the United States with $50
billion or more in total assets, including disclosures related to
regulatory capital instruments.
The proposals in this NPR and the Standardized Approach NPR would
apply to all banking organizations that are currently subject to
minimum capital requirements (including national banks, state member
banks, state nonmember banks, state and federal savings associations,
and top-tier bank holding companies domiciled in the United States not
subject to the Board's Small Bank Holding Company Policy Statement (12
CFR part 225, appendix C)), as well as top-tier savings and loan
holding companies domiciled in the United States (together, banking
organizations).
In the notice titled ``Regulatory Capital Rules: Advanced
Approaches Risk-Based Capital Rule; Market Risk Capital Rule,''
(Advanced Approaches and Market Risk NPR) the agencies are proposing to
revise the advanced approaches risk-based capital rules consistent with
Basel III and other changes to the BCBS's capital standards. The
agencies also propose to revise the advanced approaches risk-based
capital rules to be consistent with section 939A and section 171 of the
Dodd-Frank Act. Additionally, in the Advanced Approaches and Market
Risk NPR, the OCC and FDIC are proposing that the market risk capital
rules be applicable to federal and state savings associations and the
Board is proposing that the advanced approaches and market risk capital
rules apply to top-tier savings and loan holding companies domiciled in
the United States, in each case, if stated thresholds for trading
activity are met.
As described in this NPR, the agencies also propose to codify their
regulatory capital rules, which currently reside in various appendixes
to their respective regulations. The proposals are published in three
separate NPRs to reflect the distinct objectives of each proposal, to
allow interested parties to better understand the various aspects of
the overall capital framework, including which aspects of the rules
would apply to which banking organizations, and to help interested
parties better focus their comments on areas of particular interest.
[[Page 52794]]
Table of Contents \1\
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\1\ Sections marked with an asterisk generally would not apply
to less-complex banking organizations.
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I. Introduction
A. Overview of the Proposed Changes to the Agencies' Current
Capital Framework. A summary of the proposed changes to the
agencies' current capital framework through three concurrent notices
of proposed rulemaking, including comparison of key provisions of
the proposals to the agencies' general risk-based and leverage
capital rules.
B. Background. A brief review of the evolution of the agencies'
capital rules and the Basel capital framework, including an overview
of the rationale for certain revisions in the Basel capital
framework.
II. Minimum Capital Requirements, Regulatory Capital Buffer, and
Requirements for Overall Capital Adequacy
A. Minimum Capital Requirements and Regulatory Capital Buffer. A
short description of the minimum capital ratios and their
incorporation in the agencies' Prompt Corrective Action (PCA)
framework; introduction of a regulatory capital buffer.
B. Leverage Ratio
1. Minimum Tier 1 Leverage Ratio. A description of the minimum
tier 1 leverage ratio, including the calculation of the numerator
and the denominator.
2. Supplementary Leverage Ratio for Advanced Approaches Banking
Organizations.* A description of the new supplementary leverage
ratio for advanced approaches banking organizations, including the
calculation of the total leverage exposure.
C. Capital Conservation Buffer. A description of the capital
conservation buffer, which is designed to limit capital
distributions and certain discretionary bonus payments if a banking
organization does not hold a certain amount of common equity tier 1
capital in additional to the minimum risk-based capital ratios.
D. Countercyclical Capital Buffer.* A description of the
countercyclical buffer applicable to advanced approaches banking
organizations, which would serve as an extension of the capital
conservation buffer.
E. Prompt Corrective Action Requirements. A description of the
proposed revisions to the agencies' prompt corrective action
requirements, including incorporation of a common equity tier 1
capital ratio, an updated definition of tangible common equity, and,
for advanced approaches banking organizations only, a supplementary
leverage ratio.
F. Supervisory Assessment of Overall Capital Adequacy. A brief
overview of the capital adequacy requirements and supervisory
assessment of a banking organization's capital adequacy.
G. Tangible Capital Requirement for Federal Savings
Associations. A discussion of a statutory capital requirement unique
to federal savings associations.
III. Definition of Capital
A. Capital Components and Eligibility Criteria for Regulatory
Capital Instruments
1. Common Equity Tier 1 Capital. A description of the common
equity tier 1 capital elements and a description of the eligibility
criteria for common equity tier 1 capital instruments.
2. Additional Tier 1 Capital. A description of the additional
tier 1 capital elements and a description of the eligibility
criteria for additional tier 1 capital instruments.
3. Tier 2 Capital. A description of the tier 2 capital elements
and a description of the eligibility criteria for tier 2 capital
instruments.
4. Capital Instruments of Mutual Banking Organizations. A
discussion of potential issues related to capital instruments
specific to mutual banking organizations.
5. Grandfathering of Certain Capital Instruments. A discussion
of the recognition within regulatory capital of instruments
specifically related to certain U.S. government programs.
6. Agency Approval of Capital Elements. A description of the
approval process for new capital instruments.
7. Addressing the Point of Non-viability Requirements under
Basel III.* A discussion of disclosure requirements for advanced
approaches banking organizations for regulatory capital instruments
addressing the point of non-viability requirements in Basel III.
8. Qualifying Capital Instruments Issued by Consolidated
Subsidiaries of a Banking Organization. A description of limits on
the inclusion of minority interest in regulatory capital, including
a discussion of Real Estate Investment Trust (REIT) preferred
securities.
B. Regulatory Adjustments and Deductions
1. Regulatory Deductions from Common Equity Tier 1 Capital. A
discussion of the treatment of goodwill and certain other intangible
assets and certain deferred tax assets.
2. Regulatory Adjustments to Common Equity Tier 1 Capital. A
discussion of the adjustments to common equity tier 1 for certain
cash flow hedges and changes in a banking organization's own
creditworthiness.
3. Regulatory Deductions Related to Investments in Capital
Instruments. A discussion of the treatment for capital investments
in other financial institutions.
4. Items subject to the 10 and 15 Percent Common Equity Tier 1
Capital Threshold Deductions. A discussion of the treatment of
mortgage servicing assets, certain capital investments in other
financial institutions and certain deferred tax assets.
5. Netting of Deferred Tax Liabilities against Deferred Tax
Assets and Other Deductible Assets. A discussion of a banking
organization's option to net deferred tax liabilities against
deferred tax assets if certain conditions are met under the
proposal.
6. Deduction from Tier 1 Capital of Investments in Hedge Funds
and Private Equity Funds Pursuant to section 619 of the Dodd-Frank
Act.* A description of the deduction from tier 1 capital for
investments in hedge funds and private equity funds pursuant to
section 619 of the Dodd-Frank Act.
IV. Denominator Changes. A description of the changes to the
calculation of risk-weighted asset amounts related to the Basel III
regulatory capital requirements.
V. Transition Provisions
A. Minimum Regulatory Capital Ratios. A description of the
transition provisions for minimum regulatory capital ratios.
B. Capital Conservation and Countercyclical Capital Buffer. A
description of the transition provisions for the capital
conservation buffer, and for advanced approaches banking
organizations, the countercyclical capital buffer.
C. Regulatory Capital Adjustments and Deductions. A description
of the transition provisions for regulatory capital adjustments and
deductions.
D. Non-qualifying Capital Instruments. A description of the
transition provisions for non-qualifying capital instruments.
E. Leverage Ratio.* A description of the transition provisions
for the new supplementary leverage ratio for advanced approaches
banking organizations.
VI. Additional OCC Technical Amendments. A description of additional
technical and conforming amendments to the OCC's current capital
framework in 12 CFR part 3.
VII. Abbreviations
VIII. Regulatory Flexibility Act Analysis
IX. Paperwork Reduction Act
X. Plain Language
XI. OCC Unfunded Mandates Reform Act of 1995 Determination
Addendum 1: Summary of This NPR for Community Banking Organizations
I. Introduction
A. Overview of the Proposed Changes to the Agencies' Current Capital
Framework
The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
proposing comprehensive revisions to their regulatory capital framework
through three concurrent notices of proposed rulemaking (NPR). These
proposals would revise the agencies' current general risk-based rules,
advanced approaches risk-based capital rules (advanced approaches), and
leverage capital rules (collectively, the current capital rules).\2\
The proposed
[[Page 52795]]
revisions incorporate changes made by the Basel Committee on Banking
Supervision (BCBS) to the Basel capital framework, including those in
``Basel III: A Global Regulatory Framework for More Resilient Banks and
Banking Systems'' (Basel III).\3\ The proposed revisions also would
implement relevant provisions of the Dodd-Frank Act and restructure the
agencies' capital rules into a harmonized, codified regulatory capital
framework.\4\
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\2\ The agencies' general risk-based capital rules are at 12 CFR
part 3, appendix A, 12 CFR part 167 (OCC); 12 CFR parts 208 and 225,
appendix A (Board); and 12 CFR part 325, appendix A, and 12 CFR part
390, subpart Z (FDIC). The agencies' current leverage rules are at
12 CFR 3.6(b), 3.6(c), and 167.6 (OCC); 12 CFR part 208, appendix B,
and 12 CFR part 225, appendix D (Board); and 12 CFR 325.3, and
390.467 (FDIC) (general risk-based capital rules). For banks and
bank holding companies with significant trading activity, the
general risk-based capital rules are supplemented by the agencies'
market risk rules, which appear at 12 CFR part 3, appendix B (OCC);
12 CFR part 208, appendix E, and 12 CFR part 225, appendix E
(Board); and 12 CFR part 325, appendix C (FDIC) (market risk rules).
The agencies' advanced approaches rules are at 12 CFR part 3,
appendix C, 12 CFR part 167, appendix C, (OCC); 12 CFR part 208,
appendix F, and 12 CFR part 225, appendix G (Board); 12 CFR part
325, appendix D, and 12 CFR part 390, subpart Z, Appendix A (FDIC)
(advanced approaches rules). The advanced approaches rules are
generally mandatory for banking organizations and their subsidiaries
that have $250 billion or more in total consolidated assets or that
have consolidated total on-balance sheet foreign exposure at the
most recent year-end equal to $10 billion or more. Other banking
organizations may use the advanced approaches rules with the
approval of their primary federal supervisor. See 12 CFR part 3,
appendix C, section 1(b) (national banks); 12 CFR part 167, appendix
C (federal savings associations); 12 CFR part 208, appendix F,
section 1(b) (state member banks); 12 CFR part 225, appendix G,
section 1(b) (bank holding companies); 12 CFR part 325, appendix D,
section 1(b) (state nonmember banks); and 12 CFR part 390, subpart
Z, appendix A, section 1(b) (state savings associations).
The market risk capital rules apply to a banking organization if
its total trading assets and liabilities is 10 percent or more of
total assets or exceeds $1 billion. See 12 CFR part 3, appendix B,
section 1(b) (national banks); 12 CFR parts 208 and 225, appendix E,
section 1(b) (state member banks and bank holding companies,
respectively); and 12 CFR part 325, appendix C, section 1(b) (state
nonmember banks).
\3\ The BCBS is a committee of banking supervisory authorities,
which was established by the central bank governors of the G-10
countries in 1975. It currently consists of senior representatives
of bank supervisory authorities and central banks from Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. Documents issued by the BCBS are available through the Bank
for International Settlements Web site at https://www.bis.org.
\4\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010) (Dodd-
Frank Act).
---------------------------------------------------------------------------
This notice (Basel III NPR) proposes the Basel III revisions to
international capital standards related to minimum requirements,
regulatory capital, and additional capital ``buffers'' to enhance the
resiliency of banking organizations, particularly during periods of
financial stress. It also proposes transition periods for many of the
proposed requirements, consistent with Basel III and the Dodd-Frank
Act. A second NPR (Standardized Approach NPR) would revise the
methodologies for calculating risk-weighted assets in the general risk-
based capital rules, incorporating aspects of the Basel II Standardized
Approach and other changes.\5\ The Standardized Approach NPR also
proposes alternative standards of creditworthiness (to credit ratings)
consistent with section 939A of the Dodd-Frank Act.\6\ A third NPR
(Advanced Approaches and Market Risk NPR) proposes changes to the
advanced approaches rules to incorporate applicable provisions of Basel
III and other agreements reached by the BCBS since 2009, proposes to
apply the market risk capital rule (market risk rule) to savings
associations and savings and loan holding companies and to apply the
advanced approaches rule to savings and loan holding companies, and
also removes references to credit ratings.
---------------------------------------------------------------------------
\5\ See BCBS, ``International Convergence of Capital Measurement
and Capital Standards: A Revised Framework,'' (June 2006), available
at https://www.bis.org/publ/bcbs128.htm (Basel II).
\6\ See section 939A of the Dodd-Frank Act (15 U.S.C. 78o-7
note).
---------------------------------------------------------------------------
Other than bank holding companies subject to the Board's Small Bank
Holding Company Policy Statement \7\ (small bank holding companies),
the proposals in the Basel III NPR and the Standardized Approach NPR
would apply to all banking organizations currently subject to minimum
capital requirements, including national banks, state member banks,
state nonmember banks, state and federal savings associations, top-tier
bank holding companies domiciled in the United States that are not
small bank holding companies, as well as top-tier savings and loan
holding companies domiciled in the United States (together, banking
organizations).\8\ Certain aspects of these proposals would apply only
to advanced approaches banking organizations or banking organizations
with total consolidated assets of more than $50 billion. Consistent
with the Dodd-Frank Act, a bank holding company subsidiary of a foreign
banking organization that is currently relying on the Board's
Supervision and Regulation Letter (SR) 01-1 would not be required to
comply with the proposed capital requirements under any of these NPRs
until July 21, 2015.\9\ In addition, the Board is proposing for all
three NPRs to apply on a consolidated basis to top-tier savings and
loan holding companies domiciled in the United States, subject to the
applicable thresholds of the advanced approaches rules and the market
risk rules.
---------------------------------------------------------------------------
\7\ 12 CFR part 225, appendix C (Small Bank Holding Company
Policy Statement).
\8\ Small bank holding companies would continue to be subject to
the Small Bank Holding Company Policy Statement. Application of the
proposals to all savings and loan holding companies (including small
savings and loan holding companies) is consistent with the transfer
of supervisory responsibilities to the Board and the requirements of
section 171 of the Dodd-Frank Act. Section 171 of the Dodd-Frank Act
by its terms does not apply to small bank holding companies, but
there is no exemption from the requirements of section 171 for small
savings and loan holding companies. See 12 U.S.C. 5371.
\9\ See section 171(b)(4)(E) of the Dodd-Frank Act (12 U.S.C.
5371(b)(4)(E)); see also SR letter 01-1 (January 5, 2001), available
at https://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
---------------------------------------------------------------------------
The agencies are publishing all the proposed changes to the
agencies' current capital rules at the same time in these three NPRs so
that banking organizations can read the three NPRs together and assess
the potential cumulative impact of the proposals on their operations
and plan appropriately. The overall proposal is being divided into
three separate NPRs to reflect the distinct objectives of each proposal
and to allow interested parties to better understand the various
aspects of the overall capital framework, including which aspects of
the rules will apply to which banking organizations, and to help
interested parties better focus their comments on areas of particular
interest. The agencies believe that separating the proposals into three
NPRs makes it easier for banking organizations of all sizes to more
easily understand which proposed changes are related to the agencies'
objective to improve the quality and increase the quantity of capital
(Basel III NPR) and which are related to the agencies' objective to
enhance the overall risk-sensitivity of the calculation of a banking
organization's total risk-weighted assets (Standardized Approach NPR).
The agencies believe that the proposals would result in capital
requirements that better reflect banking organizations' risk profiles
and enhance their ability to continue functioning as financial
intermediaries, including during periods of financial stress, thereby
improving the overall resiliency of the banking system. The agencies
have carefully considered the potential impact of the three NPRs on all
banking organizations, including community banking organizations, and
sought to minimize the potential burden of these changes where
consistent with applicable law and the agencies' goals of
[[Page 52796]]
establishing a robust and comprehensive capital framework.
In developing each of the three NPRs, wherever possible and
appropriate, the agencies have tailored the proposed requirements to
the size and complexity of a banking organization. The agencies believe
that most banking organizations already hold sufficient capital to meet
the proposed requirements, but recognize that the proposals entail
significant changes with respect to certain aspects of the agencies'
capital requirements. The agencies are proposing transition
arrangements or delayed effective dates for aspects of the revised
capital requirements consistent with Basel III and the Dodd-Frank Act.
The agencies anticipate that they separately would seek comment on
regulatory reporting instructions to harmonize regulatory reports with
these proposals in a subsequent Federal Register notice.
Many of the proposed requirements in the three NPRs are not
applicable to smaller, less complex banking organizations. To assist
these banking organizations in rapidly identifying the elements of
these proposals that would apply to them, this NPR and the Standardized
Approach NPR provide, as addenda to the corresponding preambles, a
summary of the various aspects of each NPR designed to clearly and
succinctly describe the two NPRs as they would typically apply to
smaller, less complex banking organizations.\10\
---------------------------------------------------------------------------
\10\ The Standardized Approach NPR also contains a second
addendum to the preamble, which contains the definitions proposed
under the Basel III NPR. Many of the proposed definitions also are
applicable to the Standardized Approach NPR, which is published
elsewhere in today's Federal Register.
---------------------------------------------------------------------------
Basel III NPR
In 2010, the BCBS published Basel III, a comprehensive reform
package that is designed to improve the quality and the quantity of
regulatory capital and to build additional capacity into the banking
system to absorb losses in times of future market and economic
stress.\11\ This NPR proposes the majority of the revisions to
international capital standards in Basel III, including a more
restrictive definition of regulatory capital, higher minimum regulatory
capital requirements, and a capital conservation and a countercyclical
capital buffer, to enhance the ability of banking organizations to
absorb losses and continue to operate as financial intermediaries
during periods of economic stress.\12\ The proposal would place limits
on banking organizations' capital distributions and certain
discretionary bonuses if they do not hold specified ``buffers'' of
common equity tier 1 capital in excess of the new minimum capital
requirements.
---------------------------------------------------------------------------
\11\ BCBS published Basel III in December 2010 and revised it in
June 2011. The text is available at https://www.bis.org/publ/bcbs189.htm. This NPR does not incorporate the Basel III reforms
related to liquidity risk management, published in December 2010,
``Basel III: International Framework for Liquidity Risk Measurement,
Standards and Monitoring.'' The agencies expect to propose rules to
implement the Basel III liquidity provisions in a separate
rulemaking.
\12\ Selected aspects of Basel III that would apply only to
advanced approaches banking organizations are proposed in the
Advanced Approaches and Market Risk NPR.
---------------------------------------------------------------------------
This NPR also includes a leverage ratio contained in Basel III that
incorporates certain off-balance sheet assets in the denominator
(supplementary leverage ratio). The supplementary leverage ratio would
apply only to banking organizations that use the advanced approaches
rules (advanced approaches banking organizations). The current leverage
ratio requirement (computed using the proposed new definition of
capital) would continue to apply to all banking organizations,
including advanced approaches banking organizations.
In this NPR, the agencies also propose revisions to the agencies'
prompt corrective action (PCA) rules to incorporate the proposed
revisions to the minimum regulatory capital ratios.\13\
---------------------------------------------------------------------------
\13\ 12 CFR part 6, 12 CFR 165 (OCC); 12 CFR part 208, subpart E
(Board); 12 CFR part 325 and part 390, subpart Y (FDIC).
---------------------------------------------------------------------------
Standardized Approach NPR
The Standardized Approach NPR aims to enhance the risk-sensitivity
of the agencies' capital requirements by revising the calculation of
risk-weighted assets. It would do this by incorporating aspects of the
Basel II Standardized Approach, including aspects of the 2009
``Enhancements to the Basel II Framework'' (2009 Enhancements), and
other changes designed to improve the risk-sensitivity of the general
risk-based capital requirements. The proposed changes are described in
further detail in the preamble to the Standardized Approach NPR.\14\ As
compared to the general risk-based capital rules, the Standardized
Approach NPR includes a greater number of exposure categories for
purposes of calculating total risk-weighted assets, provides for
greater recognition of financial collateral, and permits a wider range
of eligible guarantors. In addition, to increase transparency in the
derivatives market, the Standardized Approach NPR would provide a more
favorable capital treatment for derivative and repo-style transactions
cleared through central counterparties (as compared to the treatment
for bilateral transactions) in order to create an incentive for banking
organizations to enter into cleared transactions. Further, to promote
transparency and market discipline, the Standardized Approach NPR
proposes disclosure requirements that would apply to top-tier banking
organizations domiciled in the United States with $50 billion or more
in total assets that are not subject to disclosure requirements under
the advanced approaches rule.
---------------------------------------------------------------------------
\14\ See BCBS, ``Enhancements to the Basel II Framework'' (July
2009), available at https://www.bis.org/publ/bcbs157.htm (2009
Enhancements). See also BCBS, ``International Convergence of Capital
Measurement and Capital Standards: A Revised Framework,'' (June
2006), available at https://www.bis.org/publ/bcbs128.htm (Basel II).
---------------------------------------------------------------------------
In the Standardized Approach NPR, the agencies also propose to
revise the calculation of risk-weighted assets for certain exposures,
consistent with the requirements of section 939A of the Dodd-Frank Act
by using standards of creditworthiness that are alternatives to credit
ratings. These alternative standards would be used to assign risk
weights to several categories of exposures, including sovereigns,
public sector entities, depository institutions, and securitization
exposures. These alternative standards and risk-based capital
requirements have been designed to result in capital requirements that
are consistent with safety and soundness, while also exhibiting risk
sensitivity to the extent possible. Furthermore, these capital
requirements are intended to be similar to those generated under the
Basel capital framework.
The Standardized Approach NPR would require banking organizations
to implement the revisions contained in that NPR on January 1, 2015;
however, the proposal would also allow banking organizations to early
adopt the Standardized Approach revisions.
Advanced Approaches and Market Risk NPR
The proposals in the Advanced Approaches and Market Risk NPR would
amend the advanced approaches rules and integrate the agencies' revised
market risk rules into the codified regulatory capital rules.\15\ The
Advanced Approaches and Market Risk NPR would incorporate revisions to
the Basel capital framework published by the BCBS in a series of
documents between 2009 and 2011, including the 2009 Enhancements and
Basel III. The proposals would also revise the
[[Page 52797]]
advanced approaches rules to achieve consistency with relevant
provisions of the Dodd-Frank Act.
---------------------------------------------------------------------------
\15\ The agencies' market risk rules are revised by a final rule
published elsewhere today in the Federal Register.
---------------------------------------------------------------------------
Significant proposed revisions to the advanced approaches rules
include the treatment of counterparty credit risk, the methodology for
computing risk-weighted assets for securitization exposures, and risk
weights for exposures to central counterparties. For example, the
Advanced Approaches and Market Risk NPR proposes capital requirements
to account for credit valuation adjustments (CVA), wrong-way risk,
cleared derivative and repo-style transactions (similar to proposals in
the Standardized Approach NPR) and default fund contributions to
central counterparties. The Advanced Approaches and Market Risk NPR
would also require banking organizations subject to the advanced
approaches rules (advanced approaches banking organizations) to conduct
more rigorous credit analysis of securitization exposures and implement
certain disclosure requirements.
The Advanced Approaches and Market Risk NPR additionally proposes
to remove the ratings-based approach and the internal assessment
approach from the current advanced approaches rules' securitization
hierarchy consistent with section 939A of the Dodd-Frank Act, and to
include in the hierarchy the simplified supervisory formula approach
(SSFA) as a methodology to calculate risk-weighted assets for
securitization exposures. The SSFA methodology is also proposed in the
Standardized Approach NPR and is included in the market risk rule. The
agencies also are proposing to remove references to credit ratings from
certain defined terms under the advanced approaches rules and replace
them with alternative standards of creditworthiness.
Banking organizations currently subject to the advanced approaches
rule would continue to be subject to the advanced approaches rules. In
addition, the Board proposes to apply the advanced approaches and
market risk rules to savings and loan holding companies, and the OCC
and FDIC propose to apply the market risk rules to federal and state
savings associations that meet the scope of application of those rules,
respectively.
For advanced approaches banking organizations, the regulatory
capital requirements proposed in this NPR and the Standardized Approach
NPR would be ``generally applicable'' capital requirements for purposes
of section 171 of the Dodd-Frank Act.\16\
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 5371.
---------------------------------------------------------------------------
Proposed Structure of the Agencies' Regulatory Capital Framework and
Key Provisions of the Three Proposals
In connection with the changes proposed in the three NPRs, the
agencies intend to codify their current regulatory capital requirements
under applicable statutory authority. Under the revised structure, each
agency's capital regulations would include definitions in subpart A.
The minimum risk-based and leverage capital requirements and buffers
would be contained in Subpart B and the definition of regulatory
capital would be included in subpart C. Subpart D would include the
risk-weighted asset calculations required of all banking organizations;
these proposed risk-weighted asset calculations are described in the
Standardized Approach NPR. Subpart E would contain the advanced
approaches rules, including changes made pursuant to the advanced
approach NPR. The market risk rule would be contained in subpart F.
Transition provisions would be in subpart G. The agencies believe that
this revision would reduce the burden associated with multiple
reference points for applicable capital requirements, promote
consistency of capital rules across the banking agencies, and reduce
repetition of certain features, such as definitions, across the rules.
Table 1 outlines the proposed structure of the agencies' capital
rules, as well as references to the proposed revisions to the PCA
rules.
Table 1--Proposed Structure of the Agencies' Capital Rules and Proposed
Revisions to the PCA Framework
------------------------------------------------------------------------
Subpart or regulation Description of content
------------------------------------------------------------------------
Subpart A (included in the Basel III Purpose; applicability;
NPR). reservation of authority;
definitions.
Subpart B (included in the Basel III Minimum capital requirements;
NPR). minimum leverage capital
requirements; capital buffers.
Subpart C (included in the Basel III Regulatory capital: Eligibility
NPR). criteria, minority interest,
adjustments and deductions.
Subpart D (included in the Standardized Calculation of standardized
Approach NPR). total risk-weighted assets for
general credit risk, off-
balance sheet items, over the
counter (OTC) derivative
contracts, cleared
transactions and default fund
contributions, unsettled
transactions, securitization
exposures, and equity
exposures. Description of
credit risk mitigation.
Subpart E (included in the Advanced Calculation of advanced
Approaches and Market Risk NPR). approaches total risk-weighted
assets.
Subpart F (included in the Advanced Calculation of market risk-
Approaches and Market Risk NPR). weighted assets.
Subpart G (included in the Basel III Transition provisions.
NPR).
Subpart D of Regulation H (Board), 12 Revised PCA capital framework,
CFR part 6 (OCC), Subpart H of part including introduction of a
324 (FDIC). common equity tier 1 capital
threshold; revision of the
current PCA thresholds to
incorporate the proposed
regulatory capital minimums;
an update of the definition of
tangible common equity, and,
for advanced approaches
organizations only, a
supplementary leverage ratio.
------------------------------------------------------------------------
While the agencies are mindful that the proposal will result in
higher capital requirements and costs associated with changing systems
to calculate capital requirements, the agencies believe that the
proposed changes are necessary to address identified weaknesses in the
agencies' current capital rules; strengthen the banking sector and help
reduce risk to the deposit insurance fund and the financial system; and
revise the agencies' capital rules
[[Page 52798]]
consistent with the international agreements and U.S. law. Accordingly,
this NPR includes transition arrangements that aim to provide banking
organizations sufficient time to adjust to the proposed new rules and
that are generally consistent with the transitional arrangements of the
Basel capital framework.
In December 2010, the BCBS conducted a quantitative impact study of
internationally active banks to assess the impact of the capital
adequacy standards announced in July 2009 and the Basel III proposal
published in December 2009. Overall, the BCBS found that as a result of
the proposed changes, banking organizations surveyed will need to hold
more capital to meet the new minimum requirements. In addition,
quantitative analysis by the Macroeconomic Assessment Group, a working
group of the BCBS, found that the stronger Basel capital requirements
would lower the probability of banking crises and their associated
output losses while having only a modest negative impact on gross
domestic product and lending costs, and that the negative impact could
be mitigated by phasing the requirements in over time.\17\ The agencies
believe that the benefits of these changes to the U.S. financial
system, in terms of the reduction of risk to the deposit insurance fund
and the financial system, ultimately outweigh the burden on banking
organizations of compliance with the new standards.
---------------------------------------------------------------------------
\17\ See ``Assessing the Macroeconomic Impact of the Transition
to Stronger Capital and Liquidity Requirements'' (August 2010),
available at https://www.bis.org/publ/othp10.pdf; ``An assessment of
the long-term economic impact of stronger capital and liquidity
requirements'' (August 2010), available at https://www.bis.org/publ/bcbs173.pdf.
---------------------------------------------------------------------------
As part of developing this proposal, the agencies conducted an
impact analysis using depository institution and bank holding company
regulatory reporting data to estimate the change in capital that
banking organizations would be required to hold to meet the proposed
minimum capital requirements. The impact analysis assumed the proposed
definition of capital for purposes of the numerator and the proposed
standardized risk-weights for purposes of the denominator, and made
stylized assumptions in cases where necessary input data were
unavailable from regulatory reports. Based on the agencies' analysis,
the vast majority of banking organizations currently would meet the
fully phased-in minimum capital requirements as of March 31, 2012, and
those organizations that would not meet the proposed minimum
requirements should have ample time to adjust their capital levels by
the end of the transition period.
Table 2 summarizes key changes proposed in the Basel III and
Standardized Approach NPRs and how these changes compare with the
agencies' general risk-based and leverage capital rules.
Table 2--Key Provisions of the Basel III and Standardized Approach NPRs
as Compared With the Current Risk-Based and Leverage Capital Rules
------------------------------------------------------------------------
Aspect of proposed requirements Proposed treatment
------------------------------------------------------------------------
Basel III NPR
------------------------------------------------------------------------
Minimum Capital Ratios:
Common equity tier 1 capital ratio Introduces a minimum
(section 10). requirement of 4.5 percent.
Tier 1 capital ratio (section 10).. Increases the minimum
requirement from 4.0 percent
to 6.0 percent.
Total capital ratio (section 10)... Minimum unchanged (remains at
8.0 percent).
Leverage ratio (section 10)........ Modifies the minimum leverage
ratio requirement based on the
new definition of tier 1
capital. Introduces a
supplementary leverage ratio
requirement for advanced
approaches banking
organizations.
Components of Capital and Eligibility Enhances the eligibility
Criteria for Regulatory Capital criteria for regulatory
Instruments (sections 20-22). capital instruments and adds
certain adjustments to and
deductions from regulatory
capital, including increased
deductions for mortgage
servicing assets (MSAs) and
deferred tax assets (DTAs) and
new limits on the inclusion of
minority interests in capital.
Provides that unrealized gains
and losses on all available
for sale (AFS) securities and
gains and losses associated
with certain cash flow hedges
flow through to common equity
tier 1 capital.
Capital Conservation Buffer (section Introduces a capital
11). conservation buffer of common
equity tier 1 capital above
the minimum risk-based capital
requirements, which must be
maintained to avoid
restrictions on capital
distributions and certain
discretionary bonus payments.
Countercyclical Capital Buffer (section Introduces for advanced
11). approaches banking
organizations a mechanism to
increase the capital
conservation buffer during
times of excessive credit
growth.
------------------------------------------------------------------------
Standardized Approach NPR Risk-Weighted Assets
------------------------------------------------------------------------
Credit exposures to: Unchanged.
U.S. government and its agencies...
U.S. government-sponsored entities.
U.S. depository institutions and
credit unions.
U.S. public sector entities, such
as states and municipalities
(section 32).
Credit exposures to: Introduces a more risk-
Foreign sovereigns sensitive treatment using the
Foreign banks Country Risk Classification
Foreign public sector entities (section measure produced by the
32) Organization for Economic
Cooperation and Development.
Corporate exposures (section 32)....... Assigns a 100 percent risk
weight to corporate exposures,
including exposures to
securities firms.
[[Page 52799]]
Residential mortgage exposures (section Introduces a more risk-
32). sensitive treatment based on
several criteria, including
certain loan characteristics
and the loan-to-value-ratio of
the exposure.
High volatility commercial real estate Applies a 150 percent risk
exposures (section 32). weight to certain credit
facilities that finance the
acquisition, development or
construction of real property.
Past due exposures (section 32)........ Applies a 150 percent risk
weight to exposures that are
not sovereign exposures or
residential mortgage exposures
and that are more than 90 days
past due or on nonaccrual.
Securitization exposures (sections 41- Maintains the gross-up approach
45). for securitization exposures.
Replaces the current ratings-
based approach with a formula-
based approach for determining
a securitization exposure's
risk weight based on the
underlying assets and
exposure's relative position
in the securitization's
structure.
Equity exposures (sections 51-53)...... Introduces more risk-sensitive
treatment for equity
exposures.
Off-balance Sheet Items (sections 33).. Revises the measure of the
counterparty credit risk of
repo-style transactions.
Raises the credit conversion
factor for most short-term
commitments from zero percent
to 20 percent.
Derivative Contracts (section 34)...... Removes the 50 percent risk
weight cap for derivative
contracts.
Cleared Transactions (section 35)...... Provides preferential capital
requirements for cleared
derivative and repo-style
transactions (as compared to
requirements for non-cleared
transactions) with central
counterparties that meet
specified standards. Also
requires that a clearing
member of a central
counterparty calculate a
capital requirement for its
default fund contributions to
that central counterparty.
Credit Risk Mitigation (section 36).... Provides a more comprehensive
recognition of collateral and
guarantees.
Disclosure Requirements (sections 61- Introduces qualitative and
63). quantitative disclosure
requirements, including
regarding regulatory capital
instruments, for banking
organizations with total
consolidated assets of $50
billion or more that are not
subject to the separate
advanced approaches disclosure
requirements.
------------------------------------------------------------------------
Under section 165 of the Dodd-Frank Act, the Board is required to
establish the enhanced risk-based and leverage capital requirements for
bank holding companies with total consolidated assets of $50 billion or
more and nonbank financial companies that the Financial Stability
Oversight Council has designated for supervision by the Board
(collectively, covered companies).\18\ The Board published for comment
in the Federal Register on January 5, 2012, a proposal regarding the
enhanced prudential standards and early remediation requirements. The
capital requirements as proposed in the three NPRs would become a key
part of the Board's overall approach to enhancing the risk-based
capital and leverage standards applicable to covered companies in
accordance with section 165 of the Dodd-Frank Act.\19\ In addition, the
Board intends to supplement the enhanced risk-based capital and
leverage requirements included in its January 2012 proposal with a
subsequent proposal to implement a quantitative risk-based capital
surcharge for covered companies or a subset of covered companies. The
BCBS is calibrating a methodology for assessing an additional capital
surcharge for global systemically important banks (G-SIBs).\20\ The
Board intends to propose a quantitative risk-based capital surcharge in
the United States based on the BCBS approach and consistent with the
BCBS's implementation time frame. The forthcoming proposal would
contemplate adopting implementing rules in 2014, and requiring G-SIBs
to meet the capital surcharges on a phased-in basis from 2016-2019. The
OCC also is reviewing the BCBS proposal and is considering whether to
propose to apply a similar surcharge for globally significant national
banks.
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\18\ See section 165 of the Dodd-Frank Act (12 U.S.C. 5365).
\19\ 77 FR 594 (January 5, 2012).
\20\ See ``Global Systemically Important Banks: Assessment
Methodology and the Additional Loss Absorbency Requirement'' (July
2011), available at https://www.bis.org/publ/bcbs201.pdf.
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Question 1: The agencies solicit comment on all aspects of the
proposals including comment on the specific issues raised throughout
this preamble. Commenters are requested to provide a detailed
qualitative or quantitative analysis, as appropriate, as well as any
relevant data and impact analysis to support their positions.
B. Background
In 1989, the agencies established a risk-based capital framework
for U.S. national banks, state member and nonmember banks, and bank
holding companies with the general risk-based capital rules.\21\ The
agencies based the framework on the ``International Convergence of
Capital Measurement and Capital Standards'' (Basel I), released by the
BCBS in 1988.\22\ The general risk-based capital rules instituted a
uniform risk-based capital system that was more risk-sensitive than,
and addressed several shortcomings in, the regulatory capital rules in
effect prior to 1989. The agencies' capital rules also included a
minimum leverage measure of capital to total assets, established in the
early 1980s, to place a constraint on the maximum degree to which a
banking organization can leverage its capital base.
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\21\ See 54 FR 4186 (January 27, 1989) (Board); 54 FR 4168
(January 27, 1989) (OCC); 54 FR 11500 (March 21, 1989).
\22\ BCBS, ``International Convergence of Capital Measurement
and Capital Standards'' (July 1988), available at https://www.bis.org/publ/bcbs04a.htm.
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In 2004, the BCBS introduced a new international capital adequacy
framework (Basel II) that was intended
[[Page 52800]]
to improve risk measurement and management processes and to better
align minimum risk-based capital requirements with risk of the
underlying exposures.\23\ Basel II is designed as a ``three pillar''
framework encompassing risk-based capital requirements for credit risk,
market risk, and operational risk (Pillar 1); supervisory review of
capital adequacy (Pillar 2); and market discipline through enhanced
public disclosures (Pillar 3). To calculate risk-based capital
requirements for credit risk, Basel II provides three approaches: the
standardized approach (Basel II standardized approach), the foundation
internal ratings-based approach, and the advanced internal ratings-
based approach. Basel II also introduces an explicit capital
requirement for operational risk, which may be calculated using one of
three approaches: the basic indicator approach, the standardized
approach, or the advanced measurement approaches. On December 7, 2007,
the agencies implemented the advanced approaches rules that
incorporated Basel II advanced internal ratings-based approach for
credit risk and the advanced measurement approaches for operational
risk.\24\
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\23\ See ``International Convergence of Capital Measurement and
Capital Standards: A Revised Framework'' (June 2006), available at
https://www.bis.org/publ/bcbs128.htm.
\24\ See 72 FR 69288 (December 7, 2007).
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To address some of the shortcomings in the international capital
standards exposed during the crisis, the BCBS issued the ``2009
Enhancements'' in July 2009 to enhance certain risk-based capital
requirements and to encourage stronger management of credit and market
risk. The ``2009 Enhancements'' strengthen the risk-based capital
requirements for certain securitization exposures to better reflect
their risk, increase the credit conversion factors for certain short-
term liquidity facilities, and require that banking organizations
conduct more rigorous credit analysis of their exposures.\25\
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\25\ In July 2009, the BCBS also issued ``Revisions to the Basel
II Market Risk Framework,'' available at https://www.bis.org/publ/bcbs193.htm. The agencies issued an NPR in January 2011 and a
supplement in December 2011, that included provisions to implement
the market-risk related provisions. 76 FR 1890 (January 11, 2011);
76 FR 79380 (December 21, 2011).
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In 2010, the BCBS published a comprehensive reform package, Basel
III, which is designed to improve the quality and the quantity of
regulatory capital and to build additional capacity into the banking
system to absorb losses in times of future market and economic stress.
Basel III introduces or enhances a number of capital standards,
including a stricter definition of regulatory capital, a minimum tier 1
common equity ratio, the addition of a regulatory capital buffer, a
leverage ratio, and a disclosure requirement for regulatory capital
instruments. Implementing Basel III is the focus of this NPR, as
described below. Certain elements of Basel III are also proposed in the
Standardized Approach NPR and the Advanced Approaches and Market Risk
NPR, as discussed in those notices.
Quality and Quantity of Capital
The recent financial crisis demonstrated that the amount of high-
quality capital held by banks globally was insufficient to absorb
losses during that period. In addition, some non-common stock capital
instruments included in tier 1 capital did not absorb losses to the
extent previously expected. A lack of clear and easily understood
disclosures regarding the amount of high-quality regulatory capital and
characteristics of regulatory capital instruments, as well as
inconsistencies in the definition of capital across jurisdictions,
contributed to the difficulties in evaluating a bank's capital
strength. To evaluate banks' creditworthiness and overall stability
more accurately, market participants increasingly focused on the amount
of banks' tangible common equity, the most loss-absorbing form of
capital.
The crisis also raised questions about banks' ability to conserve
capital during a stressful period or to cancel or defer interest
payments on tier 1 capital instruments. For example, in some
jurisdictions banks exercised call options on hybrid tier 1 capital
instruments, even when it became apparent that the banks' capital
positions would suffer as a result.
Consistent with Basel III, the proposals in this NPR would address
these deficiencies by imposing, among other requirements, stricter
eligibility criteria for regulatory capital instruments and increasing
the minimum tier 1 capital ratio from 4 to 6 percent. To help ensure
that a banking organization holds truly loss-absorbing capital, the
proposal also introduces a minimum common equity tier 1 capital to
total risk-weighted assets ratio of 4.5 percent. In addition, the
proposals would require that most regulatory deductions from, and
adjustments to, regulatory capital (for example, the deductions related
to mortgage servicing assets (MSAs) and deferred tax assets (DTAs) be
applied to common equity tier 1 capital. The proposals would also
eliminate certain features of the current risk-based capital rules,
such as adjustments to regulatory capital to neutralize the effect on
the capital account of unrealized gains and losses on AFS debt
securities. To reduce the double counting of regulatory capital, Basel
III also limits investments in the capital of unconsolidated financial
institutions that would be included in regulatory capital and requires
deduction from capital if a banking organization has exposures to these
institutions that go beyond certain percentages of its common equity
tier 1 capital. Basel III also revises risk-weights associated with
certain items that are subject to deduction from regulatory capital.
Finally, to promote transparency and comparability of regulatory
capital across jurisdictions, Basel III introduces public disclosure
requirements, including those for regulatory capital instruments, that
are designed to help market participants assess and compare the overall
stability and resiliency of banking organizations across jurisdictions.
Capital Conservation and Countercyclical Capital Buffer
As noted previously, some banking organizations continued to pay
dividends and substantial discretionary bonuses even as their financial
condition weakened as a result of the recent financial crisis and
economic downturn. Such capital distributions had a significant
negative impact on the overall strength of the banking sector. To
encourage better capital conservation by banking organizations and to
improve the resiliency of the banking system, Basel III and this
proposal include limits on capital distributions and discretionary
bonuses for banking organizations that do not hold a specified amount
of common equity tier 1 capital in addition to the common equity
necessary to meet the minimum risk-based capital requirements (capital
conservation buffer).
Under this proposal, for advanced approaches banking organizations,
the capital conservation buffer may be expanded by up to 2.5 percent of
risk-weighted assets if the relevant national authority determines that
financial markets in its jurisdiction are experiencing a period of
excessive aggregate credit growth that is associated with an increase
in system-wide risk. The countercyclical capital buffer is designed to
take into account the macro-financial environment in which banking
organizations function and help protect the banking system from the
systemic vulnerabilities.
[[Page 52801]]
Basel III Leverage Ratio
Since the early 1980s, U.S. banking organizations have been subject
to a minimum leverage measure of capital to total assets designed to
place a constraint on the maximum degree to which a banking
organization can leverage its equity capital base. However, prior to
the adoption of Basel III, the Basel capital framework did not include
a leverage ratio requirement. It became apparent during the crisis that
some banks built up excessive on- and off-balance sheet leverage while
continuing to present strong risk-based capital ratios. In many
instances, banks were forced by the markets to reduce their leverage
and exposures in a manner that increased downward pressure on asset
prices and further exacerbated overall losses in the financial sector.
The BCBS introduced a leverage ratio (the Basel III leverage ratio)
to discourage the acquisition of excess leverage and to act as a
backstop to the risk-based capital requirements. The Basel III leverage
ratio is defined as the ratio of tier 1 capital to a combination of on-
and off-balance sheet assets; the minimum ratio is 3 percent. The
introduction of the leverage requirement in the Basel capital framework
should improve the resiliency of the banking system worldwide by
providing an ultimate limit on the amount of leverage a banking
organization may incur.
As described in section II.B of this preamble, the agencies are
proposing to apply the Basel III leverage ratio only to advanced
approaches banking organizations as an additional leverage requirement
(supplementary leverage ratio). For all banking organizations, the
agencies are proposing to update and maintain the current leverage
requirement, as revised to reflect the proposed definition of tier 1
capital.
Additional Revisions to the Basel Capital Framework
To facilitate the implementation of Basel III, the BCBS issued a
series of releases in 2011 in the form of frequently asked
questions.\26\ In addition, in 2011, the BCBS proposed to revise the
treatment of counterparty credit risk and specific capital requirements
for derivative and repo-style transaction exposures to central
counterparties (CCP) to address concerns related to the
interconnectedness and complexity of the derivatives markets.\27\ The
proposed revisions provide incentives for banking organizations to
clear derivatives and repo-style transactions through qualifying
central counterparties (QCCP) to help promote market transparency and
improve the ability of market participants to unwind their positions
quickly and efficiently. The agencies have incorporated these
provisions in the Standardized Approach NPR and the Advanced Approaches
and Market Risk NPR.
---------------------------------------------------------------------------
\26\ See, e.g., ``Basel III FAQs answered by the Basel
Committee'' (July, October, December 2011), available at https://www.bis.org/list/press_releases/index.htm.
\27\ The BCBS left unchanged the treatment of exposures to CCPs
for settlement of cash transactions such as equities, fixed income,
spot foreign exchange and spot commodities. See ``Capitalization of
Banking Organization Exposures to Central Counterparties'' (December
2010, revised November 2011) (CCP consultative release), available
at https://www.bis.org/publ/bcbs206.pdf.
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II. Minimum Regulatory Capital Ratios, Additional Capital Requirements,
and Overall Capital Adequacy
A. Minimum Risk-Based Capital Ratios and Other Regulatory Capital
Provisions
Consistent with Basel III, the agencies are proposing to require
that banking organizations comply with the following minimum capital
ratios: (1) A common equity tier 1 capital ratio of 4.5 percent; (2) a
tier 1 capital ratio of 6 percent; (3) a total capital ratio of 8
percent; and (4) a tier 1 capital to average consolidated assets of 4
percent and, for advanced approaches banking organizations only, an
additional requirement tier 1 capital to total leverage exposure ratio
of 3 percent.\28\ As noted above, the common equity tier 1 capital
ratio would be a new minimum requirement. It is designed to ensure that
banking organizations hold high-quality regulatory capital that is
available to absorb losses. The proposed capital ratios would apply to
a banking organization on a consolidated basis.
---------------------------------------------------------------------------
\28\ Advanced approaches banking organizations should refer to
section 10 of the proposed rule text and to the Advanced Approaches
and Market Risk NPR for a more detailed discussion of the applicable
minimum capital ratios.
---------------------------------------------------------------------------
Under this NPR, tier 1 capital would equal the sum of common equity
tier 1 capital and additional tier 1 capital. Total capital would
consist of three capital components: common equity tier 1, additional
tier 1, and tier 2 capital. The definitions of each of these categories
of regulatory capital are discussed below in section III of this
preamble. To align the proposed regulatory capital requirements with
the agencies' current PCA rules, this NPR also would incorporate the
proposed revisions to the minimum capital requirements into the
agencies' PCA framework, as further discussed in section II.E of this
preamble.
In addition, a banking organization would be subject to a capital
conservation buffer in excess of the risk-based capital requirements
that would impose limitations on its capital distributions and certain
discretionary bonuses, as described in sections II.C and II.D of this
preamble. Because the regulatory capital buffer would apply in addition
to the regulatory minimum requirements, the restrictions on capital
distributions and discretionary bonus payments associated with the
regulatory capital buffer would not give rise to any applicable
restrictions under section 38 of the Federal Deposit Insurance Act and
the agencies' implementing PCA rules, which apply when an insured
institution's capital levels drop below certain regulatory
thresholds.\29\
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\29\ 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165 (OCC); 12
CFR 208.45 (Board); 12 CFR 325.105, 12 CFR 390.455 (FDIC).
---------------------------------------------------------------------------
As a prudential matter, the agencies have a long-established policy
that banking organizations should hold capital commensurate with the
level and nature of the risks to which they are exposed, which may
entail holding capital significantly above the minimum requirements,
depending on the nature of the banking organization's activities and
risk profile. Section II.F of this preamble describes the requirement
for overall capital adequacy of banking organizations and the
supervisory assessment of an entity's capital adequacy.
Furthermore, consistent with the agencies' authority under the
current capital rules, section 10(d) of the proposal includes a
reservation of authority that would allow a banking organization's
primary federal supervisor to require a banking organization to hold a
different amount of regulatory capital than otherwise would be required
under the proposal, if the supervisor determines that the regulatory
capital held by the banking organization is not commensurate with a
banking organization's credit, market, operational, or other risks.
B. Leverage Ratio
1. Minimum Tier 1 Leverage Ratio
Under the proposal, all banking organizations would remain subject
to a 4 percent tier 1 leverage ratio, which would be calculated by
dividing an organization's tier 1 capital by its average consolidated
assets, minus amounts deducted from tier 1 capital. The numerator for
this ratio would be a banking organization's tier 1 capital as defined
in section 2 of the proposal. The denominator would be its average
total on-balance sheet assets as reported on
[[Page 52802]]
the banking organization's regulatory report, net of amounts deducted
from tier 1 capital.\30\
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\30\ Specifically, to determine average total on-balance sheet
assets, bank holding companies and savings and loan holding
companies would use the Consolidated Financial Statements for Bank
Holding Companies (FR Y-9C); national banks, state member banks,
state nonmember banks, and savings associations would use On-balance
sheet Reports of Condition and Income (Call Report).
---------------------------------------------------------------------------
In this NPR, the agencies are proposing to remove the tier 1
leverage ratio exception for banking organizations with a supervisory
composite rating of 1 that exists under the current leverage rules.\31\
This exception provides for a 3 percent tier 1 leverage measure for
such institutions.\32\ The current exception would also be eliminated
for bank holding companies with a supervisory composite rating of 1 and
subject to the market risk rule. Accordingly, as proposed, all banking
organizations would be subject to a 4 percent minimum tier 1 leverage
ratio.
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\31\ Under the agencies' current rules, the minimum ratio of
tier 1 capital to total assets for strong banking organizations
(that is, rated composite ``1'' under the CAMELS system for state
nonmember and national banks, ``1'' under UFIRS for state member
banks, and ``1'' under RFI/CD for bank holding companies) not
experiencing or anticipating significant growth is 3 percent. See 12
CFR 3.6, 12 CFR 167.8 (OCC); 12 CFR 208.43, 12 CFR part 225,
Appendix D (Board); 12 CFR 325.3, 12 CFR 390.467 (FDIC).
\32\ See 12 CFR 3.6 (OCC); 12 CFR part 208, Appendix B and 12
CFR part 225, Appendix D (Board); and 12 CFR part 325.3 (FDIC).
---------------------------------------------------------------------------
2. Supplementary Leverage Ratio for Advanced Approaches Banking
Organizations
Advanced approaches banking organizations would also be required to
maintain the supplementary leverage ratio of tier 1 capital to total
leverage exposure of 3 percent. The supplementary leverage ratio
incorporates the Basel III definition of tier 1 capital as the
numerator and uses a broader exposure base, including certain off-
balance sheet exposures (total leverage exposure), for the denominator.
The agencies believe that the supplementary leverage ratio is most
appropriate for advanced approaches banking organizations because these
banking organizations tend to have more significant amounts of off-
balance sheet exposures that are not captured by the current leverage
ratio. Applying the supplementary leverage ratio rather than the
current tier 1 leverage ratio to other banking organizations would
increase the complexity of their leverage ratio calculation, and in
many cases could result in a reduced leverage capital requirement. The
agencies believe that, along with the 5 percent ``well-capitalized''
PCA leverage threshold described in section II.E of this preamble, the
proposed leverage requirements are, for the majority of banking
organizations that are not subject to the advanced approaches rule,
both more conservative and simpler than the supplementary leverage
ratio.
An advanced approaches banking organization would calculate the
supplementary leverage ratio, including each of the ratio components,
at the end of every month and then calculate a quarterly leverage ratio
as the simple arithmetic mean of the three monthly leverage ratios over
the reporting quarter. As proposed, total leverage exposure would equal
the sum of the following exposures:
(1) The balance sheet carrying value of all of the banking
organization's on-balance sheet assets minus amounts deducted from tier
1 capital;
(2) The potential future exposure amount for each derivative
contract to which the banking organization is a counterparty (or each
single-product netting set for such transactions) determined in
accordance with section 34 of the proposal;
(3) 10 percent of the notional amount of unconditionally
cancellable commitments made by the banking organization; and
(4) The notional amount of all other off-balance sheet exposures of
the banking organization (excluding securities lending, securities
borrowing, reverse repurchase transactions, derivatives and
unconditionally cancellable commitments).
The BCBS continues to assess the Basel III leverage ratio,
including through supervisory monitoring during a parallel run period
in which the proposed design and calibration of the Basel III leverage
ratio will be evaluated, and the impact of any differences in national
accounting frameworks material to the definition of the leverage ratio
will be considered. A final decision by the BCBS on the measure of
exposure for certain transactions and calibration of the leverage ratio
is not expected until closer to 2018.
Due to these ongoing observations and international discussions on
the most appropriate measurement of exposure for repo-style
transactions, the agencies are proposing to maintain the current on-
balance sheet measurement of repo-style transactions for purposes of
calculating total leverage exposure. Under this NPR, a banking
organization would measure exposure as the value of repo-style
transactions (including repurchase agreements, securities lending and
borrowing transactions, and reverse repos) carried as an asset on the
balance sheet, consistent with the measure of exposure used in the
agencies' current leverage measure. The agencies are participating in
international discussions and ongoing quantitative analysis of the
exposure measure for repo-style transactions, and will consider
modifying in the future the measurement of repo-style transactions in
the calculation of total leverage exposure to reflect results of these
international efforts.
The agencies are proposing to apply the supplementary leverage
ratio as a requirement for advanced approaches banking organizations
beginning in 2018, consistent with Basel III. However, beginning on
January 1, 2015, advanced approaches banking organizations would be
required to calculate and report their supplementary leverage ratio.
Question 2: The agencies solicit comments on all aspects of this
proposal, including regulatory burden and competitive impact. Should
all banking organizations, banking organizations with total
consolidated assets above a certain threshold, or banking organizations
with certain risk profiles (for example, concentrations in derivatives)
be required to comply with the supplementary leverage ratio, and why?
What are the advantages and disadvantages of the application of two
leverage ratio requirements to advanced approaches banking
organizations?
Question 3: What modifications to the proposed supplementary
leverage ratio should be considered and why? Are there alternative
measures of exposure for repo-style transactions that should be
considered by the agencies? What alternative measures should be used in
cases in which the use of the current exposure method may overstate
leverage (for example, in certain cases of calculating derivative
exposure) or understate leverage (for example, in the case of credit
protection sold)? The agencies request data and supplementary analysis
that would support consideration of such alternative measures.
Question 4: Given differences in international accounting,
particularly the difference in how International Financial Reporting
Standards and GAAP treat securities for securities lending, the
agencies solicit comments on the adjustments that should be
contemplated to mitigate or offset such differences.
Question 5: The agencies solicit comments on the advantages and
disadvantages of including off-balance sheet exposures in the
supplementary leverage ratio. The agencies seek
[[Page 52803]]
detailed comments, with supporting data, on the proposed method of
calculating exposures and estimates of burden, particularly for off-
balance sheet exposures.
C. Capital Conservation Buffer
Consistent with Basel III, the proposal incorporates a capital
conservation buffer that is designed to bolster the resilience of
banking organizations throughout financial cycles. The buffer would
provide incentives for banking organizations to hold sufficient capital
to reduce the risk that their capital levels would fall below their
minimum requirements during stressful conditions. The capital
conservation buffer would be composed of common equity tier 1 capital
and would be separate from the minimum risk-based capital requirements.
As proposed, a banking organization's capital conservation buffer
would be the lowest of the following measures: (1) The banking
organization's common equity tier 1 capital ratio minus its minimum
common equity tier 1 capital ratio; (2) the banking organization's tier
1 capital ratio minus its minimum tier 1 capital ratio; and (3) the
banking organization's total capital ratio minus its minimum total
capital ratio.\33\ If the banking organization's common equity tier 1,
tier 1 or total capital ratio were less than or equal to its minimum
common equity tier 1, tier 1 or total capital ratio, respectively, the
banking organization's capital conservation buffer would be zero. For
example, if a banking organization's common equity tier 1, tier 1, and
total capital ratios are 7.5, 9.0, and 10 percent, respectively, and
the banking organization's minimum common equity tier 1, tier 1, and
total capital ratio requirements are 4.5, 6, and 8, respectively, the
banking organization's applicable capital conservation buffer would be
2 percent for purposes of establishing a 60 percent maximum payout
ratio under table 3.
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\33\ For purposes of the capital conservation buffer
calculations, a banking organization would be required to use
standardized total risk weighted assets if it is a standardized
approach banking organization and it would be required to use
advanced total risk weighted assets if it is an advanced approaches
banking organization.
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Under the proposal, a banking organization would need to hold a
capital conservation buffer in an amount greater than 2.5 percent of
total risk-weighted assets (plus, for an advanced approaches banking
organization, 100 percent of any applicable countercyclical capital
buffer amount) to avoid being subject to limitations on capital
distributions and discretionary bonus payments to executive officers,
as defined under the proposal. The maximum payout ratio would be the
percentage of eligible retained income that a banking organization
would be allowed to pay out in the form of capital distributions and
certain discretionary bonus payments during the current calendar
quarter and would be determined by the amount of the capital
conservation buffer held by the banking organization during the
previous calendar quarter. Under the proposal, eligible retained income
would be defined as a banking organization's net income (as reported in
the banking organization's quarterly regulatory reports) for the four
calendar quarters preceding the current calendar quarter, net of any
capital distributions, certain discretionary bonus payments, and
associated tax effects not already reflected in net income.
A banking organization's maximum payout amount for the current
calendar quarter would be equal to the banking organization's eligible
retained income, multiplied by the applicable maximum payout ratio in
accordance with table 3. A banking organization with a capital
conservation buffer that is greater than 2.5 percent (plus, for an
advanced approaches banking organization, 100 percent of any applicable
countercyclical buffer) would not be subject to a maximum payout amount
as a result of the application of this provision (but the agencies'
authority to restrict capital distributions for other reasons remains
undiminished).
In a scenario where a banking organization's risk-based capital
ratios fall below its minimum risk-based capital ratios plus 2.5
percent of total risk-weighted assets, the maximum payout ratio would
also decline, in accordance with table 3. A banking organization that
becomes subject to a maximum payout ratio would remain subject to
restrictions on capital distributions and certain discretionary bonus
payments until it is able to build up its capital conservation buffer
through retained earnings, raising additional capital, or reducing its
risk-weighted assets. In addition, as a general matter, a banking
organization would not be able to make capital distributions or certain
discretionary bonus payments during the current calendar quarter if the
banking organization's eligible retained income is negative and its
capital conservation buffer is less than 2.5 percent as of the end of
the previous quarter.
As illustrated in table 3, the capital conservation buffer is
divided into equal quartiles, each associated with increasingly
stringent limitations on capital distributions and discretionary bonus
payments to executive officers as the capital conservation buffer falls
closer to zero percent. As described in more detail in the next
section, each quartile, associated with a certain maximum payout ratio
in table 3, would expand proportionately for advanced approaches
banking organizations when the countercyclical capital buffer amount is
greater than zero.
The agencies propose to define a capital distribution as: (1) A
reduction of tier 1 capital through the repurchase of a tier 1 capital
instrument or by other means; (2) a reduction of tier 2 capital through
the repurchase, or redemption prior to maturity, of a tier 2 capital
instrument or by other means; (3) a dividend declaration on any tier 1
capital instrument; (4) a dividend declaration or interest payment on
any tier 2 capital instrument if such dividend declaration or interest
payment may be temporarily or permanently suspended at the discretion
of the banking organization; or (5) any similar transaction that the
agencies determine to be in substance a distribution of capital. The
proposed definition is similar in effect to the definition of capital
distribution in the Board's rule requiring annual capital plan
submissions for bank holding companies with $50 billion or more in
total assets.\34\
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\34\ See 12 CFR 225.8.
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The agencies propose to define a discretionary bonus payment as a
payment made to an executive officer of a banking organization or an
individual with commensurate responsibilities within the organization,
such as a head of a business line, where: (1) The banking organization
retains discretion as to the fact of the payment and as to the amount
of the payment until the discretionary bonus is paid to the executive
officer; (2) the amount paid is determined by the banking organization
without prior promise to, or agreement with, the executive officer; and
(3) the executive officer has no contract right, express or implied, to
the bonus payment.
An executive officer would be defined as a person who holds the
title or, without regard to title, salary, or compensation, performs
the function of one or more of the following positions: president,
chief executive officer, executive chairman, chief operating officer,
chief financial officer, chief investment officer, chief legal officer,
chief lending officer, chief risk officer, or head of a major business
line, and other staff that the board of directors of the banking
organization deems to have
[[Page 52804]]
equivalent responsibility.\35\ The purpose of limiting restrictions on
discretionary bonus payments to executive officers is to focus these
measures on the individuals within a banking organization who could
expose the organization to the greatest risk. The agencies note that a
banking organization may otherwise be subject to limitations on capital
distributions under other laws or regulations.\36\
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\35\ See 76 FR 21170 (April 14, 2011).
\36\ See 12 U.S.C. 56, 60, and 1831o(d)(1); 12 CFR 1467a(f); see
also 12 CFR 225.8.
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Table 3 shows the relationship between the capital conservation
buffer and the maximum payout ratio. The maximum dollar amount that a
banking organization would be permitted to pay out in the form of
capital distributions or discretionary bonus payments during the
current calendar quarter would be equal to the maximum payout ratio
multiplied by the banking organization's eligible retained income. The
calculation of the maximum payout amount would be made as of the last
day of the previous calendar quarter and any resulting restrictions
would apply during the current calendar quarter.
Table 3--Capital Conservation Buffer and Maximum Payout Ratio \37\
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer (as a percentage Maximum payout ratio (as a percentage of eligible retained
of total risk-weighted assets) income)
----------------------------------------------------------------------------------------------------------------
Greater than 2.5 percent....................... No payout ratio limitation applies.
Less than or equal to 2.5 percent, and greater 60 percent.
than 1.875 percent.
Less than or equal to 1.875 percent, and 40 percent.
greater than 1.25 percent.
Less than or equal to 1.25 percent, and greater 20 percent.
than 0.625 percent.
Less than or equal to 0.625 percent............ 0 percent.
----------------------------------------------------------------------------------------------------------------
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\37\ Calculations in this table are based on the assumption that
the countercyclical buffer amount is zero.
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For example, a banking organization with a capital conservation
buffer between 1.875 and 2.5 percent (for example, a common equity tier
1 capital ratio of 6.5 percent, a tier 1 capital ratio of 8 percent, or
a total capital ratio of 10 percent) as of the end of the previous
calendar quarter would be allowed to distribute no more than 60 percent
of its eligible retained income in the form of capital distributions or
discretionary bonus payments during the current calendar quarter. That
is, the banking organization would need to conserve at least 40 percent
of its eligible retained income during the current calendar quarter.
A banking organization with a capital conservation buffer of less
than or equal to 0.625 percent (for example, a banking organization
with a common equity tier 1 capital ratio of 5.0 percent, a tier 1
capital ratio of 6.5 percent, or a total capital ratio of 8.5 percent)
as of the end of the previous calendar quarter would not be permitted
to make any capital distributions or discretionary bonus payments
during the current calendar quarter.
In contrast, a banking organization with a capital conservation
buffer of more than 2.5 percent (for example, a banking organization
with a common equity tier 1 capital ratio of 7.5 percent, a tier 1
capital ratio of 9.0 percent, and a total capital ratio of 11.0
percent) as of the end of the previous calendar quarter would not be
subject to restrictions on the amount of capital distributions and
discretionary bonus payments that could be made during the current
calendar quarter. Consistent with the agencies' current practice with
respect to regulatory restrictions on dividend payments and other
capital distributions, each agency would retain its authority to permit
a banking organization supervised by that agency to make a capital
distribution or a discretionary bonus payment, if the agency determines
that the capital distribution or discretionary bonus payment would not
be contrary to the purposes of the capital conservation buffer or the
safety and soundness of the banking institution. In making such a
determination, the agency would consider the nature and extent of the
request and the particular circumstances giving rise to the request.
The agencies are proposing that banking organizations that are not
subject to the advanced approaches rule would calculate their capital
conservation buffer using total risk-weighted assets as calculated by
all banking organizations, and that banking organizations subject to
the advanced approaches rule would calculate the buffer using advanced
approaches total risk-weighted assets. Under the proposed approach,
internationally active U.S. banking organizations using the advanced
approaches would face capital conservation buffers determined in a
manner comparable to those of their foreign competitors. Depending on
the difference in risk-weighted assets calculated under the two
approaches, capital distributions and bonus restrictions applied to an
advanced approaches banking organization could be more or less
stringent than if its capital conservation buffer were based on risk-
weighted assets as calculated by all banking organizations.
Question 6: The agencies seek comment on all aspects of the
proposed capital buffer framework, including issues of domestic and
international competitive equity, and the adequacy of the proposed
buffer to provide incentives for banking organizations to hold
sufficient capital to withstand a stress event and still remain above
regulatory minimum capital levels. What are the advantages and
disadvantages of requiring advanced approaches banking organizations to
calculate their capital buffers using total risk-weighted assets that
are the greater of standardized total risk-weighted assets and advanced
total risk-weighted assets? What is the potential effect of the
proposal on banking organizations' processes for planning and executing
capital distributions and utilization of discretionary bonus payments
to retain key staff? What modifications, if any, should the agencies
consider?
Question 7: The agencies solicit comments on the scope of the
definition of executive officer for purposes of the limitations on
discretionary bonus payments under the proposal. Is the scope too broad
or too narrow? Should other categories of employees who could expose
the institution to material risk be included within the scope of
employees whose discretionary bonuses could be subject to the
restriction? If so, how should such a class of employees be defined?
What are the potential implications for a banking organization of
restricting discretionary bonus payments for executive officers or for
broader classes of employees? Please
[[Page 52805]]
provide data and analysis to support your views.
Question 8: What are the pros and cons of the proposed definition
for eligible retained income in the context of the proposed quarterly
limitations on capital distributions and discretionary bonus payments?
Question 9: What would be the impact, if any, in terms of the cost
of raising new capital, of not allowing a banking organization that is
subject to a maximum payout ratio of zero percent to make a penny
dividend to common stockholders? Please provide data to support any
responses.
D. Countercyclical Capital Buffer
Under Basel III, the countercyclical capital buffer is designed to
take into account the macro-financial environment in which banking
organizations function and to protect the banking system from the
systemic vulnerabilities that may build-up during periods of excessive
credit growth, then potentially unwind in a disorderly way that may
cause disruptions to financial institutions and ultimately economic
activity. As proposed and consistent with Basel III, the
countercyclical capital buffer would serve as an extension of the
capital conservation buffer.
The agencies propose to apply the countercyclical capital buffer
only to advanced approaches banking organizations, because large
banking organizations generally are more interconnected with other
institutions in the financial system. Therefore, the marginal benefits
to financial stability from a countercyclical buffer function should be
greater with respect to such institutions. Application of the
countercyclical buffer to advanced approaches banking organizations
also reflects the fact that making cyclical adjustments to capital
requirements is costly for institutions to implement and the marginal
costs are higher for smaller institutions.
The countercyclical capital buffer aims to protect the banking
system and reduce systemic vulnerabilities in two ways. First, the
accumulation of a capital buffer during an expansionary phase could
increase the resilience of the banking system to declines in asset
prices and consequent losses that may occur when the credit conditions
weaken. Specifically, when the credit cycle turns following a period of
excessive credit growth, accumulated capital buffers would act to
absorb the above-normal losses that a banking organization would likely
face. Consequently, even after these losses are realized, banking
organizations would remain healthy and able to access funding, meet
obligations, and continue to serve as credit intermediaries.
Countercyclical capital buffers may also reduce systemic
vulnerabilities and protect the banking system by mitigating excessive
credit growth and increases in asset prices that are not supported by
fundamental factors. By increasing the amount of capital required for
further credit extensions, countercyclical capital buffers may limit
excessive credit extension.
Consistent with Basel III, the agencies propose a countercyclical
capital buffer that would augment the capital conservation buffer under
certain circumstances, upon a determination by the agencies.
The countercyclical capital buffer amount in the U.S. would
initially be set to zero, but it could increase if the agencies
determine that there is excessive credit in the markets, possibly
leading to subsequent wide-spread market failures.\38\ The agencies
expect to consider a range of macroeconomic, financial, and supervisory
information indicating an increase in systemic risk including, but not
limited to, the ratio of credit to gross domestic product, a variety of
asset prices, other factors indicative of relative credit and liquidity
expansion or contraction, funding spreads, credit condition surveys,
indices based on credit default swap spreads, options implied
volatility, and measures of systemic risk. The agencies anticipate
making such determinations jointly. Because the countercyclical capital
buffer amount would be linked to the condition of the overall U.S.
financial system and not the characteristics of an individual banking
organization, the agencies expect that the countercyclical capital
buffer amount would be the same at the depository institution and
holding company levels.
---------------------------------------------------------------------------
\38\ The proposed operation of the countercyclical capital
buffer is also consistent with section 616(c) of the Dodd-Frank Act.
See 12 U.S.C. 3907(a)(1).
---------------------------------------------------------------------------
To provide banking organizations with time to adjust to any
changes, the agencies expect to announce an increase in the
countercyclical capital buffer amount up to12 months prior to
implementation. If the agencies determine that a more immediate
implementation would be necessary based on economic conditions, the
agencies may announce implementation of a countercyclical capital
buffer in less than 12 months. The agencies would make their
determination and announcement in accordance with any applicable legal
requirements. The agencies would follow the same procedures in
adjusting the countercyclical capital buffer applicable for exposures
located in foreign jurisdictions.
A decrease in the countercyclical capital buffer amount would
become effective the day following announcement or the earliest date
permitted by applicable law or regulation. In addition, the
countercyclical capital buffer amount would return to zero percent 12
months after its effective date, unless an agency announces a decision
to maintain the adjusted countercyclical capital buffer amount or
adjust it again before the expiration of the 12-month period.
In the United States, the countercyclical capital buffer would
augment the capital conservation buffer by up to 2.5 percent of a
banking organization's total risk-weighted assets. For other
jurisdictions, an advanced approaches banking organization would
determine its countercyclical capital buffer amount by calculating the
weighted average of the countercyclical capital buffer amounts
established for the national jurisdictions where the banking
organization has private sector credit exposures, as defined below in
this section. The contributing weight assigned to a jurisdiction's
countercyclical capital buffer amount would be calculated by dividing
the total risk-weighted assets for the banking organization's private
sector credit exposures located in the jurisdiction by the total risk-
weighted assets for all of the banking organization's private sector
credit exposures.\39\
---------------------------------------------------------------------------
\39\ As described in the discussion of the capital conservation
buffer, an advanced approaches banking organization would calculate
its total risk-weighted assets using the advanced approaches rules
for purposes of determining the capital conservation buffer amount.
An advanced approaches banking organizations may also be subject to
the capital plan rule and its stress testing provisions, which may
have a separate effect on a banking organization's capital
distributions. See 12 CFR 225.8.
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As proposed, a private sector credit exposure would be defined as
an exposure to a company or an individual that is included in credit
risk-weighted assets, not including an exposure to a sovereign, the
Bank for International Settlements, the European Central Bank, the
European Commission, the International Monetary Fund, a multilateral
development bank (MDB), a public sector entity (PSE), or a government
sponsored entity (GSE).
The geographic location of a private sector credit exposure (that
is not a securitization exposure) would be the national jurisdiction
where the borrower is located (that is, where the borrower
[[Page 52806]]
is incorporated, chartered, or similarly established or, if it is an
individual, where the borrower resides). If, however, the decision to
issue the private sector credit exposure is based primarily on the
creditworthiness of the protection provider, the location of the non-
securitization exposure would be the location of the protection
provider. The location of a securitization exposure would be the
location of the borrowers of the underlying exposures. If the borrowers
on the underlying exposures are located in multiple jurisdictions, the
location of a securitization exposure would be the location of the
borrowers of the underlying exposures in one jurisdiction with the
largest proportion of the aggregate unpaid principal balance of the
underlying exposures.
Table 4 illustrates how an advanced approaches banking organization
would calculate the weighted average countercyclical capital buffer. In
the following example, the countercyclical capital buffer established
in the various jurisdictions in which the banking organization has
private sector credit exposures is reported in column A. Column B
contains the banking organization's risk-weighted asset amounts for the
private sector credit exposures in each jurisdiction. Column C shows
the contributing weight for each countercyclical buffer amount, which
is calculated by dividing each of the rows in column B by the total for
column B. Column D shows the contributing weight applied to each
countercyclical capital buffer amount, calculated as the product of the
corresponding contributing weight (column C) and the countercyclical
capital buffer set by each jurisdiction's national supervisor (column
A). The sum of the rows in column D shows the banking organization's
weighted average countercyclical capital buffer, which is 1.4 percent
of risk-weighted assets.
Table 4--Example of Weighted Average Countercyclical Capital Buffer Calculation for Advanced Approaches Banking Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D)
Countercyclical buffer Banking organization's Contributing weight Contributing weight
amount set by national risk-weighted assets (column B/column B applied to each
supervisor (RWA) for private total) countercyclical capital
(percent) sector credit exposures buffer amount
($b) (column A * column C)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-U.S. jurisdiction 1............................. 2.0 250 0.29 0.6
Non-U.S. jurisdiction 2............................. 1.5 100 0.12 0.2
U.S................................................. 1 500 0.59 0.6
---------------------------------------------------------------------------------------------------
Total........................................... ....................... 850 1.00 1.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
A banking organization's maximum payout ratio for purposes of its
capital conservation buffer would vary depending on its countercyclical
buffer amount. For instance, if its countercyclical capital buffer
amount is equal to zero percent of total risk-weighted assets, the
banking organization that held only U.S. credit exposures would need to
hold a combined capital conservation buffer of at least 2.5 percent to
avoid restrictions on its capital distributions and certain
discretionary bonus payments. However, if its countercyclical capital
buffer amount is equal to 2.5 percent of total risk-weighted assets,
the banking organization whose assets consist of only U.S. credit
exposures would need to hold a combined capital conservation and
countercyclical buffer of at least 5 percent to avoid restrictions on
its capital distributions and discretionary bonus payments.
Question 10: The agencies solicit comment on potential inputs used
in determining whether excessive credit growth is occurring and whether
a formula-based approach might be useful in determining the appropriate
level of the countercyclical capital buffer. What additional factors,
if any, should the agencies consider when determining the
countercyclical capital buffer amount? What are the pros and cons of
using a formula-based approach and what factors might be incorporated
in the formula to determine the level of the countercyclical capital
buffer amount?
Question 11: The agencies recognize that a banking organization's
risk-weighted assets for private sector credit exposures should include
relevant covered positions under the market risk capital rule and
solicit comment regarding appropriate methodologies for incorporating
these positions; specifically, what position-specific or portfolio-
specific methodologies should be used for covered positions with
specific risk and particularly those for which a banking organization
uses models to measure specific risk?
Question 12: The agencies solicit comment on the appropriateness of
the proposed 12-month prior notification period to adjust to a newly
implemented or adjusted countercyclical capital buffer amount.
E. Prompt Corrective Action Requirements
Section 38 of the Federal Deposit Insurance Act directs the federal
banking agencies to take prompt corrective action (PCA) to resolve the
problems of insured depository institutions at the least cost to the
Deposit Insurance Fund.\40\ To facilitate this purpose, the agencies
have established five regulatory capital categories in the current PCA
regulations that include capital thresholds for the leverage ratio,
tier 1 risk-based capital ratio, and the total risk-based capital ratio
for insured depository institutions. These five PCA categories under
section 38 of the Act and the PCA regulations are: ``Well
capitalized,'' ``adequately capitalized,'' ``undercapitalized,''
``significantly undercapitalized,'' and ``critically
undercapitalized.'' Insured depository institutions that fail to meet
these capital measures are subject to increasingly strict limits on
their activities, including their ability to make capital
distributions, pay management fees, grow their balance sheet, and take
other actions.\41\ Insured depository institutions are expected to be
closed within 90 days of becoming ``critically undercapitalized,''
unless their primary federal regulator takes such other action as the
agency determines, with the concurrence of the
[[Page 52807]]
FDIC, would better achieve the purpose of PCA.\42\
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\40\ 12 U.S.C. 1831o.
\41\ 12 U.S.C. 1831o(e)-(i). See 12 CFR part 6 (OCC); 12 CFR
part 208, subpart D (Board); 12 CFR part 325, subpart B (FDIC).
\42\ 12 U.S.C. 1831o(g)(3).
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All insured depository institutions, regardless of total asset size
or foreign exposure, are required to compute PCA capital levels using
the agencies' general risk-based capital rules, as supplemented by the
market risk capital rule. Under this NPR, the agencies are proposing to
augment the PCA capital categories by introducing a common equity tier
1 capital measure for four of the five PCA categories (excluding the
critically undercapitalized PCA category).\43\ In addition, the
agencies are proposing to amend the current PCA leverage measure to
include in the leverage measure for the ``adequately capitalized'' and
``undercapitalized'' capital categories for advanced approaches
depository institutions an additional leverage ratio based on the
leverage ratio in Basel III. All banking organizations would continue
to be subject to leverage measure thresholds using the current tier 1,
or ``standard'' leverage ratio in the form of tier 1 capital to total
assets. In addition, the agencies are proposing to revise the three
current capital measures for the five PCA categories to reflect the
changes to the definition of capital, as provided in the proposed
revisions to the agencies' PCA regulations.
---------------------------------------------------------------------------
\43\ See 12 U.S.C. 1831o(c)(1)(B)(i).
---------------------------------------------------------------------------
The proposed changes to the current minimum PCA thresholds and the
introduction of a new common equity tier 1 capital measure would take
effect January 1, 2015. Consistent with transition provisions in Basel
III, the proposed amendments to the current PCA leverage measure for
advanced approaches depository institutions would take effect on
January 1, 2018. In contrast, changes to the definitions of the
individual capital components that are used to calculate the relevant
capital measures under PCA would coincide with the transition
arrangements discussed in section V of the preamble, or with the
transition provisions of other capital regulations, as applicable.
Thus, the changes to these definitions, including any deductions or
modifications to capital, automatically would flow through to the
definitions in the PCA framework.
Table 5 sets forth the current risk-based and leverage capital
thresholds for each of the PCA capital categories for insured
depository institutions.
Table 5--Current PCA Levels
----------------------------------------------------------------------------------------------------------------
Total Risk- Leverage
Based Capital Tier 1 RBC measure (tier 1
Requirement (RBC) measure measure (tier 1 (standard) PCA requirements
(total RBC RBC ratio-- leverage ratio--
ratio--percent) percent) percent)
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................. >=10 >=6 >=5 None.
Adequately Capitalized............ >=8 >=4 \44\ >=4 (or May limit nonbanking
>=3) activities at DI's FHC
and includes limits on
brokered deposits.
Undercapitalized.................. <8 <4 <4 (or <3) Includes adequately
capitalized
restrictions, and also
includes restrictions on
asset growth; dividends;
requires a capital plan.
Significantly undercapitalized.... <6 <3 <3 Includes undercapitalized
restrictions, and also
includes restrictions on
sub-debt payments.
---------------------------------------------------
Critically undercapitalized....... Tangible Equity to Total Assets <=2 Generally receivership/
conservatorship within
90 days.
----------------------------------------------------------------------------------------------------------------
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\44\ The minimum ratio of tier 1 capital to total assets for
strong depository institutions (rated composite ``1'' under the
CAMELS system and not experiencing or anticipating significant
growth) is 3 percent.
---------------------------------------------------------------------------
Table 6 sets forth the proposed risk-based and leverage capital
thresholds for each of the PCA capital categories for insured
depository institutions that are not advanced approaches banks. For
each PCA category except critically undercapitalized, an insured
depository institution would be required to meet a minimum common
equity tier 1 capital ratio, in addition to a minimum tier 1 risk-based
capital ratio, total risk-based capital ratio, and leverage ratio.
Table 6--Proposed PCA Levels for Insured Depository Institutions Not Subject to the Advanced Approaches Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Common equity
Total RBC Tier 1 RBC tier 1 RBC Leverage
measure (total measure (tier 1 measure (common Measure
Requirement RBC ratio-- RBC ratio-- equity tier 1 (leverage PCA requirements
percent) percent) RBC ratio ratio--percent)
(percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized................................ >=10 >=8 >=6.5 >=5 Unchanged from current rules *.
Adequately Capitalized.......................... >=8 >=6 >=4.5 >=4 Do.
Undercapitalized................................ <8 <6 <4.5 <4 Do.
Significantly undercapitalized.................. <6 <4 <3 <3 Do.
--------------------------------------------------------------------
Critically undercapitalized..................... Tangible Equity (defined as tier 1 capital plus non-tier 1 Do.
perpetual preferred stock) to Total Assets <=2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Additional restrictions on capital distributions that are not reflected in the agencies' proposed revisions to the PCA regulations are described in
section II.C of this preamble.
[[Page 52808]]
To be well capitalized, an insured depository institution would be
required to maintain a total risk-based capital ratio equal to or
greater than 10 percent; a tier 1 capital ratio equal to or greater
than 8 percent; a common equity tier 1 capital ratio equal to or
greater than 6.5 percent; and a leverage ratio equal to or greater than
5 percent. An adequately capitalized depository institution would be
required to maintain a total risk-based capital ratio equal to or
greater than 8 percent; a tier 1 capital ratio equal to or greater than
6 percent; common equity tier 1 capital ratio equal to or greater than
4.5 percent; and a leverage ratio equal to or greater than 4
percent.\45\
---------------------------------------------------------------------------
\45\ An insured depository institution is considered adequately
capitalized if it meets the qualifications for the adequately
capitalized capital category and does not qualify as well
capitalized.
---------------------------------------------------------------------------
An insured depository institution would be considered
undercapitalized under the proposal if its total capital ratio were
less than 8 percent, or if its tier 1 capital ratio were less than 6
percent, if its common equity tier 1 ratio were less than 4.5 percent,
or if its leverage ratio were less than 4 percent. If an institution's
tier 1 capital ratio were less than 4 percent, or if its common equity
tier 1 ratio were less than 3 percent, it would be considered
significantly undercapitalized. The other numerical capital ratio
thresholds for being significantly undercapitalized would be
unchanged.\46\
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\46\ Under current PCA standards, in order to qualify as well
capitalized, an insured depository institution must not be subject
to any written agreement, order, capital directive, or prompt
corrective action directive issued by the Board pursuant to section
8 of the Federal Deposit Insurance Act, the International Lending
Supervision Act of 1983, or section 38 of the Federal Deposit
Insurance Act, or any regulation thereunder, to meet a maintain a
specific capital level for any capital measure. See 12 CFR
6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(iv) (Board); 12 CFR
325.103(b)(1)(iv) (FDIC). The agencies are not proposing any changes
to this requirement.
---------------------------------------------------------------------------
Table 7 sets forth the proposed risk-based and leverage thresholds
for advanced approaches depository institutions. As indicated in the
table, in addition to the PCA requirements and categories described
above, the leverage measure for advanced approaches depository
institutions in the adequately capitalized and undercapitalized PCA
capital categories would include a supplementary leverage ratio based
on the Basel III leverage ratio.
Table 7--Proposed PCA Levels for Insured Depository Institutions Subject to the Advanced Approaches Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Common Equity Leverage measure
Total RBC Tier 1 RBC tier 1 RBC -----------------------------------------
measure (total measure (tier 1 measure (common
Requirement RBC ratio-- RBC ratio-- equity tier 1 Leverage ratio Supplementary leverage PCA requirements
percent) percent) RBC ratio (percent) ratio (percent)
percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized.................... >=10 >=8 >=6.5 >=5 Not applicable........ Unchanged from current
rule *.
Adequately Capitalized.............. >=8 >=6 >=4.5 >=4 >=3................... Do.
Undercapitalized.................... <8 <6 <4.5 <4 <3.................... Do.
Significantly undercapitalized...... <6 <4 <3 <3 Not applicable........ Do.
--------------------------------------------------------------------
Critically undercapitalized......... Tangible Equity (defined as tier 1 capital plus non-tier 1 Not applicable........ Do.
perpetual preferred stock) to Total Assets [lE]2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Additional restrictions on capital distributions that are not reflected in the agencies' proposed revisions to the PCA regulations are described in
section II.C of this preamble.
As discussed above, the agencies believe that the supplementary
leverage ratio is an important measure of an advanced approaches
depository institution's ability to support its on-and off-balance
sheet exposures, and advanced approaches institutions tend to have
significant amounts of off-balance sheet exposures that are not
captured by the current leverage ratio. Consistent with other minimum
ratio requirements, the agencies propose that the minimum requirement
for the supplementary leverage ratio in section 10 of the proposal
would be the minimum supplementary leverage ratio a banking
organization would need to maintain in order to be adequately
capitalized. With respect to the other PCA categories (other than
critically undercapitalized), the agencies are proposing ranges of
minimum thresholds for comment. The agencies intend to specify the
minimum threshold for each of those categories when the proposed PCA
requirements are finalized.
Under the proposed PCA framework, for each measure other than the
leverage measure, an advanced approaches depository institution would
be well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized on the
same basis as all other insured depository institutions. An advanced
approaches bank would also be subject to the same thresholds with
respect to the leverage ratio on the same basis as other insured
depository institutions. In addition, with respect to the supplementary
leverage ratio, in order to be adequately capitalized, an advanced
approaches depository institution would be required to maintain a
supplementary leverage ratio of greater than or equal to 3 percent. An
advanced approaches depository institution would be undercapitalized if
its supplementary leverage ratio were less than 3 percent.
Question 13: The agencies seek comment regarding the proposed
incorporation of the supplementary leverage ratio into the PCA
framework, as well as the proposed ranges of PCA categories for the
supplementary leverage ratio. Within the proposed ranges, what is the
appropriate percentage for each PCA category? Please provide data to
support your answer.
As discussed in section II of this preamble, the current PCA
framework permits an insured depository institution that is rated
composite 1 under the CAMELS rating system and not experiencing or
anticipating significant growth to maintain a 3 percent ratio of tier 1
capital to average total consolidated assets (leverage ratio) rather
than the 4.0 percent minimum
[[Page 52809]]
leverage ratio that is otherwise required for an institution to be
adequately capitalized under PCA. The agencies believe that it would be
appropriate for all insured depository institutions, regardless of
their CAMELS rating, to meet the same minimum leverage ratio
requirements. Accordingly, the agencies propose to eliminate the 3
percent leverage ratio requirement for insured depository institutions
with composite 1 CAMELS ratings.
The proposal would increase some of the existing PCA capital
requirements while maintaining the structure of the current PCA
framework. For example, similar to the current PCA requirements, the
risk-based capital ratios for well capitalized banking organizations
would be two percentage points higher than the ratios for adequately
capitalized banking organizations. The tier 1 leverage ratio for well
capitalized banking organizations would be one percentage point higher
than for adequately capitalized banking organizations. While the PCA
levels do not explicitly incorporate the capital conservation buffer,
the agencies believe that the PCA and capital conservation buffer
frameworks will complement each other to ensure that banking
organizations hold an adequate amount of common equity tier 1 capital.
The determination of whether an insured depository institution is
critically undercapitalized for PCA purposes is based on its ratio of
tangible equity to total assets. This is a statutory requirement within
the PCA framework, and the experience of the recent financial crisis
has confirmed that tangible equity is of critical importance in
assessing the viability of an insured depository institution. Tangible
equity for PCA purposes is currently defined as including core capital
elements, which consist of (1) Common stock holder's equity, (2)
qualifying noncumulative perpetual preferred stock (including related
surplus), and (3) minority interest in the equity accounts of
consolidated subsidiaries; plus outstanding cumulative preferred
perpetual stock; minus all intangible assets except mortgage servicing
rights that are included in tier 1 capital. The current PCA definition
of tangible equity does not address the treatment of DTAs in
determining whether an insured depository institution is critically
undercapitalized.
The agencies propose to clarify the calculation of the capital
measures for the critically undercapitalized PCA category by revising
the definition of tangible equity to consist of tier 1 capital, plus
outstanding perpetual preferred stock (including related surplus) not
included in tier 1 capital. The revised definition would more
appropriately align the calculation of tangible equity with the
calculation of tier 1 capital generally for regulatory capital
requirements. Assets included in a banking organization's equity
account under GAAP, such as DTAs, would be included in tangible equity
only to the extent that they are included in tier 1 capital. This
modification should promote consistency and provide for clearer
boundaries across and between the various PCA categories. In connection
with this modification to the definition of tangible equity, the
agencies propose to retain the current critically undercapitalized
capital category threshold for insured depository institutions of less
than 2 percent tangible equity to total assets. Based on the proposed
new definition of tier 1 capital, the agencies believe the proposed
critically undercapitalized threshold is at least as stringent as the
agencies' current approach.
Question 14: The agencies solicit comment on the proposed
regulatory capital requirements in the PCA framework, the introduction
of a common equity tier 1 ratio as a new capital measure for purposes
of PCA, and the proposed PCA thresholds for each PCA category.
In addition to the changes described in this section, the OCC is
proposing the following amendments to 12 CFR part 6 to integrate the
rules governing national banks and federal savings associations. Under
the proposal, part 6 would be applicable to federal savings
associations. The OCC also would make various non-substantive,
technical amendments to part 6. In addition, the OCC proposes to
rescind the current PCA rules in part 165 governing federal savings
associations, with the exception of sections 165.8, Procedures for
reclassifying a federal savings association based on criteria other
than capital, and 165.9, Order to dismiss a director or senior
executive officer; and to make non-substantive, technical amendments to
sections 165.8 and 165.9. Any substantive issues regarding sections
165.8 and 165.9 will be addressed as part of a separate integration
rulemaking.
F. Supervisory Assessment of Overall Capital Adequacy
Capital helps to ensure that individual banking organizations can
continue to serve as credit intermediaries even during times of stress,
thereby promoting the safety and soundness of the overall U.S. banking
system. The agencies' current capital rules indicate that the capital
requirements are minimum standards based on broad credit-risk
considerations. The risk-based capital ratios do not explicitly take
account of the quality of individual asset portfolios or the range of
other types of risk to which banking organizations may be exposed, such
as interest-rate, liquidity, market, or operational risks.
A banking organization is generally expected to have internal
processes for assessing capital adequacy that reflect a full
understanding of its risks and to ensure that it holds capital
corresponding to those risks to maintain overall capital adequacy.\47\
Accordingly, a supervisory assessment of capital adequacy must take
account of the internal processes for capital adequacy, as well as
risks and other factors that can affect a banking organization's
financial condition, including, for example, the level and severity of
problem assets and its exposure to operational and interest rate risk.
For this reason, a supervisory assessment of capital adequacy may
differ significantly from conclusions that might be drawn solely from
the level of a banking organization's risk-based capital ratios.
---------------------------------------------------------------------------
\47\ The Basel framework incorporates similar requirements under
Pillar 2 of Basel II.
---------------------------------------------------------------------------
In light of these considerations, as a prudential matter, a banking
organization is generally expected to operate with capital positions
well above the minimum risk-based ratios and to hold capital
commensurate with the level and nature of the risks to which it is
exposed, which may entail holding capital significantly above the
minimum requirement. For example, banking organizations contemplating
significant expansion proposals are expected to maintain strong capital
levels substantially above the minimum ratios and should not allow
significant diminution of financial strength below these strong levels
to fund their expansion plans. Banking organizations with high levels
of risk are also expected to operate even further above minimum
standards. In addition to evaluating the appropriateness of a banking
organization's capital level given its overall risk profile, the
supervisory assessment takes into account the quality and trends in a
banking organization's capital composition, including the share of
common and non-common-equity capital elements.
Section 10(d) of the proposal would maintain and reinforce these
supervisory expectations by requiring that a banking organization
maintain capital commensurate with the level
[[Page 52810]]
and nature of all risks to which it is exposed and that a banking
organization have a process for assessing its overall capital adequacy
in relation to its risk profile, as well as a comprehensive strategy
for maintaining an appropriate level of capital.
The supervisory evaluation of a banking organization's capital
adequacy, including compliance with section 10(d), may include such
factors as whether the banking organization is newly chartered,
entering new activities, or introducing new products. The assessment
would also consider whether a banking organization is receiving special
supervisory attention, has or is expected to have losses resulting in
capital inadequacy, has significant exposure due to risks from
concentrations in credit or nontraditional activities, or has
significant exposure to interest rate risk, operational risk, or could
be adversely affected by the activities or condition of a banking
organization's holding company.
In addition, a banking organization should have an appropriately
rigorous process for assessing its overall capital adequacy in relation
to its risk profile and a comprehensive strategy for maintaining an
appropriate level of capital, consistent with the longstanding approach
employed by the agencies in their supervision of banking organizations.
Supervisors also would evaluate the comprehensiveness and effectiveness
of a banking organization's capital planning in light of its activities
and capital levels. An effective capital planning process would require
a banking organization to assess the risks to which it is exposed and
its processes for managing and mitigating those risks, evaluate its
capital adequacy relative to its risks, and consider potential impact
on its earnings and capital base from current and prospective economic
conditions.\48\
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\48\ See, for example, SR 09-4, Applying Supervisory Guidance
and Regulations on the Payment of Dividends, Stock Redemptions, and
Stock Repurchases at Bank Holding Companies (Board).
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While the elements of supervisory review of capital adequacy would
be similar across banking organizations, evaluation of the level of
sophistication of an individual banking organization's capital adequacy
process would be commensurate with the banking organization's size,
sophistication, and risk profile, similar to the current supervisory
practice.
G. Tangible Capital Requirement for Federal Savings Associations
As part of the OCC's overall effort to integrate the regulatory
requirements for national banks and federal savings associations, the
OCC is proposing to include a tangible capital requirement for Federal
savings associations in this NPR.\49\ Under section 5(t)(2)(B) of the
Home Owners' Loan Act (HOLA),\50\ federal savings associations are
required to maintain tangible capital in an amount not less than 1.5
percent of adjusted total assets.\51\ This statutory requirement is
implemented in the capital rules applicable to federal savings
associations at 12 CFR 167.9.\52\ Under that rule, tangible capital is
defined differently from other capital measures, such as tangible
equity in 12 CFR part 165.
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\49\ Under Title III of the Dodd-Frank Act, the OCC assumed all
functions of the Office of Thrift Supervision (OTS) and the Director
of the OTS relating to Federal savings associations. As a result,
the OCC has responsibility for the ongoing supervision, examination
and regulation of Federal savings associations as of the transfer
date of July 21, 2011. The Act also transfers to the OCC the
rulemaking authority of the OTS relating to all savings
associations, both state and Federal for certain rules. Section
312(b)(2)(B)(i) (to be codified 12 U.S.C. 5412(b)(2)(B)(i)). The
FDIC has rulemaking authority for the capital and PCA rules pursuant
to section 38 of the FDI Act (12 U.S.C. 1831n) and section
5(t)(1)(A) of the Home Owners' Loan Act (12 U.S.C.1464(t)(1)(A)).
\50\ 12 U.S.C. 1464(t).
\51\ ``Tangible capital'' is defined in section 5(t)(9)(B) to
mean ``core capital minus any intangible assets (as intangible
assets are defined by the Comptroller of the Currency for national
banks.)'' Section 5(t)(9)(A) defines ``core capital'' to mean ``core
capital as defined by the Comptroller of the Currency for national
banks, less any unidentifiable intangible assets [goodwill]'' unless
the OCC prescribes a more stringent definition.
\52\ 54 FR 49649 (Nov. 30, 1989).
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After reviewing HOLA, the OCC has determined that a unique
regulatory definition of tangible capital is not necessary to satisfy
the requirement of the statute. Therefore, the OCC is proposing to
define ``tangible capital'' as the amount of tier 1 capital plus the
amount of outstanding perpetual preferred stock (including related
surplus) not included in tier 1 capital. This definition mirrors the
proposed definition of ``tangible equity'' for PCA purposes.\53\
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\53\ See 12 CFR 6.2.
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While OCC recognizes that the terms used are not identical
(``capital'' as compared to ``equity''), the OCC believes that this
revised definition of tangible capital would reduce the computational
burden on federal savings associations in complying with this statutory
mandate, as well as being consistent with both the purposes of HOLA and
PCA. Similarly, the FDIC also is proposing to include a tangible
capital requirement for state savings associations as part of this
proposal.
III. Definition of Capital
A. Capital Components and Eligibility Criteria for Regulatory Capital
Instruments
1. Common Equity Tier 1 Capital
Under this proposal, a banking organization's common equity tier 1
capital would be the sum of its outstanding common equity tier 1
capital instruments and related surplus (net of treasury stock),
retained earnings, accumulated other comprehensive income (AOCI), and
common equity tier 1 minority interest subject to the provisions set
forth in section 21 of the proposal, minus regulatory adjustments and
deductions specified in section 22 of the proposal.
a. Criteria
To ensure that a banking organization's common equity tier 1
capital is available to absorb losses as they occur, consistent with
Basel III, the agencies propose to require that common equity tier 1
capital instruments issued by a banking organization satisfy the
following criteria:
(1) The instrument is paid in, issued directly by the banking
organization, and represents the most subordinated claim in a
receivership, insolvency, liquidation, or similar proceeding of the
banking organization.
(2) The holder of the instrument is entitled to a claim on the
residual assets of the banking organization that is proportional with
the holder's share of the banking organization's issued capital after
all senior claims have been satisfied in a receivership, insolvency,
liquidation, or similar proceeding. That is, the holder has an
unlimited and variable claim, not a fixed or capped claim.
(3) The instrument has no maturity date, can only be redeemed via
discretionary repurchases with the prior approval of the agency, and
does not contain any term or feature that creates an incentive to
redeem.
(4) The banking organization did not create at issuance of the
instrument through any action or communication an expectation that it
will buy back, cancel, or redeem the instrument, and the instrument
does not include any term or feature that might give rise to such an
expectation.
(5) Any cash dividend payments on the instrument are paid out of
the banking organization's net income and retained earnings and are not
subject to
[[Page 52811]]
a limit imposed by the contractual terms governing the instrument.
(6) The banking organization has full discretion at all times to
refrain from paying any dividends and making any other capital
distributions on the instrument without triggering an event of default,
a requirement to make a payment-in-kind, or an imposition of any other
restrictions on the banking organization.
(7) Dividend payments and any other capital distributions on the
instrument may be paid only after all legal and contractual obligations
of the banking organization have been satisfied, including payments due
on more senior claims.
(8) The holders of the instrument bear losses as they occur
equally, proportionately, and simultaneously with the holders of all
other common stock instruments before any losses are borne by holders
of claims on the banking organization with greater priority in a
receivership, insolvency, liquidation, or similar proceeding.
(9) The paid-in amount is classified as equity under GAAP.
(10) The banking organization, or an entity that the banking
organization controls, did not purchase or directly or indirectly fund
the purchase of the instrument.
(11) The instrument is not secured, not covered by a guarantee of
the banking organization or of an affiliate of the banking
organization, and is not subject to any other arrangement that legally
or economically enhances the seniority of the instrument.
(12) The instrument has been issued in accordance with applicable
laws and regulations. In most cases, the agencies, understand that the
issuance of these instruments would require the approval of the board
of directors of the banking organization or, where applicable, of the
banking organization's shareholders or of other persons duly authorized
by the banking organization's shareholders.
(13) The instrument is reported on the banking organization's
regulatory financial statements separately from other capital
instruments.
These proposed criteria have been designed to ensure that common
equity tier 1 capital instruments do not possess features that would
cause a banking organization's condition to further weaken during
periods of economic and market stress. For example, the proposed
requirement that a banking organization have full discretion on the
amount and timing of distributions and dividend payments would enhance
the ability of the banking organization to absorb losses during periods
of stress. The agencies believe that most existing common stock
instruments previously issued by U.S. banking organizations fully
satisfy the proposed criteria.
The criteria would also apply to instruments issued by banking
organizations where ownership of the company is neither freely
transferable, nor evidenced by certificates of ownership or stock, such
as mutual banking organizations. For these entities, instruments that
would be considered common equity tier 1 capital would be those that
are fully equivalent to common stock instruments in terms of their
subordination and availability to absorb losses, and that do not
possess features that could cause the condition of the company to
weaken as a going concern during periods of market stress.
The agencies believe that stockholders' voting rights generally are
a valuable corporate governance tool that permits parties with an
economic interest at stake to take part in the decision-making process
through votes on establishing corporate objectives and policy, and in
electing the banking organization's board of directors. For that
reason, the agencies continue to expect under the proposal that voting
common stockholders' equity (net of the adjustments to and deductions
from common equity tier 1 capital proposed under the rule) should be
the dominant element within common equity tier 1 capital. To the extent
that a banking organization issues non-voting common shares or common
shares with limited voting rights, such shares should be identical to
the banking organization's voting common shares in all respects except
for any limitations on voting rights.
Question 15: The agencies solicit comments on the eligibility
criteria for common equity tier 1 capital instruments. Which, if any,
criteria could be problematic given the main characteristics of
outstanding common stock instruments and why? Please provide supporting
data and analysis.
b. Treatment of Unrealized Gains and Losses of Certain Debt Securities
in Common Equity Tier 1 Capital
Under the agencies' general risk-based capital rules, unrealized
gains and losses on AFS debt securities are not included in regulatory
capital, unrealized losses on AFS equity securities are included in
tier 1 capital, and unrealized gains on AFS equity securities are
partially included in tier 2 capital.\54\ As proposed, unrealized gains
and losses on all AFS securities would flow through to common equity
tier 1 capital. This would include those unrealized gains and losses
related to debt securities whose valuations primarily change as a
result of fluctuations in a benchmark interest rate, as opposed to
changes in credit risk (for example, U.S. Treasuries and U.S.
government agency debt obligations).
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\54\ See 12 CFR part 3, appendix A, section 2(b)(5) (OCC); 12
CFR parts 208 and 225, appendix A, section II.A.2.e (Board); 12 CFR
part 325, appendix A, section I.A.2.f (FDIC).
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The agencies believe this proposed treatment would better reflect
an institution's actual risk. In particular, while unrealized gains and
losses on AFS securities might be temporary in nature and might reverse
over a longer time horizon, (especially when they are primarily
attributable to changes in a benchmark interest rate), unrealized
losses could materially affect a banking organization's capital
position at a particular point in time and associated risks should be
reflected in its capital ratios. In addition, the proposed treatment
would be consistent with the common market practice of evaluating a
firm's capital strength by measuring its tangible common equity.
Accordingly, the agencies propose to require unrealized gains and
losses on all AFS securities to flow through to common equity tier 1
capital. However, the agencies recognize that including unrealized
gains and losses related to certain debt securities whose valuations
primarily change as a result of fluctuations in a benchmark interest
rate could introduce substantial volatility in a banking organization's
regulatory capital ratios. The potential increased volatility could
significantly change a banking organization's risk-based capital
ratios, in some cases, due primarily to fluctuations in a benchmark
interest rate and could result in a change in the banking
organization's PCA category. Likewise, the agencies recognize that such
volatility could discourage some banking organizations from holding
highly liquid instruments with very low levels of credit risk even
where prudent for liquidity risk management.
The agencies seek comment on alternatives to the proposed treatment
of unrealized gains and losses on AFS securities, including an approach
where the unrealized gains and losses related to debt securities whose
valuations primarily change as a result of fluctuations in a benchmark
interest rate would be excluded from a banking organization's
regulatory capital. In particular, the agencies seek comment on an
approach that would not include in regulatory capital unrealized gains
and losses on U.S. government and agency debt obligations, U.S. GSE
debt obligations and other sovereign debt obligations that would
qualify for a zero
[[Page 52812]]
percent risk weight under the proposed standardized approach. The
agencies also seek comment on whether unrealized gains and losses on
general obligations issued by states or other political subdivisions of
the United States should receive similar treatment, even though
unrealized gains and losses on these obligations are more likely to
result from changes in credit risk and not primarily from fluctuations
in a benchmark interest rate.
Question 16: To what extent would a requirement to include
unrealized gains and losses on all debt securities whose changes in
fair value are recognized in AOCI (1) result in excessive volatility in
regulatory capital; (2) impact the levels of liquid assets held by
banking organizations; (3) affect the composition of the banking
organization's securities portfolios; and (4) pose challenges for
banking organizations' asset-liability management? Please provide
supporting data and analysis.
Question 17: What are the pros and cons of an alternative treatment
that would allow U.S. banking organizations to exclude from regulatory
capital unrealized gains and losses on debt securities whose changes in
fair value are predominantly attributable to fluctuations in a
benchmark interest rate (for example, U.S. government and agency debt
obligations and U.S. GSE debt obligations)? In the context of such an
alternative treatment, what other categories of securities should be
considered and why? Are there other alternatives that the agencies
should consider (for example, retaining the current treatment for
unrealized gains and losses on AFS debt and equity securities)?
2. Additional Tier 1 Capital
Consistent with Basel III, under the proposal, additional tier 1
capital would be the sum of: Additional tier 1 capital instruments that
satisfy certain criteria, related surplus, and tier 1 minority interest
that is not included in a banking organization's common equity tier 1
capital (subject to the limitations on minority interests set forth in
section 21 of the proposal); less applicable regulatory adjustments and
deductions. Under the agencies' existing capital rules, non-cumulative
perpetual preferred stock, which currently qualifies as tier 1 capital,
generally would continue to qualify as additional tier 1 capital under
the proposal. The proposed criteria for qualifying additional tier 1
capital instruments, consistent with Basel III criteria, are:
(1) The instrument is issued and paid in.
(2) The instrument is subordinated to depositors, general
creditors, and subordinated debt holders of the banking organization in
a receivership, insolvency, liquidation, or similar proceeding.
(3) The instrument is not secured, not covered by a guarantee of
the banking organization or of an affiliate of the banking
organization, and not subject to any other arrangement that legally or
economically enhances the seniority of the instrument.
(4) The instrument has no maturity date and does not contain a
dividend step-up or any other term or feature that creates an incentive
to redeem.
(5) If callable by its terms, the instrument may be called by the
banking organization only after a minimum of five years following
issuance, except that the terms of the instrument may allow it to be
called earlier than five years upon the occurrence of a regulatory
event (as defined in the agreement governing the instrument) that
precludes the instrument from being included in additional tier 1
capital or a tax event. In addition:
(i) The banking organization must receive prior approval from the
agency to exercise a call option on the instrument.
(ii) The banking organization does not create at issuance of the
instrument, through any action or communication, an expectation that
the call option will be exercised.
(iii) Prior to exercising the call option, or immediately
thereafter, the banking organization must either:
(A) Replace the instrument to be called with an equal amount of
instruments that meet the criteria under section 20(b) or (c) of the
proposal (replacement can be concurrent with redemption of existing
additional tier 1 capital instruments); or
(B) Demonstrate to the satisfaction of the agency that following
redemption, the banking organization will continue to hold capital
commensurate with its risk.
(6) Redemption or repurchase of the instrument requires prior
approval from the agency.
(7) The banking organization has full discretion at all times to
cancel dividends or other capital distributions on the instrument
without triggering an event of default, a requirement to make a
payment-in-kind, or an imposition of other restrictions on the banking
organization except in relation to any capital distributions to holders
of common stock.
(8) Any capital distributions on the instrument are paid out of the
banking organization's net income and retained earnings.
(9) The instrument does not have a credit-sensitive feature, such
as a dividend rate that is reset periodically based in whole or in part
on the banking organization's credit quality, but may have a dividend
rate that is adjusted periodically independent of the banking
organization's credit quality, in relation to general market interest
rates or similar adjustments.
(10) The paid-in amount is classified as equity under GAAP.
(11) The banking organization, or an entity that the banking
organization controls, did not purchase or directly or indirectly fund
the purchase of the instrument.
(12) The instrument does not have any features that would limit or
discourage additional issuance of capital by the banking organization,
such as provisions that require the banking organization to compensate
holders of the instrument if a new instrument is issued at a lower
price during a specified time frame.
(13) If the instrument is not issued directly by the banking
organization or by a subsidiary of the banking organization that is an
operating entity, the only asset of the issuing entity is its
investment in the capital of the banking organization, and proceeds
must be immediately available without limitation to the banking
organization or to the banking organization's top-tier holding company
in a form which meets or exceeds all of the other criteria for
additional tier 1 capital instruments. De minimis assets related to the
operation of the issuing entity can be disregarded for purposes of this
criterion.
(14) For an advanced approaches banking organization, the governing
agreement, offering circular, or prospectus of an instrument issued
after January 1, 2013 must disclose that the holders of the instrument
may be fully subordinated to interests held by the U.S. government in
the event that the banking organization enters into a receivership,
insolvency, liquidation, or similar proceeding.
The proposed criteria are designed to ensure that additional tier 1
capital instruments are available to absorb losses on a going concern
basis. Trust preferred securities and cumulative perpetual preferred
securities, which are eligible for limited inclusion in tier 1 capital
under the general risk-based capital rules for bank holding companies,
would generally not qualify for inclusion in additional tier 1
[[Page 52813]]
capital.\55\ The agencies believe that instruments that allow for the
accumulation of interest payable are not sufficiently loss-absorbent to
be included in tier 1 capital. In addition, the exclusion of these
instruments from the tier 1 capital of depository institution holding
companies is consistent with section 171 of the Dodd-Frank Act.
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\55\ See 12 CFR part 225, appendix A, section II.A.1.
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The agencies recognize that instruments classified as liabilities
for accounting purposes could potentially be included in additional
tier 1 capital under Basel III. However, as proposed, an instrument
classified as a liability under GAAP would not qualify as additional
tier 1 capital. The agencies believe that allowing only the inclusion
of instruments classified as equity under GAAP in tier 1 capital would
help strengthen the loss-absorption capabilities of additional tier 1
capital instruments, further increasing the quality of the capital base
of U.S. banking organizations.
The agencies are also proposing to allow banking organizations to
include in additional tier 1 capital instruments that were (1) issued
under the Small Business Jobs Act of 2010 or, prior to October 4, 2010,
under the Emergency Economic Stabilization Act of 2008, and (2)
included in tier 1 capital under the agencies' current general risk-
based capital rules.\56\ These instruments would be included in tier 1
capital whether or not they meet the proposed qualifying criteria for
common equity tier 1 or additional tier 1 capital instruments. The
agencies believe that continued tier 1 capital treatment of these
instruments is important to promote financial recovery and stability
following the recent financial crisis.\57\
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\56\ Public Law 110-343, 122 Stat. 3765 (October 3, 2008).
\57\ See 73 FR 43982 (July 29, 2008); see also 76 FR 35959 (June
21, 2011).
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Question 18: The agencies solicit comments and views on the
eligibility criteria for additional tier 1 capital instruments. Is
there any specific criterion that could potentially be problematic
given the main characteristics of outstanding non-cumulative perpetual
preferred instruments? If so, please explain.
Additional Criterion Regarding Certain Institutional Investors' Minimum
Dividend Payment Requirements
Some banking organizations may want or need to limit their capital
distributions during a particular payout period, but may opt to pay a
penny dividend instead of fully cancelling dividends to common
shareholders because certain institutional investors only hold stocks
that pay a dividend. The agencies believe that the payment of a penny
dividend on common stock should not preclude a banking organization
from canceling (or making marginal) dividend payments on additional
tier 1 capital instruments. The agencies are therefore considering a
revision to criterion (7) of additional tier 1 capital instruments that
would require a banking organization to have the ability to cancel or
substantially reduce dividend payments on additional tier 1 capital
instruments during a period of time when the banking organization is
paying a penny dividend to its common shareholders.
The agencies believe that such a requirement could substantially
increase the loss-absorption capacity of additional tier 1 capital
instruments. To maintain the hierarchy of the capital structure under
these circumstances, banking organizations would have the ability to
pay the holders of additional tier 1 capital instruments the equivalent
of what they pay out to common shareholders.
Question 19: What is the potential impact of such a requirement on
the traditional hierarchy of capital instruments and on the market
dynamics and cost of issuing additional tier 1 capital instruments?
Question 20: What mechanisms could be used to ensure,
contractually, that such a requirement would not result in an
additional tier 1 capital instrument being effectively more loss
absorbent than common stock?
3. Tier 2 Capital
Under the proposal, tier 2 capital would be the sum of: Tier 2
capital instruments that satisfy certain criteria, related surplus,
total capital minority interests not included in a banking
organization's tier 1 capital (subject to the limitations and
requirements on minority interests set forth in section 21 of the
proposal), and limited amounts of the allowance for loan and lease
losses (ALLL); less any applicable regulatory adjustments and
deductions. Consistent with the general risk-based capital rules, when
calculating its standardized total capital ratio, a banking
organization would be able to include in tier 2 capital the amount of
ALLL that does not exceed 1.25 percent of its total standardized risk-
weighted assets not including any amount of the ALLL (a banking
organization subject to the market risk capital rules would exclude its
standardized market risk-weighted assets from the calculation).\58\
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\58\ A banking organization would deduct the amount of ALLL in
excess of the amount permitted to be included in tier 2 capital, as
well as allocated transfer risk reserves, from standardized total
risk-weighted risk assets and use the resulting amount as the
denominator of the standardized total capital ratio.
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When calculating its advanced approaches total capital ratio,
rather than including in tier 2 capital the amount of ALLL described
previously, an advanced approaches banking organization may include the
excess of eligible credit reserves over its total expected credit
losses (ECL) to the extent that such amount does not exceed 0.6 percent
of its total credit risk weighted-assets.\59\
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\59\ An advanced approaches banking organization would deduct
any excess eligible credit reserves that are not permitted to be
included in tier 2 capital from advanced approaches total risk-
weighted assets and use the resulting amount as the denominator of
the total capital ratio.
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The proposed criteria for tier 2 capital instruments, consistent
with Basel III, are:
(1) The instrument is issued and paid in.
(2) The instrument is subordinated to depositors and general
creditors of the banking organization.
(3) The instrument is not secured, not covered by a guarantee of
the banking organization or of an affiliate of the banking
organization, and not subject to any other arrangement that legally or
economically enhances the seniority of the instrument in relation to
more senior claims.
(4) The instrument has a minimum original maturity of at least five
years. At the beginning of each of the last five years of the life of
the instrument, the amount that is eligible to be included in tier 2
capital is reduced by 20 percent of the original amount of the
instrument (net of redemptions) and is excluded from regulatory capital
when remaining maturity is less than one year. In addition, the
instrument must not have any terms or features that require, or create
significant incentives for, the banking organization to redeem the
instrument prior to maturity.
(5) The instrument, by its terms, may be called by the banking
organization only after a minimum of five years following issuance,
except that the terms of the instrument may allow it to be called
sooner upon the occurrence of an event that would preclude the
instrument from being included in tier 2 capital, or a tax event. In
addition:
(i) The banking organization must receive the prior approval of the
agency to exercise a call option on the instrument.
[[Page 52814]]
(ii) The banking organization does not create at issuance, through
action or communication, an expectation the call option will be
exercised.
(iii) Prior to exercising the call option, or immediately
thereafter, the banking organization must either:
(A) Replace any amount called with an equivalent amount of an
instrument that meets the criteria for regulatory capital under this
section,\60\ or
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\60\ Replacement of tier 2 capital instruments can be concurrent
with redemption of existing tier 2 capital instruments.
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(B) Demonstrate to the satisfaction of the agency that following
redemption, the banking organization would continue to hold an amount
of capital that is commensurate with its risk.
(6) The holder of the instrument must have no contractual right to
accelerate payment of principal or interest on the instrument, except
in the event of a receivership, insolvency, liquidation, or similar
proceeding of the banking organization.
(7) The instrument has no credit-sensitive feature, such as a
dividend or interest rate that is reset periodically based in whole or
in part on the banking organization's credit standing, but may have a
dividend rate that is adjusted periodically independent of the banking
organization's credit standing, in relation to general market interest
rates or similar adjustments.
(8) The banking organization, or an entity that the banking
organization controls, has not purchased and has not directly or
indirectly funded the purchase of the instrument.
(9) If the instrument is not issued directly by the banking
organization or by a subsidiary of the banking organization that is an
operating entity, the only asset of the issuing entity is its
investment in the capital of the banking organization, and proceeds
must be immediately available without limitation to the banking
organization or the banking organization's top-tier holding company in
a form that meets or exceeds all the other criteria for tier 2 capital
instruments under this section.\61\
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\61\ De minimis assets related to the operation of the issuing
entity can be disregarded for purposes of this criterion.
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(10) Redemption of the instrument prior to maturity or repurchase
requires the prior approval of the agency.
(11) For an advanced approaches banking organization, the governing
agreement, offering circular, or prospectus of an instrument issued
after January 1, 2013 must disclose that the holders of the instrument
may be fully subordinated to interests held by the U.S. government in
the event that the banking organization enters into a receivership,
insolvency, liquidation, or similar proceeding.
As explained previously, under the proposed eligibility criteria
for additional tier 1 capital instruments, trust preferred securities
and cumulative perpetual preferred securities would not qualify for
inclusion in additional tier 1 capital. However, many of these
instruments could qualify for inclusion in tier 2 capital under the
proposed eligibility criteria for tier 2 capital instruments.
Given that as proposed, unrealized gains and losses on AFS
securities would flow through to common equity tier 1 capital, the
agencies propose to eliminate the inclusion of a portion of certain
unrealized gains on AFS equity securities in tier 2 capital.
As a result of the proposed new minimum common equity tier 1
capital requirement, higher tier 1 capital requirement, and the broader
goal of simplifying the definition of tier 2 capital, the agencies are
proposing to eliminate some existing limits related to tier 2 capital.
Specifically, there would be no limit on the amount of tier 2 capital
that could be included in a banking organization's total capital.
Likewise, existing limitations on term subordinated debt, limited-life
preferred stock and trust preferred securities within tier 2 would also
be eliminated.\62\
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\62\ See 12 CFR part 3, Appendix A, section 2(b)(3); 12 CFR
parts 208 and 225, appendix A, section II.A.2; 12 CFR part 325,
appendix A, section I.A.2.
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Question 21: The agencies solicit comments on the eligibility
criteria for tier 2 capital instruments. Is there any specific
criterion that could potentially be problematic? If so, please explain.
For the reasons explained previously with respect to tier 1 capital
instruments, the agencies propose to allow an instrument that qualified
as tier 2 capital under the general risk-based capital rules and that
was issued under the Small Business Jobs Act of 2010 or, prior to
October 4, 2010, under the Emergency Economic Stabilization Act of
2008, to continue to be includable in tier 2 capital regardless of
whether it meets all of the proposed qualifying criteria.
4. Capital Instruments of Mutual Banking Organizations
Most of the capital of mutual banking organizations is generally in
the form of retained earnings (including retained earnings surplus
accounts) and the agencies believe that mutual banking organizations
generally should be able to meet the proposed regulatory capital
requirements.
Consistent with Basel III, the proposed criteria for regulatory
capital instruments would potentially permit the inclusion in
regulatory capital of certain capital instruments issued by mutual
banking organizations (for example, non-withdrawable accounts, pledged
deposits, or mutual capital certificates), provided that the
instruments meet all the proposed eligibility criteria of the relevant
capital component.
However, some previously-issued mutual capital instruments that
were includable in the regulatory capital of mutual banking
organizations may not meet all of the relevant criteria for capital
instruments under the proposal. For example, instruments that are
liabilities or that are cumulative would not meet the criteria for
additional tier 1 capital instruments. However, these instruments would
be subject to the proposed transition provisions and excluded from
capital over time.
Question 21: What instruments or accounts currently included in the
regulatory capital of mutual banking organizations would not meet the
proposed criteria for capital instruments?
Question 23: What impact, if any, would the exclusion of such
instruments or accounts have on the regulatory capital ratios of mutual
banking organizations? Please provide data supporting your answer.
Question 24: Would such instruments be unable to meet any of the
proposed criteria? Could the terms of such instruments be modified to
align with the proposed criteria for capital instruments? Please
explain.
Question 25: Would the proposed criteria for capital instruments
affect the ability of mutual banking organizations to increase
regulatory capital levels going forward?
5. Grandfathering of Certain Capital Instruments
Under Basel III, capital investments in a banking organization made
before September 12, 2010 by the government where the banking
organization is domiciled are grandfathered until January 1, 2018.
However, as described above with respect to qualifying criteria for
tier 1 and tier 2 instruments, the agencies are proposing a different
grandfathering treatment for the capital investments by the U.S.
government, consistent with the Dodd-Frank Act.\63\
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\63\ See 12 U.S.C. 5371(b)(5)(A).
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As discussed above, as proposed, capital investments by the U.S.
[[Page 52815]]
government included in the tier 1 and tier 2 capital of banking
organizations issued under the Small Business Jobs Act of 2010 or,
prior to October 4, 2010,\64\ under the Emergency Economic
Stabilization Act \65\ (for example, tier 1 instruments issued under
the TARP program) would be grandfathered permanently. Transitional
arrangements for regulatory capital instruments that do not comply with
the Basel III criteria and transitional arrangements for debt or equity
instruments issued by depository institution holding companies that do
not qualify as regulatory capital under the general risk-based capital
rules are discussed under section V of this preamble.
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\64\ Public Law 111-240 (September 27, 2010).
\65\ Public Law 110-343, 122 Stat. 3765 (October 3, 2008).
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6. Agency Approval of Capital Elements
The agencies expect that most existing common stock instruments
that banking organizations currently include in tier 1 capital would
meet the proposed eligibility criteria for common equity tier 1 capital
instruments. In addition, the agencies expect that most existing non-
cumulative perpetual preferred stock instruments that banking
organizations currently include in tier 1 capital and most existing
subordinated debt instruments they include in tier 2 capital would meet
the proposed eligibility criteria for additional tier 1 and tier 2
capital instruments, respectively. However, the agencies recognize that
over time, capital instruments that are equivalent in quality and loss-
absorption capacity to existing instruments may be created to satisfy
different market needs and are proposing to consider the eligibility of
such instruments on a case-by-case basis.
Accordingly, the agencies propose to require a banking organization
request approval from its primary federal supervisor before it may
include a capital element in regulatory capital, unless:
(i) Such capital element is currently included in regulatory
capital under the agencies' general risk-based capital and leverage
rules and the underlying instrument complies with the applicable
proposed eligibility criteria for regulatory capital instruments; or
(ii) The capital element is equivalent in terms of capital quality
and loss-absorption capabilities to an element described in a previous
decision made publicly available by the banking organization's primary
federal supervisor.
The agency that is considering a request to include a new capital
element in regulatory capital would consult with the other agencies
when determining whether the element should be included in common
equity tier 1, additional tier 1, or tier 2 capital. Once an agency
determines that a capital element may be included in a banking
organization's common equity tier 1, additional tier 1, or tier 2
capital, the agency would make its decision publicly available,
including a brief description of the element and the rationale for the
conclusion.
7. Addressing the Point of Non-Viability Requirements Under Basel III
During the recent financial crisis, in the United States and other
countries, governments lent to, and made capital investments in,
distressed banking organizations. These investments helped to stabilize
the recipient banking organizations and the financial sector as a
whole. However, because of the investments, the recipient banking
organizations' existing tier 2 capital instruments, and (in some cases)
tier 1 capital instruments, did not absorb the banking organizations'
credit losses consistent with the purpose of regulatory capital. At the
same time, taxpayers became exposed to those losses.
On January 13, 2011, the BCBS issued international standards for
all additional tier 1 and tier 2 capital instruments issued by
internationally active banking organizations, to ensure that such
regulatory capital instruments fully absorb losses before taxpayers are
exposed to such losses (Basel non-viability standard). Under the Basel
non-viability standard, all non-common stock regulatory capital
instruments issued by an internationally active banking organization
must include terms that subject the instruments to write-off or
conversion to common equity at the point that either (1) the write-off
or conversion of those instruments occurs or (2) a government (or
public sector) injection of capital would be necessary to keep the
banking organization solvent. Alternatively, if the governing
jurisdiction of the banking organization has established laws that
require such tier 1 and tier 2 capital instruments to be written off or
otherwise fully absorb losses before tax payers are exposed to loss,
the standard is already met. If the governing jurisdiction has such
laws in place, the Basel non-viability standard states that
documentation for such instruments should disclose that information to
investors and market participants, and should clarify that the holders
of such instruments would fully absorb losses before taxpayers are
exposed to loss.\66\
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\66\ See ``Final Elements of the Reforms to Raise the Quality of
Regulatory Capital'' (January 2011), available at: https://www.bis.org/press/p110113.pdf.
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The agencies believe that U.S. law generally is consistent with the
Basel non-viability standard. The resolution regime established in
Title 2, section 210 of the Dodd-Frank Act provides the FDIC with the
authority necessary to place failing financial companies that pose a
significant risk to the financial stability of the United States into
receivership.\67\ The Dodd-Frank Act provides that this authority shall
be exercised in the manner that minimizes systemic risk and moral
hazard, so that (1) Creditors and shareholders will bear the losses of
the financial company; (2) management responsible for the condition of
the financial company will not be retained; and (3) the FDIC and other
appropriate agencies will take steps necessary and appropriate to
ensure that all parties, including holders of capital instruments,
management, directors, and third parties having responsibility for the
condition of the financial company, bear losses consistent with their
respective ownership or responsibility.\68\ Section 11 of the Federal
Deposit Insurance Act has similar provisions for the resolution of
depository institutions.\69\ Additionally, under U.S. bankruptcy law,
regulatory capital instruments issued by a company in bankruptcy would
absorb losses before more senior unsecured creditors.
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\67\ See 12 U.S.C. 5384.
\68\ 12 U.S.C. 5384.
\69\ 12 U.S.C. 1821.
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Furthermore, consistent with the Basel non-viability standard,
under the proposal, additional tier 1 and tier 2 capital instruments
issued by advanced approaches banking organizations after the proposed
requirements for capital instruments are finalized would be required to
include a disclosure that the holders of the instrument may be fully
subordinated to interests held by the U.S. government in the event that
the banking organization enters into receivership, insolvency,
liquidation, or similar proceeding.
8. Qualifying Capital Instruments Issued by Consolidated Subsidiaries
of a Banking Organization
Investments by third parties in a consolidated subsidiary of a
banking organization may significantly improve the overall capital
adequacy of that subsidiary. However, as became apparent during the
financial crisis, while capital issued by consolidated subsidiaries and
not owned by the
[[Page 52816]]
parent banking organization (minority interest) is available to absorb
losses at the subsidiary level, that capital does not always absorb
losses at the consolidated level. Therefore, inclusion of minority
interests in the regulatory capital at the consolidated level should be
limited to prevent highly capitalized subsidiaries from overstating the
amount of capital available to absorb losses at the consolidated level.
Under the proposal, a banking organization would be allowed to
include in its consolidated capital limited amounts of minority
interests, if certain requirements are met. Minority interest would be
classified as a common equity tier 1, tier 1, or total capital minority
interest depending on the underlying capital instrument and on the type
of subsidiary issuing such instrument. Any instrument issued by the
consolidated subsidiary to third parties would need to meet the
relevant eligibility criteria under section 20 of the proposal in order
for the resulting minority interest to be included in the banking
organization's common equity tier 1, additional tier 1 or tier 2
capital elements, as appropriate. In addition, common equity tier 1
minority interest would need to be issued by a depository institution
or foreign bank that is a consolidated subsidiary of a banking
organization.
The limits on the amount of minority interest that may be included
in the consolidated capital of a banking organization would be based on
the amount of capital held by the consolidated subsidiary, relative to
the amount of capital the subsidiary would have to hold in order to
avoid any restrictions on capital distributions and discretionary bonus
payments under the capital conservation buffer framework, as provided
in section 11 of the proposal.
For example, if a subsidiary needs to maintain a common equity tier
1 capital ratio of more than 7 percent to avoid limitations on capital
distributions and discretionary bonus payments, and the subsidiary's
common equity tier 1 capital ratio is 8 percent, the subsidiary would
be considered to have ``surplus'' common equity tier 1 capital and, at
the consolidated level, the banking organization would not be able to
include the portion of such surplus common equity tier 1 capital held
by third party investors.
The steps for determining the amount of minority interest
includable in a banking organization's regulatory capital are described
in this section below and are illustrated in a numerical example that
follows. For example, the amount of common equity tier 1 minority
interest includable in the common equity tier 1 capital of a banking
organization under the proposal would be: the common equity tier 1
minority interest of the subsidiary minus the ratio of the subsidiary's
common equity tier 1 capital owned by third parties to the total common
equity tier 1 capital of the subsidiary, multiplied by the difference
between the common equity tier 1 capital of the subsidiary and the
lower of: (1) The amount of common equity tier 1 capital the subsidiary
must hold to avoid restrictions on capital distributions and
discretionary bonus payments, or (2) the total risk-weighted assets of
the banking organization that relate to the subsidiary, multiplied by
the common equity tier 1 capital ratio needed by the banking
organization subsidiary to avoid restrictions on capital distributions
and discretionary bonus payments. If the subsidiary were not subject to
the same minimum regulatory capital requirements or capital
conservation buffer framework of the banking organization, the banking
organization would need to assume, for purposes of the calculation
described above, that the subsidiary is subject to the minimum capital
requirements and to the capital conservation buffer framework of the
banking organization.
To determine the amount of tier 1 minority interest includable in
the tier 1 capital of the banking organization and the total capital
minority interest includable in the total capital of the banking
organization, a banking organization would follow the same methodology
as the one outlined previously for common equity tier 1 minority
interest. Section 21 of the proposal sets forth the precise
calculations. The amount of tier 1 minority interest that can be
included in the additional tier 1 capital of the banking organization
is equivalent to the banking organization's tier 1 minority interest,
subject to the limitations outlined above, less any tier 1 minority
interest that is included in the banking organization's common equity
tier 1 capital. Likewise, the amount of total capital minority interest
that can be included in the tier 2 capital of the banking organization
is equivalent to its total capital minority interest, subject to the
limitations outlined previously, less any tier 1 minority interest that
is included in the banking organization's tier 1 capital.
As proposed, minority interest related to qualifying common or
noncumulative perpetual preferred stock directly issued by a
consolidated U.S. depository institution or foreign bank subsidiary,
which are eligible for inclusion in tier 1 capital under the general
risk-based capital rules without limitation, would generally qualify
for inclusion in common equity tier 1 and additional tier 1 capital,
respectively, subject to the appropriate limits under section 21 of the
proposed rule. Likewise, under the proposed rule, minority interest
related to qualifying cumulative perpetual preferred stock directly
issued by a consolidated U.S. depository institution or foreign bank
subsidiary, which are eligible for limited inclusion in tier 1 capital
under the general risk-based capital rules, would generally not qualify
for inclusion in additional tier 1 capital under the proposal.
Table 8-- Example of the Calculation of the Proposed Limits on Minority Interest
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Capital issued Capital owned Amount of Minimum Minimum Surplus Surplus Minority
by subsidiary by third minority capital capital capital of minority interest
($) parties interest ($) requirement requirement subsidiary ($) interest ($) included at
(percent) ((a)*(b)) plus capital plus capital ((a)-(e)) ((f)*(b)) banking
conservation conservation organization
buffer buffer ($) level ($)((c)-
(percent) ((RWAs*(d)) (g))
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common equity tier 1 capital.................................... 80 30 24 7 70 10 3 21
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Additional tier 1 capital....................................... 30 50 15 .............. .............. .............. .............. 9.1
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Tier 1 capital.................................................. 110 35 39 8.5 85 25 8.9 30.1
Tier 2 capital.................................................. 20 75 15 .............. .............. .............. .............. 13.5
-------------------------------------------------------------------------------------------------------------------------------
Total capital............................................... 130 42 54 10.5 105 25 10.4 43.6
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[[Page 52817]]
For purposes of the example in table 8, assume a consolidated
depository institution subsidiary has common equity tier 1, additional
tier 1 and tier 2 capital of $80, $30, and $20, respectively, and third
parties own 30 percent of the common equity tier 1 capital ($24), 50
percent of the additional tier 1 capital ($15) and 75 percent of the
tier 2 capital ($15). If the subsidiary has $1000 of total risk-
weighted assets, the sum of its minimum common equity tier 1 capital
requirement (4.5 percent) plus the capital conservation buffer (2.5
percent) (assuming a countercyclical capital buffer amount of zero) is
7 percent ($70), the sum of its minimum tier 1 capital requirement (6.0
percent) plus the capital conservation buffer (2.5 percent) is 8.5
percent ($85), and the sum of its minimum total capital requirement (8
percent) plus the capital conservation buffer (2.5 percent) is 10.5
percent ($105).
In this example, the surplus common equity tier 1 capital of the
subsidiary equals $10 ($80 - $70), the amount of the surplus common
equity tier 1 minority interest is equal to $3 ($10*$24/$80), and
therefore the amount of common equity tier 1 minority interest that may
be included at the consolidated level is equal to $21 ($24 - $3).
The surplus tier 1 capital of the subsidiary is equal to $25 ($110
- $85), the amount of the surplus tier 1 minority interest is equal to
$8.9 ($25*$39/$110), and therefore the amount of tier 1 minority
interest that may be included in the banking organization is equal to
$30.1 ($39 - $8.9). Since the banking organization already includes $21
of common equity tier 1 minority interest in its common equity tier 1
capital, it would include $9.1 ($30.1 - $21) of such tier 1 minority
interest in its additional tier 1 capital.
The surplus total capital of the subsidiary is equal to $25 ($130 -
$105), the amount of the surplus total capital minority interest is
equal to $10.4 ($25*$54/$130), and therefore the amount of total
capital minority interest that may be included in the banking
organization is equal to $43.6 ($54 - $10.4). Since the banking
organization already includes $30.1 of tier 1 minority interest in its
tier 1 capital, it would include $13.5 ($43.6 - $30.1) of such total
capital minority interest in its tier 2 capital.
Question 26: The agencies solicit comments on the proposed
qualitative restrictions and quantitative limits for including minority
interest in regulatory capital. What is the potential impact of these
restrictions and limitations on the issuance of certain types of
capital instruments (for example, subordinated debt) by depository
institution subsidiaries of banking organizations? Please provide data
to support your answer.
Real Estate Investment Trust Preferred Capital
A Real Estate Investment Trust (REIT) is a company that is required
to invest in real estate and real estate-related assets and make
certain distributions in order to maintain a tax-advantaged status.
Some banking organizations have consolidated subsidiaries that are
REITs, and such REITs may have issued capital instruments to be
included in the regulatory capital of the consolidated banking
organization as minority interest.
Under the agencies' general risk-based capital rules, preferred
shares issued by a REIT subsidiary generally may be included in a
banking organization's tier 1 capital as minority interest if the
preferred shares meet the eligibility requirements for tier 1
capital.\70\ The agencies have interpreted this requirement to entail
that the REIT preferred shares must be exchangeable automatically into
noncumulative perpetual preferred stock of the banking organization
under certain circumstances. Specifically the primary federal
supervisor may direct the banking organization in writing to convert
the REIT preferred shares into noncumulative perpetual preferred stock
of the banking organization because the banking organization: (1)
Became undercapitalized under the PCA regulations; \71\ (2) was placed
into conservatorship or receivership; or (3) was expected to become
undercapitalized in the near term.\72\
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\70\ 12 CFR part 325, subpart B (FDIC); 12 CFR part 3, Appendix
A, Sec. 2(a)(3) (OCC).
\71\ 12 CFR part 3, appendix A, section 2(a)(3), 12 CFR
167.5(a)(1)(iii) (OCC); 12 CFR part 208, subpart D (Board); 12 CFR
part 325, subpart B, 12 CFR part 390, subpart Y (FDIC).
\72\ See OCC Corporate Decision No. 97-109 (December 1997)
available at https://www.occ.gov/static/interpretations-and-precedents/dec97/cd97-109.pdf and the Comptroller's licensing
manual, Capital and Dividends available at https://www.occ.gov/static/publications/capital3.pdf; 12 CFR parts 208 and 225, appendix
A (Board); 12 CFR part 325, subpart B (FDIC).
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Under the proposed rule, the limitations described previously on
the inclusion of minority interest in regulatory capital would apply to
capital instruments issued by consolidated REIT subsidiaries.
Specifically, REIT preferred shares issued by a REIT subsidiary that
meets the proposed definition of an operating entity would qualify for
inclusion in the regulatory capital of a banking organization subject
to the limitations outlined in section 21 of the proposed rule only if
the REIT preferred shares meet the criteria for additional tier 1 or
tier 2 capital instruments outlined in section 20 of the proposed rule.
Under the proposal, an operating entity is a subsidiary of the banking
organization set up to conduct business with clients with the intention
of earning a profit in its own right.
Because a REIT must distribute 90 percent of its earnings in order
to maintain its beneficial tax status, a banking organization might be
reluctant to cancel dividends on the REIT preferred shares. However,
for a capital instrument to qualify as additional tier 1 capital, which
must be available to absorb losses, the issuer must have the ability to
cancel dividends. In cases where a REIT could maintain its tax status
by declaring a consent dividend and has the ability to do so, the
agencies generally would consider REIT preferred shares to satisfy
criterion (7) of the proposed eligibility criteria for additional tier
1 capital instruments under the proposed rule.\73\ The agencies do not
expect preferred stock issued by a REIT that does not have the ability
to declare a consent dividend to qualify as tier 1 minority interest;
however, such instrument could qualify as total capital minority
interest if it meets all of the relevant tier 2 eligibility criteria
under the proposed rule.
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\73\ A consent dividend is a dividend that is not actually paid
to the shareholders, but is kept as part of a company's retained
earnings, yet the shareholders have consented to treat the dividend
as if paid in cash and include it in gross income for tax purposes.
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Question 27: The agencies are seeking comment on the proposed
treatment of REIT preferred capital. Specifically, how would the
proposed minority interest limitations and interpretation of criterion
(7) of the proposed eligibility criteria for additional tier 1 capital
instruments affect the future issuance of REIT preferred capital
instruments?
B. Regulatory Adjustments and Deductions
1. Regulatory Deductions From Common Equity Tier 1 Capital
The proposed rule would require a banking organization to make the
deductions described in this section from the sum of its common equity
tier 1 capital elements. Amounts deducted would be excluded from the
banking organization's risk-weighted assets and leverage exposure.
[[Page 52818]]
Goodwill and Other Intangibles (Other Than MSAs)
Goodwill and other intangible assets have long been either fully or
partially excluded from regulatory capital in the U.S. because of the
high level of uncertainty regarding the ability of the banking
organization to realize value from these assets, especially under
adverse financial conditions.\74\ Likewise, U.S. federal banking
statutes generally prohibit inclusion of goodwill in the regulatory
capital of insured depository institutions.\75\
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\74\ See 54 FR 4186, 4196 (1989) (Board); 54 FR 4168, 4175
(1989) (OCC); 54 FR 11509 (FDIC).
\75\ 12 U.S.C. 1828(n).
---------------------------------------------------------------------------
Accordingly, under the proposal, goodwill and other intangible
assets other than MSAs (for example, purchased credit card
relationships (PCCRs) and non-mortgage servicing assets), net of
associated deferred tax liabilities (DTLs), would be deducted from
common equity tier 1 capital elements. Goodwill for purposes of this
deduction would include any goodwill embedded in the valuation of
significant investments in the capital of an unconsolidated financial
institution in the form of common stock. Such deduction of embedded
goodwill would apply to investments accounted for under the equity
method. Under GAAP, if there is a difference between the initial cost
basis of the investment and the amount of underlying equity in the net
assets of the investee, the resulting difference should be accounted
for as if the investee were a consolidated subsidiary (which may
include imputed goodwill). Consistent with Basel III, these deductions
would be taken from common equity tier 1 capital. Although MSAs are
also intangibles, they are subject to a different treatment under Basel
III and the proposal, as explained in this section.
DTAs
As proposed, consistent with Basel III, a banking organization
would deduct DTAs that arise from operating loss and tax credit
carryforwards net of any related valuation allowances (and net of DTLs
calculated as outlined in section 22(e) of the proposal) from common
equity tier 1 capital elements because of the high degree of
uncertainty regarding the ability of the banking organization to
realize value from such DTAs.
DTAs arising from temporary differences that the banking
organization could not realize through net operating loss carrybacks
net of any related valuation allowances and net of DTLs calculated as
outlined in section 22(e) of the proposal (for example, DTAs resulting
from the banking organization's ALLL), would be subject to strict
limitations described in section 22(d) of the proposal because of
concerns regarding a banking organization's ability to realize such
DTAs.
DTAs arising from temporary differences that the banking
organization could realize through net operating loss carrybacks are
not subject to deduction, and instead receive a 100 percent risk
weight. For a banking organization that is a member of a consolidated
group for tax purposes, the amount of DTAs that could be realized
through net operating loss carrybacks may not exceed the amount that
the banking organization could reasonably expect to have refunded by
its parent holding company.
Gain-on-Sale Associated With a Securitization Exposure
A banking organization would deduct from common equity tier 1
capital elements any after-tax gain-on-sale associated with a
securitization exposure. Under this proposal, gain-on-sale means an
increase in the equity capital of a banking organization resulting from
the consummation or issuance of a securitization (other than an
increase in equity capital resulting from the banking organization's
receipt of cash in connection with the securitization).
Defined Benefit Pension Fund Assets
As proposed, defined benefit pension fund liabilities included on
the balance sheet of a banking organization would be fully recognized
in common equity tier 1 capital (that is, common equity tier 1 capital
cannot be increased via the de-recognition of these liabilities).
However, under the proposal, defined benefit pension fund assets
(defined as excess assets of the pension fund that are reported on the
banking organization's balance sheet due to its overfunded status), net
of any associated DTLs, would be deducted in the calculation of common
equity tier 1 capital given the high level of uncertainty regarding the
ability of the banking organization to realize value from such assets.
Consistent with Basel III, under the proposal, with supervisory
approval, a banking organization would not be required to deduct a
defined benefit fund assets to which the banking organization has
unrestricted and unfettered access. In this case, the banking
organization would assign to such assets the risk weight they would
receive if they were directly owned by the banking organization. Under
the proposal, unrestricted and unfettered access would mean that a
banking organization is not required to request and receive specific
approval from pension beneficiaries each time it would access excess
funds in the plan.
The FDIC has unfettered access to the excess assets of an insured
depository institution's pension plan in the event of receivership.
Therefore, the agencies have determined that generally an insured
depository institution would not be required to deduct any assets
associated with a defined benefit pension plan from common equity tier
1 capital. Similarly, a holding company would not need to deduct any
assets associated with a subsidiary insured depository institution's
defined benefit pension plan from capital.
Activities by Savings Association Subsidiaries That Are Impermissible
for National Banks
As part of the OCC's overall effort to integrate the regulatory
requirements for national banks and federal savings associations, the
OCC is proposing to incorporate in the proposal a deduction requirement
specifically applicable to federal savings association subsidiaries
that engage in activities impermissible for national banks. Similarly,
the FDIC is proposing to incorporate in the proposal a deduction
requirement specifically applicable to state savings association
subsidiaries that engage in activities impermissible for national
banks. Section 5(t)(5) \76\ of HOLA requires a separate capital
calculation for Federal savings associations for ``investments in and
extensions of credit to any subsidiary engaged in activities not
permissible for a national bank.'' This statutory provision is
implemented through the definition of ``includable subsidiary'' as a
deduction from the core capital of the federal savings association for
those subsidiaries that are not ``includable subsidiaries.'' \77\
Specifically, where a subsidiary of a federal savings association
engages in activities that are impermissible for national banks, the
rules require the deconsolidation and deduction of the federal savings
association's investment in the subsidiary from the assets and
regulatory capital of the Federal savings association. If the
activities of the federal savings association subsidiary are
permissible for a national bank, then consistent with GAAP, the balance
sheet of the subsidiary generally is consolidated with the balance
sheet of the federal savings association.
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\76\ 12 U.S.C. 1464(t)(5).
\77\ See 12 CFR 167.1; 12 CFR 167.5(a)(2)(iv).
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[[Page 52819]]
The OCC is proposing to carry over the general regulatory treatment
of includable subsidiaries, with some technical modifications, by
adding a new paragraph to section 22(a) of the proposal. The OCC notes
that such treatment is consistent with how a national bank deducts its
equity investments in financial subsidiaries. Under this proposal,
investments (both debt and equity) by a federal savings association in
a subsidiary that is not an ``includable subsidiary'' are required to
be deducted (with certain exceptions) from the common equity tier 1
capital of the federal savings association. Among other things,
includable subsidiary is defined as a subsidiary of a federal savings
association that engages solely in activities not impermissible for a
national bank. Aside from a few technical modifications, this proposal
is intended to carry over the current general regulatory treatment of
includable subsidiaries for federal savings associations into the
proposal.
Question 28: The OCC and FDIC request comments on all aspects of
this proposal to incorporate the current deduction requirement for
federal and state, savings association subsidiaries that engage in
activities impermissible for national banks. In particular, the OCC and
FDIC are interested in whether this statutorily required deduction can
be revised to reduce burden on federal and state savings associations.
2. Regulatory Adjustments to Common Equity Tier 1 Capital
Unrealized Gains and Losses on Certain Cash Flow Hedges
Consistent with Basel III, the agencies are proposing that
unrealized gains and losses on cash flow hedges that relate to the
hedging of items that are not recognized at fair value on the balance
sheet (including projected cash flows) be excluded from regulatory
capital. That is, if the banking organization has an unrealized-net-
cash-flow-hedge gain, it would deduct it from common equity tier 1
capital, and if it has an unrealized-net-cash-flow-hedge loss it would
add it back to common equity tier 1 capital, net of applicable tax
effects. That is, if the amount of the cash flow hedge is positive, a
banking organization would deduct such amount from common equity tier 1
capital elements, and if the amount is negative, a banking organization
would add such amount to common equity tier 1 capital elements.
This proposed regulatory adjustment would reduce the artificial
volatility that can arise in a situation where the unrealized gain or
loss of the cash flow hedge is included in regulatory capital but any
change in the fair value of the hedged item is not. However, the
agencies recognize that in a regulatory capital framework where
unrealized gains and losses on AFS securities flow through to common
equity tier 1 capital, the exclusion of unrealized cash flow hedge
gains and losses might have an adverse effect on banking organizations
that manage their interest rate risk by using cash flow hedges to hedge
items that are not recognized on the balance sheet at fair value (for
example, floating rate liabilities) and that are used to fund the
banking organizations' AFS investment portfolios. In this scenario, a
banking organization's regulatory capital could be adversely affected
by fluctuations in a benchmark interest rate even if the banking
organization's interest rate risk is effectively hedged because its
unrealized gains and losses on the AFS securities would flow through to
regulatory capital while its unrealized gains and losses on the cash
flow hedges would not, resulting in a regulatory capital asymmetry.
Question 29: How would a requirement to exclude unrealized net
gains and losses on cash flow hedges related to the hedging of items
that are not measured at fair value in the balance sheet (in the
context of a framework where the unrealized gains and losses on AFS
debt securities would flow through to regulatory capital) change the
way banking organizations currently hedge against interest rate risk?
Please explain and provide supporting data and analysis.
Question 30: Could this adjustment potentially introduce excessive
volatility in regulatory capital predominantly as a result of
fluctuations in a benchmark interest rate for institutions that are
effectively hedged against interest rate risk? Please explain and
provide supporting data and analysis.
Question 31: What are the pros and cons of an alternative treatment
where floating rate liabilities are deemed to be fair valued for
purposes of the proposed adjustment for unrealized gains and losses on
cash flow hedges? Please explain and provide supporting data and
analysis.
Changes in the Banking Organization's Creditworthiness
The agencies believe that it would be inappropriate to allow
banking organizations to increase their capital ratios as a result of a
deterioration in their own creditworthiness, and are therefore
proposing, consistent with Basel III, that banking organizations not be
allowed to include in regulatory capital any change in the fair value
of a liability that is due to changes in their own creditworthiness.
Therefore, a banking organization would be required to deduct any
unrealized gain from and add back any unrealized loss to common equity
tier 1 capital elements due to changes in a banking organization's own
creditworthiness. An advanced approaches banking organization would
deduct from common equity tier 1 capital elements any unrealized gains
associated with derivative liabilities resulting from the widening of a
banking organization's credit spread premium over the risk free rate.
3. Regulatory Deductions Related to Investments in Capital Instruments
Deduction of Investments in own Regulatory Capital Instruments
To avoid the double-counting of regulatory capital, under the
proposal a banking organization would be required to deduct the amount
of its investments in its own capital instruments, whether held
directly or indirectly, to the extent such investments are not already
derecognized from regulatory capital. Specifically, a banking
organization would deduct its investment in its own common equity tier
1, own additional tier 1 and own tier 2 capital instruments from the
sum of its common equity tier 1, additional tier 1, and tier 2 capital
elements, respectively. In addition, any common equity tier 1,
additional tier 1 or tier 2 capital instrument issued by a banking
organization which the banking organization could be contractually
obliged to purchase would also be deducted from its common equity tier
1, additional tier 1 or tier 2 capital elements, respectively. If a
banking organization already deducts its investment in its own shares
(for example, treasury stock) from its common equity tier 1 capital
elements, it does not need to make such deduction twice.
A banking organization would be required to look through its
holdings of index securities to deduct investments in its own capital
instruments. Gross long positions in investments in its own regulatory
capital instruments resulting from holdings of index securities may be
netted against short positions in the same underlying index. Short
positions in indexes that are hedging long cash or synthetic positions
may be decomposed to recognize the hedge. More specifically, the
portion of the index that is composed of the same underlying exposure
that is being hedged may be used to offset the long position only if
both the exposure being hedged and the short position in the index are
positions
[[Page 52820]]
subject to the market risk rule, the positions are fair valued on the
banking organization's balance sheet, and the hedge is deemed effective
by the banking organization's internal control processes, which have
been assessed by the primary supervisor of the banking organization. If
the banking organization finds it operationally burdensome to estimate
the exposure amount as a result of an index holding, it may, with prior
approval from the primary federal supervisor, use a conservative
estimate. In all other cases, gross long positions would be allowed to
be deducted net of short positions in the same underlying instrument
only if the short positions involve no counterparty risk (for example,
the position is fully collateralized or the counterparty is a
qualifying central counterparty).
Definition of Financial Institution
Consistent with Basel III, the proposal would require banking
organizations to deduct investments in the capital of unconsolidated
financial institutions where those investments exceed certain
thresholds, as described further below. These deduction requirements
are one of the measures included in Basel III designed to address
systemic risk arising out of interconnectedness between banking
organizations.
Under the proposal, ``financial institution'' would mean bank
holding companies, savings and loan holding companies, non-bank
financial institutions supervised by the Board under Title I of the
Dodd-Frank Act, depository institutions, foreign banks, credit unions,
insurance companies, securities firms, commodity pools (as defined in
the Commodity Exchange Act), covered funds under section 619 of the
Dodd-Frank Act (and regulations issued thereunder), benefit plans, and
other companies predominantly engaged in certain financial activities,
as set forth in the proposal. See the definition of ``financial
institution'' in section 2 of the proposed rules.
The proposed definition is designed to include entities whose
primary business is financial activities and therefore could contribute
to risk in the financial system, including entities whose primary
business is banking, insurance, investing, and trading, or a
combination thereof. The proposed definition is also designed to align
with similar definitions and concepts included in other rulemakings,
including those funds that are covered by the restrictions of section
13 of the Bank Holding Company Act. The proposed definition also
includes a standard for ``predominantly engaged'' in financial
activities similar to the standard from the Board's proposed rule to
define ``predominantly engaged in financial activities'' for purposes
of Title I of the Dodd-Frank Act.\78\ Likewise, the proposed definition
seeks to exclude firms that are predominantly engaged in activities
that have a financial nature but are focused on community development,
public welfare projects, and similar objectives.
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\78\ 76 FR 7731 (February 11, 2011) and 77 FR 21494 (April 10,
2012).
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Question 32: The agencies seek comment on the proposed definition
of financial institution. The agencies have sought to achieve
consistency in the definition of financial institution with similar
definitions proposed in other proposed regulations. The agencies seek
comment on the appropriateness of this standard for purposes of the
proposal and whether a different threshold, such as greater than 50
percent, would be more appropriate. The agencies ask that commenters
provide detailed explanations in their responses.
The Corresponding Deduction Approach
The proposal incorporates the Basel III corresponding deduction
approach for the deductions from regulatory capital related to
reciprocal cross holdings, non-significant investments in the capital
of unconsolidated financial institutions, and non-common stock
significant investments in the capital of unconsolidated financial
institutions. Under this approach a banking organization would be
required to make any such deductions from the same component of capital
for which the underlying instrument would qualify if it were issued by
the banking organization itself. If a banking organization does not
have a sufficient amount of a specific regulatory capital component to
effect the deduction, the shortfall would be deducted from the next
higher (that is, more subordinated) regulatory capital component. For
example, if a banking organization does not have enough additional tier
1 capital to satisfy the required deduction from additional tier 1
capital, the shortfall would be deducted from common equity tier 1
capital.
If the banking organization invests in an instrument issued by a
non-regulated financial institution, the banking organization would
treat the instrument as common equity tier 1 capital if the instrument
is common stock (or if it is otherwise the most subordinated form of
capital of the financial institution) and as additional tier 1 capital
if the instrument is subordinated to all creditors of the financial
institution except common shareholders. If the investment is in the
form of an instrument issued by a regulated financial institution and
the instrument does not meet the criteria for any of the regulatory
capital components for banking organizations, the banking organization
would treat the instrument as (1) Common equity tier 1 capital if the
instrument is common stock included in GAAP equity or represents the
most subordinated claim in liquidation of the financial institution;
(2) additional tier 1 capital if the instrument is GAAP equity and is
subordinated to all creditors of the financial institution and is only
senior in liquidation to common shareholders; and (3) tier 2 capital if
the instrument is not GAAP equity but it is considered regulatory
capital by the primary regulator of the financial institution.
Deduction of Reciprocal Cross Holdings in the Capital Instruments of
Financial Institutions
A reciprocal cross holding results from a formal or informal
arrangement between two financial institutions to swap, exchange, or
otherwise intend to hold each other's capital instruments. The use of
reciprocal cross holdings of capital instruments to artificially
inflate the capital positions of each of the banking organizations
involved would undermine the purpose of regulatory capital, potentially
affecting the stability of such banking organizations as well as the
financial system.
Under the agencies' general risk-based capital rules, reciprocal
holdings of capital instruments of banking organizations are deducted
from regulatory capital. Consistent with Basel III, the proposal would
require a banking organization to deduct reciprocal holdings of capital
instruments of other financial institutions, where these investments
are made with the intention of artificially inflating the capital
positions of the banking organizations involved. The deductions would
be made by using the corresponding deduction approach.
Determining the Exposure Amount for Investments in the Capital of
Unconsolidated Financial Institutions
Under the proposal, the exposure amount of an investment in the
capital of an unconsolidated financial institution would refer to a net
long position in an instrument that is recognized as capital for
regulatory purposes by the primary supervisor of an unconsolidated
regulated financial institution or in an instrument that is part of the
GAAP equity of an unconsolidated unregulated financial
[[Page 52821]]
institution. It would include direct, indirect, and synthetic exposures
to capital instruments, and exclude underwriting positions held by the
banking organization for five business days or less. It would be
equivalent to the banking organization's potential loss on such
exposure should the underlying capital instrument have a value of zero.
The net long position would be the gross long position in the
exposure (including covered positions under the market risk capital
rules) net of short positions in the same exposure where the maturity
of the short position either matches the maturity of the long position
or has a residual maturity of at least one year. The long and short
positions in the same index without a maturity date would be considered
to have matching maturities. For covered positions under the market
risk capital rules, if a banking organization has a contractual right
or obligation to sell a long position at a specific point in time, and
the counterparty in the contract has an obligation to purchase the long
position if the banking organization exercises its right to sell, this
point in time may be treated as the maturity of the long position.
Therefore, if these conditions are met, the maturity of the long
position and the short position would be deemed to be matched even if
the maturity of the short position is less than one year.
Gross long positions in investments in the capital instruments of
unconsolidated financial institutions resulting from holdings of index
securities may be netted against short positions in the same underlying
index. However, short positions in indexes that are hedging long cash
or synthetic positions may be decomposed to recognize the hedge. More
specifically, the portion of the index that is composed of the same
underlying exposure that is being hedged may be used to offset the long
position as long as both the exposure being hedged and the short
position in the index are positions subject to the market risk rule,
the positions are fair valued on the banking organization's balance
sheet, and the hedge is deemed effective by the banking organization's
internal control processes assessed by the primary supervisor of the
banking organization. Also, instead of looking through and monitoring
its exact exposure to the capital of other financial institutions
included in an index security, a banking organization may be permitted,
with the prior approval of its primary federal supervisor, to use a
conservative estimate of the amount of its investments in the capital
instruments of other financial institutions through the index security.
An indirect exposure would result from the banking organization's
investment in an unconsolidated entity that has an exposure to a
capital instrument of a financial institution. A synthetic exposure
results from the banking organization's investment in an instrument
where the value of such instrument is linked to the value of a capital
instrument of a financial institution. Examples of indirect and
synthetic exposures would include: (1) An investment in the capital of
an unconsolidated entity that has an investment in the capital of an
unconsolidated financial institution; (2) a total return swap on a
capital instrument of another financial institution; (3) a guarantee or
credit protection, provided to a third party, related to the third
party's investment in the capital of another financial institution; (4)
a purchased call option or a written put option on the capital
instrument of another financial institution; and (5) a forward purchase
agreement on the capital of another financial institution.
Investments, including indirect and synthetic exposures, in the
capital of unconsolidated financial institutions would be subject to
the corresponding deduction approach if they surpass certain thresholds
described below. With the prior written approval of the primary federal
supervisor, for the period of time stipulated by the supervisor, a
banking organization would not be required to deduct investments in the
capital of unconsolidated financial institutions described in this
section if the investment is made in connection with the banking
organization providing financial support to a financial institution in
distress. Likewise, a banking organization that is an underwriter of a
failed underwriting can request approval from its primary federal
supervisor to exclude underwriting positions related to such failed
underwriting for a longer period of time.
Question 33: The agencies solicit comments on the scope of indirect
exposures for purposes of determining the exposure amount for
investments in the capital of unconsolidated financial institutions.
Specifically, what parameters (for example, a specific percentage of
the issued and outstanding common shares of the unconsolidated
financial institution) would be appropriate for purposes of limiting
the scope of indirect exposures in this context and why?
Question 34: What are the pros and cons of the proposed exclusion
from the exposure amount of an investment in the capital of an
unconsolidated financial institution for underwriting positions held by
the banking organization for 5 business days or fewer? Would limiting
the exemption to 5 days affect banking organizations' willingness to
underwrite stock offerings by smaller banking organizations? Please
provide data to support your answer.
Deduction of Non-Significant Investments in the Capital of
Unconsolidated Financial Institutions
Under the proposal, non-significant investments in the capital of
unconsolidated financial institutions would be investments where a
banking organization owns 10 percent or less of the issued and
outstanding common shares of an unconsolidated financial institution.
Under the proposal, if the aggregate amount of a banking
organization's non-significant investments in the capital of
unconsolidated financial institutions exceeds 10 percent of the sum of
the banking organization's common equity tier 1 capital elements, minus
certain applicable deductions and other regulatory adjustments to
common equity tier 1 capital (the 10 percent threshold for non-
significant investments), the banking organization would have to deduct
the amount of the non-significant investments that are above the 10
percent threshold for non-significant investments, applying the
corresponding deduction approach.\79\
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\79\ The regulatory adjustments and deductions applied in the
calculation of the 10 percent threshold for non-significant
investments are those required under sections 22(a) through 22(c)(3)
of the proposal. That is, the required deductions and adjustments
for goodwill and other intangibles (other than MSAs) net of
associated DTLs, DTAs that arise from operating loss and tax credit
carryforwards net of related valuation allowances and DTLs (as
described below), cash flow hedges associated with items that are
not reported at fair value, excess ECLs (for advanced approaches
banking organizations only), gains-on-sale on securitization
exposures, gains and losses due to changes in own credit risk on
fair valued financial liabilities, defined benefit pension fund net
assets for banking organizations that are not insured by the FDIC
(net of associated DTLs), investments in own regulatory capital
instruments (not deducted as treasury stock), and reciprocal cross
holdings.
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The amount to be deducted from a specific capital component would
be equal to the amount of a banking organization's non-significant
investments in the capital of unconsolidated financial institutions
exceeding the 10 percent threshold for non-significant investments
multiplied by the ratio of (1) the amount of non-significant
investments in the capital of
[[Page 52822]]
unconsolidated financial institutions in the form of such capital
component to (2) the amount of the banking organization's total non-
significant investments in the capital of unconsolidated financial
institutions. The amount of a banking organization's non-significant
investments in the capital of unconsolidated financial institutions
that does not exceed the 10 percent threshold for non-significant
investments would generally be assigned the applicable risk weight
under sections 32 (in the case of non-common stock instruments), 52 (in
the case of common stock instruments), or 53 (in the case of indirect
investments via a mutual fund) of the proposal, as appropriate.
For example, if a banking organization has a total of $200 in non-
significant investments in the capital of unconsolidated financial
institutions (of which 50 percent is in the form of common stock, 30
percent is in the form of an additional tier 1 capital instrument, and
20 percent is in the form of tier 2 capital subordinated debt) and $100
of these investments exceed the 10 percent threshold for non-
significant investments, the banking organization would need to deduct
$50 from its common equity tier 1 capital elements, $30 from its
additional tier 1 capital elements and $20 from its tier 2 capital
elements.
Deduction of Significant Investments in the Capital of Unconsolidated
Financial Institutions That Are Not in the Form of Common Stock
Under the proposal, a significant investment of a banking
organization in the capital of an unconsolidated financial institution
would be an investment where the banking organization owns more than 10
percent of the issued and outstanding common shares of the
unconsolidated financial institution. Significant investments in the
capital of unconsolidated financial institutions that are not in the
form of common stock would be deducted applying the corresponding
deduction approach described previously. Significant investments in the
capital of unconsolidated financial institutions that are in the form
of common stock would be subject to the common equity deduction
threshold approach described in section III.B.4 of this preamble.
Section 121 of the Graham-Leach-Bliley Act (GLBA) allows national
banks and insured state banks to establish entities known as financial
subsidiaries.\80\ One of the statutory requirements for establishing a
financial subsidiary is that a national bank or insured state bank must
deduct any investment in a financial subsidiary from the bank's
capital.\81\ The agencies implemented this statutory requirement
through regulation at 12 CFR 5.39(h)(1) (OCC), 12 CFR 208.73 (Board),
and 12 CFR 362.18 (FDIC). Under the agencies' current rules, a bank
must deduct the aggregate amount of its outstanding equity investment,
including retained earnings, in its financial subsidiaries from its
total assets and tangible equity, and deduct such investment from its
total risk-based capital (made equally from tier 1 and tier 2 capital).
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\80\ Public Law 106-102, 113 Stat. 1338, 1373 (Nov. 12, 1999).
\81\ 12 U.S.C. 24a(c); 12 U.S.C. 1831w(a)(2).
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Under the NPR, investments by a national bank or insured state bank
in financial subsidiaries would be deducted entirely from the bank's
common equity tier 1 capital.\82\ Because common equity tier 1 capital
is a component of tangible equity, the proposed deduction from common
equity tier 1 would automatically result in a deduction from tangible
equity. The agencies believe that the more conservative treatment is
appropriate for financial subsidiaries, given the risks associated with
nonbanking activities.
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\82\ The deduction provided for in the agencies' existing
regulations would be removed.
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4. Items Subject to the 10 and 15 Percent Common Equity Tier 1 Capital
Threshold Deductions
Under the proposal, a banking organization would deduct from the
sum of its common equity tier 1 capital elements the amount of each of
the following items that individually exceeds the 10 percent common
equity tier 1 capital deduction threshold described below: (1) DTAs
arising from temporary differences that could not be realized through
net operating loss carrybacks (net of any related valuation allowances
and net of DTLs, as described in section 22(e) of the proposal); (2)
MSAs net of associated DTLs; and (3) significant investments in the
capital of financial institutions in the form of common stock (referred
to herein as items subject to the threshold deductions).
A banking organization would calculate the 10 percent common equity
tier 1 capital deduction threshold by taking 10 percent of the sum of a
banking organization's common equity tier 1 elements, less adjustments
to, and deductions from common equity tier 1 capital required under
sections 22(a) through (c) of the proposal.\83\
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\83\ The regulatory adjustments and deductions applied in the
calculation of the 10 percent common equity deduction threshold are
those required under sections 22(a) through (c) of the proposal.
That is, the required deductions and adjustments for goodwill and
other intangibles (other than MSAs) net of associated DTLs, DTAs
that arise from operating loss and tax credit carryforwards net of
related valuation allowances and DTLs (as described below), cash
flow hedges associated with items that are not reported at fair
value, excess ECLs (for advanced approaches banking organizations
only), gains-on-sale on securitization exposures, gains and losses
due to changes in own credit risk on fair valued financial
liabilities, defined benefit pension fund net assets for banking
organizations that are not insured by the FDIC (net of associated
DTLs), investments in own regulatory capital instruments (not
deducted as treasury stock), reciprocal cross holdings, non-
significant investments in the capital of unconsolidated financial
institutions, and, if applicable, significant investments in the
capital of unconsolidated financial institutions that are not in the
form of common stock.
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As mentioned above, banking organizations would deduct from common
equity tier 1 capital elements any goodwill embedded in the valuation
of significant investments in the capital of unconsolidated financial
institutions in the form of common stock. Therefore, a banking
organization would be allowed to net such embedded goodwill against the
exposure amount of such significant investment. For example, if a
banking organization has deducted $10 of goodwill embedded in a $100
significant investment in the capital of an unconsolidated financial
institution in the form of common stock, the banking organization would
be allowed to net such embedded goodwill against the exposure amount of
such significant investment (that is, the value of the investment would
be $90 for purposes of the calculation of the amount that would be
subject to deduction under this part of the proposal).
In addition, the aggregate amount of the items subject to the
threshold deductions that are not deducted as a result of the 10
percent common equity tier 1 capital deduction threshold described
above would not be permitted to exceed 15 percent of a banking
organization's common equity tier 1 capital, as calculated after
applying all regulatory adjustments and deductions required under the
proposal (the 15 percent common equity tier 1 capital deduction
threshold). That is, a banking organization would be required to deduct
the amounts of the items subject to the threshold deductions that
exceed 17.65 percent (the proportion of 15 percent to 85 percent) of
common equity tier 1 capital elements, less all regulatory adjustments
and deductions required for the calculation of the 10 percent common
equity tier 1 capital deduction threshold mentioned above, and less the
items subject to the 10 and 15 percent common equity tier 1 capital
[[Page 52823]]
deduction thresholds in full. As described below, banking organization
would be required to include the amounts of these three items that are
not deducted from common equity tier 1 capital in its risk-weighted
assets and assign a 250 percent risk weight to them.
Under section 475 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C. 1828 note), the amount of readily
marketable MSAs that a banking organization may include in regulatory
capital cannot be valued at more than 90 percent of their fair market
value \84\ and the fair market value of such MSAs must be determined at
least on a quarterly basis. Therefore, if the amount of MSAs a banking
organization deducts after the application of the 10 percent and 15
percent common equity tier 1 deduction threshold is less than 10
percent of the fair value of its MSAs, the banking organization must
deduct an additional amount of MSAs so that the total amount of MSAs
deducted is at least 10 percent of the fair value of its MSAs.
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\84\ Section 475 also provides that mortgage servicing rights
may be valued at more than 90 percent of their fair market value but
no more than 100 percent of such value, if the agencies jointly make
a finding that such valuation would not have an adverse effect on
the deposit insurance funds or the safety and soundness of insured
depository institutions. The agencies have not made such a finding.
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Question 35: The agencies solicit comments and supporting data on
the additional regulatory capital deductions outlined in this section
above.
5. Netting of DTLs Against DTAs and Other Deductible Assets
Under the proposal, the netting of DTLs against assets (other than
DTAs) that are subject to deduction under section 22 of the proposal
would be permitted provided the DTL is associated with the asset and
the DTL would be extinguished if the associated asset becomes impaired
or is derecognized under GAAP. Likewise, banking organizations would be
prohibited from using the same DTL for netting purposes more than once.
This practice would be generally consistent with the approach that the
agencies currently take with respect to the netting of DTLs against
goodwill.
With respect to the netting of DTLs against DTAs, the amount of
DTAs that arise from operating loss and tax credit carryforwards, net
of any related valuation allowances, and the amount of DTAs arising
from temporary differences that the banking organization could not
realize through net operating loss carrybacks, net of any related
valuation allowances, would be allowed to be netted against DTLs if the
following conditions are met. First, only the DTAs and DTLs that relate
to taxes levied by the same taxation authority and that are eligible
for offsetting by that authority would be offset for purposes of this
deduction. And second, the amount of DTLs that the banking organization
would be able to net against DTAs that arise from operating loss and
tax credit carryforwards, net of any related valuation allowances, and
against DTAs arising from temporary differences that the banking
organization could not realize through net operating loss carrybacks,
net of any related valuation allowances, would be allocated in
proportion to the amount of DTAs that arise from operating loss and tax
credit carryforwards (net of any related valuation allowances, but
before any offsetting of DTLs) and of DTAs arising from temporary
differences that the banking organization could not realize through net
operating loss carrybacks (net of any related valuation allowances, but
before any offsetting of DTLs), respectively.
6. Deduction From Tier 1 Capital of Investments in Hedge Funds and
Private Equity Funds Pursuant to Section 619 of the Dodd-Frank Act
Section 619 of the Dodd-Frank Act (the Volcker Rule) contains a
number of restrictions and other prudential requirements applicable to
any ``banking entity'' \85\ that engages in proprietary trading or has
certain interests in, or relationships with, a hedge fund or a private
equity fund.\86\
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\85\ The term ``banking entity'' is defined in section 13(h)(1)
of the Bank Holding Company Act (BHC Act), as amended by section 619
of the Dodd-Frank Act. See 12 U.S.C. 1851(h)(1). The statutory
definition includes any insured depository institution (other than
certain limited purpose trust institutions), any company that
controls an insured depository institution, any company that is
treated as a bank holding company for purposes of section 8 of the
International Banking Act of 1978 (12 U.S.C. 3106), and any
affiliate or subsidiary of any of the foregoing.
\86\ Section 13 of the BHC Act defines the terms ``hedge fund''
and ``private equity fund'' as ``an issuer that would be an
investment company, as defined in the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 3(c)(7) of
that Act, or such similar funds as the appropriate Federal banking
agencies, the Securities and Exchange Commission, and the
Commodities Futures Trading Commission may, by rule, * * *
determine.'' See 12 U.S.C. 1851(h)(2).
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Section 13(d)(3) of the Bank Holding Company Act, as added by the
Volcker Rule, provides that the agencies ``shall * * * adopt rules
imposing additional capital requirements and quantitative limitations,
including diversification requirements, regarding activities permitted
under the Volcker Rule if the appropriate Federal banking agencies, the
Securities and Exchange Commission, and the Commodity Future Trading
Commission determine that additional capital and quantitative
limitations are appropriate to protect the safety and soundness of
banking entities engaged in such activities.''
The Volcker Rule also added section 13(d)(4)(B)(iii) to the Bank
Holding Company Act, which pertains to ownership interests in a hedge
fund or private equity fund organized and offered by a banking entity
(or an affiliate or subsidiary thereof) and provides, ``For the
purposes of determining compliance with the applicable capital
standards under paragraph (3), the aggregate amount of the outstanding
investments by a banking entity under this paragraph, including
retained earnings, shall be deducted from the assets and tangible
equity of the banking entity, and the amount of the deduction shall
increase commensurate with the leverage of the hedge fund or private
equity fund.''
In October 2011, the agencies and the SEC issued a proposal to
implement the Volcker Rule (the Volcker Rule proposal).\87\ Section
12(d) of the Volcker Rule proposal included a provision that would
require a ``banking entity'' to deduct from tier 1 capital its
investments in a hedge fund or a private equity fund that the banking
entity organizes and offers pursuant to the Volcker rule as provided by
section 13(d)(3) and (4)(B)(iii) of the Bank Holding Company Act.
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\87\ The agencies sought public comment on the Volcker Rule
proposal on October 11, 2011, and the Securities and Exchange
Commission sought public comment on the same proposal on October 12,
2011. See 76 FR 68846 (Nov. 7, 2011). On January 11, 2012, the
Commodities Futures Trading Commission requested comment on a
substantively similar proposed rule implementing section 13 of the
BHC Act. See 77 FR 8332 (Feb. 14, 2012).
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Under the Volcker Rule proposal, a banking organization subject to
the Volcker Rule \88\ would be required to deduct from tier 1 capital
the aggregate value of its investments in hedge funds and private
equity funds that the banking organization organizes and offers
pursuant to section 13(d)(1)(G) of the Bank Holding Company Act. As
proposed, the Volcker Rule deduction would not apply to an ownership
interest in a hedge fund or private
[[Page 52824]]
equity fund held by a banking entity pursuant to any of the exemption
activity categories in section 13(d)(1) of the Bank Holding Company
Act. For instance, a banking entity that acquires or retains an
investment in a small business investment company or an investment
designed to promote the public welfare of the type permitted under 12
U.S.C. 24 (Eleventh), which are specifically permitted under section
13(d)(1)(E) of the Bank Holding Company Act, would not be required to
deduct the value of such ownership interest from its tier 1 capital.
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\88\ The Volcker rule regulations apply to ``banking entities,''
as defined in section 13(h)(1) of the Bank Holding Company Act (BHC
Act), as amended by section 619 of the Dodd-Frank Act. This term
generally includes all banking organizations subject to the Federal
banking agencies' capital regulations with the exception of limited
purpose trust institutions that are not affiliated with a depository
institution or bank holding company.
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The agencies believe that this proposed capital requirement, as it
applies to banking organizations, should be considered within the
context of the agencies' entire regulatory capital framework, so that
its potential interaction with all other regulatory capital
requirements is assessed fully. The agencies intend to avoid
prescribing overlapping regulatory capital requirements for the same
exposures. Therefore, once the regulatory capital requirements
prescribed by the Volcker Rule are finalized, the Federal banking
agencies expect to amend the regulatory capital treatment for
investments in the capital of an unconsolidated financial institution--
currently set forth in section 22 of the proposal--to include the
deduction that would be required under the Volcker Rule. Exposures
subject to that deduction would not also be subject to the capital
requirements for investments in the capital of an unconsolidated
financial institution nor would they be considered for the purpose of
determining the relevant thresholds for the deductions from regulatory
capital required for investments in the capital of an unconsolidated
financial institution.
IV. Denominator Changes Related to the Proposed Regulatory Changes
Consistent with Basel III, for purposes of calculating total risk-
weighted assets, the proposal would require a banking organization to
assign a 250 percent risk weight to (1) MSAs, (2) DTAs arising from
temporary differences that a banking organization could not realize
through net operating loss carrybacks (net of any related valuation
allowances and net of DTLs, as described in section 22(e) of the
proposal), and (3) significant investments in the capital of
unconsolidated financial institutions in the form of common stock that
are not deducted from tier 1 capital pursuant to section 22 of the
proposal.
Basel III also requires banking organizations to apply a 1,250
percent risk weight to certain exposures that are deducted from total
capital under the general risk-based capital rules. Accordingly, for
purposes of calculating total risk-weighted assets, the proposal would
require a banking organization to apply a 1,250 percent risk weight to
the portion of a credit-enhancing interest-only strips that does not
constitute an after-tax-gain-on-sale. A banking organization would not
be required to deduct such exposures from regulatory capital.
V. Transitions Provisions
The main goal of the transition provisions is to give banking
organizations sufficient time to adjust to the proposal while
minimizing the potential impact that implementation could have on their
ability to lend. The proposed transition provisions have been designed
to ensure compliance with the Dodd-Frank Act. As a result, they could,
in certain circumstances, be more stringent than the transitional
arrangements proposed in Basel III.
The transition provisions would apply to the following areas: (1)
The minimum regulatory capital ratios; (2) the capital conservation and
countercyclical capital buffers; (3) the regulatory capital adjustments
and deductions; and (4) non-qualifying capital instruments. In the
Standardized Approach NPR, the agencies are proposing changes to the
calculation of risk-weighted assets that would be effective January 1,
2015, with an option to early adopt.
A. Minimum Regulatory Capital Ratios
The transition period for the minimum common equity tier 1 and tier
1 capital ratios is from January 1, 2013 to December 31, 2014 as set
forth below.
Table 9--Transition for Minimum Capital Ratios
------------------------------------------------------------------------
Transition Minimum Common Equity Tier 1 and Tier 1 Capital Ratios
-------------------------------------------------------------------------
Common equity
Transition period tier 1 capital Tier 1 capital
ratio ratio
------------------------------------------------------------------------
Calendar year 2013.................... 3.5 4.5
Calendar year 2014.................... 4.0 5.5
Calendar year 2015 and thereafter..... 4.5 6.0
------------------------------------------------------------------------
The minimum common equity tier 1 and tier 1 capital ratios, as well
as the minimum total capital ratio, will be calculated during the
transition period using the definitions for the respective capital
components in section 20 of the proposed rule and using the proposed
transition provisions for the regulatory adjustments and deductions and
for the non-qualifying capital instruments described in this section.
B. Capital Conservation and Countercyclical Capital Buffer
As explained in more detail in section 11 of the proposed rule, a
banking organization's applicable capital conservation buffer would be
the lowest of the following three ratios: the banking organization's
common equity tier 1, tier 1 and total capital ratio less its minimum
common equity tier 1, tier 1 and total capital ratio requirement,
respectively. Table 10 shows the regulatory capital levels banking
organizations would generally need to meet during the transition period
to avoid becoming subject to limitations on capital distributions and
discretionary bonus payments from January 1, 2016 until January 1,
2019.
[[Page 52825]]
Table 10--Proposed Regulatory Capital Levels
----------------------------------------------------------------------------------------------------------------
Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1,
2013 2014 2015 2016 2017 2018 2019
(percent) (percent) (percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer. .......... .......... .......... 0.625 1.25 1.875 2.5
Minimum common equity tier 1 3.5 4.0 4.5 5.125 5.75 6.375 7.0
capital ratio + capital
conservation buffer........
Minimum tier 1 capital ratio 4.5 5.5 6.0 6.625 7.25 7.875 8.5
+ capital conservation
buffer.....................
Minimum total capital ratio 8.0 8.0 8.0 8.625 9.25 9.875 10.5
+ capital conservation
buffer.....................
Maximum potential .......... .......... .......... 0.625 1.25 1.875 2.5
countercyclical capital
buffer.....................
----------------------------------------------------------------------------------------------------------------
Banking organizations would not be subject to the capital
conservation and the countercyclical capital buffer until January 1,
2016. From January 1, 2016 through December 31, 2018, banking
organizations would be subject to transitional arrangements with
respect to the capital conservation and countercyclical capital buffers
as outlined in more detail in table 11.
Table 11--Transition Provision for the Capital Conservation and
Countercyclical Capital Buffer
------------------------------------------------------------------------
Capital conservation Maximum payout
buffer (assuming a ratio (as a
Transition period countercyclical percentage of
capital buffer of eligible
zero) retained income)
------------------------------------------------------------------------
Calendar year 2016............ Greater than 0.625 No payout ratio
percent. limitation
applies
Less than or equal to 60 percent
0.625 percent, and
greater than 0.469
percent.
Less than or equal to 40 percent
0.469 percent, and
greater than 0.313
percent.
Less than or equal to 20 percent
0.313 percent, and
greater than 0.156
percent.
Less than or equal to 0 percent
0.156 percent.
------------------------------------------------------------------------
Calendar year 2017............ Greater than 1.25 No payout ratio
percent. limitation
applies
Less than or equal to 60 percent
1.25 percent, and
greater than 0.938
percent.
Less than or equal to 40 percent
0.938 percent, and
greater than 0.625
percent.
Less than or equal to 20 percent
0.625 percent, and
greater than 0.313
percent.
Less than or equal to 0 percent
0.313 percent.
------------------------------------------------------------------------
Calendar year 2018............ Greater than 1.875 No payout ratio
percent. limitation
applies
Less than or equal to 60 percent
1.875 percent, and
greater than 1.406
percent.
Less than or equal to 40 percent
1.406 percent, and
greater than 0.938
percent.
Less than or equal to 20 percent
0.938 percent, and
greater than 0.469
percent.
Less than or equal to 0 percent
0.469 percent.
------------------------------------------------------------------------
As illustrated in table 11, from January 1, 2016 through December
31, 2016, a banking organization would be able to make capital
distributions and discretionary bonus payments without limitation under
this section as long as it maintains a capital conservation buffer
greater than 0.625 percent (plus for an advanced approaches banking
organization, any applicable countercyclical capital buffer amount).
From January 1, 2017 through December 31, 2017, a banking organization
would be able to make capital distributions and discretionary bonus
payments without limitation under this section as long as it maintains
a capital conservation buffer greater than 1.25 percent (plus for an
advanced approaches banking organization, any applicable
countercyclical capital buffer amount). From January 1, 2018 through
December 31, 2018, a banking organization would be able to make capital
distributions and discretionary bonus payments without limitation under
this section as long as it maintains a capital conservation buffer
greater than 1.875 percent (plus for an advanced approaches banking
organization, any applicable countercyclical capital buffer amount).
From January 1, 2019 onward, a banking organization would be able to
make capital distributions and discretionary bonus payments without
limitation under this section as long as it maintains a capital
conservation buffer greater than 2.5 percent (plus for an advanced
approaches banking organization, 100 percent of the applicable
countercyclical capital buffer amount).
For example, if a banking organization's capital conservation
buffer is 1.0 percent (for example, its common equity tier 1 capital
ratio is 5.5 percent or its tier 1 capital ratio is 7.0 percent) as of
December 31, 2017, the banking organization's maximum payout ratio
during the first quarter of 2018 would be 60 percent. If a banking
organization has a capital conservation buffer of 0.25 percent as of
December 31, 2017, the banking organization would not be allowed to
make capital distributions and discretionary bonus payments during the
first quarter of 2018 under the proposed transition provisions. If a
banking organization has a capital conservation buffer of 1.5 percent
as of December 31, 2017, it would not have any restrictions under this
section on the amount of capital distributions and discretionary bonus
payments during the first quarter of 2018.
If applicable, the countercyclical capital buffer would be phased-
in according to the transition schedule described in table 11 by
proportionately expanding each of the quartiles in the table by the
countercyclical capital buffer amount. The maximum countercyclical
capital buffer amount would be 0.625 percent on January 1, 2016 and
would increase each subsequent year by an additional 0.625
[[Page 52826]]
percentage points, to reach its fully phased-in maximum of 2.5 percent
on January 1, 2019.
C. Regulatory Capital Adjustments and Deductions
Banking organizations are currently subject to a series of
deductions from and adjustments to regulatory capital, most of which
apply at the tier 1 capital level, including deductions for goodwill,
MSAs, certain DTAs, and adjustments for net unrealized gains and losses
on AFS securities and for accumulated net gains and losses on cash flow
hedges and defined benefit pension obligations. Under section 22 of the
proposed rule, banking organizations would become subject to a series
of deductions and adjustments, the bulk of which will be applied at the
common equity tier 1 capital level. In order to give sufficient time to
banking organizations to adapt to the new regulatory capital
adjustments and deductions, the proposed rule incorporates transition
provisions for such adjustments and deductions. From January 1, 2013
through December 31, 2017, a banking organization would be required to
make the regulatory capital adjustments to and deductions from
regulatory capital in section 22 of the proposed rule in accordance
with the proposed transition provisions for such adjustments and
deductions outlined below. Starting on January 1, 2018, banking
organizations would apply all regulatory capital adjustments and
deductions as outlined in section 22 of the proposed rule.
Deductions for Certain Items in Section 22(a) of the Proposed Rule
From January 1, 2013 through December 31, 2017, a banking
organization would deduct from common equity tier 1 or from tier 1
capital elements goodwill (section 22(a)(1)), DTAs that arise from
operating loss and tax credit carryforwards (section 22(a)(3)), gain-
on-sale associated with a securitization exposure (section 22(a)(4)),
defined benefit pension fund assets (section 22(a)(5)), and expected
credit loss that exceeds eligible credit reserves for the case of
banking organizations subject to subpart E of the proposed rule
(section 22(a)(6)), in accordance with table 12 below. During this
period, any of these items that are not deducted from common equity
tier 1 capital, are deducted from tier 1 capital instead.
Table 12--Proposed Transition Deductions Under Section 22(a)(1) and Sections 22(a)(3)-(a)(6) of the Proposal
----------------------------------------------------------------------------------------------------------------
Transition deductions Transition deductions under sections
under section 22(a)(3)-(a)(6)
22(a)(1) ---------------------------------------------
-----------------------
Transition period Percentage of the Percentage of the Percentage of the
deductions from deductions from deductions from tier
common equity tier 1 common equity tier 1 1 capital
capital capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2013......................... 100 0 100
Calendar year 2014......................... 100 20 80
Calendar year 2015......................... 100 40 60
Calendar year 2016......................... 100 60 40
Calendar year 2017......................... 100 80 20
Calendar year 2018 and thereafter.......... 100 100 0
----------------------------------------------------------------------------------------------------------------
In accordance with table 12, starting in 2013, banking
organizations would be required to deduct the full amount of goodwill
(net of any associated DTLs), including any goodwill embedded in the
valuation of significant investments in the capital of unconsolidated
financial institutions, from common equity tier 1 capital elements.
This approach is stricter than that under Basel III, which transitions
the goodwill deduction from common equity tier 1 capital in line with
the rest of the deductible items. Under U.S. law, goodwill cannot be
included in a banking organization's regulatory capital. Additionally,
the agencies believe that fully deducting goodwill from common equity
tier 1 capital elements starting on January 1, 2013 would result in a
more meaningful common equity tier 1 capital ratio from a supervisory
and market perspective.
For example, from January 1, 2014 through December 31, 2014, a
banking organization would deduct 100 percent of goodwill from common
equity tier 1 capital elements. However, during that same period, only
20 percent of the aggregate amount of DTAs that arise from operating
loss and tax credit carryforwards, gain-on-sale associated with a
securitization exposure, defined benefit pension fund assets, and
expected credit loss that exceeds eligible credit reserves (for a
banking organization subject to subpart E of the proposed rule), would
be deducted from common equity tier 1 capital elements while 80 percent
of such aggregate amount would be deducted from tier 1 capital
elements. Starting on January 1, 2018, 100 percent of the items in
section 22(a) of the proposed rule would be fully deducted from common
equity tier 1 capital elements.
Deductions for Intangibles Other Than Goodwill and MSAs
For intangibles other than goodwill and MSAs, including PCCRs
(section 22(a)(2) of the proposal), the transition arrangement is
outlined in table 13. During this transition period, any of these items
that are not deducted would be subject to a risk weight of 100 percent.
Table 13--Proposed Transition Deductions Under Section 22(a)(2) of the
Proposal
------------------------------------------------------------------------
Transition deductions under
section 22(a)(2)--Percentage of
Transition period the deductions from common
equity tier 1 capital
------------------------------------------------------------------------
Calendar year 2013..................... 0
Calendar year 2014..................... 20
[[Page 52827]]
Calendar year 2015..................... 40
Calendar year 2016..................... 60
Calendar year 2017..................... 80
Calendar year 2018 and thereafter...... 100
------------------------------------------------------------------------
For example, from January 1, 2014 through December 31, 2014, 20
percent of the aggregate amount of the deductions that would be
required under section 22(a)(2) of the proposed rule for intangibles
other than goodwill and MSAs would be applied to common equity tier 1
capital, while any such intangibles that are not deducted from capital
during the transition period would be risk-weighted at 100 percent.
Regulatory Adjustments Under Section 22(b)(2) of the Proposed Rule
From January 1, 2013 through December 31, 2017, banking
organizations would apply the regulatory adjustments under section
22(b)(2) of the proposed rule related to changes in the fair value of
liabilities due to changes in the banking organization's own credit
risk to common equity tier 1 or tier 1 capital in accordance with table
14. During this period, any of the adjustments related to this item
that are not applied to common equity tier 1 capital are applied to
tier 1 capital instead.
Table 14--Proposed Transition Adjustments Under Section 22(b)(2)
----------------------------------------------------------------------------------------------------------------
Transition adjustments under section 22(b)(2)
---------------------------------------------------------------------
Transition period Percentage of the adjustment
applied to common equity tier 1 Percentage of the adjustment
capital applied to tier 1 capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2013........................ 0 100
Calendar year 2014........................ 20 80
Calendar year 2015........................ 40 60
Calendar year 2016........................ 60 40
Calendar year 2017........................ 80 20
Calendar year 2018 and thereafter......... 100 0
----------------------------------------------------------------------------------------------------------------
For example, from January 1, 2013 through December 31, 2013, no
regulatory adjustments to common equity tier 1 capital related to
changes in the fair value of liabilities due to changes in the banking
organization's own credit risk would be applied to common equity tier 1
capital, but 100 percent of such adjustments would be applied to tier 1
capital (that is, if the aggregate amount of these adjustments is
positive, 100 percent would be deducted from tier 1 capital elements
and if such aggregate amount is negative, 100 percent would be added
back to tier 1 capital elements). Likewise, from January 1, 2014
through December 31, 2014, 20 percent of the aggregate amount of the
regulatory adjustments to common equity tier 1 capital related to this
item would be applied to common equity tier 1 capital and 80 percent
would be applied to tier 1 capital. Starting on January 1, 2018, 100
percent of the regulatory capital adjustments related to changes in the
fair value of liabilities due to changes in the banking organization's
own credit risk would be applied to common equity tier 1 capital.
Phase Out of Current AOCI Regulatory Capital Adjustments
Until December 31, 2017, the aggregate amount of net unrealized
gains and losses on AFS debt securities, accumulated net gains and
losses related to defined benefit pension obligations, unrealized gains
on AFS equity securities, and accumulated net gains and losses on cash
flow hedges related to items that are reported on the balance sheet at
fair value included in AOCI (transition AOCI adjustment amount) is
treated as set forth in table 15 below. Specifically, if a banking
organization's transition AOCI adjustment amount is positive, it would
need to adjust its common equity tier 1 capital by deducting the
appropriate percentage of such aggregate amount in accordance with
table 15 below and if such amount is negative, it would need to adjust
its common equity tier 1 capital by adding back the appropriate
percentage of such aggregate amount in accordance with table 15 below.
Table 15--Proposed Percentage of the Transition AOCI Adjustment Amount
------------------------------------------------------------------------
Percentage of the transition
AOCI adjustment amount to be
Transition period applied to common equity
tier 1 capital
------------------------------------------------------------------------
Calendar year 2013........................ 100
Calendar year 2014........................ 80
Calendar year 2015........................ 60
Calendar year 2016........................ 40
Calendar year 2017........................ 20
Calendar year 2018 and thereafter......... 0
------------------------------------------------------------------------
[[Page 52828]]
For example, if during calendar year 2013 a banking organization's
transition AOCI adjustment amount is positive 100 percent would be
deducted from common equity tier 1 capital elements and if such
aggregate amount is negative 100 percent would be added back to common
equity tier 1 capital elements. Starting on January 1, 2018, there
would be no adjustment for net unrealized gains and losses on AFS
securities or for accumulated net gains and losses on cash flow hedges
related to items that are reported on the balance sheet at fair value
included in AOCI.
Phase Out of Unrealized Gains on AFS Equity Securities in Tier 2
Capital
A banking organization would gradually decrease the amount of
unrealized gains on AFS equity securities it currently holds in tier 2
capital during the transition period in accordance with table 16.
Table 16--Proposed Percentage of Unrealized Gains on AFS Equity
Securities That May Be Included in Tier 2 Capital
------------------------------------------------------------------------
Percentage of unrealized
gains on AFS equity
Transition period securities that may be
included in tier 2 capital
------------------------------------------------------------------------
Calendar year 2013........................ 45
Calendar year 2014........................ 36
Calendar year 2015........................ 27
Calendar year 2016........................ 18
Calendar year 2017........................ 9
Calendar year 2018 and thereafter......... 0
------------------------------------------------------------------------
For example, during calendar year 2014, banking organizations would
include up to 36 percent (80 percent of 45 percent) of unrealized gains
on AFS equity securities in tier 2 capital; during calendar years 2015,
2016, 2017, and 2018 (and thereafter) these percentages would go down
to 27, 18, 9 and zero, respectively.
Deductions Under Sections 22(c) and 22(d) of the Proposed Rule
From January 1, 2013 through December 31, 2017, a banking
organization would calculate the appropriate deductions under sections
22(c) and 22(d) of the proposed rule related to investments in capital
instruments and to the items subject to the 10 and 15 percent common
equity tier 1 capital deduction thresholds (that is, MSAs, DTAs arising
from temporary differences that the banking organization could not
realize through net operating loss carrybacks, and significant
investments in the capital of unconsolidated financial institutions in
the form of common stock) as set forth in table 17. Specifically,
during such transition period, the banking organization would make the
percentage of the aggregate common equity tier 1 capital deductions
related to these items in accordance with the percentages outlined in
table 17 and would apply a 100 percent risk-weight to the aggregate
amount of such items that are not deducted under this section.
Beginning on January 1, 2018, a banking organization would be required
to apply a 250 percent risk-weight to the aggregate amount of the items
subject to the 10 and 15 percent common equity tier 1 capital deduction
thresholds that are not deducted from common equity tier 1 capital.
Table 17--Proposed Transition Deductions Under Sections 22(c) and 22(d)
of the Proposal
------------------------------------------------------------------------
Transition deductions under
sections 22(c) and 22(d)--
Transition period Percentage of the deductions
from common equity tier 1
capital elements
------------------------------------------------------------------------
Calendar year 2013....................... 0
Calendar year 2014....................... 20
Calendar year 2015....................... 40
Calendar year 2016....................... 60
Calendar year 2017....................... 80
Calendar year 2018 and thereafter........ 100
------------------------------------------------------------------------
However, banking organizations would not be subject to the
methodology to calculate the 15 percent common equity deduction
threshold for DTAs arising from temporary differences that the banking
organization could not realize through net operating loss carrybacks,
MSAs, and significant investments in the capital of unconsolidated
financial institutions in the form of common stock described in section
22(d) of the proposed rule from January 1, 2013 through December 31,
2017. During this transition period, a banking organization would be
required to deduct from its common equity tier 1 capital elements a
specified percentage of the amount by which the aggregate sum of the
items subject to the 10 and 15 percent common equity tier 1 capital
deduction thresholds exceeds 15 percent of the sum of the banking
organization's common equity tier 1 capital elements after making the
deductions required under sections 22(a) through (c) of the proposed
rule. These deductions include goodwill, intangibles other than
goodwill and MSAs, DTAs that arise from operating loss and tax credit
carryforwards cash flow hedges associated with items that are not fair
valued, excess ECLs (for advanced approaches banking organizations),
gains-on-sale on certain securitization exposures, defined benefit
pension fund net assets for banks that are not insured by the FDIC, and
reciprocal cross holdings, gains (or adding back losses) due to changes
in own credit risk on fair valued financial liabilities, and after
applying the
[[Page 52829]]
appropriate common equity tier 1 capital deductions related to non-
significant investments in the capital of unconsolidated financial
institutions (the 15 percent common equity deduction threshold for
transition purposes).
Notwithstanding the transition provisions for the items under
sections 22(c) and 22(d) of the proposed rule described above, if the
amount of MSAs a banking organization deducts after the application of
the appropriate thresholds is less than 10 percent of the fair value of
its MSAs, the banking organization must deduct an additional amount of
MSAs so that the total amount of MSAs deducted is at least 10 percent
of the fair value of its MSAs.
Beginning January 1, 2018, the aggregate amount of the items
subject to the 10 and 15 percent common equity tier 1 capital deduction
thresholds would not be permitted to exceed 15 percent of the banking
organization's common equity tier 1 capital after all deductions. That
is, as of January 1, 2018, the banking organization would be required
to deduct, from common equity tier 1 capital elements the items subject
to the 10 and 15 percent common equity tier 1 capital deduction
thresholds that exceed 17.65 percent of common equity tier 1 capital
elements less the regulatory adjustments and deductions mentioned in
the previous paragraph and less the aggregate amount of the items
subject to the 10 and 15 percent common equity tier 1 capital deduction
thresholds in full.
For example, during calendar year 2014, 20 percent of the aggregate
amount of the deductions required for the items subject to the 10 and
15 percent common equity tier 1 capital deduction thresholds would be
applied to common equity tier 1 capital, while any such items not
deducted would be risk weighted at 100 percent. Starting on January 1,
2018, 100 percent of the appropriate aggregate deductions described in
sections 22(c) and 22(d) of the proposed rule would be fully applied,
while any of the items subject to the 10 and 15 percent common equity
tier 1 capital deduction thresholds that are not deducted would be risk
weighted at 250 percent.
Numerical Example for the Transition Provisions
The following example illustrates the potential impact from
regulatory capital adjustments and deductions on the common equity tier
1 capital ratios of a banking organization. As outlined in table 18,
the banking organization in this example has common equity tier 1
capital elements (before any deductions) and total risk weighted assets
of $200 and $1000 respectively, and also has goodwill, DTAs that arise
from operating loss and tax credit carryforwards, non-significant
investments in the capital of unconsolidated financial institutions,
DTAs arising from temporary differences that could not be realized
through net operating loss carrybacks, MSAs, and significant
investments in the capital of unconsolidated financial institutions in
the form of common stock of $40, $30, $10, $30, $20, and $10,
respectively. For simplicity, this example only focuses on common
equity tier 1 capital and assumes that the risk weight applied to all
assets is 100 percent (the only exception being the 250 percent risk
weight applied in 2018 to the ``items subject to an aggregate 15%
threshold'').
Table 18--Example--Impact of Regulatory Deductions During Transition
Period
------------------------------------------------------------------------
------------------------------------------------------------------------
Common equity tier 1 capital elements, net of treasury stock 200
(CET1) elements (before deductions)...........................
Items subject to full deduction:
Goodwill................................................... 40
Deferred tax assets (DTAs) that arise from operating loss 30
and tax credit carryforwards (DTAs from operating loss
carryforwards)............................................
Items subject to threshold deductions:
Non-significant investments in the capital of 10
unconsolidated financial institutions (non-significant
investments)..............................................
Items subject to aggregate 15% threshold:
DTAs arising from temporary differences that the banking 30
organization could not realize through net operating loss
carrybacks (temporary differences DTAs)...................
MSAs........................................................... 20
Significant investments in the capital of unconsolidated 10
financial institutions in the form of common stock
(significant investments).....................................
Risk-weighted assets (RWAs).................................... 1000
------------------------------------------------------------------------
Table 19 below illustrates the process to calculate the deductions
while showing the potential impact of the deductions on the common
equity tier 1 capital ratio of the banking organization during the
transition period.
Table 19--Example--Impact of Regulatory Deductions During Transition Period
----------------------------------------------------------------------------------------------------------------
Base
Transition calendar years case 2013 2014 2015 2016 2017 2018
----------------------------------------------------------------------------------------------------------------
Percentage of deduction................... ........ ........ 20% 40% 60% 80% 100%
CET1 before deductions.................... 200 200 200 200 200 200 200
Deduction of goodwill..................... 40 40 40 40 40 40 40
Deduction of DTAs from operating loss 30 0 6 12 18 24 30
carryforwards............................
CET1 after non-threshold deductions....... 130 160 154 148 142 136 130
10% limit for non-significant investments. 13.0 16.0 15.4 14.8 14.2 13.6 13.0
Deduction of non-significant investments.. 0 0 0 0 0 0 0
CET1 after non-threshold deductions and 130 160 154 148 142 136 130
deduction of non-significant investments.
10% CET1 limit for items subject to 15% 13.0 16.0 15.4 14.8 14.2 13.6 13.0
threshold................................
Deduction of significant investments due 0 0 0 0 0 0 0
to 10% limit.............................
Deduction of temporary differences DTAs 17.0 0 3.4 6.8 10.2 13.6 17.0
due to 10% limit.........................
Deduction of MSAs due to 10% limit........ 7.0 0 1.4 2.8 4.2 5.6 7.0
CET1 after deductions related to 10% limit 106 160 149.2 138.4 127.6 116.8 106.0
Outstanding significant investments....... 10 10 10 10 10 10 10
[[Page 52830]]
Outstanding temporary differences DTAs.... 13 30 27 23 20 16 13
Outstanding MSAs.......................... 13 20 19 17 16 14 13
Sum of outstanding items subject to 15% 36 60 55 50 46 41 36
threshold................................
15% CET1 limit (for items subject to 15% 19.5 24.0 23.1 22.2 21.3 20.4 19.5
threshold) (pre-2018)....................
Deduction of outstanding items subject to 16.5 0.0 3.3 6.6 9.9 13.2 ........
15% threshold due to 15% limit (pre-2018)
Additional MSA deduction as of the 0 2 0 0 0 0 0
statutory limit (i.e., 10% of FV of MSAs)
CET1 after all deductions (pre-2018)...... 89.5 158.0 145.9 131.8 117.7 103.6 ........
Total New RWAs (pre-2018)................. 889.5 928.0 921.9 913.8 905.7 897.6 ........
15% CET1 limit (for items subject to 15% ........ ........ ........ ........ ........ ........ 12
threshold) (2018)........................
Deduction of outstanding items subject to ........ ........ ........ ........ ........ ........ 24
15% threshold due to 15% limit (2018)....
----------------------------------------------------------------------------------------------------------------
CET1 after all deductions--starting 2018.. ........ ........ ........ ........ ........ ........ 82.4
2018 RWAs................................. ........ ........ ........ ........ ........ ........ 901
----------------------------------------------------------------------------------------------------------------
CET1 ratio................................ ........ 17.0% 15.8% 14.4% 13.0% 11.5% 9.1%
----------------------------------------------------------------------------------------------------------------
To establish the starting point (or ``base case'') for the
deductions, the banking organization calculates the fully phased-in
deductions, except in the case of the 15 percent deduction threshold,
which is calculated during the transition period as described above.
Common equity tier 1 capital elements, after the deduction of items
that are not subject to the threshold deductions are $160, $154, $148,
$142, and $136, and $130 as of January 1, 2013, January 1, 2014,
January 1, 2015, January 1, 2016, January 1, 2017, and January 1, 2018,
respectively. In this particular example, these numbers are obtained
after fully deducting goodwill, and after deducting the base case
deduction for DTAs that arise from operating loss and tax credit
carryforwards multiplied by the appropriate percentage under the
transition arrangement for deductions outlined in table 12 of this
section. That is, after deducting from common equity tier 1 capital
elements 100 percent of goodwill and 20 percent of the base case
deduction for DTAs that arise from operating loss and tax credit
carryforwards during 2014, 40 percent during 2015, 60 percent during
2016, 80 percent during 2017, and 100 percent during 2018).\89\
---------------------------------------------------------------------------
\89\ As outlined in table 12, the amount of DTAs that arise from
operating loss and tax credit carryforwards that are not deducted
from common equity tier 1 capital during the transition period are
deducted from tier 1 capital instead.
---------------------------------------------------------------------------
After applying the required deduction as a result of the 10 and 15
percent common equity tier 1 deduction thresholds outlined in table 17
of this section and after making the additional $2 deduction of MSAs
during 2013 as a result of the MSA minimum statutory deduction (that
is, 10 percent of the fair value of the MSAs), the common equity tier 1
capital elements would be $158, $146, $132, $118, $104, and $82 as of
January 1, 2013, January 1, 2014, January 1, 2015, January 1, 2016,
January 1, 2017, and January 1, 2018, respectively. After adjusting the
total risk weighted assets measure as a result of the numerator
deductions, the common equity tier 1 capital ratios would be 17.0
percent, 15.8 percent, 14.4 percent, 13.0 percent, 11.5 percent and 9.1
percent as of January 1, 2013, January 1, 2014, January 1, 2015,
January 1, 2016, January 1, 2017, and January 1, 2018, respectively.
Any DTAs arising from temporary differences that could not be realized
through net operating loss carrybacks, MSAs, or significant investments
in the capital of unconsolidated financial institutions in the form of
common stock that are not deducted from common equity tier 1 capital
elements as a result of the transitional arrangements would be risk
weighted at 100 percent during the transition period and would be risk
weighted at 250 percent starting on 2018.
D. Non-Qualifying Capital Instruments
Under the NPR, non-qualifying capital instruments, including
instruments that are part of minority interest, would be phased out
from regulatory capital depending on the size of the issuing banking
organization and the type of capital instrument involved. Under the
proposed rule, and in line with the requirements under the Dodd-Frank
Act, instruments like cumulative perpetual preferred stock and trust
preferred securities, which bank holding companies have historically
included (subject to limits) in tier 1 capital under the ``restricted
core capital elements'' bucket generally would not comply with either
the eligibility criteria for additional tier 1 capital instruments
outlined in section 20 of the proposed rule or the general risk-based
capital rules for depository institutions and therefore would be phased
out from tier 1 capital as outlined in more detail below. However,
these instruments would generally be included without limits in tier 2
capital if they meet the eligibility criteria for tier 2 capital
instruments outlined in section 20 of the proposed rule.
Phase-Out Schedule for Non-Qualifying Capital Instruments of Depository
Institution Holding Companies of $15 Billion or More in Total
Consolidated Assets
Under section 171 of the Dodd-Frank Act, depository institution
holding companies with total consolidated assets greater than or equal
to $15 billion as of December 31, 2009 (depository institution holding
companies of $15 billion or more) would be required to phase out their
non-qualifying capital instruments as set forth in table 20 below. In
the case of depository institution holding companies of $15 billion or
more, non-qualifying capital instruments are debt or equity instruments
issued before May 19, 2010, that do not meet the criteria in section 20
of the proposed rule and were included in tier 1 or tier 2 capital as
of May 19, 2010. Table 20 would apply separately to additional tier 1
and tier 2 non-qualifying capital instruments but the amount of non-
qualifying capital instruments that would be excluded from additional
tier 1 capital under this section would be included in tier 2
[[Page 52831]]
capital without limitation if they meet the eligibility criteria for
tier 2 capital instruments under section 20 of the proposed rule. If a
depository institution holding company of $15 billion or more acquires
a depository institution holding company with total consolidated assets
of less than $15 billion as of December 31, 2009 (depository
institution holding company under $15 billion) or a depository
institution holding company that was a mutual holding company as of May
19, 2010 (2010 MHC), the non-qualifying capital instruments of the
resulting organization would be subject to the phase-out schedule
outlined in table 20. Likewise, if a depository institution holding
company under $15 billion makes an acquisition and the resulting
organization has total consolidated assets of $15 billion or more, its
non-qualifying capital instruments would also be subject to the phase-
out schedule outlined in table 20.
Table 20--Proposed Percentage of Non-Qualifying Capital Instruments
Included in Additional Tier 1 or Tier 2 Capital
------------------------------------------------------------------------
Percentage of non-qualifying
capital instruments included
in additional tier 1 or tier
Transition period (calendar year) 2 capital for depository
institution holding
companies of $15 billion or
more
------------------------------------------------------------------------
Calendar year 2013........................ 75
Calendar year 2014........................ 50
Calendar year 2015........................ 25
Calendar year 2016 and thereafter......... 0
------------------------------------------------------------------------
Accordingly, under the proposed rule a depository institution
holding company of $15 billion or more would be allowed to include only
75 percent of non-qualifying capital instruments in regulatory capital
as of January 1, 2013, 50 percent as of January 1, 2014, 25 percent as
of January 1, 2015, and zero percent as of January 1, 2016 and
thereafter.
Phase-Out Schedule for Non-Qualifying Capital Instruments of Depository
Institution Holding Companies Under $15 Billion, 2010 MHCs, and
Depository Institutions
Under the proposed rule, non-qualifying capital instruments of
depository institutions and of depository institution holding companies
under $15 billion and 2010 MHCs (issued before September 12, 2010),
that were outstanding as of January 1, 2013 would be included in
capital up to the percentage of the outstanding principal amount of
such non-qualifying capital instruments as of December 31, 2013
indicated in table 21. Table 21 applies separately to additional tier 1
and tier 2 non-qualifying capital instruments but the amount of non-
qualifying capital instruments that would be excluded from additional
tier 1 capital under this section would be included in the tier 2
capital, provided the instruments meet the eligibility criteria for
tier 2 capital instruments under section 20 of the proposed rule.
Table 21--Proposed Percentage of Non-Qualifying Capital Instruments
Included in Additional Tier 1 or Tier 2 Capital
------------------------------------------------------------------------
Percentage of non-qualifying
capital instruments included
in additional tier 1 or tier
2 capital for depository
Transition period (calendar year) institution holding
companies under $15 billion,
depository institutions, and
2010 MHCs
------------------------------------------------------------------------
Calendar year 2013........................ 90
Calendar year 2014........................ 80
Calendar year 2015........................ 70
Calendar year 2016........................ 60
Calendar year 2017........................ 50
Calendar year 2018........................ 40
Calendar year 2019........................ 30
Calendar year 2020........................ 20
Calendar year 2021........................ 10
Calendar year 2022 and thereafter......... 0
------------------------------------------------------------------------
For example, a banking organization that issued a tier 1 non-
qualifying capital instrument in August 2010 would be able to count 90
percent of the notional outstanding amount of the instrument as of
January 1, 2013 during calendar year 2013 and 80 percent during
calendar year 2014. As of January 1, 2022, no tier 1 non-qualifying
capital instruments would be recognized in tier 1 capital.
Phase-Out Schedule for Surplus and Non-Qualifying Minority Interest
From January 1, 2013 through December 31, 2018, a banking
organization would be allowed to include in regulatory capital a
portion of the common equity tier 1, tier 1, or total capital minority
interest that would be disqualified from regulatory capital as a result
of the requirements and limitations outlined in section 21 (surplus
minority interest). If a banking organization has surplus minority
interest outstanding as of January 1, 2013, such surplus minority
interest would be subject to the phase-out schedule outlined in table
22. For example, if a banking organization has $10 of surplus common
equity tier 1 minority interest as of January 1, 2013, it would be
allowed to include all such
[[Page 52832]]
surplus in its common equity tier 1 capital during calendar year 2013,
$8 during calendar year 2014, $6 during calendar year 2015, $4 during
calendar year 2016, $2 during calendar year 2017 and $0 starting in
January 1, 2018. Likewise, from January 1, 2013 through December 31,
2018, a banking organization would be able to include in tier 1 or
total capital a portion of the instruments issued by a consolidated
subsidiary that qualified as tier 1 or total capital of the banking
organization as of December 31, 2012 but that would not qualify as tier
1 or total minority interest as of January 1, 2013 (non-qualifying
minority interest) in accordance with Table 22. For example, if a
banking organization has $10 of non-qualifying minority interest that
previously qualified as tier 1 capital, it would be allowed to include
$10 in its tier 1 capital during calendar year 2013, $8 during calendar
year 2014, $6 during calendar year 2015, $4 during calendar year 2016,
$2 during calendar year 2017 and $0 starting in January 1, 2018.
Table 22--Percentage of the Amount of Surplus or Non-Qualifying Minority
Interest Includable in Regulatory Capital During Transition Period
------------------------------------------------------------------------
Percentage of the amount of
surplus or non-qualifying
minority interest that can
Transition period be included in regulatory
capital during the
transition period
------------------------------------------------------------------------
Calendar year 2013........................ 100
Calendar year 2014........................ 80
Calendar year 2015........................ 60
Calendar year 2015........................ 60
Calendar year 2016........................ 40
Calendar year 2017........................ 20
Calendar year 2018 and thereafter......... 0
------------------------------------------------------------------------
Transition Provisions for Standardized Approach NPR
In addition, under the Standardized Approach NPR, beginning on
January 1, 2015, a banking organization would be required to calculate
risk-weighted assets using the proposed new approaches described in
that NPR. The Standardized Approach NPR proposes that until then, the
banking organization may calculate risk-weighted assets using the
current methodologies unless it decides to early adopt the proposed
changes. Notwithstanding the transition provisions in the Standardized
Approach NPR, the banking organization would be subject to the
transition provisions described in this Basel III NPR.
Question 36: The agencies solicit comments on the transition
arrangements outlined previously. In particular, what specific
regulatory reporting burden or complexities would result from the
application of the transition arrangements described in this section of
the preamble, and what specific alternatives exist to deal with such
burden or complexity while still adhering to the general transitional
provisions required under the Dodd-Frank Act?
Question 37: What are the pros and cons of a potentially stricter
(but less complex) alternative transitions approach for the regulatory
adjustments and deductions outlined in this section C under which
banking organizations would be required to (1) apply all the regulatory
adjustments and deductions currently applicable to tier 1 capital under
the general risk-based capital rules to common equity tier 1 capital
from January 1, 2013 through December 31, 2015; and (2) fully apply all
the regulatory adjustments and deductions proposed in section 22 of the
proposed rule starting on January 1, 2016? Please provide data to
support your views.
E. Leverage Ratio
The agencies are proposing to apply the supplementary leverage
ratio beginning in 2018. However, beginning on January 1, 2015,
advanced approaches banking organizations would be required to
calculate and report the supplementary leverage ratio using the
proposed definition of tier 1 capital and total exposure measure.
Question 38: The agencies solicit comment on the proposed
transition arrangements for the supplementary leverage ratio. In
particular, what specific challenges do banking organizations
anticipate with regard to the proposed arrangements and what specific
alternative arrangements would address these challenges?
VI. Additional OCC Technical Amendments
In addition to the changes described above, the OCC is proposing to
redesignate subpart C, Establishment of Minimum Capital Ratios for an
Individual Bank, subpart D, Enforcement, and subpart E, Issuance of a
Directive, as subparts H, I, and J, respectively. The OCC is also
proposing to redesignate section 3.100, Capital and Surplus, as subpart
K, Capital and Surplus. The OCC is carrying over redesignated subpart
K, which includes definitions of the terms ``capital'' and ``surplus''
and related definitions that are used for determining statutory limits
applicable to national banks that are based on capital and surplus. The
agencies have systematically adopted a definition of capital and
surplus that is based on tier 1 and tier 2 capital. The OCC believes
that the definitions in redesignated subpart K may no longer be
necessary and is considering whether to delete these definitions in the
final rule. Finally, as part of the integration of the rules governing
national banks and federal savings associations, the OCC proposes to
make part 3 applicable to federal savings associations, make other non-
substantive, technical amendments, and rescind part 167, Capital.
In the final rule, the OCC may need to make additional technical
and conforming amendments to other OCC rules, such as Sec. 5.46,
subordinated debt, which contains cross references to Part 3 that we
propose to change pursuant to this rule. Cross references to appendices
A, B, or C will also need to be amended because we propose to replace
those appendices with subparts A through H.
Question 39: The OCC requests comment on all aspects of these
proposed changes, but is specifically interested in whether it is
necessary to retain the definitions of capital and surplus and related
terms in redesignated subpart K.
VII. Abbreviations
ABCP Asset-Backed Commercial Paper
ABS Asset Backed Security
AD.C. Acquisition, Development, or Construction
AFS Available For Sale
[[Page 52833]]
AOCI Accumulated Other Comprehensive Income
BCBS Basel Committee on Banking Supervision
BHC Bank Holding Company
BIS Bank for International Settlements
CAMELS Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity, and Sensitivity to Market Risk
CCF Credit Conversion Factor
CCP Central Counterparty
CD.C. Community Development Corporation
CDFI Community Development Financial Institution
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CF Conversion Factor
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
CMBS Commercial Mortgage Backed Security
CPSS Committee on Payment and Settlement Systems
CRC Country Risk Classifications
CRAM Country Risk Assessment Model
CRM Credit Risk Mitigation
CUSIP Committee on Uniform Securities Identification Procedures
D.C.O Derivatives Clearing Organizations
DFA Dodd-Frank Act
DI Depository Institution
DPC Debts Previously Contracted
DTA Deferred Tax Asset
DTL Deferred Tax Liability
DVA Debit Valuation Adjustment
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure at Default
ECL Expected Credit Loss
EE Expected Exposure
E.O. Executive Order
EPE Expected Positive Exposure
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FFIEC Federal Financial Institutions Examination Council
FHLMC Federal Home Loan Mortgage Corporation
FMU Financial Market Utility
FNMA Federal National Mortgage Association
FR Federal Register
GAAP Generally Accepted Accounting Principles
GDP Gross Domestic Product
GLBA Gramm-Leach-Bliley Act
GSE Government-Sponsored Entity
HAMP Home Affordable Mortgage Program
HELOC Home Equity Line of Credit
HOLA Home Owners' Loan Act
HVCRE High-Volatility Commercial Real Estate
IFRS International Reporting Standards
IMM Internal Models Methodology
I/O Interest-Only
IOSCO International Organization of Securities Commissions
LTV Loan-to-Value Ratio
M Effective Maturity
MDB Multilateral Development Banks
MSA Mortgage Servicing Assets
NGR Net-to-Gross Ratio
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical Rating Organization
OCC Office of the Comptroller of the Currency
OECD Organization for Economic Co-operation and Development
OIRA Office of Information and Regulatory Affairs
OMB Office of Management and Budget
OTC Over-the-Counter
PCA Prompt Corrective Action
PCCR Purchased Credit Card Receivables
PFE Potential Future Exposure
PMI Private Mortgage Insurance
PSE Public Sector Entities
PvP Payment-versus-Payment
QCCP Qualifying Central Counterparty
RBA Ratings-Based Approach
REIT Real Estate Investment Trust
RFA Regulatory Flexibility Act
RMBS Residential Mortgage Backed Security
RTCRRI Act Resolution Trust Corporation Refinancing, Restructuring,
and Improvement Act of 1991
RVC Ratio of Value Change
RWA Risk-Weighted Asset
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SFT Securities Financing Transactions
SBLF Small Business Lending Facility
SLHC Savings and Loan Holding Company
SPE Special Purpose Entity
SPV Special Purpose Vehicle
SR Supervision and Regulation Letter
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UMRA Unfunded Mandates Reform Act of 1995
U.S. United States
U.S.C. United States Code
VaR Value-at-Risk
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency to provide an initial regulatory flexibility analysis with a
proposed rule or to certify that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include banking entities with assets less than
or equal to $175 million) and publish its certification and a short,
explanatory statement in the Federal Register along with the proposed
rule.
The agencies are separately publishing initial regulatory
flexibility analyses for the proposals as set forth in this NPR.
Board
A. Statement of the Objectives of the Proposal; Legal Basis
As discussed previously in the Supplementary Information, the Board
is proposing in this NPR to revise its capital requirements to promote
safe and sound banking practices, implement Basel III, and codify its
capital requirements. The proposals also satisfy certain requirements
under the Dodd-Frank Act by imposing new or revised minimum capital
requirements on certain depository institution holding companies.\90\
Under section 38(c)(1) of the Federal Deposit Insurance Act, the
agencies may prescribe capital standards for depository institutions
that they regulate.\91\ In addition, among other authorities, the Board
may establish capital requirements for state member banks under the
Federal Reserve Act,\92\ for state member banks and bank holding
companies under the International Lending Supervision Act and Bank
Holding Company Act,\93\ and for savings and loan holding companies
under the Home Owners Loan Act.\94\
---------------------------------------------------------------------------
\90\ See 12 U.S.C. 5371.
\91\ See 12 U.S.C. 1831o(c)(1).
\92\ See 12 CFR 208.43.
\93\ See 12 U.S.C. 3907; 12 U.S.C. 1844.
\94\ See 12 U.S.C. 1467a(g)(1).
---------------------------------------------------------------------------
B. Small Entities Potentially Affected by the Proposal
Under regulations issued by the Small Business Administration,\95\
a small entity includes a depository institution or bank holding
company with total assets of $175 million or less (a small banking
organization). As of March 31, 2012 there were 373 small state member
banks. As of December 31, 2011, there were approximately 128 small
savings and loan holding companies and 2,385 small bank holding
companies.\96\
---------------------------------------------------------------------------
\95\ See 13 CFR 121.201.
\96\ The December 31, 2011 data are the most recent available
data on small savings and loan holding companies and small bank
holding companies.
---------------------------------------------------------------------------
The proposal would not apply to small bank holding companies that
are not engaged in significant nonbanking activities, do not conduct
significant off-balance sheet activities, and do not have a material
amount of debt or equity securities outstanding that are registered
with the SEC. These small bank holding companies remain subject to the
Board's Small Bank Holding Company Policy Statement (Policy
Statement).\97\
---------------------------------------------------------------------------
\97\ See 12 CFR part 225, appendix C. Section 171 of the Dodd-
Frank provides an exemption from its requirements for bank holding
companies subject to the Policy Statement (as in effect on May 19,
2010). Section 171 does not provide a similar exemption for small
savings and loan holding companies and they are therefore subject to
the proposals. 12 U.S.C. 5371(b)(5)(C).
---------------------------------------------------------------------------
Small state member banks and small savings and loan holding
companies (covered small banking organizations) would be subject to the
proposals in this NPR.
[[Page 52834]]
C. Impact on Covered Small Banking Organizations
The proposals may impact covered small banking organizations in
several ways. The proposals would affect covered small banking
organizations' regulatory capital requirements. They would change the
qualifying criteria for regulatory capital, including required
deductions and adjustments, and modify the risk weight treatment for
some exposures. They also would require covered small banking
organizations to meet new minimum common equity tier 1 to risk-weighted
assets ratio of 4.5 percent and an increased minimum tier 1 capital to
risk-weighted assets risk-based capital ratio of 6 percent. Under the
proposals, all banking organizations would remain subject to a 4
percent minimum tier 1 leverage ratio.\98\
---------------------------------------------------------------------------
\98\ Banking organizations subject to the advanced approaches
rules also would be required in 2018 to achieve a minimum tier 1
capital to total leverage exposure ratio (the supplementary leverage
ratio) of 3 percent. Advanced approaches banking organizations
should refer to section 10 of subpart B of the proposed rule and
section II.B of the preamble for a more detailed discussion of the
applicable minimum capital ratios.
---------------------------------------------------------------------------
In addition, as described above, the proposals would impose
limitations on capital distributions and discretionary bonus payments
for covered small banking organizations that do not hold a buffer of
common equity tier 1 capital above the minimum ratios. As a result of
these new requirements, some covered small banking organizations may
have to alter their capital structure (including by raising new capital
or increasing retention of earnings) in order to achieve compliance.
Most small state member banks already hold capital in excess of the
proposed minimum risk-based regulatory ratios. Therefore, the proposed
requirements are not expected to significantly impact the capital
structure of most covered small state member banks. Comparing the
capital requirements proposed in this NPR and the Standardized Approach
NPR on a fully phased-in basis to minimum requirements of the current
rules, the capital ratios of approximately 1-2 percent of small state
member banks would fall below at least one of the proposed minimum
risk-based capital requirements. Thus, the Board believes that the
proposals in this NPR and the Standardized NPR would affect an
insubstantial number of small state member banks.
Because the Board has not fully implemented reporting requirements
for savings and loan holding companies, it is unable to determine the
impact of the proposed requirements on small savings and loan holding
companies. The Board seeks comment on the potential impact of the
proposed requirements on small savings and loan holding companies.
Covered small banking organizations that would have to raise
additional capital to comply with the requirements of the proposals may
incur certain costs, including costs associated with issuance of
regulatory capital instruments. The Board has sought to minimize the
burden of raising additional capital by providing for transitional
arrangements that phase-in the new capital requirements over several
years, allowing banking organizations time to accumulate additional
capital through retained earnings as well as raising capital in the
market. While the proposals would establish a narrower definition of
capital, a minimum common equity tier 1 capital ratio and a minimum
tier 1 capital ratio that is higher than under the general risk-based
capital rules, the majority of capital instruments currently held by
small covered banking organizations under existing capital rules, such
as common stock and noncumulative perpetual preferred stock, would
remain eligible as regulatory capital instruments under the proposed
requirements.
As discussed above, the proposals would modify criteria for
regulatory capital, deductions and adjustments to capital, and risk
weights for exposures, as well as calculation of the leverage ratio.
Accordingly, covered small banking organizations would be required to
change their internal reporting processes to comply with these changes.
These changes may require some additional personnel training and
expenses related to new systems (or modification of existing systems)
for calculating regulatory capital ratios.
For small savings and loan holding companies, the compliance
burdens described above may be greater than for those of other covered
small banking organizations. Small savings and loan holding companies
previously were not subject to regulatory capital requirements and
reporting requirements tied regulatory capital requirements. Small
savings and loan holding companies may therefore need to invest
additional resources in establishing internal systems (including
purchasing software or hiring personnel) or raising capital to come
into compliance with the proposed requirements.
D. Transitional Arrangements To Ease Compliance Burden
For those covered small banking organizations that would not
immediately meet the proposed minimum requirements, this NPR provides
transitional arrangements for banking organizations to make adjustments
and to come into compliance. Small covered banking organizations would
be required to meet the proposed minimum capital ratio requirements
beginning on January 1, 2013 thorough to December 31, 2014. On January
1, 2015, small covered banking organizations would be required to
comply with the proposed minimum capital ratio requirements.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
The Board is unaware of any duplicative, overlapping, or
conflicting federal rules. As noted above, the Board anticipates
issuing a separate proposal to implement reporting requirements that
are tied to (but do not overlap or duplicate) the proposed
requirements. The Board seeks comments and information regarding any
such rules that are duplicative, overlapping, or otherwise in conflict
with the proposed requirements.
F. Discussion of Significant Alternatives
The Board has sought to incorporate flexibility and provide
alternative treatments in this NPR and the Standardized NPR to lessen
burden and complexity for smaller banking organizations wherever
possible, consistent with safety and soundness and applicable law,
including the Dodd-Frank Act. These alternatives and flexibility
features include the following:
Covered small banking organizations would not be subject
to the proposed enhanced disclosure requirements.
Covered small banking organizations would not be subject
to possible increases in the capital conservation buffer through the
countercyclical buffer.
Covered small banking organizations would not be subject
to the new supplementary leverage ratio.
Covered small institutions that have issued capital
instruments to the U.S. Treasury through the Small Business Lending
Fund (a program for banking organizations with less than $10 billion in
consolidated assets) or under the Emergency Economic Stabilization Act
of 2008 prior to October 4, 2010, would be able to continue to include
those
[[Page 52835]]
instruments in tier 1 or tier 2 capital (as applicable) even if not all
criteria for inclusion under the proposed requirements are met.
Covered small banking organizations that issued capital
instruments that could no longer be included in tier 1 capital or tier
2 capital under the proposed requirements would have a longer
transition period for removing the instruments from tier 1 or tier 2
capital (as applicable).
The Board welcomes comment on any significant alternatives to the
proposed requirements applicable to covered small banking organizations
that would minimize their impact on those entities, as well as on all
other aspects of its analysis. A final regulatory flexibility analysis
will be conducted after consideration of comments received during the
public comment period.
OCC
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA), the OCC is publishing this summary of its
Initial Regulatory Flexibility Analysis (IRFA) for this NPR. The RFA
requires an agency to publish in the Federal Register its IRFA or a
summary of its IRFA at the time of the publication of its general
notice of proposed rulemaking \99\ or to certify that the proposed rule
will not have a significant economic impact on a substantial number of
small entities.\100\ For its IRFA, the OCC analyzed the potential
economic impact of this NPR on the small entities that it regulates.
---------------------------------------------------------------------------
\99\ 5 U.S.C. 603(a).
\100\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The OCC welcomes comment on all aspects of the summary of its IRFA.
A final regulatory flexibility analysis will be conducted after
consideration of comments received during the public comment period.
A. Reasons Why the Proposed Rule Is Being Considered by the Agencies;
Statement of the Objectives of the Proposed Rule; and Legal Basis
As discussed in the Supplementary Information section above, the
agencies are proposing to revise their capital requirements to promote
safe and sound banking practices, implement Basel III, and harmonize
capital requirements across charter type. Federal law authorizes each
of the agencies to prescribe capital standards for the banking
organizations that it regulates.\101\
---------------------------------------------------------------------------
\101\ See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C. 1831o(c)(1);
12 U.S.C. 1844; 12 U.S.C. 3907; and 12 U.S.C. 5371.
---------------------------------------------------------------------------
B. Small Entities Affected by the Proposal
Under regulations issued by the Small Business Administration,\102\
a small entity includes a depository institution or bank holding
company with total assets of $175 million or less (a small banking
organization). As of March 31, 2012, there were approximately 599 small
national banks and 284 small federally chartered savings associations.
---------------------------------------------------------------------------
\102\ See 13 CFR 121.201.
---------------------------------------------------------------------------
C. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
This NPR includes changes to the general risk-based capital
requirements that affect small banking organizations. Under this NPR,
the changes to minimum capital requirements that would impact small
national banks and federal savings associations include a more
conservative definition of regulatory capital, a new common equity tier
1 capital ratio, a higher minimum tier 1 capital ratio, new thresholds
for prompt corrective action purposes, and a new capital conservation
buffer. To estimate the impact of this NPR on national banks' and
federal savings associations' capital needs, the OCC estimated the
amount of capital the banks will need to raise to meet the new minimum
standards relative to the amount of capital they currently hold. To
estimate new capital ratios and requirements, the OCC used currently
available data from banks' quarterly Consolidated Report of Condition
and Income (Call Reports) to approximate capital under the proposed
rule, which shows that most banks have raised their capital levels well
above the existing minimum requirements. After comparing existing
levels with the proposed new requirements, the OCC has determined that
28 small institutions that it regulates would fall short of the
proposed increased capital requirements. Together, those institutions
would need to raise approximately $82 million in regulatory capital to
meet the proposed minimum requirements. The OCC estimates that the cost
of lost tax benefits associated with increasing total capital by $82
million will be approximately $0.5 million per year. Averaged across
the 28 affected institutions, the cost is approximately $18,000 per
institution per year.
To determine if a proposed rule has a significant economic impact
on small entities, we compared the estimated annual cost with annual
noninterest expense and annual salaries and employee benefits for each
small entity. Based on this analysis, the OCC has concluded for
purposes of this IRFA that the changes described in this NPR, when
considered without regard to other changes to the capital requirements
that the agencies simultaneously are proposing, would not result in a
significant economic impact on a substantial number of small entities.
However, as discussed in the Supplementary Information section
above, the changes proposed in this NPR also should be considered
together with changes proposed in the separate Standardized Approach
NPR also published in today's Federal Register. The changes described
in the Standardized NPR include:
1. Changing the denominator of the risk-based capital ratios by
revising the asset risk weights;
2. Revising the treatment of counterparty credit risk;
3. Replacing references to credit ratings with alternative measures
of creditworthiness;
4. Providing more comprehensive recognition of collateral and
guarantees; and
5. Providing a more favorable capital treatment for transactions
cleared through qualifying central counterparties.
These changes are designed to enhance the risk-sensitivity of the
calculation of risk-weighted assets. Therefore, capital requirements
may go down for some assets and up for others. For those assets with a
higher risk weight under this NPR, however, that increase may be large
in some instances, e.g., requiring the equivalent of a dollar-for-
dollar capital charge for some securitization exposures.
The Basel Committee on Banking Supervision has been conducting
periodic reviews of the potential quantitative impact of the Basel III
framework.\103\ Although these reviews monitor the impact of
implementing the Basel III framework rather than the proposed rule, the
OCC is using estimates consistent with the Basel Committee's analysis,
including a conservative estimate of a 20 percent increase in risk-
weighted assets, to gauge the impact of the Standardized Approach NPR
on risk-weighted assets. Using this assumption, the OCC estimates that
a total of 56 small national banks and federally chartered savings
associations will need to raise additional capital to meet their
regulatory minimums. The OCC
[[Page 52836]]
estimates that this total projected shortfall will be $143 million and
that the cost of lost tax benefits associated with increasing total
capital by $143 million will be approximately $0.8 million per year.
Averaged across the 56 affected institutions, the cost is approximately
$14,000 per institution per year.
---------------------------------------------------------------------------
\103\ See, ``Update on Basel III Implementation Monitoring,''
Quantitative Impact Study Working Group, (January 28, 2012).
---------------------------------------------------------------------------
To comply with the proposed rules in the Standardized Approach NPR,
covered small banking organizations would be required to change their
internal reporting processes. These changes would require some
additional personnel training and expenses related to new systems (or
modification of existing systems) for calculating regulatory capital
ratios.
Additionally, covered small banking organizations that hold certain
exposures would be required to obtain additional information under the
proposed rules in order to determine the applicable risk weights.
Covered small banking organizations that hold exposures to sovereign
entities other than the United States, foreign depository institutions,
or foreign public sector entities would have to acquire Country Risk
Classification ratings produced by the OECD to determine the applicable
risk weights. Covered small banking organizations that hold residential
mortgage exposures would need to have and maintain information about
certain underwriting features of the mortgage as well as the LTV ratio
in order to determine the applicable risk weight. Generally, covered
small banking organizations that hold securitization exposures would
need to obtain sufficient information about the underlying exposures to
satisfy due diligence requirements and apply either the simplified
supervisory formula or the gross-up approach described in section --.43
of the Standardized Approach NPR to calculate the appropriate risk
weight, or be required to assign a 1,250 percent risk weight to the
exposure.
Covered small banking organizations typically do not hold
significant exposures to foreign entities or securitization exposures,
and the agencies expect any additional burden related to calculating
risk weights for these exposures, or holding capital against these
exposures, would be relatively modest. The OCC estimates that, for
small national banks and federal savings associations, the cost of
implementing the alternative measures of creditworthiness will be
approximately $36,125 per institution.
Some covered small banking organizations may hold significant
residential mortgage exposures. However, if the small banking
organization originated the exposure, it should have sufficient
information to determine the applicable risk weight under the proposed
rule. If the small banking organization acquired the exposure from
another institution, the information it would need to determine the
applicable risk weight is consistent with information that it should
normally collect for portfolio monitoring purposes and internal risk
management.
Covered small banking organizations would not be subject to the
disclosure requirements in subpart D of the proposed rule. However, the
agencies expect to modify regulatory reporting requirements that apply
to covered small banking organizations to reflect the changes made to
the agencies' capital requirements in the proposed rules. The agencies
expect to propose these changes to the relevant reporting forms in a
separate notice.
To determine if a proposed rule has a significant economic impact
on small entities the OCC compared the estimated annual cost with
annual noninterest expense and annual salaries and employee benefits
for each small entity. If the estimated annual cost was greater than or
equal to 2.5 percent of total noninterest expense or 5 percent of
annual salaries and employee benefits the OCC classified the impact as
significant. As noted above, the OCC has concluded for purposes of this
IRFA that the proposed rules in this NPR, when considered without
regard to changes in the Standardized NPR, would not exceed these
thresholds and therefore would not result in a significant economic
impact on a substantial number of small entities. However, the OCC has
concluded that the proposed rules in the Standardized Approach NPR
would have a significant impact on a substantial number of small
entities. The OCC estimates that together, the changes proposed in this
NPR and the Standardized Approach NPR will exceed these thresholds for
500 small national banks and 253 small federally chartered private
savings institutions. Accordingly, when considered together, this NPR
and the Standardized Approach NPR appear to have a significant economic
impact on a substantial number of small entities.
D. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
The OCC is unaware of any duplicative, overlapping, or conflicting
federal rules. As noted previously, the OCC anticipates issuing a
separate proposal to implement reporting requirements that are tied to
(but do not overlap or duplicate) the requirements of the proposed
rules. The OCC seeks comments and information regarding any such
federal rules that are duplicative, overlapping, or otherwise in
conflict with the proposed rule.
E. Discussion of Significant Alternatives to the Proposed Rule
The agencies have sought to incorporate flexibility into the
proposed rule and lessen burden and complexity for smaller banking
organizations wherever possible, consistent with safety and soundness
and applicable law, including the Dodd-Frank Act. The agencies are
requesting comment on potential options for simplifying the rule and
reducing burden, including whether to permit certain small banking
organizations to continue using portions of the current general risk-
based capital rules to calculate risk-weighted assets. Additionally,
the agencies proposed the following alternatives and flexibility
features:
Covered small banking organizations are not subject to the
enhanced disclosure requirements of the proposed rules.
Covered small banking organizations would continue to
apply a 100 percent risk weight to corporate exposures (as described in
section --.32 of the Standardized Approach NPR).
Covered small banking organizations may choose to apply
the simpler gross-up method for securitization exposures rather than
the Simplified Supervisory Formula Approach (SSFA) (as described in
section --.43 of the Standardized Approach NPR).
The proposed rule offers covered small banking
organizations a choice between a simpler and more co