Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-Weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 20754-20761 [2014-08259]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 79, Number 71 (Monday, April 14, 2014)]
[Rules and Regulations]
[Pages 20754-20761]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-08259]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303, 308, 324, 327, 333, 337, 347, 349, 360, 362, 363, 
364, 365, 390, and 391

RIN 3064-AD95


Regulatory Capital Rules: Regulatory Capital, Implementation of 
Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective 
Action, Standardized Approach for Risk-Weighted Assets, Market 
Discipline and Disclosure Requirements, Advanced Approaches Risk-Based 
Capital Rule, and Market Risk Capital Rule

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is adopting 
as final an interim final rule that revised the risk-based and leverage 
capital requirements for FDIC-supervised institutions, with no 
substantive changes. This final rule is substantively identical to a 
joint final rule issued by the Office of the Comptroller of the 
Currency (OCC) and the Board of Governors of the Federal Reserve System 
(Federal Reserve) (together, with the FDIC, the agencies). The interim 
final rule became effective on January 1, 2014; however, the mandatory 
compliance date for FDIC-supervised institutions that are not subject 
to the advanced internal ratings-based approaches (advanced approaches) 
is January 1, 2015.

DATES: Effective date: April 14, 2014. Mandatory compliance date: 
January 1, 2014 for advanced approaches FDIC-supervised institutions; 
January 1, 2015 for all other FDIC-supervised institutions.

FOR FURTHER INFORMATION CONTACT: Bobby R. Bean, Associate Director, 
bbean@fdic.gov; Ryan Billingsley, Chief, Capital Policy Section, 
rbillingsley@fdic.gov; Karl Reitz, Chief, Capital Markets Strategies 
Section, kreitz@fdic.gov; David Riley, Senior Policy Analyst, 
dariley@fdic.gov; Benedetto Bosco, Capital Markets Policy Analyst, 
bbosco@fdic.gov, regulatorycapital@fdic.gov, Capital Markets Branch, 
Division of Risk Management Supervision, (202) 898-6888; or Mark 
Handzlik, Counsel, mhandzlik@fdic.gov; Michael Phillips, Counsel, 
mphillips@fdic.gov; Greg Feder, Counsel, gfeder@fdic.gov; or Rachel 
Ackmann, Senior Attorney, rackmann@fdic.gov, Supervision Branch, Legal 
Division, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On August 30, 2012, the agencies published in the Federal Register 
three joint notices of proposed rulemaking seeking public comment on 
revisions to their risk-based and leverage capital requirements and the 
methodologies for calculating risk-weighted assets under the 
standardized and advanced approaches (each, a proposal, and together, 
the notices of proposed rulemaking (NPRs), the proposed rules, or the 
proposals).\1\ The proposed rules, in part, reflected revisions to 
international capital standards adopted by the Basel Committee on 
Banking Supervision (BCBS) and described in, Basel III: A Global 
Regulatory Framework for More Resilient Banks and Banking Systems 
(Basel III), as well as subsequent changes to the Basel III framework 
and recent BCBS consultative papers.\2\ The proposals also included 
certain provisions that are required under, or maintain consistency 
with, the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the Dodd-Frank Act).\3\ After considering the public comments received 
on the NPRs, on September 10, 2013, the FDIC issued the three proposals 
as a consolidated interim final rule (Basel III interim final rule).\4\
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    \1\ 77 FR 52792 (August 30, 2012); 77 FR 52888 (August 30, 
2012); 77 FR 52978 (August 30, 2012).
    \2\ Basel III was published in December 2010 and revised in June 
2011. The text is available at https://www.bis.org/publ/bcbs189.htm. 
The BCBS is a committee of banking supervisory authorities, which 
was established by the central bank governors of the G-10 countries 
in 1975. More information regarding the BCBS and its membership is 
available at https://www.bis.org/bcbs/about.htm. Documents issued by 
the BCBS are available through the Bank for International 
Settlements Web site at https://www.bis.org.
    \3\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010).
    \4\ 78 FR 55340 (Sept. 10, 2013). The OCC and the Federal 
Reserve issued the three proposals as a consolidated final rule that 
was substantively identical to the FDIC's Basel III interim final 
rule (78 FR 62018 (Oct. 11, 2013)).
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    Concurrent with the adoption of the Basel III interim final rule, 
the agencies issued a related joint notice of proposed rulemaking that 
would adopt enhanced supplementary leverage ratio standards for large, 
interconnected U.S. banking organizations and their insured depository 
institution subsidiaries (enhanced supplementary leverage ratio 
NPR).\5\ The Basel III interim final rule sought comments on the 
interaction between the Basel III interim final rule

[[Page 20755]]

and the enhanced supplementary leverage ratio standards NPR. The FDIC 
is now issuing as final its Basel III interim final rule with no 
substantive changes.
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    \5\ 78 FR 51101 (Aug. 20, 2013).
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II. Summary of the Comments and the Final Rule

A. Comments

    In response to the Basel III interim final rule, the FDIC received 
three public comments from two banking organizations and one trade 
association representing the financial services industry. This section 
of the preamble provides a discussion of the comment letters and the 
FDIC's response to them.
    One commenter encouraged the FDIC to seek public comment earlier in 
the development process of new international capital standards. 
Specifically, the commenter stated that while developing international 
capital standards among the BCBS members the FDIC should issue an 
advance notice of proposed rulemaking describing prospective revisions 
to those standards so that U.S. banking organizations can more fully 
understand the implications for the U.S. banking sector and the U.S. 
economy as a whole. The commenter also recommended conducting an 
empirical study of the impact on the U.S. banking system, bank 
customers in particular, and the economy in general, resulting from the 
U.S. implementation of any international capital standards adopted by 
the BCBS. The FDIC notes that the BCBS seeks public comment, including 
from U.S. banking organizations, in connection with its development of 
international capital standards. As members of the BCBS the agencies 
are actively engaged in this process, which also includes quantitative 
impact analyses to assess the impact of proposed capital standards.
    Another commenter requested that the FDIC revise the credit 
conversion factors (CCFs) for trade related, self-liquidating financing 
for on-balance sheet exposures for up to one year, provided that the 
banking organization has proper documentation to substantiate the 
transaction. This commenter also requested that the FDIC use the same 
country risk classification ratings (CRC) as the OECD without any 
further downgrades for exposures to foreign banking organizations. For 
the reasons stated in the Basel III interim final rule, the final rule 
adopts the CCFs and CRC methodology set forth in the interim final rule 
without any substantive change.\6\
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    \6\ 78 FR 55402-55403.
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    The commenter also encouraged the FDIC to reconsider several of the 
issues raised by commenters responding to the three proposals issued in 
2012. For example, the commenter requested that the FDIC reconsider the 
treatment under the Basel III interim final rule for capital 
instruments issued by banking organizations that are organized as S-
corporations; the limitation on the amount of mortgage servicing assets 
that may be included in common equity tier 1 capital; the deduction of 
collateralized debt obligations supported by trust preferred 
securities; the inclusion of accumulated other comprehensive income 
(AOCI) in common equity tier 1 capital; and the 150 percent risk weight 
for certain delinquent exposures. For the reasons stated in the Basel 
III interim final rule, the final rule adopts these provisions without 
substantive change.\7\
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    \7\ 78 FR 55354 (S-corporations), 78 FR 55388 (MSAs), 78 FR 
55386 (TruPs), 78 FR 55346 (AOCI); and 78 FR 55407-55408 (delinquent 
exposures).
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    Another commenter requested that the FDIC reconsider whether to 
recognize financial guarantee insurers as guarantors under the 
definition of ``eligible guarantor'' set forth in the Basel III interim 
final rule. The commenter stated that such an exclusion fails to 
recognize the risk mitigating benefits that may be associated with 
financial guarantee insurance. The FDIC believes that guarantees issued 
by these types of entities can exhibit wrong-way risk and that 
modifying the definition of eligible guarantor to accommodate these 
entities or entities that are not investment grade would be contrary to 
one of the key objectives of the capital framework, which is to 
mitigate interconnectedness and systemic vulnerabilities within the 
financial system. Therefore, the FDIC is finalizing the definition of 
``eligible guarantor'' with no change.

B. The Final Rule 8

    The FDIC is adopting the Basel III interim final rule as a final 
rule with no substantive changes. The only changes in this final rule 
are technical revisions to conform it to the final rules issued by the 
Federal Reserve and the OCC. For example, the final rule uses the 
correct compliance date, January 1, 2015, in section 324.63(a) rather 
than January 1, 2014 as used in the Basel III interim final rule. Also, 
several sections of the final rule have been clarified to read, ``this 
paragraph (x)'', instead of ``this paragraph,'' to match internal 
references in the final rule adopted by the Federal Reserve and the 
OCC.
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    \8\ For a section-by-section summary of the final rule see 78 FR 
55340 (Sept. 10, 2013).
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    Consistent with the Basel III interim final rule, the final rule is 
intended to improve both the quality and quantity of FDIC-supervised 
institutions' capital.\9\ The final rule implements a revised 
definition of regulatory capital, a new common equity tier 1 minimum 
capital requirement, a higher minimum tier 1 capital requirement, and, 
for FDIC-supervised institutions subject to the advanced approaches, a 
supplementary leverage ratio that incorporates a broader set of 
exposures in the denominator measure (that is, total leverage 
exposure).\10\ The final rule incorporates these new requirements into 
the FDIC's prompt corrective action (PCA) framework. In addition, the 
final rule establishes limits on an FDIC-supervised institution's 
capital distributions and certain discretionary bonus payments if the 
institution 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. The final rule amends the methodologies for 
determining risk-weighted assets for all FDIC-supervised institutions, 
and adopts changes to the FDIC's regulatory capital requirements that 
meet the requirements of and are consistent with section 171 and 
section 939A of the Dodd-Frank Act.\11\ In addition, the FDIC notes 
that while portions of the final rule refer to circumstances where a 
party becomes subject to receivership, the final rule is intended to 
govern matters relating to capital requirements and should not be 
construed as an indication of FDIC receivership rules or policies.
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    \9\ FDIC-supervised institutions include state nonmember banks 
and state savings associations. The term banking organizations 
includes 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 Federal 
Reserve'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, except certain savings and 
loan holding companies that are substantially engaged in insurance 
underwriting or commercial activities.
    \10\ The supplementary leverage ratio is defined as the simple 
arithmetic mean of the ratio of the banking organization's tier 1 
capital to total leverage exposure calculated as of the last day of 
each month in the reporting quarter.
    \11\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010).
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    The final rule codifies the FDIC's regulatory capital rules, which 
have previously resided in various appendices to their respective 
regulations, into a harmonized integrated regulatory framework. In 
addition, the final rule amends the

[[Page 20756]]

market risk capital rule (market risk rule) to apply to state savings 
associations.

III. Regulatory Flexibility Act

    In general, section 4 of the Regulatory Flexibility Act (5 U.S.C. 
604) (RFA) requires an agency to prepare a final regulatory flexibility 
analysis (FRFA) for a final rule unless the agency certifies that the 
rule will not, if promulgated, have a significant economic impact on a 
substantial number of small entities (defined for purposes of the RFA 
to include banking entities with total assets of $500 million or less). 
Pursuant to the RFA, the agency must make the FRFA available to members 
of the public and must publish the FRFA, or a summary thereof, in the 
Federal Register. The FDIC published a summary of its FRFA in the 
Federal Register with the Basel III interim final rule.\12\ The FDIC 
did not receive comments on the FRFA provided in the interim final 
rule. As such, and consistent with the FRFA in the Basel III interim 
final rule, the FDIC is publishing the following summary of its 
FRFA.\13\
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    \12\ 78 FR 55465-55468.
    \13\ The FDIC published a summary of its initial regulatory 
flexibility analysis (IRFA) in connection with each of the proposed 
rules in accordance with Section 3(a) of the Regulatory Flexibility 
Act, 5 U.S.C. 603 (RFA). In the IRFAs provided in connection with 
the proposed rules, the FDIC requested comment on all aspects of the 
IRFAs, and, in particular, on any significant alternatives to the 
proposed rules applicable to covered small FDIC-supervised 
institutions that would minimize their impact on those entities. In 
the IRFA provided by the FDIC in connection with the proposal to 
revise the advanced approaches (77 FR 52978 (August 30, 2012)), the 
FDIC determined that there would not be a significant economic 
impact on a substantial number of small FDIC-supervised institutions 
and published a certification and a short explanatory statement 
pursuant to section 605(b) of the RFA.
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    For purposes of the FRFA, the FDIC analyzed the potential economic 
impact of the final rule on FDIC-supervised institutions with total 
assets of $500 million or less (small FDIC-supervised institutions).
    As discussed in more detail below, the FDIC believes that this 
final rule may have a significant economic impact on a substantial 
number of the small entities under its jurisdiction.

A. Statement of the Need for, and Objectives of, the Final Rule

    As discussed in the Supplementary Information section of the 
preamble to this final rule, the FDIC is revising its regulatory 
capital requirements to promote safe and sound banking practices, 
implement Basel III and other aspects of the Basel capital framework, 
harmonize capital requirements between types of FDIC-supervised 
institutions, and codify capital requirements.
    Additionally, this final rule is consistent with certain 
requirements under the Dodd-Frank Act by: (1) Revising regulatory 
capital requirements to remove references to, and requirements of 
reliance on, credit ratings,\14\ and (2) imposing new or revised 
minimum capital requirements on certain FDIC-supervised 
institutions.\15\
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    \14\ See 15 U.S.C. 78o-7, note.
    \15\ See 12 U.S.C. 5371.
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    Under section 38(c)(1) of the Federal Deposit Insurance Act, the 
FDIC may prescribe capital standards for depository institutions that 
it regulates.\16\ The FDIC also must establish capital requirements 
under the International Lending Supervision Act for institutions that 
it regulates.\17\
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    \16\ See 12 U.S.C. 1831o(c).
    \17\ See 12 U.S.C. 3907.
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B. Description and Estimate of Small FDIC-Supervised Institutions 
Affected by the Final Rule

    Under regulations issued by the Small Business Administration,\18\ 
a small entity includes a depository institution with total assets of 
$500 million or less. As of December 31, 2013, the FDIC supervised 
approximately 3,394 small state nonmember banks and 303 small state 
savings associations.
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    \18\ See 13 CFR 121.201.
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C. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The final rule may impact small FDIC-supervised institutions in 
several ways. The final rule affects small FDIC-supervised 
institutions' regulatory capital requirements by changing the 
qualifying criteria for regulatory capital, including required 
deductions and adjustments, and modifying the risk-weight treatment for 
some exposures. The final rule also requires small FDIC-supervised 
institutions to meet a new minimum common equity tier 1 capital to 
risk-weighted assets ratio of 4.5 percent and an increased minimum tier 
1 capital to risk-weighted assets ratio of 6 percent. Under the final 
rule, all FDIC-supervised institutions would remain subject to a 4 
percent minimum tier 1 leverage ratio requirement.\19\ The final rule 
imposes limitations on capital distributions and discretionary bonus 
payments for small FDIC-supervised institutions that do not hold a 
minimum buffer of common equity tier 1 capital above the minimum 
ratios.
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    \19\ Beginning on January 1, 2018, advanced approaches FDIC-
supervised institutions also would be required to satisfy a minimum 
tier 1 capital to total leverage exposure ratio requirement (the 
supplementary leverage ratio) of 3 percent. Advanced approaches 
FDIC-supervised institutions should refer to section 10 of subpart B 
of the final rule.
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    The final rule also includes changes to the general risk-based 
capital requirements that address the calculation of risk-weighted 
assets. Specifically, the final rule:
     Introduces a higher risk weight for certain past due 
exposures and acquisition, development, and construction real estate 
loans;
     Provides a more risk sensitive approach to exposures to 
non-U.S. sovereigns and non-U.S. public sector entities;
     Replaces references to credit ratings with new measures of 
creditworthiness; \20\
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    \20\ Section 939A of the Dodd-Frank Act addresses the use of 
credit ratings in Federal regulations. Accordingly, the final rule 
introduces alternative measures of creditworthiness for foreign 
debt, securitization positions, and resecuritization positions.
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     Provides more comprehensive recognition of collateral and 
guarantees; and
     Provides a more favorable capital treatment for 
transactions cleared through qualifying central counterparties.
    As a result of the new requirements, some small FDIC-supervised 
institutions may have to alter their capital structure (including by 
raising new capital or increasing retention of earnings) in order to 
achieve compliance.
    The FDIC has excluded from its analysis any burden associated with 
changes to the Consolidated Reports of Income and Condition for small 
FDIC-supervised institutions (FFIEC 031 and 041; OMB Nos. 7100-0036, 
3064-0052, 1557-0081). Through the FFIEC, the FDIC and the other 
federal banking agencies published information collection changes in 
the regulatory reporting requirements to reflect the requirements of 
the final rule separately that include associated estimates of 
burden.\21\ The FDIC, and the other federal banking agencies, also 
expects to publish additional information collection changes in the 
regulatory reporting requirements for risk-weighted assets in the 
immediate future. Further analysis of the projected reporting 
requirements imposed by the final rule is located in the Paperwork 
Reduction Act section, below.
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    \21\ 79 FR 2527-2535 (Jan. 14, 2014).
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    Most small FDIC-supervised institutions hold capital in excess of 
the minimum leverage and risk-based capital requirements set forth in 
the final rule. Although the capital requirements under the final rule 
are

[[Page 20757]]

not expected to significantly impact the capital structure of these 
institutions, the FDIC expects that some may change internal capital 
allocation policies and practices to accommodate the requirements of 
the final rule. For example, an institution may elect to raise capital 
to return its excess capital position to the levels maintained prior to 
implementation of the final rule.
    A comparison of the capital requirements in the final rule on a 
fully-implemented basis to the minimum requirements under the general 
risk-based capital rules shows that approximately 74 small FDIC-
supervised institutions with total assets of $500 million or less 
currently do not hold sufficient capital to satisfy the requirements of 
the final rule. Those institutions, which represent approximately three 
percent of small FDIC-supervised institutions, collectively would need 
to raise approximately $233 million in regulatory capital to meet the 
minimum capital requirements under the final rule.
    To estimate the cost to small FDIC-supervised institutions of the 
new capital requirement, the FDIC examined the effect of this 
requirement on capital structure and the overall cost of capital.\22\ 
The cost of financing a small FDIC-supervised institution is the 
weighted average cost of its various financing sources, which amounts 
to a weighted average cost of capital reflecting many different types 
of debt and equity financing. Because interest payments on debt are tax 
deductible, a more leveraged capital structure reduces corporate taxes, 
thereby lowering funding costs, and the weighted average cost of 
financing tends to decline as leverage increases. Thus, an increase in 
required equity capital would--all else equal--increase the cost of 
capital for that institution. This effect could be offset to some 
extent if the additional capital protection caused the risk premium 
demanded by the institution's counterparties to decline sufficiently. 
The FDIC did not try to measure this effect. This increased cost in the 
most burdensome year would be tax benefits foregone: The capital 
requirement, multiplied by the interest rate on the debt displaced and 
by the effective marginal tax rate for the small FDIC-supervised 
institutions affected by the final rule. The effective marginal 
corporate tax rate is affected not only by the statutory Federal and 
state rates, but also by the probability of positive earnings and the 
offsetting effects of personal taxes on required bond yields. Graham 
(2000) considers these factors and estimates a median marginal tax 
benefit of $9.40 per $100 of interest.\23\ So, using an estimated 
interest rate on debt of 6 percent, the FDIC estimated that for 
institutions with total assets of $500 million or less, the annual tax 
benefits foregone on $233 million of capital switching from debt to 
equity is approximately $1.3 million per year ($233 million * 0.06 
(interest rate) * 0.094 (median marginal tax savings)). Averaged across 
74 institutions, the cost is approximately $18,000 per institution per 
year.
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    \22\ See Merton H. Miller, (1995), ``Do the M & M Propositions 
Apply to Banks?'' Journal of Banking & Finance, Vol. 19, pp. 483-
489.
    \23\ See John R. Graham, (2000), How Big Are the Tax Benefits of 
Debt?, Journal of Finance, Vol. 55, No. 5, pp. 1901-1941. Graham 
points out that ignoring the offsetting effects of personal taxes 
would increase the median marginal tax rate to $31.5 per $100 of 
interest.
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    Working with the other agencies, the FDIC also estimated the direct 
compliance costs related to financial reporting as a result of the 
final rule. This aspect of the final rule likely will require 
additional personnel training and expenses related to new systems (or 
modification of existing systems) for calculating regulatory capital 
ratios, in addition to updating risk weights for certain exposures. The 
FDIC assumes that small FDIC-supervised institutions will spend 
approximately $43,000 per institution to update reporting system and 
change the classification of existing exposures. Based on comments from 
the industry, the FDIC increased this estimate from the $36,125 
estimate used in the proposed rules. The FDIC believes that this 
revised cost estimate is more conservative because it has increased 
even though many of the labor-intensive provisions proposed in the NPRs 
have been excluded from the final rule. For example, small FDIC-
supervised institutions have the option to maintain the current 
reporting methodology for gains and losses classified as Available for 
Sale (AFS) thus eliminating the need to update systems. Additionally, 
the exposures for which the risk weights are changing typically 
represent a small portion of assets (less than 5 percent) on 
institutions' balance sheets. Additionally, small FDIC-supervised 
institutions can maintain existing risk weights for residential 
mortgage exposures, eliminating the need for those institutions to 
reclassify existing mortgage exposures. The FDIC estimates that the 
$43,000 in direct compliance costs will represent a burden for 
approximately 34 percent of small FDIC-supervised institutions with 
total assets of $500 million or less. For purposes of this FRFA, the 
FDIC defines significant burden as an estimated cost greater than 2.5 
percent of total non-interest expense or 5 percent of annual salaries 
and employee benefits. The direct compliance costs are the most 
significant cost since few small FDIC-supervised institutions will need 
to raise capital to meet the minimum ratios, as noted above.

D. Steps Taken To Minimize the Economic Impact on Small FDIC-Supervised 
Institutions; Significant Alternatives

    As discussed in the Basel III interim final rule, the FDIC made 
several significant revisions to the proposals in response to public 
comments. For example, under the final rule, non-advanced approaches 
FDIC-supervised institutions will be permitted to elect to exclude 
amounts reported as AOCI when calculating regulatory capital, to the 
same extent currently permitted under the general risk-based capital 
rules.\24\ In addition, for purposes of calculating risk-weighted 
assets under the standardized approach, the FDIC is not adopting the 
proposed treatment for 1-4 family residential mortgages, which would 
have required small FDIC-supervised institutions to categorize 
residential mortgage loans into one of two categories based on certain 
underwriting standards and product features, and then risk weight each 
loan based on its loan-to-value ratio. The FDIC also is retaining the 
120-day safe harbor from recourse treatment for loans transferred 
pursuant to an early default provision. The FDIC believes that these 
changes will meaningfully reduce the compliance burden of the final 
rule for small FDIC-supervised institutions. For instance, in contrast 
to the proposal, the final rule does not require small FDIC-supervised 
institutions to review existing mortgage loan files, purchase new 
software to track loan-to-value ratios, train employees on the new 
risk-weight methodology, or hold more capital for exposures that would 
have been deemed category 2 under the proposed rule. Similarly, the 
option to elect to retain the current treatment of AOCI will reduce the 
burden associated with managing the volatility in regulatory capital 
resulting from changes in the value of a small FDIC-supervised 
institutions' AFS debt securities portfolio due to shifting interest 
rate environments. The FDIC

[[Page 20758]]

believes these modifications substantially reduce compliance burden for 
small FDIC-supervised institutions.
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    \24\ For most non-advanced approaches FDIC-supervised 
institutions, this will be a one-time only election. However, in 
certain limited circumstances, such as a merger of organizations 
that have made different elections, the FDIC may permit the 
resultant entity to make a new election.
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IV. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501-3521), the FDIC 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.
    In conjunction with the proposed rules, the FDIC submitted the 
information collection requirements contained therein to OMB for 
review. In response, OMB filed comments with the FDIC in accordance 
with 5 CFR 1320.11(c) withholding PRA approval and instructing that the 
collection should be resubmitted to OMB at the final rule stage. As 
instructed by OMB, the information collection requirements contained in 
this final rule were submitted by the FDIC to OMB for review in 
connection with the adoption of the Basel III interim final rule under 
the PRA, under OMB Control No. 3064-0153. On January 24, 2014, OMB 
approved the FDIC's information collection request for a six-month 
period under emergency clearance procedures.
    The final rule contains the same information collection 
requirements subject to the PRA that were included in the Basel III 
interim final rule. They are found in sections 324.3, 324.22, 324.35, 
324.37, 324.41, 324.42, 324.62, 324.63 (including tables), 324.121, 
through 324.124, 324.132, 324.141, 324.142, 324.153, 324.173 (including 
tables). Therefore, the FDIC will submit another information collection 
request for extension without change of the currently approved 
collection for the typical three-year period.
    The information collection requirements contained in sections 
324.203, through 324.210, and 324.212 concerning market risk are 
approved by OMB under Control No. 3604-0178.

V. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the FDIC to use 
plain language in all proposed and final rules published after January 
1, 2000. The agencies have sought to present the final rule in a simple 
and straightforward manner and did not receive any comments on the use 
of plain language.

VI. Small Business Regulatory Enforcement Fairness Act of 1996

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' the FDIC must advise the OMB as to whether 
the final rule constitutes a ``major'' rule.\25\ If a rule is major, 
its effectiveness will generally be delayed for 60 days pending 
congressional review.
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    \25\ 5 U.S.C. 801 et seq.
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    In accordance with SBREFA, the FDIC has advised the OMB that this 
final rule is a major rule for the purpose of congressional review. 
Following OMB's review, the FDIC will file the appropriate reports with 
Congress and the Government Accountability Office so that the final 
rule may be reviewed.

List of Subjects in 12 CFR Part 324

    Administrative practice and procedure, Banks, banking, Capital 
Adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

Authority and Issuance

    For the reasons set forth in the preamble, the interim rule 
amending chapter III of title 12 of the Code of Federal Regulations, 
which was published at 78 FR 55340 on September 10, 2013, is adopted as 
a final rule with the following changes:

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

0
1. The authority citation for part 324 continues 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).


0
2. Revise paragraph (6) of the definition of ``financial institution'', 
paragraph (2)(i) of the definition of ``high volatility commercial real 
estate'', and paragraph (1) of the definition of ``netting set'' in 
Sec.  324.2 to read as follows:


Sec.  324.2  Definitions.

* * * * *
    Financial institution means: * * *
    (6) Any other company that the FDIC may determine is a financial 
institution based on activities similar in scope, nature, or operation 
to those of the entities included in paragraphs (1) through (4) of this 
definition.
* * * * *
    High volatility commercial real estate (HVCRE) exposure means: * * 
*
    (2) * * *
    (i) Would qualify as an investment in community development under 
12 U.S.C. 338a or 12 U.S.C. 24 (Eleventh), as applicable, or as a 
``qualified investment'' under 12 CFR part 345, and
* * * * *
    Netting set means: * * *
    (1) That is not subject to such a master netting agreement; or
* * * * *


0
3. Revise the introductory text of paragraph (a) in Sec.  324.3 to read 
as follows:


Sec.  324.3  Operational requirements for counterparty credit risk.

* * * * *
    (a) Cleared transaction. In order to recognize certain exposures as 
cleared transactions pursuant to paragraphs (1)(ii), (iii), or (iv) of 
the definition of ``cleared transaction'' in Sec.  324.2, the exposures 
must meet the applicable requirements set forth in this paragraph (a).
* * * * *

0
4. Revise paragraph (b)(4) in Sec.  324.10 to read as follows:


Sec.  324.10  Minimum capital requirements.

* * * * *
    (b) * * *
    (4) Leverage ratio. An FDIC-supervised institution's leverage ratio 
is the ratio of the FDIC-supervised institution's tier 1 capital to the 
FDIC-supervised institution's average total consolidated assets as 
reported on the FDIC-supervised institution's Call Report minus amounts 
deducted from tier 1 capital under Sec.  324.22(a), (c), and (d).
* * * * *

0
5. Revise paragraph (b)(1)(iv)(C) in Sec.  324.11 to read as follows:


Sec.  324.11  Capital conservation buffer and countercyclical capital 
buffer amount.

* * * * *
    (b) * * *
    (1) * * *
    (iv) * * *
    (C) The location of a securitization exposure is the location of 
the underlying exposures, or, if the underlying exposures are located 
in more than one national jurisdiction, the national jurisdiction where 
the underlying exposures with the largest aggregate unpaid principal 
balance are located. For purposes of this paragraph (b), the location 
of an underlying exposure shall be the location of the

[[Page 20759]]

borrower, determined consistent with paragraph (b)(1)(iv)(A) of this 
section.
* * * * *

0
6. Revise paragraph (c)(2)(i) in Sec.  324.21 to read as follows:


Sec.  324.21  Minority interest.

* * * * *
    (c) * * *
    (2) * * *
    (i) The amount of common equity tier 1 capital the subsidiary must 
hold, or would be required to hold pursuant to paragraph (b) of this 
section, to avoid restrictions on distributions and discretionary bonus 
payments under Sec.  324.11 or equivalent standards established by the 
subsidiary's home country supervisor; or
* * * * *

0
7. Amend Sec.  324.22 as follows:
0
a. Revise the introductory text of paragraph (a).
0
b. Revise the introductory text of paragraph (b)(1).
0
c. Revise the first sentence in paragraph (b)(2)(iv)(C).
0
d. Revise the last sentence, and republish footnote 21, in paragraph 
(c)(4)(i).
0
e. Revise the last sentence in paragraph (c)(5).
0
f. Revise the introductory text of paragraph (d)(1).
0
g. Revise paragraph (d)(3).
0
h. Revise the introductory text of paragraph (e)(3).
0
i. Revise paragraph (e)(5).
0
j. Revise paragraph (h)(2)(iii)(B)(1).
0
k. Revise paragraph (h)(3)(i).
0
l. Revise paragraph (h)(3)(iii)(A).
    The revisions read as follows:


Sec.  324.22  Regulatory capital adjustments and deductions.

    (a) Regulatory capital deductions from common equity tier 1 
capital. An FDIC-supervised institution must deduct from the sum of its 
common equity tier 1 capital elements the items set forth in this 
paragraph (a):
* * * * *
    (b) * * *
    (1) An FDIC-supervised institution must adjust the sum of common 
equity tier 1 capital elements pursuant to the requirements set forth 
in this paragraph (b). Such adjustments to common equity tier 1 capital 
must be made net of the associated deferred tax effects.
* * * * *
    (2) * * *
    (iv) * * *
    (C) An FDIC-supervised institution may, with the prior approval of 
the FDIC, change its AOCI opt-out election under this paragraph (b) in 
the case of a merger, acquisition, or purchase transaction that meets 
the requirements set forth at paragraph (b)(2)(iv)(B) of this section, 
but does not meet the requirements of paragraph (b)(2)(iv)(A). * * *
    (c) * * *
    (4) * * *
    (i) * * * In addition, an FDIC-supervised institution that 
underwrites a failed underwriting, with the prior written approval of 
the FDIC, for the period of time stipulated by the FDIC, is not 
required to deduct a non-significant investment in the capital of an 
unconsolidated financial institution pursuant to this paragraph (c) to 
the extent the investment is related to the failed underwriting.\21\
---------------------------------------------------------------------------

    \21\ Any non-significant investments in the capital of 
unconsolidated financial institutions that do not exceed the 10 
percent threshold for non-significant investments under this section 
must be assigned the appropriate risk weight under subparts D, E, or 
F of this part, as applicable.
---------------------------------------------------------------------------

* * * * *
    (5) * * * In addition, with the prior written approval of the FDIC, 
for the period of time stipulated by the FDIC, an FDIC-supervised 
institution that underwrites a failed underwriting is not required to 
deduct a significant investment in the capital of an unconsolidated 
financial institution pursuant to this paragraph (c) if such investment 
is related to such failed underwriting.
    (d) * * *
    (1) An FDIC-supervised institution must deduct from common equity 
tier 1 capital elements the amount of each of the items set forth in 
this paragraph (d) that, individually, exceeds 10 percent of the sum of 
the FDIC-supervised institution'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).
* * * * *
    (3) For purposes of calculating the amount of DTAs subject to the 
10 and 15 percent common equity tier 1 capital deduction thresholds, an 
FDIC-supervised institution may exclude DTAs and DTLs relating to 
adjustments made to common equity tier 1 capital under Sec.  paragraph 
(b) of this section. An FDIC-supervised institution that elects to 
exclude DTAs relating to adjustments under paragraph (b) of this 
section also must exclude DTLs and must do so consistently in all 
future calculations. An FDIC-supervised institution may change its 
exclusion preference only after obtaining the prior approval of the 
FDIC.
    (e) * * *
    (3) For purposes of calculating the amount of DTAs subject to the 
threshold deduction in paragraph (d) of this section, the amount of 
DTAs that arise from net operating loss and tax credit carryforwards, 
net of any related valuation allowances, and of DTAs arising from 
temporary differences that the FDIC-supervised institution could not 
realize through net operating loss carrybacks, net of any related 
valuation allowances, may be offset by DTLs (that have not been netted 
against assets subject to deduction pursuant to paragraph (e)(1) of 
this section) subject to the conditions set forth in this paragraph 
(e).
* * * * *
    (5) An FDIC-supervised institution must net DTLs against assets 
subject to deduction under this section in a consistent manner from 
reporting period to reporting period. An FDIC-supervised institution 
may change its preference regarding the manner in which it nets DTLs 
against specific assets subject to deduction under this section only 
after obtaining the prior approval of the FDIC.
* * * * *
    (h) * * *
    (2) * * *
    (iii) * * *
    (B) * * *
    (1) The highest stated investment limit (in percent) for 
investments in the FDIC-supervised institution's own capital 
instruments or the capital of unconsolidated financial institutions as 
stated in the prospectus, partnership agreement, or similar contract 
defining permissible investments of the investment fund; or
* * * * *
    (3) * * *
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position has a residual maturity of at 
least one year (maturity requirement); or
* * * * *
    (iii) * * *
    (A) An FDIC-supervised institution may only net a short position 
against a long position in the FDIC-supervised institution's own 
capital instrument under paragraph (c)(1) of this section if the short 
position involves no counterparty credit risk.
* * * * *

0
8. Revise the introductory text of paragraph (k) in Sec.  324.32 to 
read as follows:


Sec.  324.32  General risk weights.

* * * * *

[[Page 20760]]

    (k) Past due exposures. Except for a sovereign exposure or a 
residential mortgage exposure, an FDIC-supervised institution must 
determine a risk weight for an exposure that is 90 days or more past 
due or on nonaccrual according to the requirements set forth in this 
paragraph (k).
* * * * *

0
9. Revise paragraph (a)(1)(ii)(B) in Sec.  324.34 to read as follows:


Sec.  324.34  OTC derivative contracts.

    (a) * * *
    (1) * * *
    (ii) * * *
    (B) For purposes of calculating either the PFE under this paragraph 
(a) or the gross PFE under paragraph (a)(2) of this section for 
exchange rate contracts and other similar contracts in which the 
notional principal amount is equivalent to the cash flows, notional 
principal amount is the net receipts to each party falling due on each 
value date in each currency.
* * * * *

0
10. Amend Sec.  324.35 as follows:
0
a. Revise paragraph (b)(2)(i)(A).
0
b. Revise paragraph (b)(2)(ii)(A).
0
c. Revise paragraph (c)(2)(i)(A).
0
d. Revise paragraph (c)(2)(ii)(A).
0
e. Revise paragraph (d)(3)(i)(F).
0
f. Designate the text following the formula in paragraph (d)(3)(ii) as 
paragraph (d)(3)(ii)(A).
0
g. Revise the second sentence in paragraph (d)(3)(ii)(A).
    The revisions read as follows:


Sec.  324.35  Cleared transactions.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (A) The exposure amount for the derivative contract or netting set 
of derivative contracts, calculated using the methodology used to 
calculate exposure amount for OTC derivative contracts under Sec.  
324.34; plus
* * * * *
    (ii) * * *
    (A) The exposure amount for the repo-style transaction calculated 
using the methodologies under Sec.  324.37(c); plus
* * * * *
    (c) * * *
    (2) * * *
    (i) * * *
    (A) The exposure amount for the derivative contract, calculated 
using the methodology to calculate exposure amount for OTC derivative 
contracts under Sec.  324.34; plus
* * * * *
    (ii) * * *
    (A) The exposure amount for repo-style transactions calculated 
using methodologies under Sec.  324.37(c); plus
* * * * *
    (d) * * *
    (3) * * *
    (i) * * *
    (F) Where a QCCP has provided its KCCP, an FDIC-
supervised institution must rely on such disclosed figure instead of 
calculating KCCP under this paragraph (d), unless the FDIC-
supervised institution determines that a more conservative figure is 
appropriate based on the nature, structure, or characteristics of the 
QCCP.
* * * * *
    (ii) * * *
    (A) * * * For purposes of this paragraph (d), for derivatives 
ANet is defined in Sec.  324.34(a)(2)(ii) and for repo-style 
transactions, ANet means the exposure amount as defined in 
Sec.  324.37(c)(2) using the methodology in Sec.  324.37(c)(3);
* * * * *

0
11. Revise paragraph (c)(4)(i)(A) in Sec.  324.37 to read as follows:


Sec.  324.37  Collateralized transactions.

* * * * *
    (c) * * *
    (4) * * *
    (i) * * *
    (A) An FDIC-supervised institution must use a 99th percentile one-
tailed confidence interval.
* * * * *

0
12. Revise the first sentence in paragraph (b) in Sec.  324.41 to read 
as follows:


Sec.  324.41  Operational requirements for securitization exposures.

* * * * *
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, an FDIC-supervised institution may recognize 
for risk-based capital purposes the use of a credit risk mitigant to 
hedge underlying exposures only if each condition in this paragraph (b) 
is satisfied. * * *
* * * * *

0
13. Amend Sec.  324.42 as follows:
0
a. Revise the second sentence in paragraph (h)(1)(iv).
0
b. Revise the first sentence in paragraph (i)(1).
    The revisions read as follows:


Sec.  324.42  Risk-weighted assets for securitization exposures.

* * * * *
    (h) * * *
    (1) * * *
    (iv) * * * For purposes of determining whether an FDIC-supervised 
institution is well capitalized for purposes of this paragraph (h), the 
FDIC-supervised institution's capital ratios must be calculated without 
regard to the capital treatment for transfers of small-business 
obligations under this paragraph (h).
* * * * *
    (i) * * *
    (1) Protection provider. An FDIC-supervised institution may assign 
a risk weight using the SSFA in Sec.  324.43 to an n\th\-to-default 
credit derivative in accordance with this paragraph (i). * * *
* * * * *

0
14. Amend Sec.  324.43 as follows:
0
a. Revise the last sentence in the introductory text of paragraph (c).
0
b. Revise paragraph (e)(3)(i).
    The revisions read as follows:


Sec.  324.43  Simplified supervisory formula approach (SSFA) and the 
gross-up approach.

* * * * *
    (c) * * * The risk weight assigned to a securitization exposure, or 
portion of a securitization exposure, as appropriate, is the larger of 
the risk weight determined in accordance with this paragraph (c) or 
paragraph (d) of this section and a risk weight of 20 percent.
* * * * *
    (e) * * *
    (3) * * *
    (i) The exposure amount of the FDIC-supervised institution's 
securitization exposure; and
* * * * *

0
15. Revise paragraph (a)(3)(i)(A) in Sec.  324.51 to read as follows:


Sec.  324.51  Introduction and exposure measurement.

    (a) * * *
    (3) * * *
    (i) * * *
    (A) The policy owner of a separate account an amount equal to the 
shortfall between the fair value and cost basis of the separate account 
when the policy owner of the separate account surrenders the policy; or
* * * * *

0
16. Revise the last sentence in paragraph (a) of Sec.  324.63 to read 
as follows:


Sec.  324.63  Disclosures by FDIC-supervised institutions described in 
Sec.  324.61.

    (a) * * * The FDIC-supervised institution must make these 
disclosures publicly available for each of the last three years (that 
is, twelve quarters) or such shorter period beginning on January 1, 
2015.
* * * * *

[[Page 20761]]


0
17. Revise the last sentence in paragraph (a) of Sec.  324.124 to read 
as follows:


Sec.  324.124  Merger and acquisition transitional arrangements.

    (a) * * * If an FDIC-supervised institution relies on this 
paragraph (a), the FDIC-supervised institution must disclose publicly 
the amounts of risk-weighted assets and qualifying capital calculated 
under this subpart for the acquiring FDIC-supervised institution and 
under subpart D of this part for the acquired company.
* * * * *

0
18. Revise the first sentence of paragraph (e)(4) in Sec.  324.131 to 
read as follows:


Sec.  324.131  Mechanics for calculating total wholesale and retail 
risk-weighted assets.

* * * * *
    (e) * * *
    (4) Non-material portfolios of exposures. The risk-weighted asset 
amount of a portfolio of exposures for which the FDIC-supervised 
institution has demonstrated to the FDIC's satisfaction that the 
portfolio (when combined with all other portfolios of exposures that 
the FDIC-supervised institution seeks to treat under this paragraph 
(e)) is not material to the FDIC-supervised institution is the sum of 
the carrying values of on-balance sheet exposures plus the notional 
amounts of off-balance sheet exposures in the portfolio. * * *

0
19. Amend Sec.  324.132 as follows:
0
a. Revise the second sentence in paragraph (d)(2)(iv)(A).
0
b. Revise the second to last sentence in paragraph (d)(5)(iii)(B).
    The revisions read as follows:


Sec.  324.132  Counterparty credit risk of repo-style transactions, 
eligible margin loans, and OTC derivative contracts.

* * * * *
    (d) * * *
    (2) * * *
    (iv) * * *
    (A) * * * For purposes of this paragraph (d), CVA does not include 
any adjustments to common equity tier 1 capital attributable to changes 
in the fair value of the FDIC-supervised institution's liabilities that 
are due to changes in its own credit risk since the inception of the 
transaction with the counterparty. * * *
* * * * *
    (5) * * *
    (iii) * * *
    (B) * * * If the periodicity of the receipt of collateral is N-
days, the minimum margin period of risk is the minimum margin period of 
risk under this paragraph (d) plus N minus 1. * * *
* * * * *

0
20. Revise paragraph (d)(3)(i)(F) in Sec.  324.133 to read as follows:


Sec.  324.133  Cleared transactions.

* * * * *
    (d) * * *
    (3) * * *
    (i) * * *
    (F) Where a QCCP has provided its KCCP, an FDIC-
supervised institution must rely on such disclosed figure instead of 
calculating KCCP under this paragraph (d), unless the FDIC-
supervised institution determines that a more conservative figure is 
appropriate based on the nature, structure, or characteristics of the 
QCCP.
* * * * *

0
21. Revise Sec.  324.142 as follows:

0
a. Revise the second sentence in paragraph (k)(1)(iv).
0
b. Revise the first sentence in paragraph (l)(1).
0
c. Revise paragraph (m)(2)(ii)(B).
    The revisions read as follows:


Sec.  324.142  Risk-weighted assets for securitization exposures.

* * * * *
    (k) * * *
    (1) * * *
    (iv) * * * For purposes of determining whether an FDIC-supervised 
institution is well capitalized for purposes of this paragraph (k), the 
FDIC-supervised institution's capital ratios must be calculated without 
regard to the capital treatment for transfers of small-business 
obligations with recourse specified in paragraph (k)(1) of this 
section.
* * * * *
    (l) * * *
    (1) Protection provider. An FDIC-supervised institution must 
determine a risk weight using the supervisory formula approach (SFA) 
pursuant to Sec.  324.143 or the simplified supervisory formula 
approach (SSFA) pursuant to Sec.  324.144 for an nth-to-default credit 
derivative in accordance with this paragraph (l). * * *
* * * * *
    (m) * * *
    (2) * * *
    (ii) * * *
    (B) If the FDIC-supervised institution purchases the credit 
protection from a counterparty that is a securitization SPE, the FDIC-
supervised institution must determine the risk weight for the exposure 
according to this section, including paragraph (a)(5) of this section 
for a credit derivative that has a first priority claim on the cash 
flows from the underlying exposures of the securitization SPE 
(notwithstanding amounts due under interest rate or currency derivative 
contracts, fees due, or other similar payments).
0
22. Revise the last sentence in the introductory text of paragraph (c) 
in Sec.  324.144 to read as follows:


Sec.  324.144  Simplified supervisory formula approach (SSFA).

* * * * *
    (c) * * * The risk weight assigned to a securitization exposure, or 
portion of a securitization exposure, as appropriate, is the larger of 
the risk weight determined in accordance with this paragraph (c), 
paragraph (d) of this section, and a risk weight of 20 percent.
* * * * *
0
23. Revise the last sentence in the introductory text of paragraph (e) 
of Sec.  324.210 to read as follows:


Sec.  324.210  Standardized measurement method for specific risk.

* * * * *
    (e) * * * To determine the specific risk add-on of individual 
equity positions, an FDIC-supervised institution must multiply the 
absolute value of the current fair value of each net long or net short 
equity position by the appropriate specific risk-weighting factor as 
determined under this paragraph (e):
* * * * *

0
24. Revise the last two sentences in the introductory text of paragraph 
(c) of Sec.  324.211 to read as follows:


Sec.  324.211  Simplified supervisory formula approach (SSFA).

* * * * *
    (c) * * * The values of parameters A and D, relative to 
KA determine the specific risk-weighting factor assigned to 
a position as described in this paragraph (c) and paragraph (d) of this 
section. The specific risk-weighting factor assigned to a 
securitization position, or portion of a position, as appropriate, is 
the larger of the specific risk-weighting factor determined in 
accordance with this paragraph (c), paragraph (d) of this section, and 
a specific risk-weighting factor of 1.6 percent.
* * * * *

    Dated at Washington, DC, this 8th day of April 2014.

    By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014-08259 Filed 4-11-14; 8:45 am]
BILLING CODE 6714-01-P