Regulatory Capital Rules: The Federal Reserve Board's Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer, 63682-63688 [2016-21970]

Agencies

• FEDERAL RESERVE SYSTEM

[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]


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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.

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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.
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    \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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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).
---------------------------------------------------------------------------

    (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