Regulatory Capital Rules: The Federal Reserve Board's Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer, 63682-63688 [2016-21970]
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III. Policy Statement
IV. Administrative Law Matters
A. Use of Plain Language
B. Paperwork Reduction Act Analysis
C. Regulatory Flexibility Act Analysis
PART 983—PISTACHIOS GROWN IN
CALIFORNIA, ARIZONA, AND NEW
MEXICO
1. The authority citation for 7 CFR
part 983 continues to read as follows:
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Authority: 7 U.S.C. 601–674.
2. Section 983.253 is revised to read
as follows:
■
§ 983.253
Assessment rate.
On and after September 1, 2016, an
assessment rate of $0.0010 per pound is
established for California, Arizona, and
New Mexico pistachios.
Dated: September 12, 2016.
Elanor Starmer,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2016–22248 Filed 9–15–16; 8:45 am]
BILLING CODE P
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket No. R–1529; RIN 7100 AE–43]
Regulatory Capital Rules: The Federal
Reserve Board’s Framework for
Implementing the U.S. Basel III
Countercyclical Capital Buffer
Board of Governors of the
Federal Reserve System.
ACTION: Final policy statement.
AGENCY:
The Board of Governors of the
Federal Reserve System (Board) is
adopting a final policy statement (Policy
Statement) describing the framework
that the Board will follow under its
Regulation Q in setting the amount of
the U.S. countercyclical capital buffer
for advanced approaches bank holding
companies, savings and loan holding
companies, and state member banks.
DATES: The Policy Statement is effective
October 14, 2016.
FOR FURTHER INFORMATION CONTACT:
William Bassett, Deputy Associate
Director, (202) 736–5644, or Rochelle
Edge, Deputy Associate Director, (202)
452–2339, Division of Financial
Stability; Sean Campbell, Associate
Director, (202) 452–3760, Division of
Banking Supervision and Regulation;
Benjamin W. McDonough, Special
Counsel, (202) 452–2036, Mark Buresh,
Senior Attorney, (202) 452–5270, or
Mary Watkins, Attorney, (202) 452–
3722, Legal Division.
SUPPLEMENTARY INFORMATION:
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SUMMARY:
Table of Contents
I. Background
II. Summary of Comments on the Proposal
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I. Background
In December 2015, the Board invited
public comment on a proposed policy
statement describing the framework that
the Board would use to set the amount
of the U.S. countercyclical capital buffer
(CCyB) under the Board’s capital rules
(Regulation Q).1 The CCyB is a
macroprudential policy tool that the
Board can increase during periods of
rising vulnerabilities in the financial
system and reduce when vulnerabilities
recede or when the release of the CCyB
would promote financial stability.2 The
CCyB supplements the minimum capital
requirements and other capital buffers
included in Regulation Q, which
themselves are designed to provide
substantial resilience to unexpected
losses created by normal fluctuations in
economic and financial conditions.
The proposed policy statement
outlined the factors the Board would
consider in setting the level of the
CCyB, and the indicators it would
monitor to help determine whether an
adjustment to the CCyB is appropriate.
The proposed policy statement also
described the effects the Board will
monitor in determining whether the
CCyB is achieving the desired purposes
of the CCyB.
The Board received two comments on
the proposed policy statement.
Commenters raised concerns about the
process that the Board would follow in
setting the CCyB pursuant to the policy
statement, the potential economic
impact of the CCyB, and the efficacy
and appropriateness of the CCyB as a
policy tool. Commenters also made
various specific suggestions as to the
indicators and standards that the Board
should consider in determining whether
to activate the CCyB.
After reviewing comments, the Board
is revising the final Policy Statement to
clarify the following key items: (1) That
the Board expects that the CCyB will be
activated when systemic vulnerabilities
are meaningfully above normal and that
1 12 CFR part 217. See also 81 FR 5661 (February
3, 2016).
2 See 12 CFR 217.11(b). Implementation of the
CCyB also helps respond to the provision in the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) that the agencies
‘‘shall seek to make such [capital] requirements
countercyclical, so that the amount of capital
required to be maintained by a company increases
in times of economic expansion and decreases in
times of economic contraction, consistent with the
safety and soundness of the company.’’ See 12
U.S.C. 1467a; 12 U.S.C. 1844; 12 U.S.C. 3907 (as
amended by section 616 of the Dodd-Frank Act).
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the Board generally intends to increase
the CCyB gradually, (2) that the Board
expects to remove or reduce the CCyB
when the conditions that led to its
activation abate or lessen and when the
release of CCyB capital would promote
financial stability. The discussion in
Sections II and IV below responds to
comments on the proposal regarding the
Board’s process for setting the CCyB. In
particular, as indicated below, the Board
would seek comment on any proposed
change to the CCyB amount and include
a discussion of the reasons for the
change.
II. Purpose of CCyB
The CCyB is designed to increase the
resilience of large banking organizations
when the Board sees an elevated risk of
above-normal losses. Increasing the
resilience of large banking organizations
should, in turn, improve the resilience
of the broader financial system. Abovenormal losses often follow periods of
rapid asset price appreciation or credit
growth that are not well supported by
underlying economic fundamentals. As
stated in the proposed policy statement,
the circumstances in which the Board
would most likely use the CCyB as a
supplemental, macroprudential tool to
augment minimum capital requirements
and other capital buffers would be to
address circumstances when systemic
vulnerabilities are somewhat above
normal. By requiring institutions to hold
a larger capital buffer during periods
when systemic risk is increasing and
reducing the buffer requirement as
vulnerabilities diminish, the CCyB also
has the potential to moderate
fluctuations in the supply of credit over
time.
The CCyB functions as an expansion
of the Capital Conservation Buffer
(CCB), which is applicable to all
banking organizations subject to
Regulation Q. To avoid limits on capital
distributions and certain discretionary
bonus payments,3 the CCB requires that
a banking organization hold a buffer of
common equity tier 1 capital that is at
least 2.5 percent of the risk-weighted
assets in addition to the minimum riskbased capital ratios. The CCB is divided
into quartiles, each associated with
increasingly stringent limitations on
capital distributions and certain
discretionary bonus payments as the
firm’s risk-based capital ratios approach
regulatory minimums.4 The CCyB is an
additional, countercyclical buffer that
has the same limitations on dividends
and capital distributions as the CCB.
3 12
4 12
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CFR 217.11(b)(1)(i).
CFR 217.11(a).
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The CCyB was introduced for large,
internationally active banking
organizations (advanced approaches
institutions) in June 2013 as part of the
revised regulatory capital rules issued
by the Board in coordination with the
Office of the Comptroller of the
Currency (OCC) and the Federal Deposit
Insurance Corporation (FDIC).5 The
Board’s CCyB rule applies to bank
holding companies, savings and loan
holding companies, and state member
banks subject to the advanced
approaches capital rules (advanced
approaches institutions).6 The advanced
approaches capital rules generally apply
to banking organizations with greater
than $250 billion in total assets or $10
billion in on-balance-sheet foreign
exposure and to any depository
institution subsidiary of such banking
organizations.7
Because the CCyB is intended to
address elevated risks from activity that
is not well supported by underlying
economic fundamentals, the location of
the activity and the economic
conditions where the activity take place
provide important context. Accordingly,
the CCyB applies based on the location
of private-sector credit exposures by
national jurisdiction.8 Specifically, the
applicable CCyB amount for a banking
organization is equal to the weighted
average of CCyB amounts established by
the Board for the national jurisdictions
where the banking organization has
private-sector credit exposures.9 The
CCyB amount applicable to a banking
organization is weighted by jurisdiction
according to the firm’s risk-weighted
private-sector credit exposures for a
specific jurisdiction as a percentage of
the firm’s total risk-weighted privatesector credit exposures.10
Regulation Q established the initial
CCyB amount with respect to privatesector credit exposures located in the
United States (U.S.-based credit
exposures) at zero percent.11 The CCyB
5 See 78 FR 62018 (October 11, 2013) (Board and
OCC); 79 FR 20754 (April 14, 2014) (FDIC). The
Board’s Regulation Q applies generally to bank
holding companies with more than $1 billion in
total consolidated assets and savings and loan
holding companies with more than $1 billion in
total consolidated assets that are not substantially
engaged in commercial or insurance underwriting
activities. See 12 CFR 217.1(c)(1).
6 An advanced approaches institution is subject to
the CCyB regardless of whether it has completed the
parallel run process and received notification from
its primary Federal supervisor pursuant to section
217.121(d) of Regulation Q.
7 12 CFR 217.100(b)(1).
8 12 CFR 217.11(b)(1). The Board may adjust the
CCyB amount to reflect decisions made by foreign
jurisdictions. See 12 CFR 217.11(b)(3).
9 12 CFR 217.11(b)(1).
10 Id.
11 The Board affirmed the CCyB amount at the
current level of 0 percent contemporaneously with
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will not exceed 2.5 percent of riskweighted assets. This cap on the CCyB
will be phased in, with the maximum
potential amount of the CCyB for U.S.based credit exposures 0.625 percentage
points in 2016, 1.25 percentage points
in 2017, 1.875 percentage points in
2018, and 2.5 percentage points in 2019
and thereafter.12
In order to provide banking
organizations with sufficient time to
adjust to any change in the CCyB,
Regulation Q provides that a
determination to increase the
countercyclical capital buffer amount
generally will be effective 12 months
from the date of announcement.
However, economic conditions may
warrant an earlier or later effective
date.13 For example, it may be
appropriate for an increase in the
countercyclical capital buffer amount to
take effect 12 months from the date that
the Board proposes the increase, rather
than 12 months from the issuance of a
final rule.
Regulation Q states that a decision by
the Board to decrease the amount of the
CCyB for U.S.-based credit exposures
would become effective the day after the
Board decides to decrease the CCyB or
the earliest date permissible under
applicable law or regulation, whichever
is later.14 Moreover, the amount of the
CCyB for U.S.-based credit exposures
will return to 0 percent 12 months after
the effective date of any CCyB
adjustment, unless the Board announces
a decision to maintain the current
amount or adjust it again before the
expiration of the 12-month period.15
The Board expects to make decisions
about the appropriate level of the CCyB
on U.S.-based credit exposures jointly
with the OCC and FDIC. In addition, the
Board expects that the CCyB amount for
U.S.-based credit exposures would be
the same for covered insured depository
institutions as for covered depository
institution holding companies. The
CCyB is designed to take into account
the broad macroeconomic and financial
environment in which banking
organizations function and the degree to
which that environment impacts the
resilience of advanced approaches
institutions. Therefore, the Board’s
determination of the appropriate level of
the CCyB for U.S.-based credit
exposures would be most directly
linked to the condition of the overall
financial environment rather than the
issuance of the proposed policy statement. See
http://www.federalreserve.gov/newsevents/press/
bcreg/20151221b.htm.
12 12 CFR 217.300(a)(2).
13 12 CFR 217.11(b)(2)(v)(A).
14 12 CFR 217.11(b)(2)(v)(B).
15 12 CFR 217.11(b)(2)(vi).
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condition of any individual banking
organization. However, the impact of
the CCyB requirement on a particular
banking organization will vary based on
the organization’s particular
composition of private-sector credit
exposures located across national
jurisdictions.
III. Description of the Final Policy
Statement
The final policy statement (Policy
Statement) describes the framework that
the Board would follow in setting the
amount of the CCyB for U.S.-based
credit exposures. The framework
consists of a set of principles for
translating assessments of financial
system vulnerabilities that are regularly
undertaken at the Board into the
appropriate level of the CCyB. Those
assessments are informed by a broad
array of quantitative indicators of
financial and economic performance
and a set of empirical models. In
addition, the framework includes a
discussion of how the Board would
assess whether the CCyB is the most
appropriate policy instrument (among
available policy instruments) to address
the highlighted financial system
vulnerabilities.
The Policy Statement is organized as
follows. Section 1 provides background
on the Policy Statement. Section 2 is an
outline of the Policy Statement and
describes its scope. Section 3 provides
a broad description of the objectives of
the CCyB, including a description of the
ways in which the CCyB is expected to
protect large banking organizations and
the broader financial system. Section 4
provides a broad description of the
factors that the Board considers in
setting the CCyB, including specific
financial system vulnerabilities and
types of quantitative indicators of
financial and economic performance,
and outlines of empirical models the
Board may use as inputs to that
decision. Further, section 4 describes a
set of principles that the Board expects
to use for combining judgmental
assessments with quantitative indicators
to determine the appropriate level of the
CCyB. Section 5 discusses how the
Board will communicate the level of the
CCyB and any changes to the CCyB.
Section 6 describes how the Board plans
to monitor the effects of the CCyB,
including what indicators and effects
will be monitored.
The Board has revised the Policy
Statement to clarify that (1) the Board
expects that the CCyB will be activated
when systemic vulnerabilities are
meaningfully above normal and the
Board generally intends to increase the
CCyB gradually, and (2) the Board
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expects to remove or reduce the CCyB
when the conditions that led to its
activation abate or lessen and when
release of CCyB capital would promote
financial stability. These changes were
made to sections 1, 3, and 4. In addition,
minor clarifying and technical edits
were made throughout the Policy
Statement.
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IV. Changes To Address Comments on
the Proposal
As noted, the Board received two
comments regarding the proposed
policy statement. Commenters
expressed concerns about the process
that the Board would follow in setting
the CCyB pursuant to the Policy
Statement, the potential economic
impact of the CCyB, and the appropriate
uses of the CCyB.
A. Comments Regarding the Board’s
Process for Setting the CCyB
Commenters expressed concern that
the Board would apply the CCyB
without completing the procedures
required by the Administrative
Procedure Act (APA).16 In particular,
commenters argued that notice and
comment rulemaking procedures should
be used to increase the CCyB above
zero, and for each future increase.
The Board’s rule implementing the
CCyB specifically provides that the
Board will adjust the CCyB amount in
accordance with applicable law.17 In
accordance with this provision of its
rules, the Board expects to set the level
of the CCyB above zero through a public
notice and comment rulemaking, or
through an order issued in accordance
with the APA that provides each
affected institution with actual notice
and an opportunity for comment. In
setting the level of the CCyB above zero
through a public rulemaking, the Board
generally expects that the notice and
comment period would be at least 30
days. The Policy Statement is intended
to provide insight on the framework that
the Board will use to determine the
appropriate level of the CCyB, not to
alter procedures necessary to increase
the CCyB in the future.
A commenter suggested that the
Board should commit to act jointly with
the OCC and FDIC in any decision to
activate the CCyB. Consistent with
Regulation Q and the proposal, the
Board expects that any decision to
adjust the CCyB will be made jointly by
the OCC, FDIC, and Board. However, the
Board will make decisions regarding the
appropriate amount of the CCyB for the
firms that it supervises based on its
16 5
U.S.C. 551 et seq.
CFR 217.11(b)(2)(ii).
17 12
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judgment of the facts and circumstances
presented.
A commenter argued that the Board
generally should not reciprocate
decisions by foreign jurisdictions
regarding the level of the CCyB in such
jurisdictions. If the Board did decide to
incorporate CCyB decisions of foreign
jurisdictions, the commenter argued that
the Board should implement a de
minimis threshold below which U.S.
banking organizations would not have
to recognize the CCyB established in the
foreign jurisdiction. The Policy
Statement describes the framework that
the Board will follow in determining the
CCyB for U.S. private-sector credit
exposures. The Board will address
separately CCyB adjustments made by
foreign jurisdictions as needed.
B. Comments Regarding the Calibration
of, Inputs Into, and Impact of the CCyB
A commenter argued that the CCyB
should be increased only when credit
growth was considered excessive, rather
than when systemic vulnerabilities were
somewhat above normal, as suggested
by the proposal.
The CCyB is a macroprudential policy
tool intended to strengthen banking
organizations’ resilience against the
build-up of systemic vulnerabilities and
reduce fluctuations in the supply of
credit. As stated in the proposed policy
statement, activation of the CCyB at a
time when systemic vulnerabilities are
somewhat above normal reflects the
prophylactic and countercyclical goals
of this tool as well as the process and
12-month phase-in period that generally
applies before any activation of the
CCyB amount would take effect.
Moreover, activation of the CCyB at a
time when systemic vulnerabilities are
somewhat above normal rather than
delaying until systemic vulnerabilities
are excessive would allow gradual
increases in the CCyB, which would
provide additional flexibility (over and
above the 12-month phase-in period) to
banking organizations as they adjust to
any increases. That is, activation of the
CCyB at a time when systemic
vulnerabilities are somewhat above
normal would likely not be associated
with an activation of the CCyB to the
upper end of its possible range. Further,
the Board considers ‘‘systemic
vulnerabilities’’ to be the appropriate
reference point because the CCyB could
be an effective tool in addressing a
variety of financial system
vulnerabilities, not merely credit
growth.
To further clarify when the Board
would expect to increase the CCyB, the
Policy Statement has been modified to
state that the CCyB would be increased
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when systemic vulnerabilities are
‘‘meaningfully above normal.’’ For these
purposes ‘‘meaningfully above normal’’
would reflect an assessment by the
Board that financial system
vulnerabilities were above normal and
were either already at, or expected to
build to, levels sufficient to generate
material unexpected losses in the event
of an unfavorable development in
financial markets or the economy. The
text in the policy statement has also
been modified to clarify that systemic
vulnerabilities being meaningfully
above normal would correspond to the
Board beginning to increase the CCyB
above zero and to provide additional
discussion of when and how the Board
would deactivate or reduce the CCyB.
Commenters argued that the Board
should conduct and release analyses of
the economic impact and costs and
benefits of the CCyB in connection with
the proposed policy statement as well as
with any decision to increase the level
of the CCyB. Commenters contended
that such analyses should take into
account other existing prudential
regulation, including other regulatory
capital requirements, and consider
whether alternative policy tools may be
more effective for a particular situation.
The commenters expressed concern that
there could be material adverse
economic consequences to activation of
the CCyB. Similarly, one commenter
argued that the Board should conduct a
comprehensive analysis of the costs and
benefits of regulatory capital
requirements, including the CCyB, as
well as prudential liquidity regulations
and regulations established by other
agencies.
Commenters also argued that the
Board should provide additional detail
regarding the data, models, and metrics
that would inform a decision to activate
the CCyB, as well as the standards that
would be applied to determine the
calibration of the CCyB. Additionally,
commenters raised issues with certain
of the indicators identified in the Policy
Statement. For instance, a commenter
cautioned that no academic consensus
had been reached with regard to the
usefulness of a credit-to-GDP ratio gap
as an indicator of economic conditions.
The final Policy Statement provides
additional information to the public
regarding the framework that the Board
will follow in setting the CCyB. The
Policy Statement itself does not change
either the CCyB or the capital
requirements applicable to advanced
approaches banking organizations. As
described above, the Board generally
would expect to provide notice to the
public and seek comment on the
proposed level of the CCyB as part of
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making any final determination to
change the CCyB. Any proposed change
in the level of the CCyB would include
a discussion of the reasons for the
proposed action as determined by the
particular circumstances.
One commenter stated that the FFIEC
009 reporting form requires firms to
report information that is not aligned
with the information needed to
determine the CCyB amount applicable
to a firm and that the Board should
amend the FFIEC 009 to align with
CCyB in order to reduce burden. The
Board may consider reporting for
purposes of the CCyB at a later date.
The Board recognizes that no single
data point or indicator can provide a
comprehensive understanding of
economic conditions or systemic
vulnerabilities. The items for
consideration listed in the Policy
Statement are a non-exclusive list of
quantitative and qualitative indicators
that may inform the Board’s assessment
of economic conditions and
determinations regarding the
appropriate level of the CCyB. As
explained in the proposed and final
Policy Statement, some academic
research has shown the credit-to-GDP
ratio to be useful in identifying periods
of financial excess followed by a period
of crisis. However, the Board does not
expect this indicator to be used in
isolation. Furthermore, as noted, any
proposal to increase the CCyB will
include a discussion of the indicators
informing the proposal, and will seek
comment on the interpretation of these
indicators. As noted above, the Board
expects that the types of indicators and
models considered will evolve over
time, based on advances in research and
the experience of the Board with this
tool.
Commenters argued that the CCyB
would not be effective in containing
asset bubbles or excessive credit risks
because these tend to occur within
sectors as opposed to across the
financial system equally. A commenter
suggested that targeted guidance for
particular sectors would likely be more
effective at containing risks of this type
than a broad based capital charge
imposed by the CCyB.
Commenters also argued that the
CCyB would not be effective in
addressing many systemic
vulnerabilities because it applies only to
advanced approaches banking
organizations, which, while significant,
represent a relatively small percentage
of the total provision of credit in the
U.S. economy. A commenter contended
that activation of the CCyB might
exacerbate risk in the financial system
by shifting lending activity away from
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B. Paperwork Reduction Act Analysis
In accordance with the requirements
of the Paperwork Reduction Act of 1995
(44 U.S.C. 3506), the Board has
reviewed the Policy Statement to assess
any information collections. There are
no collections of information as defined
by the Paperwork Reduction Act in the
proposal.
undue burdens on, or have unintended
consequences for, small banking
organizations. The Board received one
comment on this aspect of the proposal,
which argued that the Board’s initial
regulatory flexibility analysis was
flawed in asserting that small banking
organizations would not be affected by
the proposal because of the broader
impact that the CCyB could have on
lending and economic growth in
general.
This Policy Statement will be added
as an appendix to Regulation Q to
describe the framework that the Board
will follow in setting the amount of the
CCyB for U.S.-based credit exposures.
The CCyB only applies to bank holding
companies, savings and loan holding
companies, and state member banks that
are advanced approaches Boardregulated institutions for purposes of
the Board’s Regulation Q (advanced
approaches banking organizations). The
Regulatory Flexibility Act requires
consideration only of the impact of the
proposed rule on small entities that are
subject to the requirements of the rule,
as opposed to small entities indirectly
affected by the rule through its impact
on the national economy.18 Generally,
advanced approaches banking
organizations are those with total
consolidated assets of $250 billion or
more, that have total consolidated onbalance sheet foreign exposures of $10
billion or more, that have subsidiary
depository institutions that are
advanced approaches institutions, or
that elect to use the advanced
approaches framework.19 Under
regulations issued by the Small
Business Administration, a small entity
includes a depository institution, bank
holding company, or savings and loan
holding company with assets of $550
million or less (small banking
organizations).20 As of June 30, 2016,
there were approximately 3,204 small
bank holding companies, 157 small
savings and loan holding companies,
and 594 small state member banks.
Banking organizations that are subject to
the final rule therefore are expected to
substantially exceed the $550 million
asset threshold at which a banking
entity would qualify as a small bank
C. Regulatory Flexibility Act Analysis
The Board is providing a final
regulatory flexibility analysis with
respect to this Policy Statement. The
Regulatory Flexibility Act, 5 U.S.C. 601
et seq. (RFA), generally requires that an
agency provide a regulatory flexibility
analysis in connection with a final
rulemaking.
The Board sought comment on
whether the proposal would impose
18 See e.g., Aeronautical Repair Station
Association v. Federal Aviation Administration, 494
F.3d 161, 174–178 (D.C. Cir. 2007).
19 See 12 CFR 217.100.
20 See 13 CFR 121.201. Effective July 14, 2014, the
Small Business Administration revised the size
standards for banking organizations to $550 million
in assets from $500 million in assets. 79 FR 33647
(June 12, 2014). The Small Business
Administration’s June 12, 2014, interim final rule
was adopted without change as a final rule by the
Small Business Administration on January 12, 2016.
81 FR 3949 (January 25, 2016).
large and closely regulated commercial
banks and into the shadow banking
system. In addition, a commenter
argued that advanced approaches
banking organizations were subject to
significant capital, liquidity, and other
prudential requirements such that they
were likely to be resilient in the event
of adverse economic conditions. As a
result, the commenter argued, advanced
approaches banking organizations were
unlikely to be made materially more
resilient as a result of imposition of the
CCyB.
As reflected in the Policy Statement,
the pace and magnitude of changes in
the CCyB will depend on the underlying
conditions in the financial sector and
the economy, the desired effects of the
proposed change in the CCyB, and
consideration of whether the CCyB is
the most appropriate of the Board’s
available policy instruments to address
the financial system vulnerabilities. A
natural corollary to this analysis would
be consideration of whether the CCyB
could be expected to increase other
systemic vulnerabilities. The CCyB is
one of several policy tools available to
the Board. In determining whether or
not to change the CCyB, the Board will
consider whether the CCyB is the most
appropriate of available policy tools,
and whether the CCyB would be most
effective if used in conjunction with
other policy tools.
V. Administrative Law Matters
A. Use of Plain Language
Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat.
1338, 1471, 12 U.S.C. 4809) requires the
Federal banking agencies to use plain
language in all proposed and final rules
published after January 1, 2000. The
Board received no comments on the use
of plain language.
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Federal Register / Vol. 81, No. 180 / Friday, September 16, 2016 / Rules and Regulations
holding company. As a result, the final
rule is not expected to apply directly to
any small banking organizations for
purposes of the RFA.
Therefore, there are no significant
alternatives to the final rule that would
have less economic impact on small
bank holding companies. As discussed
above, there are no projected reporting,
recordkeeping, and other compliance
requirements of the final rule. The
Board does not believe that the final
rule duplicates, overlaps, or conflicts
with any other Federal rules. In light of
the foregoing, the Board does not
believe that the final rule would have a
significant economic impact on a
substantial number of small entities.
In light of the foregoing, the Board
does not believe that the final rule will
have a significant impact on small
entities.
List of Subjects in 12 CFR Part 217
Administrative practice and
procedure, Banks, banking. Holding
companies, Reporting and
recordkeeping requirements, Securities.
Authority and Issuance
For the reasons stated in the
preamble, the Board of Governors of the
Federal Reserve System amends 12 CFR
part 217 as follows:
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS (REGULATION Q)
1. The authority citation for part 217
continues 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, 5368, 5371.
2. Appendix A to part 217 is added to
read as follows:
■
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Appendix A to Part 217—The Federal
Reserve Board’s Framework for
Implementing the Countercyclical
Capital Buffer
1. Background
(a) In 2013, the Board of Governors of the
Federal Reserve System (Board) issued a final
regulatory capital rule (Regulation Q) in
coordination with the Office of the
Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation
(FDIC) that strengthened risk-based and
leverage capital requirements applicable to
insured depository institutions and
depository institution holding companies
(banking organizations).1 Among those
1 See 12 CFR part 217; Federal Reserve Board
Approves Final Rule To Help Ensure Banks
Maintain Strong Capital Positions (July 2, 2013),
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changes was the introduction of a
countercyclical capital buffer (CCyB) for
large, internationally active banking
organizations.2
(b) The CCyB is a supplemental,
macroprudential policy tool that the Board
can increase during periods of rising
vulnerabilities in the financial system and
reduce when vulnerabilities recede. It is
designed to increase the resilience of large
banking organizations when there is an
elevated risk of above-normal losses.
Increasing the resilience of large banking
organizations will, in turn, improve the
resilience of the broader financial system.
Above-normal losses often follow periods of
rapid asset price appreciation or credit
growth that are not well supported by
underlying economic fundamentals. The
circumstances in which the Board would
most likely begin to increase the CCyB above
zero percent to augment minimum capital
requirements and other capital buffers would
be when systemic vulnerabilities are
meaningfully above normal. By requiring
large banking organizations to hold
additional capital during those periods of
excess and removing the requirement to hold
additional capital when the vulnerabilities
have diminished, the CCyB also is expected
to moderate fluctuations in the supply of
credit over time. Moderating the supply of
credit may mitigate or prevent the conditions
that contribute to above-normal losses, such
as elevated asset prices and excessive
leverage, and prevent or mitigate reductions
in lending to creditworthy borrowers that can
amplify an economic downturn. In this way,
implementation of the CCyB also responds to
the Dodd-Frank Act’s requirement that the
Board seek to make its capital requirements
countercyclical.3
(c) Regulation Q established the initial
CCyB amount with respect to private sector
credit exposures located in the United States
(U.S.-based credit exposures) at zero percent
and provided that the maximum potential
amount of the CCyB for credit exposures in
the United States was 2.5 percent of riskweighted assets.4 The Board expects to make
decisions about the appropriate level of the
CCyB for U.S.-based credit exposures jointly
with the OCC and FDIC, and expects that the
available at http://www.federalreserve.gov;
Agencies Adopt Supplementary Leverage Ratio
Notice of Proposed Rulemaking (July 9, 2013),
available at http://www.occ.gov; and FDIC Board
Approves Basel III Interim Final Rule and
Supplementary Leverage Ratio Notice of Proposed
Rulemaking (July 9, 2013) available at https://
www.fdic.gov.
2 12 CFR 217.11(b). The CCyB applies only to
banking organizations subject to the advanced
approaches capital rules, which generally apply to
those banking organizations with greater than $250
billion in assets or more than $10 billion in onbalance-sheet foreign exposures. See 12 CFR
217.100(b). An advanced approaches institution is
subject to the CCyB regardless of whether it has
completed the parallel run process and received
notification from its primary Federal supervisor.
See 12 CFR 217.121(d).
3 12 U.S.C. 1844(b), 1464a(g)(1), and 3907(a)(1)
(codifying sections 616(a), (b), and (c) of the DoddFrank Act).
4 The CCyB is subject to a phase-in arrangement
between 2016 and 2019. See 12 CFR 217.300(a)(2).
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CCyB amount for U.S.-based credit exposures
will be the same for covered depository
institution holding companies and insured
depository institutions. The CCyB is
designed to take into account the
macrofinancial environment in which
banking organizations function and the
degree to which that environment impacts
the resilience of advanced approaches
institutions. Therefore, the appropriate level
of the CCyB for U.S.-based credit exposures
is not closely linked to the characteristics of
an individual institution. Rather, the impact
of the CCyB on any single institution will
depend on the particular composition of the
private-sector credit exposures of the
institution across national jurisdictions.
2. Overview and Scope of the Policy
Statement
This Policy Statement describes the
framework that the Board will follow in
setting the amount of the CCyB for U.S.-based
credit exposures. The framework consists of
a set of principles for translating assessments
of financial system vulnerabilities that are
regularly undertaken by the Board into the
appropriate level of the CCyB. Those
assessments are informed by a broad array of
quantitative indicators of financial and
economic performance and a set of empirical
models. In addition, the framework includes
an assessment of whether the CCyB is the
most appropriate policy instrument (among
available policy instruments) to address the
highlighted financial system vulnerabilities.
3. The Objectives of the CCyB
(a) The objectives of the CCyB are to
strengthen banking organizations’ resilience
against the build-up of systemic
vulnerabilities and reduce fluctuations in the
supply of credit. The CCyB supplements the
minimum capital requirements and the
capital conservation buffer, which
themselves are designed to provide
substantial resilience to unexpected losses
created by normal fluctuations in economic
and financial conditions. The capital
surcharge on global systemically important
banking organizations adds an additional
layer of defense for the largest and most
systemically important institutions, whose
financial distress can have outsized effects on
the rest of the financial system and the real
economy.5 However, periods of financial
excesses, for example as reflected in episodes
of rapid asset price appreciation or credit
growth not well supported by underlying
economic fundamentals, are often followed
by above-normal losses that leave banking
organizations and other financial institutions
undercapitalized. Therefore, the Board would
most likely begin to increase the CCyB above
zero in those circumstances when systemic
vulnerabilities become meaningfully above
normal and progressively raise the CCyB
level if vulnerabilities become more severe.
(b) The CCyB is expected to help provide
additional resilience for advanced
approaches institutions, and by extension the
5 See, Federal Reserve Board Approves Final Rule
Requiring The Largest, Most Systemically Important
U.S. Bank Holding Companies To Further
Strengthen Their Capital Positions (July 20, 2015),
available at http://www.federalreserve.gov.
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broader financial system, against elevated
vulnerabilities primarily in two ways. First,
advanced approaches institutions will likely
hold more capital to avoid limitations on
capital distributions and discretionary bonus
payments resulting from implementation of
the CCyB. Strengthening their capital
positions when financial conditions are
accommodative would increase the capacity
of advanced approaches institutions to
absorb outsized losses during a future
significant economic downturn or period of
financial instability, thus making them more
resilient.
(c) The second and related goal of the
CCyB is to promote a more sustainable
supply of credit over the economic cycle.
During a credit cycle downturn, bettercapitalized institutions have been shown to
be more likely than weaker institutions to
have continued access to funding. Bettercapitalized institutions also are less likely to
take actions that lead to broader financialsector distress and its associated
macroeconomic costs, such as large-scale
sales of assets at prices below their
fundamental value and sharp contractions in
credit supply.6 Therefore, it is likely that as
a result of the CCyB having been put into
place during the preceding period of rapid
credit creation, advanced approaches
institutions would be better positioned to
continue their important intermediary
functions during a subsequent economic
contraction. A timely and credible reduction
in the CCyB requirement during a period of
high credit losses could reinforce those
beneficial effects of a higher base level of
capital, because it would permit advanced
approaches institutions either to realize loan
losses promptly and remove them from their
balance sheets or to expand their balance
sheets, for example by continuing to lend to
creditworthy borrowers.
(d) During a period of cyclically increasing
vulnerabilities, advanced approaches
institutions might react to an increase in the
CCyB by raising lending standards, otherwise
reducing their risk exposure, augmenting
their capital, or some combination of those
actions. They may choose to raise capital by
taking actions that would increase net
income, reducing capital distributions such
as share repurchases or dividends, or issuing
new equity. In this regard, an increase in the
CCyB would not prevent advanced
approaches institutions from maintaining
their important role as credit intermediaries,
but would reduce the likelihood that banking
organizations with insufficient capital would
foster unsustainable credit growth or engage
in imprudent risk taking. The specific
combination of adjustments and the relative
size of each adjustment will depend in part
6 For additional background on the relationship
between financial distress and economic outcomes,
see Carmen Reinhart and Kenneth Rogoff (2009),
This Time is Different. Princeton University Press;
`
`
Oscar Jorda & Moritz Schularick & Alan M Taylor
(2011), ‘‘Financial Crises, Credit Booms, and
External Imbalances: 140 Years of Lessons,’’ IMF
Economic Review, Palgrave Macmillan, vol. 59(2),
pages 340–378; and Bank for International
Settlements (2010), ‘‘Assessing the Long-Run
Economic Impact of Higher Capital and Liquidity
Requirements.’’
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on the initial capital positions of advanced
approaches institutions, the cost of debt and
equity financing, and the earnings
opportunities presented by the economic
situation at the time.7
4. The Framework for Setting the U.S. CCyB
(a) The Board regularly monitors and
assesses threats to financial stability by
synthesizing information from a
comprehensive set of financial-sector and
macroeconomic indicators, supervisory
information, surveys, and other interactions
with market participants.8 In forming its
view about the appropriate size of the U.S.
CCyB, the Board will consider a number of
financial system vulnerabilities, including
but not limited to, asset valuation pressures
and risk appetite, leverage in the
nonfinancial sector, leverage in the financial
sector, and maturity and liquidity
transformation in the financial sector. The
decision will reflect the implications of the
assessment of overall financial system
vulnerabilities as well as any concerns
related to one or more classes of
vulnerabilities. The specific combination of
vulnerabilities is important because an
adverse shock to one class of vulnerabilities
could be more likely than another to
exacerbate existing pressures in other parts of
the economy or financial system.
(b) The Board intends to monitor a wide
range of financial and macroeconomic
quantitative indicators including, but not
limited to, measures of relative credit and
liquidity expansion or contraction, a variety
of asset prices, funding spreads, credit
condition surveys, indices based on credit
default swap spreads, option implied
volatilities, and measures of systemic risk.9
In addition, empirical models that translate
a manageable set of quantitative indicators of
financial and economic performance into
potential settings for the CCyB, when used as
part of a comprehensive judgmental
assessment of all available information, can
be a useful input to the Board’s deliberations.
Such models may include, but are not
limited to, those that rely on small sets of
indicators—such as the nonfinancial creditto-GDP ratio, its growth rate, and
combinations of the credit-to-GDP ratio with
trends in the prices of residential and
commercial real estate—which some
academic research has shown to be useful in
identifying periods of financial excess
followed by a period of crisis on a crosscountry basis.10 Such models may also
7 For
estimates of the size of certain adjustments,
see Samuel G. Hanson, Anil K. Kashyap, and
Jeremy C. Stein (2011), ‘‘A Macroprudential
Approach to Financial Regulation,’’ Journal of
Economic Perspectives 25(1), pp. 3–28; Skander J.
Van den Heuvel (2008), ‘‘The Welfare Cost of Bank
Capital Requirements.’’ Journal of Monetary
Economics 55, pp. 298–320.
8 Tobias Adrian, Daniel Covitz, and Nellie Liang
(2014), ‘‘Financial Stability Monitoring.’’ Finance
and Economics Discussion Series 2013–021.
Washington: Board of Governors of the Federal
Reserve System, http://www.federalreserve.gov/
pubs/feds/2013/201321/201321pap.pdf.
9 See 12 CFR 217.11(b)(2)(iv).
10 See, e.g., Jorda, Oscar, Moritz Schularick and
Alan Taylor, 2013. ‘‘When Credit Bites Back:
Leverage, Business Cycles and Crises,’’ Journal of
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include those that consider larger sets of
indicators, which have the advantage of
representing conditions in all key sectors of
the economy, especially those specific to
risk-taking, performance, and the financial
condition of large banks.11
(c) However, no single indictor or fixed set
of indicators can adequately capture all the
vulnerabilities in the U.S. economy and
financial system. Moreover, adjustments in
the CCyB that were tightly linked to a
specific model or set of models could be
imprecise due to the relatively short period
that some indicators are available, the limited
number of past crises against which the
models can be calibrated, and limited
experience with the CCyB as a
macroprudential tool. As a result, the types
of indicators and models considered in
assessments of the appropriate level of the
CCyB are likely to change over time based on
advances in research and the experience of
the Board with this new macroprudential
tool.
(d) The Board will determine the
appropriate level of the CCyB for U.S.-based
credit exposures based on its analysis of the
above factors. Generally, a zero percent U.S.
CCyB amount would reflect an assessment
that U.S. economic and financial conditions
are broadly consistent with a financial
system in which levels of system-wide
vulnerabilities are within or near their
normal range of values. The Board could
increase the CCyB as vulnerabilities build. A
2.5 percent CCyB amount for U.S.-based
credit exposures, which is the maximum
level under the Board’s rule, would reflect an
assessment that the U.S. financial sector is
experiencing a period of significantly
elevated or rapidly increasing system-wide
vulnerabilities. Importantly, as a
macroprudential policy tool, the CCyB will
be activated and deactivated based on broad
developments and trends in the U.S.
financial system, rather than the activities of
any individual banking organization.
(e) Similarly, the Board would remove or
reduce the CCyB when the conditions that
led to its activation abate or lessen.
Additionally, the Board would remove or
reduce the CCyB when release of CCyB
capital would promote financial stability.
Indeed, for the CCyB to be most effective, the
CCyB should be deactivated or reduced in a
timely manner. Deactivating the CCyB in a
timely manner could, for example, promote
Money, Credit, and Banking, 45(2), pp. 3–28, and
Drehmann, Mathias, Claudio Borio, and Kostas
Tsatsaronis, 2012. ‘‘Characterizing the Financial
Cycle: Don’t Lose Sight of the Medium Term!’’ BIS
Working Papers 380, Bank for International
Settlements. Jorda, Oscar, Moritz Schularick and
Alan Taylor, 2015. ‘‘Leveraged Bubbles,’’ Center for
Economic Policy Research Discussion Paper No.
DP10781. BCBS (2010), ‘‘Guidance for National
Authorities Operating the Countercyclical Capital
Buffer,’’ BIS.
11 See, e.g., Aikman, David, Michael T. Kiley,
Seung Jung Lee, Michael G. Palumbo, and Missaka
N. Warusawitharana (2015), ‘‘Mapping Heat in the
U.S. Financial System,’’ Finance and Economics
Discussion Series 2015–059. Washington: Board of
Governors of the Federal Reserve System, http://
dx.doi.org/10.17016/FEDS.2015.059 (providing an
example of the range of indicators used and type
of analysis possible).
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the prompt realization of loan losses by
advanced approaches institutions and the
removal of such loans from their balance
sheets and would reduce the likelihood that
advanced approaches institutions would
significantly pare their risk-weighted assets
in order to maintain their capital ratios
during a downturn.
(f) The pace and magnitude of changes in
the CCyB will depend importantly on the
underlying conditions in the financial sector
and the economy as well as the desired
effects of the proposed change in the CCyB.
If vulnerabilities are rising gradually, then
incremental increases in the level of the
CCyB may be appropriate. Incremental
increases would allow banks to augment
their capital primarily through retained
earnings and allow policymakers additional
time to assess the effects of the policy change
before making subsequent adjustments.
However, if vulnerabilities in the financial
system are building rapidly, then larger or
more frequent adjustments may be necessary
to increase loss-absorbing capacity sooner
and potentially to mitigate the rise in
vulnerabilities.
(g) The Board will also consider whether
the CCyB is the most appropriate of its
available policy instruments to address the
financial system vulnerabilities highlighted
by the framework’s judgmental assessments
and empirical models. The CCyB primarily is
intended to address cyclical vulnerabilities,
rather than structural vulnerabilities that do
not vary significantly over time. Structural
vulnerabilities are better addressed through
targeted reforms or permanent increases in
financial system resilience. Two central
factors for the Board to consider are whether
advanced approaches institutions are
exposed—either directly or indirectly—to the
vulnerabilities identified in the
comprehensive judgmental assessment or by
the quantitative indicators that suggest
activation of the CCyB and whether advanced
approaches institutions are contributing—
either directly or indirectly—to these
highlighted vulnerabilities.
(h) In setting the CCyB for advanced
approaches institutions that it supervises, the
Board plans to consult with the OCC and
FDIC on their analyses of financial system
vulnerabilities and on the extent to which
advanced approaches banking organizations
are either exposed to or contributing to these
vulnerabilities.
5. Communication of the U.S. CCyB With the
Public
(a) The Board expects to consider at least
once per year the applicable level of the U.S.
CCyB. The Board will review financial
conditions regularly throughout the year and
may adjust the CCyB more frequently as a
result of those monitoring activities.
(b) Further, the Board will continue to
communicate with the public in other
formats regarding its assessment of U.S.
financial stability, including financial system
vulnerabilities. In the event that the Board
considered that a change in the CCyB were
appropriate, it would, in proposing the
change, include a discussion of the reasons
for the proposed action as determined by the
particular circumstances. In addition, the
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Board’s biannual Monetary Policy Report to
Congress, usually published in February and
July, will continue to contain a section that
reports on developments pertaining to the
stability of the U.S. financial system.12 That
portion of the report will be an important
vehicle for updating the public on how the
Board’s current assessment of financial
system vulnerabilities bears on the setting of
the CCyB.
6. Monitoring the Effects of the U.S. CCyB
(a) The effects of the U.S. CCyB ultimately
will depend on the level at which it is set,
the size and nature of any adjustments in the
level, and the timeliness with which it is
increased or decreased. The extent to which
the CCyB may affect vulnerabilities in the
broader financial system depends upon a
complex set of interactions between required
capital levels at the largest banking
organizations and the economy and financial
markets. In addition to the direct effects, the
secondary economic effects could be
amplified if financial markets extract a signal
from the announcement of a change in the
CCyB about subsequent actions that might be
taken by the Board. Moreover, financial
market participants might react by updating
their expectations about future asset prices in
specific markets or broader economic activity
based on the concerns expressed by the
regulators in communications announcing a
policy change.
(b) The Board will monitor and analyze
adjustments by banking organizations and
other financial institutions to the CCyB:
whether a change in the CCyB leads to
observed changes in risk-based capital ratios
at advanced approaches institutions, as well
as whether those adjustments are achieved
passively through retained earnings, or
actively through changes in capital
distributions or in risk-weighted assets. Other
factors to be monitored include the extent to
which loan growth and interest rate spreads
on loans made by affected banking
organizations change relative to loan growth
and loan spreads at banking organizations
that are not subject to the buffer. Another
consideration in setting the CCyB and other
macroprudential tools is the extent to which
the adjustments by advanced approaches
institutions to higher capital buffers lead to
migration of credit market activity outside of
those banking organizations, especially to the
nonbank financial sector. Depending on the
amount of migration, which institutions are
affected by it, and the remaining exposures
of advanced approaches institutions, those
adjustments could cause the Board to favor
either a higher or a lower value of the CCyB.
(c) The Board will also monitor
information regarding the levels of and
changes in the CCyB in other countries. The
Basel Committee on Banking Supervision is
expected to maintain this information for
member countries in a publically available
form on its Web site.13 Using that data in
12 For the most recent discussion in this format,
see box titled ‘‘Developments Related to Financial
Stability’’ in Board of Governors of the Federal
Reserve System, Monetary Policy Report to
Congress, June 2016, pp. 20–21.
13 BIS, Countercyclical capital buffer (CCyB),
www.bis.org/bcbs/ccyb/index.htm.
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conjunction with supervisory and publicly
available datasets, the Board will be able to
draw not only upon the experience of the
United States but also that of other countries
to refine estimates of the effects of changes
in the CCyB.
By order of the Board of Governors of the
Federal Reserve System, September 8, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016–21970 Filed 9–15–16; 8:45 am]
BILLING CODE 6210–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2016–6146; Directorate
Identifier 2014–NM–120–AD; Amendment
39–18656; AD 2016–19–07]
RIN 2120–AA64
Airworthiness Directives; Dassault
Aviation Airplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
We are superseding
Airworthiness Directive (AD) 2008–19–
08, for all Dassault Aviation Model
Falcon 10 airplanes. AD 2008–19–08
required repetitive replacement of the
flexible hoses installed in the wing (slat)
anti-icing system with new hoses. This
new AD requires reducing the life limit
of these flexible hoses, which reduces
the repetitive replacement intervals.
This AD was prompted by additional
reports of collapse of the flexible hoses
installed in the slat anti-icing systems
on airplanes equipped with new,
improved hoses. We are issuing this AD
to prevent collapse of the flexible hoses
in the slat anti-icing system, which
could lead to insufficient anti-icing
capability and, if icing is encountered in
this situation, could result in reduced
controllability of the airplane.
DATES: This AD is effective October 21,
2016.
The Director of the Federal Register
approved the incorporation by reference
of a certain publication listed in this AD
as of October 11, 2007 (72 FR 51161,
September 6, 2007).
ADDRESSES: For service information
identified in this final rule, contact
Dassault Falcon Jet Corporation,
Teterboro Airport, P.O. Box 2000, South
Hackensack, NJ 07606; telephone 201–
440–6700; Internet http://
www.dassaultfalcon.com. You may
view this referenced service information
SUMMARY:
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Agencies
[Federal Register Volume 81, Number 180 (Friday, September 16, 2016)]
[Rules and Regulations]
[Pages 63682-63688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21970]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket No. R-1529; RIN 7100 AE-43]
Regulatory Capital Rules: The Federal Reserve Board's Framework
for Implementing the U.S. Basel III Countercyclical Capital Buffer
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final policy statement.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is adopting a final policy statement (Policy Statement) describing the
framework that the Board will follow under its Regulation Q in setting
the amount of the U.S. countercyclical capital buffer for advanced
approaches bank holding companies, savings and loan holding companies,
and state member banks.
DATES: The Policy Statement is effective October 14, 2016.
FOR FURTHER INFORMATION CONTACT: William Bassett, Deputy Associate
Director, (202) 736-5644, or Rochelle Edge, Deputy Associate Director,
(202) 452-2339, Division of Financial Stability; Sean Campbell,
Associate Director, (202) 452-3760, Division of Banking Supervision and
Regulation; Benjamin W. McDonough, Special Counsel, (202) 452-2036,
Mark Buresh, Senior Attorney, (202) 452-5270, or Mary Watkins,
Attorney, (202) 452-3722, Legal Division.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments on the Proposal
III. Policy Statement
IV. Administrative Law Matters
A. Use of Plain Language
B. Paperwork Reduction Act Analysis
C. Regulatory Flexibility Act Analysis
I. Background
In December 2015, the Board invited public comment on a proposed
policy statement describing the framework that the Board would use to
set the amount of the U.S. countercyclical capital buffer (CCyB) under
the Board's capital rules (Regulation Q).\1\ The CCyB is a
macroprudential policy tool that the Board can increase during periods
of rising vulnerabilities in the financial system and reduce when
vulnerabilities recede or when the release of the CCyB would promote
financial stability.\2\ The CCyB supplements the minimum capital
requirements and other capital buffers included in Regulation Q, which
themselves are designed to provide substantial resilience to unexpected
losses created by normal fluctuations in economic and financial
conditions.
---------------------------------------------------------------------------
\1\ 12 CFR part 217. See also 81 FR 5661 (February 3, 2016).
\2\ See 12 CFR 217.11(b). Implementation of the CCyB also helps
respond to the provision in the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) that the agencies ``shall
seek to make such [capital] requirements countercyclical, so that
the amount of capital required to be maintained by a company
increases in times of economic expansion and decreases in times of
economic contraction, consistent with the safety and soundness of
the company.'' See 12 U.S.C. 1467a; 12 U.S.C. 1844; 12 U.S.C. 3907
(as amended by section 616 of the Dodd-Frank Act).
---------------------------------------------------------------------------
The proposed policy statement outlined the factors the Board would
consider in setting the level of the CCyB, and the indicators it would
monitor to help determine whether an adjustment to the CCyB is
appropriate. The proposed policy statement also described the effects
the Board will monitor in determining whether the CCyB is achieving the
desired purposes of the CCyB.
The Board received two comments on the proposed policy statement.
Commenters raised concerns about the process that the Board would
follow in setting the CCyB pursuant to the policy statement, the
potential economic impact of the CCyB, and the efficacy and
appropriateness of the CCyB as a policy tool. Commenters also made
various specific suggestions as to the indicators and standards that
the Board should consider in determining whether to activate the CCyB.
After reviewing comments, the Board is revising the final Policy
Statement to clarify the following key items: (1) That the Board
expects that the CCyB will be activated when systemic vulnerabilities
are meaningfully above normal and that the Board generally intends to
increase the CCyB gradually, (2) that the Board expects to remove or
reduce the CCyB when the conditions that led to its activation abate or
lessen and when the release of CCyB capital would promote financial
stability. The discussion in Sections II and IV below responds to
comments on the proposal regarding the Board's process for setting the
CCyB. In particular, as indicated below, the Board would seek comment
on any proposed change to the CCyB amount and include a discussion of
the reasons for the change.
II. Purpose of CCyB
The CCyB is designed to increase the resilience of large banking
organizations when the Board sees an elevated risk of above-normal
losses. Increasing the resilience of large banking organizations
should, in turn, improve the resilience of the broader financial
system. Above-normal losses often follow periods of rapid asset price
appreciation or credit growth that are not well supported by underlying
economic fundamentals. As stated in the proposed policy statement, the
circumstances in which the Board would most likely use the CCyB as a
supplemental, macroprudential tool to augment minimum capital
requirements and other capital buffers would be to address
circumstances when systemic vulnerabilities are somewhat above normal.
By requiring institutions to hold a larger capital buffer during
periods when systemic risk is increasing and reducing the buffer
requirement as vulnerabilities diminish, the CCyB also has the
potential to moderate fluctuations in the supply of credit over time.
The CCyB functions as an expansion of the Capital Conservation
Buffer (CCB), which is applicable to all banking organizations subject
to Regulation Q. To avoid limits on capital distributions and certain
discretionary bonus payments,\3\ the CCB requires that a banking
organization hold a buffer of common equity tier 1 capital that is at
least 2.5 percent of the risk-weighted assets in addition to the
minimum risk-based capital ratios. The CCB is divided into quartiles,
each associated with increasingly stringent limitations on capital
distributions and certain discretionary bonus payments as the firm's
risk-based capital ratios approach regulatory minimums.\4\ The CCyB is
an additional, countercyclical buffer that has the same limitations on
dividends and capital distributions as the CCB.
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\3\ 12 CFR 217.11(b)(1)(i).
\4\ 12 CFR 217.11(a).
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[[Page 63683]]
The CCyB was introduced for large, internationally active banking
organizations (advanced approaches institutions) in June 2013 as part
of the revised regulatory capital rules issued by the Board in
coordination with the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC).\5\ The Board's
CCyB rule applies to bank holding companies, savings and loan holding
companies, and state member banks subject to the advanced approaches
capital rules (advanced approaches institutions).\6\ The advanced
approaches capital rules generally apply to banking organizations with
greater than $250 billion in total assets or $10 billion in on-balance-
sheet foreign exposure and to any depository institution subsidiary of
such banking organizations.\7\
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\5\ See 78 FR 62018 (October 11, 2013) (Board and OCC); 79 FR
20754 (April 14, 2014) (FDIC). The Board's Regulation Q applies
generally to bank holding companies with more than $1 billion in
total consolidated assets and savings and loan holding companies
with more than $1 billion in total consolidated assets that are not
substantially engaged in commercial or insurance underwriting
activities. See 12 CFR 217.1(c)(1).
\6\ An advanced approaches institution is subject to the CCyB
regardless of whether it has completed the parallel run process and
received notification from its primary Federal supervisor pursuant
to section 217.121(d) of Regulation Q.
\7\ 12 CFR 217.100(b)(1).
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Because the CCyB is intended to address elevated risks from
activity that is not well supported by underlying economic
fundamentals, the location of the activity and the economic conditions
where the activity take place provide important context. Accordingly,
the CCyB applies based on the location of private-sector credit
exposures by national jurisdiction.\8\ Specifically, the applicable
CCyB amount for a banking organization is equal to the weighted average
of CCyB amounts established by the Board for the national jurisdictions
where the banking organization has private-sector credit exposures.\9\
The CCyB amount applicable to a banking organization is weighted by
jurisdiction according to the firm's risk-weighted private-sector
credit exposures for a specific jurisdiction as a percentage of the
firm's total risk-weighted private-sector credit exposures.\10\
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\8\ 12 CFR 217.11(b)(1). The Board may adjust the CCyB amount to
reflect decisions made by foreign jurisdictions. See 12 CFR
217.11(b)(3).
\9\ 12 CFR 217.11(b)(1).
\10\ Id.
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Regulation Q established the initial CCyB amount with respect to
private-sector credit exposures located in the United States (U.S.-
based credit exposures) at zero percent.\11\ The CCyB will not exceed
2.5 percent of risk-weighted assets. This cap on the CCyB will be
phased in, with the maximum potential amount of the CCyB for U.S.-based
credit exposures 0.625 percentage points in 2016, 1.25 percentage
points in 2017, 1.875 percentage points in 2018, and 2.5 percentage
points in 2019 and thereafter.\12\
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\11\ The Board affirmed the CCyB amount at the current level of
0 percent contemporaneously with issuance of the proposed policy
statement. See http://www.federalreserve.gov/newsevents/press/bcreg/20151221b.htm.
\12\ 12 CFR 217.300(a)(2).
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In order to provide banking organizations with sufficient time to
adjust to any change in the CCyB, Regulation Q provides that a
determination to increase the countercyclical capital buffer amount
generally will be effective 12 months from the date of announcement.
However, economic conditions may warrant an earlier or later effective
date.\13\ For example, it may be appropriate for an increase in the
countercyclical capital buffer amount to take effect 12 months from the
date that the Board proposes the increase, rather than 12 months from
the issuance of a final rule.
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\13\ 12 CFR 217.11(b)(2)(v)(A).
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Regulation Q states that a decision by the Board to decrease the
amount of the CCyB for U.S.-based credit exposures would become
effective the day after the Board decides to decrease the CCyB or the
earliest date permissible under applicable law or regulation, whichever
is later.\14\ Moreover, the amount of the CCyB for U.S.-based credit
exposures will return to 0 percent 12 months after the effective date
of any CCyB adjustment, unless the Board announces a decision to
maintain the current amount or adjust it again before the expiration of
the 12-month period.\15\
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\14\ 12 CFR 217.11(b)(2)(v)(B).
\15\ 12 CFR 217.11(b)(2)(vi).
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The Board expects to make decisions about the appropriate level of
the CCyB on U.S.-based credit exposures jointly with the OCC and FDIC.
In addition, the Board expects that the CCyB amount for U.S.-based
credit exposures would be the same for covered insured depository
institutions as for covered depository institution holding companies.
The CCyB is designed to take into account the broad macroeconomic and
financial environment in which banking organizations function and the
degree to which that environment impacts the resilience of advanced
approaches institutions. Therefore, the Board's determination of the
appropriate level of the CCyB for U.S.-based credit exposures would be
most directly linked to the condition of the overall financial
environment rather than the condition of any individual banking
organization. However, the impact of the CCyB requirement on a
particular banking organization will vary based on the organization's
particular composition of private-sector credit exposures located
across national jurisdictions.
III. Description of the Final Policy Statement
The final policy statement (Policy Statement) describes the
framework that the Board would follow in setting the amount of the CCyB
for U.S.-based credit exposures. The framework consists of a set of
principles for translating assessments of financial system
vulnerabilities that are regularly undertaken at the Board into the
appropriate level of the CCyB. Those assessments are informed by a
broad array of quantitative indicators of financial and economic
performance and a set of empirical models. In addition, the framework
includes a discussion of how the Board would assess whether the CCyB is
the most appropriate policy instrument (among available policy
instruments) to address the highlighted financial system
vulnerabilities.
The Policy Statement is organized as follows. Section 1 provides
background on the Policy Statement. Section 2 is an outline of the
Policy Statement and describes its scope. Section 3 provides a broad
description of the objectives of the CCyB, including a description of
the ways in which the CCyB is expected to protect large banking
organizations and the broader financial system. Section 4 provides a
broad description of the factors that the Board considers in setting
the CCyB, including specific financial system vulnerabilities and types
of quantitative indicators of financial and economic performance, and
outlines of empirical models the Board may use as inputs to that
decision. Further, section 4 describes a set of principles that the
Board expects to use for combining judgmental assessments with
quantitative indicators to determine the appropriate level of the CCyB.
Section 5 discusses how the Board will communicate the level of the
CCyB and any changes to the CCyB. Section 6 describes how the Board
plans to monitor the effects of the CCyB, including what indicators and
effects will be monitored.
The Board has revised the Policy Statement to clarify that (1) the
Board expects that the CCyB will be activated when systemic
vulnerabilities are meaningfully above normal and the Board generally
intends to increase the CCyB gradually, and (2) the Board
[[Page 63684]]
expects to remove or reduce the CCyB when the conditions that led to
its activation abate or lessen and when release of CCyB capital would
promote financial stability. These changes were made to sections 1, 3,
and 4. In addition, minor clarifying and technical edits were made
throughout the Policy Statement.
IV. Changes To Address Comments on the Proposal
As noted, the Board received two comments regarding the proposed
policy statement. Commenters expressed concerns about the process that
the Board would follow in setting the CCyB pursuant to the Policy
Statement, the potential economic impact of the CCyB, and the
appropriate uses of the CCyB.
A. Comments Regarding the Board's Process for Setting the CCyB
Commenters expressed concern that the Board would apply the CCyB
without completing the procedures required by the Administrative
Procedure Act (APA).\16\ In particular, commenters argued that notice
and comment rulemaking procedures should be used to increase the CCyB
above zero, and for each future increase.
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\16\ 5 U.S.C. 551 et seq.
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The Board's rule implementing the CCyB specifically provides that
the Board will adjust the CCyB amount in accordance with applicable
law.\17\ In accordance with this provision of its rules, the Board
expects to set the level of the CCyB above zero through a public notice
and comment rulemaking, or through an order issued in accordance with
the APA that provides each affected institution with actual notice and
an opportunity for comment. In setting the level of the CCyB above zero
through a public rulemaking, the Board generally expects that the
notice and comment period would be at least 30 days. The Policy
Statement is intended to provide insight on the framework that the
Board will use to determine the appropriate level of the CCyB, not to
alter procedures necessary to increase the CCyB in the future.
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\17\ 12 CFR 217.11(b)(2)(ii).
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A commenter suggested that the Board should commit to act jointly
with the OCC and FDIC in any decision to activate the CCyB. Consistent
with Regulation Q and the proposal, the Board expects that any decision
to adjust the CCyB will be made jointly by the OCC, FDIC, and Board.
However, the Board will make decisions regarding the appropriate amount
of the CCyB for the firms that it supervises based on its judgment of
the facts and circumstances presented.
A commenter argued that the Board generally should not reciprocate
decisions by foreign jurisdictions regarding the level of the CCyB in
such jurisdictions. If the Board did decide to incorporate CCyB
decisions of foreign jurisdictions, the commenter argued that the Board
should implement a de minimis threshold below which U.S. banking
organizations would not have to recognize the CCyB established in the
foreign jurisdiction. The Policy Statement describes the framework that
the Board will follow in determining the CCyB for U.S. private-sector
credit exposures. The Board will address separately CCyB adjustments
made by foreign jurisdictions as needed.
B. Comments Regarding the Calibration of, Inputs Into, and Impact of
the CCyB
A commenter argued that the CCyB should be increased only when
credit growth was considered excessive, rather than when systemic
vulnerabilities were somewhat above normal, as suggested by the
proposal.
The CCyB is a macroprudential policy tool intended to strengthen
banking organizations' resilience against the build-up of systemic
vulnerabilities and reduce fluctuations in the supply of credit. As
stated in the proposed policy statement, activation of the CCyB at a
time when systemic vulnerabilities are somewhat above normal reflects
the prophylactic and countercyclical goals of this tool as well as the
process and 12-month phase-in period that generally applies before any
activation of the CCyB amount would take effect. Moreover, activation
of the CCyB at a time when systemic vulnerabilities are somewhat above
normal rather than delaying until systemic vulnerabilities are
excessive would allow gradual increases in the CCyB, which would
provide additional flexibility (over and above the 12-month phase-in
period) to banking organizations as they adjust to any increases. That
is, activation of the CCyB at a time when systemic vulnerabilities are
somewhat above normal would likely not be associated with an activation
of the CCyB to the upper end of its possible range. Further, the Board
considers ``systemic vulnerabilities'' to be the appropriate reference
point because the CCyB could be an effective tool in addressing a
variety of financial system vulnerabilities, not merely credit growth.
To further clarify when the Board would expect to increase the
CCyB, the Policy Statement has been modified to state that the CCyB
would be increased when systemic vulnerabilities are ``meaningfully
above normal.'' For these purposes ``meaningfully above normal'' would
reflect an assessment by the Board that financial system
vulnerabilities were above normal and were either already at, or
expected to build to, levels sufficient to generate material unexpected
losses in the event of an unfavorable development in financial markets
or the economy. The text in the policy statement has also been modified
to clarify that systemic vulnerabilities being meaningfully above
normal would correspond to the Board beginning to increase the CCyB
above zero and to provide additional discussion of when and how the
Board would deactivate or reduce the CCyB.
Commenters argued that the Board should conduct and release
analyses of the economic impact and costs and benefits of the CCyB in
connection with the proposed policy statement as well as with any
decision to increase the level of the CCyB. Commenters contended that
such analyses should take into account other existing prudential
regulation, including other regulatory capital requirements, and
consider whether alternative policy tools may be more effective for a
particular situation. The commenters expressed concern that there could
be material adverse economic consequences to activation of the CCyB.
Similarly, one commenter argued that the Board should conduct a
comprehensive analysis of the costs and benefits of regulatory capital
requirements, including the CCyB, as well as prudential liquidity
regulations and regulations established by other agencies.
Commenters also argued that the Board should provide additional
detail regarding the data, models, and metrics that would inform a
decision to activate the CCyB, as well as the standards that would be
applied to determine the calibration of the CCyB. Additionally,
commenters raised issues with certain of the indicators identified in
the Policy Statement. For instance, a commenter cautioned that no
academic consensus had been reached with regard to the usefulness of a
credit-to-GDP ratio gap as an indicator of economic conditions.
The final Policy Statement provides additional information to the
public regarding the framework that the Board will follow in setting
the CCyB. The Policy Statement itself does not change either the CCyB
or the capital requirements applicable to advanced approaches banking
organizations. As described above, the Board generally would expect to
provide notice to the public and seek comment on the proposed level of
the CCyB as part of
[[Page 63685]]
making any final determination to change the CCyB. Any proposed change
in the level of the CCyB would include a discussion of the reasons for
the proposed action as determined by the particular circumstances.
One commenter stated that the FFIEC 009 reporting form requires
firms to report information that is not aligned with the information
needed to determine the CCyB amount applicable to a firm and that the
Board should amend the FFIEC 009 to align with CCyB in order to reduce
burden. The Board may consider reporting for purposes of the CCyB at a
later date.
The Board recognizes that no single data point or indicator can
provide a comprehensive understanding of economic conditions or
systemic vulnerabilities. The items for consideration listed in the
Policy Statement are a non-exclusive list of quantitative and
qualitative indicators that may inform the Board's assessment of
economic conditions and determinations regarding the appropriate level
of the CCyB. As explained in the proposed and final Policy Statement,
some academic research has shown the credit-to-GDP ratio to be useful
in identifying periods of financial excess followed by a period of
crisis. However, the Board does not expect this indicator to be used in
isolation. Furthermore, as noted, any proposal to increase the CCyB
will include a discussion of the indicators informing the proposal, and
will seek comment on the interpretation of these indicators. As noted
above, the Board expects that the types of indicators and models
considered will evolve over time, based on advances in research and the
experience of the Board with this tool.
Commenters argued that the CCyB would not be effective in
containing asset bubbles or excessive credit risks because these tend
to occur within sectors as opposed to across the financial system
equally. A commenter suggested that targeted guidance for particular
sectors would likely be more effective at containing risks of this type
than a broad based capital charge imposed by the CCyB.
Commenters also argued that the CCyB would not be effective in
addressing many systemic vulnerabilities because it applies only to
advanced approaches banking organizations, which, while significant,
represent a relatively small percentage of the total provision of
credit in the U.S. economy. A commenter contended that activation of
the CCyB might exacerbate risk in the financial system by shifting
lending activity away from large and closely regulated commercial banks
and into the shadow banking system. In addition, a commenter argued
that advanced approaches banking organizations were subject to
significant capital, liquidity, and other prudential requirements such
that they were likely to be resilient in the event of adverse economic
conditions. As a result, the commenter argued, advanced approaches
banking organizations were unlikely to be made materially more
resilient as a result of imposition of the CCyB.
As reflected in the Policy Statement, the pace and magnitude of
changes in the CCyB will depend on the underlying conditions in the
financial sector and the economy, the desired effects of the proposed
change in the CCyB, and consideration of whether the CCyB is the most
appropriate of the Board's available policy instruments to address the
financial system vulnerabilities. A natural corollary to this analysis
would be consideration of whether the CCyB could be expected to
increase other systemic vulnerabilities. The CCyB is one of several
policy tools available to the Board. In determining whether or not to
change the CCyB, the Board will consider whether the CCyB is the most
appropriate of available policy tools, and whether the CCyB would be
most effective if used in conjunction with other policy tools.
V. Administrative Law Matters
A. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board received no comments on the use of plain
language.
B. Paperwork Reduction Act Analysis
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the Board has reviewed the Policy Statement
to assess any information collections. There are no collections of
information as defined by the Paperwork Reduction Act in the proposal.
C. Regulatory Flexibility Act Analysis
The Board is providing a final regulatory flexibility analysis with
respect to this Policy Statement. The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA), generally requires that an agency provide a
regulatory flexibility analysis in connection with a final rulemaking.
The Board sought comment on whether the proposal would impose undue
burdens on, or have unintended consequences for, small banking
organizations. The Board received one comment on this aspect of the
proposal, which argued that the Board's initial regulatory flexibility
analysis was flawed in asserting that small banking organizations would
not be affected by the proposal because of the broader impact that the
CCyB could have on lending and economic growth in general.
This Policy Statement will be added as an appendix to Regulation Q
to describe the framework that the Board will follow in setting the
amount of the CCyB for U.S.-based credit exposures. The CCyB only
applies to bank holding companies, savings and loan holding companies,
and state member banks that are advanced approaches Board-regulated
institutions for purposes of the Board's Regulation Q (advanced
approaches banking organizations). The Regulatory Flexibility Act
requires consideration only of the impact of the proposed rule on small
entities that are subject to the requirements of the rule, as opposed
to small entities indirectly affected by the rule through its impact on
the national economy.\18\ Generally, advanced approaches banking
organizations are those with total consolidated assets of $250 billion
or more, that have total consolidated on-balance sheet foreign
exposures of $10 billion or more, that have subsidiary depository
institutions that are advanced approaches institutions, or that elect
to use the advanced approaches framework.\19\ Under regulations issued
by the Small Business Administration, a small entity includes a
depository institution, bank holding company, or savings and loan
holding company with assets of $550 million or less (small banking
organizations).\20\ As of June 30, 2016, there were approximately 3,204
small bank holding companies, 157 small savings and loan holding
companies, and 594 small state member banks. Banking organizations that
are subject to the final rule therefore are expected to substantially
exceed the $550 million asset threshold at which a banking entity would
qualify as a small bank
[[Page 63686]]
holding company. As a result, the final rule is not expected to apply
directly to any small banking organizations for purposes of the RFA.
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\18\ See e.g., Aeronautical Repair Station Association v.
Federal Aviation Administration, 494 F.3d 161, 174-178 (D.C. Cir.
2007).
\19\ See 12 CFR 217.100.
\20\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014). The Small Business Administration's
June 12, 2014, interim final rule was adopted without change as a
final rule by the Small Business Administration on January 12, 2016.
81 FR 3949 (January 25, 2016).
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Therefore, there are no significant alternatives to the final rule
that would have less economic impact on small bank holding companies.
As discussed above, there are no projected reporting, recordkeeping,
and other compliance requirements of the final rule. The Board does not
believe that the final rule duplicates, overlaps, or conflicts with any
other Federal rules. In light of the foregoing, the Board does not
believe that the final rule would have a significant economic impact on
a substantial number of small entities.
In light of the foregoing, the Board does not believe that the
final rule will have a significant impact on small entities.
List of Subjects in 12 CFR Part 217
Administrative practice and procedure, Banks, banking. Holding
companies, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends 12 CFR part 217 as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
1. The authority citation for part 217 continues 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, 5368, 5371.
0
2. Appendix A to part 217 is added to read as follows:
Appendix A to Part 217--The Federal Reserve Board's Framework for
Implementing the Countercyclical Capital Buffer
1. Background
(a) In 2013, the Board of Governors of the Federal Reserve
System (Board) issued a final regulatory capital rule (Regulation Q)
in coordination with the Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC) that
strengthened risk-based and leverage capital requirements applicable
to insured depository institutions and depository institution
holding companies (banking organizations).\1\ Among those changes
was the introduction of a countercyclical capital buffer (CCyB) for
large, internationally active banking organizations.\2\
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\1\ See 12 CFR part 217; Federal Reserve Board Approves Final
Rule To Help Ensure Banks Maintain Strong Capital Positions (July 2,
2013), available at http://www.federalreserve.gov; Agencies Adopt
Supplementary Leverage Ratio Notice of Proposed Rulemaking (July 9,
2013), available at http://www.occ.gov; and FDIC Board Approves
Basel III Interim Final Rule and Supplementary Leverage Ratio Notice
of Proposed Rulemaking (July 9, 2013) available at https://www.fdic.gov.
\2\ 12 CFR 217.11(b). The CCyB applies only to banking
organizations subject to the advanced approaches capital rules,
which generally apply to those banking organizations with greater
than $250 billion in assets or more than $10 billion in on-balance-
sheet foreign exposures. See 12 CFR 217.100(b). An advanced
approaches institution is subject to the CCyB regardless of whether
it has completed the parallel run process and received notification
from its primary Federal supervisor. See 12 CFR 217.121(d).
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(b) The CCyB is a supplemental, macroprudential policy tool that
the Board can increase during periods of rising vulnerabilities in
the financial system and reduce when vulnerabilities recede. It is
designed to increase the resilience of large banking organizations
when there is an elevated risk of above-normal losses. Increasing
the resilience of large banking organizations will, in turn, improve
the resilience of the broader financial system. Above-normal losses
often follow periods of rapid asset price appreciation or credit
growth that are not well supported by underlying economic
fundamentals. The circumstances in which the Board would most likely
begin to increase the CCyB above zero percent to augment minimum
capital requirements and other capital buffers would be when
systemic vulnerabilities are meaningfully above normal. By requiring
large banking organizations to hold additional capital during those
periods of excess and removing the requirement to hold additional
capital when the vulnerabilities have diminished, the CCyB also is
expected to moderate fluctuations in the supply of credit over time.
Moderating the supply of credit may mitigate or prevent the
conditions that contribute to above-normal losses, such as elevated
asset prices and excessive leverage, and prevent or mitigate
reductions in lending to creditworthy borrowers that can amplify an
economic downturn. In this way, implementation of the CCyB also
responds to the Dodd-Frank Act's requirement that the Board seek to
make its capital requirements countercyclical.\3\
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\3\ 12 U.S.C. 1844(b), 1464a(g)(1), and 3907(a)(1) (codifying
sections 616(a), (b), and (c) of the Dodd-Frank Act).
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(c) Regulation Q established the initial CCyB amount with
respect to private sector credit exposures located in the United
States (U.S.-based credit exposures) at zero percent and provided
that the maximum potential amount of the CCyB for credit exposures
in the United States was 2.5 percent of risk-weighted assets.\4\ The
Board expects to make decisions about the appropriate level of the
CCyB for U.S.-based credit exposures jointly with the OCC and FDIC,
and expects that the CCyB amount for U.S.-based credit exposures
will be the same for covered depository institution holding
companies and insured depository institutions. The CCyB is designed
to take into account the macrofinancial environment in which banking
organizations function and the degree to which that environment
impacts the resilience of advanced approaches institutions.
Therefore, the appropriate level of the CCyB for U.S.-based credit
exposures is not closely linked to the characteristics of an
individual institution. Rather, the impact of the CCyB on any single
institution will depend on the particular composition of the
private-sector credit exposures of the institution across national
jurisdictions.
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\4\ The CCyB is subject to a phase-in arrangement between 2016
and 2019. See 12 CFR 217.300(a)(2).
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2. Overview and Scope of the Policy Statement
This Policy Statement describes the framework that the Board
will follow in setting the amount of the CCyB for U.S.-based credit
exposures. The framework consists of a set of principles for
translating assessments of financial system vulnerabilities that are
regularly undertaken by the Board into the appropriate level of the
CCyB. Those assessments are informed by a broad array of
quantitative indicators of financial and economic performance and a
set of empirical models. In addition, the framework includes an
assessment of whether the CCyB is the most appropriate policy
instrument (among available policy instruments) to address the
highlighted financial system vulnerabilities.
3. The Objectives of the CCyB
(a) The objectives of the CCyB are to strengthen banking
organizations' resilience against the build-up of systemic
vulnerabilities and reduce fluctuations in the supply of credit. The
CCyB supplements the minimum capital requirements and the capital
conservation buffer, which themselves are designed to provide
substantial resilience to unexpected losses created by normal
fluctuations in economic and financial conditions. The capital
surcharge on global systemically important banking organizations
adds an additional layer of defense for the largest and most
systemically important institutions, whose financial distress can
have outsized effects on the rest of the financial system and the
real economy.\5\ However, periods of financial excesses, for example
as reflected in episodes of rapid asset price appreciation or credit
growth not well supported by underlying economic fundamentals, are
often followed by above-normal losses that leave banking
organizations and other financial institutions undercapitalized.
Therefore, the Board would most likely begin to increase the CCyB
above zero in those circumstances when systemic vulnerabilities
become meaningfully above normal and progressively raise the CCyB
level if vulnerabilities become more severe.
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\5\ See, Federal Reserve Board Approves Final Rule Requiring The
Largest, Most Systemically Important U.S. Bank Holding Companies To
Further Strengthen Their Capital Positions (July 20, 2015),
available at http://www.federalreserve.gov.
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(b) The CCyB is expected to help provide additional resilience
for advanced approaches institutions, and by extension the
[[Page 63687]]
broader financial system, against elevated vulnerabilities primarily
in two ways. First, advanced approaches institutions will likely
hold more capital to avoid limitations on capital distributions and
discretionary bonus payments resulting from implementation of the
CCyB. Strengthening their capital positions when financial
conditions are accommodative would increase the capacity of advanced
approaches institutions to absorb outsized losses during a future
significant economic downturn or period of financial instability,
thus making them more resilient.
(c) The second and related goal of the CCyB is to promote a more
sustainable supply of credit over the economic cycle. During a
credit cycle downturn, better-capitalized institutions have been
shown to be more likely than weaker institutions to have continued
access to funding. Better-capitalized institutions also are less
likely to take actions that lead to broader financial-sector
distress and its associated macroeconomic costs, such as large-scale
sales of assets at prices below their fundamental value and sharp
contractions in credit supply.\6\ Therefore, it is likely that as a
result of the CCyB having been put into place during the preceding
period of rapid credit creation, advanced approaches institutions
would be better positioned to continue their important intermediary
functions during a subsequent economic contraction. A timely and
credible reduction in the CCyB requirement during a period of high
credit losses could reinforce those beneficial effects of a higher
base level of capital, because it would permit advanced approaches
institutions either to realize loan losses promptly and remove them
from their balance sheets or to expand their balance sheets, for
example by continuing to lend to creditworthy borrowers.
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\6\ For additional background on the relationship between
financial distress and economic outcomes, see Carmen Reinhart and
Kenneth Rogoff (2009), This Time is Different. Princeton University
Press; [Ograve]scar Jord[agrave] & Moritz Schularick & Alan M Taylor
(2011), ``Financial Crises, Credit Booms, and External Imbalances:
140 Years of Lessons,'' IMF Economic Review, Palgrave Macmillan,
vol. 59(2), pages 340-378; and Bank for International Settlements
(2010), ``Assessing the Long-Run Economic Impact of Higher Capital
and Liquidity Requirements.''
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(d) During a period of cyclically increasing vulnerabilities,
advanced approaches institutions might react to an increase in the
CCyB by raising lending standards, otherwise reducing their risk
exposure, augmenting their capital, or some combination of those
actions. They may choose to raise capital by taking actions that
would increase net income, reducing capital distributions such as
share repurchases or dividends, or issuing new equity. In this
regard, an increase in the CCyB would not prevent advanced
approaches institutions from maintaining their important role as
credit intermediaries, but would reduce the likelihood that banking
organizations with insufficient capital would foster unsustainable
credit growth or engage in imprudent risk taking. The specific
combination of adjustments and the relative size of each adjustment
will depend in part on the initial capital positions of advanced
approaches institutions, the cost of debt and equity financing, and
the earnings opportunities presented by the economic situation at
the time.\7\
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\7\ For estimates of the size of certain adjustments, see Samuel
G. Hanson, Anil K. Kashyap, and Jeremy C. Stein (2011), ``A
Macroprudential Approach to Financial Regulation,'' Journal of
Economic Perspectives 25(1), pp. 3-28; Skander J. Van den Heuvel
(2008), ``The Welfare Cost of Bank Capital Requirements.'' Journal
of Monetary Economics 55, pp. 298-320.
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4. The Framework for Setting the U.S. CCyB
(a) The Board regularly monitors and assesses threats to
financial stability by synthesizing information from a comprehensive
set of financial-sector and macroeconomic indicators, supervisory
information, surveys, and other interactions with market
participants.\8\ In forming its view about the appropriate size of
the U.S. CCyB, the Board will consider a number of financial system
vulnerabilities, including but not limited to, asset valuation
pressures and risk appetite, leverage in the nonfinancial sector,
leverage in the financial sector, and maturity and liquidity
transformation in the financial sector. The decision will reflect
the implications of the assessment of overall financial system
vulnerabilities as well as any concerns related to one or more
classes of vulnerabilities. The specific combination of
vulnerabilities is important because an adverse shock to one class
of vulnerabilities could be more likely than another to exacerbate
existing pressures in other parts of the economy or financial
system.
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\8\ Tobias Adrian, Daniel Covitz, and Nellie Liang (2014),
``Financial Stability Monitoring.'' Finance and Economics Discussion
Series 2013-021. Washington: Board of Governors of the Federal
Reserve System, http://www.federalreserve.gov/pubs/feds/2013/201321/201321pap.pdf.
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(b) The Board intends to monitor a wide range of financial and
macroeconomic quantitative indicators including, but not limited to,
measures of relative credit and liquidity expansion or contraction,
a variety of asset prices, funding spreads, credit condition
surveys, indices based on credit default swap spreads, option
implied volatilities, and measures of systemic risk.\9\ In addition,
empirical models that translate a manageable set of quantitative
indicators of financial and economic performance into potential
settings for the CCyB, when used as part of a comprehensive
judgmental assessment of all available information, can be a useful
input to the Board's deliberations. Such models may include, but are
not limited to, those that rely on small sets of indicators--such as
the nonfinancial credit-to-GDP ratio, its growth rate, and
combinations of the credit-to-GDP ratio with trends in the prices of
residential and commercial real estate--which some academic research
has shown to be useful in identifying periods of financial excess
followed by a period of crisis on a cross-country basis.\10\ Such
models may also include those that consider larger sets of
indicators, which have the advantage of representing conditions in
all key sectors of the economy, especially those specific to risk-
taking, performance, and the financial condition of large banks.\11\
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\9\ See 12 CFR 217.11(b)(2)(iv).
\10\ See, e.g., Jorda, Oscar, Moritz Schularick and Alan Taylor,
2013. ``When Credit Bites Back: Leverage, Business Cycles and
Crises,'' Journal of Money, Credit, and Banking, 45(2), pp. 3-28,
and Drehmann, Mathias, Claudio Borio, and Kostas Tsatsaronis, 2012.
``Characterizing the Financial Cycle: Don't Lose Sight of the Medium
Term!'' BIS Working Papers 380, Bank for International Settlements.
Jorda, Oscar, Moritz Schularick and Alan Taylor, 2015. ``Leveraged
Bubbles,'' Center for Economic Policy Research Discussion Paper No.
DP10781. BCBS (2010), ``Guidance for National Authorities Operating
the Countercyclical Capital Buffer,'' BIS.
\11\ See, e.g., Aikman, David, Michael T. Kiley, Seung Jung Lee,
Michael G. Palumbo, and Missaka N. Warusawitharana (2015), ``Mapping
Heat in the U.S. Financial System,'' Finance and Economics
Discussion Series 2015-059. Washington: Board of Governors of the
Federal Reserve System, http://dx.doi.org/10.17016/FEDS.2015.059
(providing an example of the range of indicators used and type of
analysis possible).
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(c) However, no single indictor or fixed set of indicators can
adequately capture all the vulnerabilities in the U.S. economy and
financial system. Moreover, adjustments in the CCyB that were
tightly linked to a specific model or set of models could be
imprecise due to the relatively short period that some indicators
are available, the limited number of past crises against which the
models can be calibrated, and limited experience with the CCyB as a
macroprudential tool. As a result, the types of indicators and
models considered in assessments of the appropriate level of the
CCyB are likely to change over time based on advances in research
and the experience of the Board with this new macroprudential tool.
(d) The Board will determine the appropriate level of the CCyB
for U.S.-based credit exposures based on its analysis of the above
factors. Generally, a zero percent U.S. CCyB amount would reflect an
assessment that U.S. economic and financial conditions are broadly
consistent with a financial system in which levels of system-wide
vulnerabilities are within or near their normal range of values. The
Board could increase the CCyB as vulnerabilities build. A 2.5
percent CCyB amount for U.S.-based credit exposures, which is the
maximum level under the Board's rule, would reflect an assessment
that the U.S. financial sector is experiencing a period of
significantly elevated or rapidly increasing system-wide
vulnerabilities. Importantly, as a macroprudential policy tool, the
CCyB will be activated and deactivated based on broad developments
and trends in the U.S. financial system, rather than the activities
of any individual banking organization.
(e) Similarly, the Board would remove or reduce the CCyB when
the conditions that led to its activation abate or lessen.
Additionally, the Board would remove or reduce the CCyB when release
of CCyB capital would promote financial stability. Indeed, for the
CCyB to be most effective, the CCyB should be deactivated or reduced
in a timely manner. Deactivating the CCyB in a timely manner could,
for example, promote
[[Page 63688]]
the prompt realization of loan losses by advanced approaches
institutions and the removal of such loans from their balance sheets
and would reduce the likelihood that advanced approaches
institutions would significantly pare their risk-weighted assets in
order to maintain their capital ratios during a downturn.
(f) The pace and magnitude of changes in the CCyB will depend
importantly on the underlying conditions in the financial sector and
the economy as well as the desired effects of the proposed change in
the CCyB. If vulnerabilities are rising gradually, then incremental
increases in the level of the CCyB may be appropriate. Incremental
increases would allow banks to augment their capital primarily
through retained earnings and allow policymakers additional time to
assess the effects of the policy change before making subsequent
adjustments. However, if vulnerabilities in the financial system are
building rapidly, then larger or more frequent adjustments may be
necessary to increase loss-absorbing capacity sooner and potentially
to mitigate the rise in vulnerabilities.
(g) The Board will also consider whether the CCyB is the most
appropriate of its available policy instruments to address the
financial system vulnerabilities highlighted by the framework's
judgmental assessments and empirical models. The CCyB primarily is
intended to address cyclical vulnerabilities, rather than structural
vulnerabilities that do not vary significantly over time. Structural
vulnerabilities are better addressed through targeted reforms or
permanent increases in financial system resilience. Two central
factors for the Board to consider are whether advanced approaches
institutions are exposed--either directly or indirectly--to the
vulnerabilities identified in the comprehensive judgmental
assessment or by the quantitative indicators that suggest activation
of the CCyB and whether advanced approaches institutions are
contributing--either directly or indirectly--to these highlighted
vulnerabilities.
(h) In setting the CCyB for advanced approaches institutions
that it supervises, the Board plans to consult with the OCC and FDIC
on their analyses of financial system vulnerabilities and on the
extent to which advanced approaches banking organizations are either
exposed to or contributing to these vulnerabilities.
5. Communication of the U.S. CCyB With the Public
(a) The Board expects to consider at least once per year the
applicable level of the U.S. CCyB. The Board will review financial
conditions regularly throughout the year and may adjust the CCyB
more frequently as a result of those monitoring activities.
(b) Further, the Board will continue to communicate with the
public in other formats regarding its assessment of U.S. financial
stability, including financial system vulnerabilities. In the event
that the Board considered that a change in the CCyB were
appropriate, it would, in proposing the change, include a discussion
of the reasons for the proposed action as determined by the
particular circumstances. In addition, the Board's biannual Monetary
Policy Report to Congress, usually published in February and July,
will continue to contain a section that reports on developments
pertaining to the stability of the U.S. financial system.\12\ That
portion of the report will be an important vehicle for updating the
public on how the Board's current assessment of financial system
vulnerabilities bears on the setting of the CCyB.
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\12\ For the most recent discussion in this format, see box
titled ``Developments Related to Financial Stability'' in Board of
Governors of the Federal Reserve System, Monetary Policy Report to
Congress, June 2016, pp. 20-21.
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6. Monitoring the Effects of the U.S. CCyB
(a) The effects of the U.S. CCyB ultimately will depend on the
level at which it is set, the size and nature of any adjustments in
the level, and the timeliness with which it is increased or
decreased. The extent to which the CCyB may affect vulnerabilities
in the broader financial system depends upon a complex set of
interactions between required capital levels at the largest banking
organizations and the economy and financial markets. In addition to
the direct effects, the secondary economic effects could be
amplified if financial markets extract a signal from the
announcement of a change in the CCyB about subsequent actions that
might be taken by the Board. Moreover, financial market participants
might react by updating their expectations about future asset prices
in specific markets or broader economic activity based on the
concerns expressed by the regulators in communications announcing a
policy change.
(b) The Board will monitor and analyze adjustments by banking
organizations and other financial institutions to the CCyB: whether
a change in the CCyB leads to observed changes in risk-based capital
ratios at advanced approaches institutions, as well as whether those
adjustments are achieved passively through retained earnings, or
actively through changes in capital distributions or in risk-
weighted assets. Other factors to be monitored include the extent to
which loan growth and interest rate spreads on loans made by
affected banking organizations change relative to loan growth and
loan spreads at banking organizations that are not subject to the
buffer. Another consideration in setting the CCyB and other
macroprudential tools is the extent to which the adjustments by
advanced approaches institutions to higher capital buffers lead to
migration of credit market activity outside of those banking
organizations, especially to the nonbank financial sector. Depending
on the amount of migration, which institutions are affected by it,
and the remaining exposures of advanced approaches institutions,
those adjustments could cause the Board to favor either a higher or
a lower value of the CCyB.
(c) The Board will also monitor information regarding the levels
of and changes in the CCyB in other countries. The Basel Committee
on Banking Supervision is expected to maintain this information for
member countries in a publically available form on its Web site.\13\
Using that data in conjunction with supervisory and publicly
available datasets, the Board will be able to draw not only upon the
experience of the United States but also that of other countries to
refine estimates of the effects of changes in the CCyB.
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\13\ BIS, Countercyclical capital buffer (CCyB), www.bis.org/bcbs/ccyb/index.htm.
By order of the Board of Governors of the Federal Reserve
System, September 8, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-21970 Filed 9-15-16; 8:45 am]
BILLING CODE 6210-01-P