Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations, 3062-3094 [2018-27002]

Download as PDF 3062 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 1, 3, 5, 6, 23, 24, 32, 34, 160, and 192 [Docket ID OCC–2018–0040] RIN 1557–AE59 FEDERAL RESERVE SYSTEM 12 CFR Parts 206, 208, 211, 215, 217, 223, 225, 238, and 251 [Regulation Q; Docket No. R–1638] RIN 7100–AF29 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 303, 324, 337, 347, 362, 365, and 390 RIN 3064–AE91 Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Notice of proposed rulemaking. AGENCY: The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) are inviting public comment on a notice of proposed rulemaking (proposal) that would provide for a simple measure of capital adequacy for certain community banking organizations, consistent with section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the proposal, most depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, that meet risk-based qualifying criteria, and that have a community bank leverage ratio (as defined in the proposal) of greater than 9 percent would be eligible to opt into a community bank leverage ratio framework. Such banking organizations that elect to use the community bank leverage ratio and that maintain a community bank leverage ratio of greater than 9 percent would not be subject to other risk-based and leverage capital requirements and would be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal amozie on DSK3GDR082PROD with PROPOSALS3 SUMMARY: VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 Deposit Insurance Act and regulations implementing that section, as applicable, and the generally applicable capital requirements under the agencies’ capital rule. DATES: Comments must be received by April 9, 2019. ADDRESSES: Comments should be directed to: OCC: You may submit comments to the OCC by any of the methods set forth below. Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title ‘‘Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations’’ to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal— ‘‘Regulations.gov’’: Go to www.regulations.gov. Enter ‘‘Docket ID OCC–2018–0040’’ in the Search Box and click ‘‘Search.’’ Click on ‘‘Comment Now’’ to submit public comments. • Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. • Email: regs.comments@ occ.treas.gov. • Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Fax: (571) 465–4326. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2018–0040’’ in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the Regulations.gov website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this rulemaking action by any of the following methods: • Viewing Comments Electronically: Go to www.regulations.gov. Enter PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 ‘‘Docket ID OCC–2018–0040’’ in the Search box and click ‘‘Search.’’ Click on ‘‘Open Docket Folder’’ on the right side of the screen. Comments and supporting materials can be viewed and filtered by clicking on ‘‘View all documents and comments in this docket’’ and then using the filtering tools on the left side of the screen. • Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov. The docket may be viewed after the close of the comment period in the same manner as during the comment period. • Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649–6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649–5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments. Board: You may submit comments, identified by Docket No. R–1638, by any of the following methods: • Agency website: https:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/general info/foia/ProposedRegs.cfm. • Email: regs.comments@ federalreserve.gov. Include docket number in the subject line of the message. • Fax: (202) 452–3819 or (202) 452– 3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. All public comments are available from the Board’s website at https://www.federalreserve.gov/general info/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 3515, 1801 K Street NW (between 18th and 19th Street NW), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays. FDIC: You may submit comments, identified by RIN 3064–AE91 by any of the following methods: • Agency website: https:// www.FDIC.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency website. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules ESS, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. • Hand Delivered/Courier: Comments may be hand-delivered to the guard station at the rear of the 550 17th Street NW, building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m. • Email: comments@FDIC.gov. Include the RIN 3064–AE91 on the subject line of the message. • Public Inspection: All comments received must include the agency name and RIN 3064–AE91 for this rulemaking. All comments received will be posted without change to https://www.fdic.gov/ regulations/laws/federal/, including any personal information provided. Paper copies of public comments may be ordered from the FDIC Public Information Center, 3501 North Fairfax Drive, Room E–1002, Arlington, VA 22226 by telephone at (877) 275–3342 or (703) 562–2200. FOR FURTHER INFORMATION CONTACT: OCC: Christine A. Smith, Risk Analyst; or David Elkes, Risk Expert; or JungSup Kim, Risk Specialist, Capital Policy (202–649–6370); or Carl Kaminski, Special Counsel; or Daniel Perez, Attorney; or Rima Kundnani, Attorney, Chief Counsel’s Office, (202) 649–5490, for persons who are deaf or hearing impaired, TTY, (202) 649–5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. Board: Constance M. Horsley, Deputy Associate Director, (202) 452–5239; Juan Climent, Manager, (202) 872–7526; Sviatlana Phelan, Senior Supervisory Financial Analyst, (202) 912–4306; Andrew Willis, Senior Supervisory Financial Analyst, (202) 912–4323; Division of Supervision and Regulation; or Benjamin McDonough, Assistant General Counsel, (202) 452–2036; Mark Buresh, Counsel, (202) 452–5270; or Andrew Hartlage, Counsel, (202) 452– 6483; Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263– 4869. FDIC: Benedetto Bosco, Chief, Capital Policy Section, bbosco@fdic.gov; Stephanie Lorek, Senior Capital Markets Policy Analyst, slorek@fdic.gov; Dushan Gorechan, Financial Analyst, dgorechan@fdic.gov; Kyle McCormick, Financial Analyst, kmccormick@ fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898–6888; or Michael Phillips, Counsel, mphillips@fdic.gov; VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 Catherine Wood, Counsel, cawood@ fdic.gov; Alexander Bonander, Attorney, abonander@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Summary of the Proposal A. Overview of the Community Bank Leverage Ratio Framework B. Qualifying Community Banking Organization 1. Total Consolidated Assets 2. Total Off-balance Sheet Exposures 3. Total Trading Assets and Trading Liabilities 4. Mortgage Servicing Assets 5. Temporary Difference Deferred Tax Assets 6. Advanced Approaches Banking Organization C. CBLR Tangible Equity 1. Minority Interests 2. Accumulated Other Comprehensive Income 3. Intangible Assets 4. Deferred Tax Assets D. Average Total Consolidated Assets (CBLR Denominator) E. Calibration of the Community Bank Leverage Ratio F. Election to Use the Community Bank Leverage Ratio Framework G. Compliance with the Proposed CBLR Framework 1. Definition of a qualifying community banking organization 2. Treatment of a community banking organization that falls below the CBLR Requirement a. CBLR Levels for Certain PCA Categories b. Critically Undercapitalized Capital Category c. Effect of CBLR Levels on Other Regulations d. Alternative Approach H. Other Affected Regulations I. Deposit Insurance Assessment Regulations J. Illustrative Reporting Form K. Consultation with State Bank Supervisors III. Regulatory Analyses A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 E. Riegle Community Development and Regulatory Improvement Act of 1994 I. Background In 2013, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) revised the regulatory capital rule (capital rule) to address weaknesses in the capital framework that became apparent in the PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 3063 financial crisis of 2007–09.1 The capital rule strengthened the capital requirements applicable to banking organizations 2 supervised by the agencies by improving both the quality and quantity of regulatory capital and increasing risk-sensitivity. For example, the capital rule introduced a minimum common equity tier 1 capital requirement of 4.5 percent and strengthened the qualifying criteria for regulatory capital instruments, which had the effect of making the existing capital requirements more stringent.3 The capital rule also raised the minimum tier 1 risk-based capital requirement from 4 percent to 6 percent and, for advanced approaches banking organizations only,4 established a supplementary leverage ratio of 3 percent.5 Since the issuance of the capital rule in 2013, community banking organizations have raised concerns regarding the regulatory burden, complexity, and costs associated with certain aspects of the capital rule. In March 2017, the agencies published the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) Joint Report to Congress.6 In 1 The Board and OCC issued a joint final rule on October 11, 2013 (78 FR 62018), and the FDIC issued a substantially identical interim final rule on September 10, 2013 (78 FR 55340). On April 14, 2014 (79 FR 20754), the FDIC adopted the interim final rule as a final rule with no substantive changes. 2 Banking organizations subject to the agencies’ capital rule include national banks, state member banks, insured state nonmember banks, savings associations, and top-tier bank holding companies and savings and loan holding companies domiciled in the United States not subject to the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (12 CFR part 225, appendix C), excluding certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities or that are estate trusts, and bank holding companies and savings and loan holding companies that are employee stock ownership plans. 3 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20 (FDIC). 4 A banking organization is an advanced approaches banking organization if it has consolidated assets of at least $250 billion or if it has consolidated on-balance sheet foreign exposures of at least $10 billion, or if it is a subsidiary of a depository institution, bank holding company, savings and loan holding company, or intermediate holding company that is an advanced approaches banking organization. See 12 CFR 3.100 (OCC); 12 CFR 217.100 (Board); 12 CFR 324.100 (FDIC). The agencies are seeking comment on the definition of an advanced approaches banking organization. See https://www.federalreserve.gov/ newsevents/pressreleases/bcreg20181031a.htm 5 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); 12 CFR 324.10(a) (FDIC). 6 See Joint Report to Congress; Economic Growth and Regulatory Paperwork Reduction Act (March 2017), https://www.ffiec.gov/pdf/2017_FFIEC_ EGRPRA_Joint-Report_to_Congress.pdf. EGRPRA, Public Law 104–208, 110 Stat. 3009. E:\FR\FM\08FEP3.SGM 08FEP3 3064 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS3 the EGRPRA report, the agencies stated they are considering simplifications to the capital rule with the goal of meaningfully reducing regulatory burden on community banking organizations while maintaining safety and soundness and the quality and quantity of regulatory capital in the banking system. In September 2017, the agencies proposed simplifying certain capital requirements for all banking organizations, except advanced approaches banking organizations (simplifications proposal).7 In an effort to provide immediate relief, the agencies also extended transition provisions for certain regulatory capital requirements that would be affected by the simplifications proposal.8 On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) amended provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 9 as well as certain other statutes administered by the agencies.10 Section 201 of the Act, titled ‘‘Capital Simplification for Qualifying Community Banks,’’ directs the agencies to develop a community bank leverage ratio (CBLR) of not less than 8 percent and not more than 10 percent for qualifying community banks (qualifying community banking organizations). The Act defines a qualifying community banking organization as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion. A qualifying community banking organization that exceeds the CBLR level established by the agencies is considered to have met: (i) The generally applicable leverage and riskbased capital requirements under the agencies’ capital rule; (ii) the capital ratio requirements in order to be considered well capitalized under the agencies’ prompt corrective action (PCA) framework (in the case of insured depository institutions); and (iii) any other applicable capital or leverage requirements. In addition, the Act directs the agencies to establish procedures for the treatment of qualifying community banking organizations that fall below the CBLR level established by the agencies.11 7 82 FR 49984 (October 27, 2017). FR 55309 (November 21, 2017). The agencies continue to evaluate comments on the simplifications proposal. 9 Public Law 111–203, 124 Stat. 1376. 10 See Public Law 115–174, 132 Stat. 1296. 11 The agencies note that under existing legal requirements applicable to holding companies and insured depository institutions, to be considered well capitalized a banking organization must 8 83 VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 Section 201 of the Act defines the CBLR as the ratio of a qualifying community banking organization’s CBLR tangible equity to its average total consolidated assets, both as reported on the qualifying community banking organization’s applicable regulatory filing. In addition, the Act states that the agencies may determine that a banking organization is not a qualifying community banking organization based on the banking organization’s risk profile. The Act states that such a determination shall be based on consideration of off-balance sheet exposures, trading assets and liabilities, total notional derivatives exposures, and such other factors as the agencies determine appropriate. The Act also specifies that the CBLR framework developed by the agencies does not limit the authority of the Federal banking agencies in effect as of the date of enactment of the Act. Finally, the Act directs the agencies to consult with applicable state bank supervisors in carrying out section 201 of the Act and to notify the applicable state bank supervisor of any qualifying community banking organization that exceeds, or does not exceed after previously exceeding, the CBLR. II. Summary of the Proposal A. Overview of the Community Bank Leverage Ratio Framework The proposed CBLR framework, based on the requirements of section 201 of the Act, is a simple alternative methodology to measure capital adequacy for qualifying community banking organizations. The proposal together with associated reporting requirement changes that the agencies anticipate proposing would simplify regulatory requirements and provide material regulatory relief to qualifying community banking organizations that opt into the CBLR framework. The agencies designed the CBLR framework taking into account multiple considerations, seeking to balance the simplicity of the framework with safety and soundness goals. First, the CBLR framework is intended to be available to a meaningful number of well capitalized banking organizations with less than $10 billion in total consolidated assets. Second, the CBLR should be calibrated to not reduce the amount of capital currently held by qualifying community banking organizations. Third, the demonstrate that it is not subject to any written agreement, order, capital directive, or as applicable, prompt corrective action directive, to meet and maintain a specific capital level for any capital measure. See, e.g., 12 CFR 225.2. The same legal requirements would continue to apply under the CBLR framework. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 agencies intend for banking organizations with higher risk profiles to remain subject to the generally applicable capital requirements 12 to ensure that such banking organizations hold capital commensurate with the risk of their exposures and activities. Fourth, consistent with the Act, the agencies would maintain the supervisory actions applicable under the PCA framework and other statutes and regulations based on the capital ratios and risk profile of a banking organization. Finally, the CBLR framework is intended to provide meaningful regulatory compliance burden relief and be relatively simple for banking organizations to implement. Under the proposal, a qualifying community banking organization would be defined as a depository institution or depository institution holding company with less than $10 billion in total consolidated assets with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets (MSAs), and deferred tax assets (DTAs) arising from temporary differences that a banking organization could not realize through net operating loss carrybacks (temporary difference DTAs). In addition, an advanced approaches banking organization would not be a qualifying community banking organization. The CBLR would be calculated as the ratio of tangible equity capital (CBLR tangible equity) divided by average total consolidated assets. Under the proposal, CBLR tangible equity would be defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income (AOCI), DTAs arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than MSAs), each as of the most recent calendar quarter and calculated in accordance with a qualifying community banking organization’s regulatory reports. Average total consolidated assets would be calculated in a manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the CBLR numerator would also be excluded from the CBLR denominator. Under the proposal, a qualifying community banking organization may elect to use the CBLR framework if its CBLR is greater than 9 percent. A CBLR greater than 9 percent, in conjunction with the proposed definitions of a qualifying community banking organization and CBLR tangible equity, 12 12 CFR 3.10(a)–(b) (OCC); 12 CFR 217.10(a)–(b) (Board); 12 CFR 324.10(a)–(b) (FDIC). E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules should generally maintain the current level of capital held by these banking organizations, while supporting the agencies’ goals of reducing regulatory burden for community banking organizations and retaining safety and soundness in the banking system. The proposal provides a regulatory capital treatment for a qualifying community banking organization that elects to use the CBLR framework (CBLR banking organization), but whose CBLR subsequently falls to 9 percent or less, and continues to provide for the agencies’ supervisory actions under PCA and other applicable statutes and regulations. Specifically, for insured depository institutions, the proposal incorporates CBLR levels as proxies for the following PCA categories: Adequately capitalized, undercapitalized and significantly undercapitalized. If a CBLR banking organization’s CBLR meets the corresponding CBLR levels, it would be considered to have met the capital ratio requirements within the applicable PCA category and be subject to the same restrictions that currently apply to any other insured depository institution in the same PCA category. Further, the proposal would not limit the agencies’ authority to take any supervisory actions consistent with their supervisory authority under the PCA framework or other statutes or regulations. The agencies are not proposing changes to the definition of the critically undercapitalized category under their PCA rules. Therefore, under the proposal, if an insured depository institution is considered significantly undercapitalized, based on its CBLR, the insured depository institution would be required to provide promptly to its appropriate regulators such information as is necessary to calculate the tangible equity ratio as defined under the PCA framework for insured depository institutions. The CBLR calculation would require significantly less data than are used to calculate the generally applicable capital requirements. The agencies therefore expect that a CBLR banking organization would report its CBLR and other relevant information on a simpler regulatory capital schedule, relative to Schedules RC–R of the Consolidated Reports of Condition and Income (Call Report) and HC–R of Form FR Y–9C. The agencies are including in this Supplementary Information an illustrative CBLR reporting schedule. The illustrative schedule reflects potential reduced reporting requirements and is intended to aid commenters in understanding the VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 proposal. The agencies intend to publish a separate information collection proposal in the Federal Register to seek comment on revising the reporting schedules and instructions for purposes of the CBLR framework. The agencies are monitoring the impact of the upcoming implementation of the current expected credit losses methodology (CECL) on community banking organizations. In May 2018, the agencies issued a notice of proposed rulemaking to amend the capital rule in response to CECL (CECL transitions NPR).13 The CECL transitions NPR proposed an optional three-year transition arrangement that would allow a banking organization to phase in any adverse day-one regulatory capital effects of CECL adoption on retained earnings, DTAs, allowance for credit losses, and average total consolidated assets. These day-one regulatory capital effects would be phased in over the transition period on a straight line basis. Question 1: The agencies invite comment on the impact to the CBLR framework due to the upcoming implementation of CECL. What changes should the agencies consider? For example, what are the advantages and disadvantages of providing CBLR banking organizations an optional transition arrangement to phase in any adverse day-one effects on the CBLR due to the implementation of CECL? How could any phase-in be included in the CBLR framework without creating undue burden? B. Qualifying Community Banking Organization Under the proposal, a qualifying community banking organization would be defined as a depository institution or depository institution holding company that is not an advanced approaches banking organization and that meets the following criteria (qualifying criteria), each as described further below: • Total consolidated assets of less than $10 billion; • Total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets; • Total trading assets and trading liabilities of 5 percent or less of total consolidated assets; • MSAs of 25 percent or less of CBLR tangible equity; and • Temporary difference DTAs of 25 percent or less of CBLR tangible equity.14 13 83 FR 22312 (May 14, 2018). addition, the agencies would reserve the authority to disallow the use of the CBLR 14 In PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 3065 The agencies believe that banking organizations that do not meet these qualifying criteria should remain subject to the generally applicable capital requirements to ensure that such banking organizations hold capital commensurate with the risk profile of their activities. The agencies would monitor the appropriateness of the proposed qualifying criteria over time to ensure that they remain effective in excluding banking organizations with complex or potentially risky off-balance sheet activities from the CBLR framework. As mentioned previously, the agencies developed these qualifying criteria in conjunction with the proposed CBLR of greater than 9 percent and the CBLR tangible equity definition to create a simple alternative framework to the generally applicable capital requirements. Question 2: The agencies invite comment on the definition of a qualifying community banking organization. What are the advantages and disadvantages of the qualifying criteria? What is the burden associated with determining whether a banking organization meets the proposed qualifying criteria? What other criteria, if any, should the agencies consider in the proposed definition of a qualifying community banking organization? What are commenters’ views on the tradeoffs between simplicity and having additional risk profile criteria? In specifying any alternative qualifying criteria regarding a banking organization’s risk profile, please provide information on how alternative qualifying criteria should be considered in conjunction with the calibration of the CBLR level and why the agencies should consider such alternative criteria. 1. Total Consolidated Assets Under the proposal, a qualifying community banking organization would be required to have less than $10 billion in total consolidated assets as of the end of the most recent calendar quarter, in accordance with the Act. Total consolidated assets would be calculated in accordance with the reporting framework by a depository institution or depository institution holding company, based on the risk profile of the banking organization. This authority would be reserved under the general reservation of authority included in the capital rule, in which the CBLR framework would be codified. See 12 CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR 324.1(d) (FDIC). In addition, for purposes of the capital rule and section 201 of the Act, the agencies would reserve the authority to take action under other provisions of law, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law or regulation. See 12 CFR 3.1(b) (OCC); 12 CFR 217.1(b) (Board); 12 CFR 324.1(b) (FDIC). E:\FR\FM\08FEP3.SGM 08FEP3 3066 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS3 instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable. 2. Total Off-Balance Sheet Exposures Under the proposal, a qualifying community banking organization would be required to have total off-balance sheet exposures of 25 percent or less of its total consolidated assets, as of the end of the most recent calendar quarter. The agencies are including this qualifying criterion in the CBLR framework because the CBLR includes only on-balance sheet assets in its denominator and thus would not require a qualifying banking organization to hold capital against its off-balance sheet exposures. This qualifying criterion is intended to reduce the likelihood that a qualifying community banking organization with significant off-balance sheet exposures would hold less capital under the CBLR framework than under the generally applicable capital requirements. Under the proposal, total off-balance sheet exposures would be calculated as the sum of the notional amounts of certain off-balance sheet items as of the end of the most recent calendar quarter. Total off-balance sheet exposures would include the unused portions of commitments (except for unconditionally cancellable commitments); self-liquidating, traderelated contingent items that arise from the movement of goods; transactionrelated contingent items (i.e., performance bonds, bid bonds and warranties); sold credit protection in the form of guarantees and credit derivatives; credit-enhancing representations and warranties; offbalance sheet securitization exposures; letters of credit; forward agreements that are not derivative contracts; and securities lending and borrowing transactions (total off-balance sheet exposures). Total off-balance sheet exposures would exclude derivatives that are not credit derivatives, such as foreign exchange swaps and interest rate swaps. The agencies believe the notional amount for such derivatives is not an appropriate indicator of credit risk and could inadvertently disqualify a banking organization from using the CBLR framework if the banking organization is appropriately hedging its credit risks. The proposed components of total offbalance sheet exposures would be generally consistent with off-balance sheet items in the generally applicable capital requirements, except for securities lending and borrowing transactions. Securities lending and borrowing transactions would include VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 the sum of off-balance sheet securities lent and borrowed measured in accordance with the reporting instructions for these items in Schedules RC–L of the Call Report or HC–L of Form FR Y–9C, as applicable. The proposed calculation of total offbalance sheet exposures is significantly simpler than under the generally applicable capital requirements, which require that off-balance sheet exposures be converted to on-balance sheet equivalents and assigned the appropriate risk weight. As mentioned previously, the agencies also intend to ensure that the regulatory relief included in the CBLR framework is available to a meaningful number of community banking organizations. As a result, the agencies do not believe that traditional banking activities, such as extending loan commitments to customers, should necessarily preclude a banking organization from qualifying to use the CBLR framework. The agencies analyzed average off-balance sheet exposures, relative to total consolidated assets, for banking organizations with less than $10 billion in total consolidated assets and observed that the vast majority of such banking organizations report off-balance sheet exposures totaling less than 25 percent of total consolidated assets. Accordingly, the agencies have determined that the proposed 25 percent qualifying criterion of total offbalance sheet exposures to total consolidated assets would allow a meaningful number of banking organizations to use the CBLR framework without unduly restricting lending practices. The proposed criterion would help to prevent banking organizations from engaging in excessive off-balance sheet exposures without a commensurate capital requirement under the CBLR framework. Question 3: The agencies invite comment on the proposed off-balance sheet qualifying criterion. What aspects of the off-balance sheet qualifying criterion, including definitions, require further clarity? For example, what aspects, if any, of the generally applicable capital requirement’s definition of credit enhancing representations and warranties or the reporting instructions to Schedules RC– L of the Call Report or HC–L of Form FR Y–9C for securities lent and borrowed require further clarity? What other alternatives should the agencies consider for purposes of defining the proposed qualifying criterion? For example, what are the advantages and disadvantages of using off-balance sheet PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 items reported on Schedules RC–L of the Call Report or HC–L of Form FR Y–9C in place of the off-balance sheet items as currently reported on Schedules RC– R of the Call Report or HC–R of Form FR Y–9C? What impact would the proposed qualifying criterion have on a banking organization’s business strategies and lending decisions? 3. Total Trading Assets and Trading Liabilities Under the proposal, a qualifying banking organization would be required to have total trading assets and liabilities of 5 percent or less of its total consolidated assets, each measured as of the end of the most recent calendar quarter. Total trading assets and liabilities would be calculated as the sum of those exposures, in accordance with the reporting instructions for these items on Schedules RC of the Call Report or HC of Form FR Y–9C, as applicable. A banking organization would divide the sum of its total trading assets and trading liabilities by its total consolidated assets to determine its percentage of total trading assets and liabilities. The agencies recognize the potential elevated levels of risk and complexity that can be associated with certain trading activities. For this reason, banking organizations with significant trading assets and liabilities are subject to a market risk capital requirement under the generally applicable riskbased capital requirements.15 In contrast, CBLR banking organizations would not be required to calculate additional market risk capital requirements and, as a result, the CBLR framework may not appropriately capitalize for material amounts of trading assets and trading liabilities. In addition, elevated levels of trading activity can produce a heightened level of earnings volatility, which has implications for capital adequacy. Therefore, the agencies have concerns about making the CBLR framework available to banking organizations with material market risk exposure. At the same time, the agencies do not believe that low levels of trading activity should preclude a banking organization from using the CBLR framework. Based on the agencies’ analysis, the vast majority of banking organizations with less than $10 billion in total consolidated assets have total trading assets and liabilities well below 5 percent of their total consolidated assets. The agencies believe that the 15 12 CFR part 3, subpart F (OCC); 12 CFR part 217, subpart F (Board); 12 CFR part 324, subpart F (FDIC). E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules proposed 5 percent threshold would help to ensure that banking organizations under the CBLR framework would not engage in significant trading activity. Further, this criterion is generally consistent with section 203 of the Act, which excludes a community banking organization from proprietary trading restrictions if its trading assets and liabilities are 5 percent or less of its total consolidated assets. The agencies considered adopting an additional qualifying criterion in the CBLR framework based on a banking organization’s total notional derivatives exposures. However, as described above, the agencies are concerned that such additional criterion may inadvertently disqualify a banking organization from using the CBLR framework if the banking organization engages in prudent risk management by appropriately hedging its risks associated with traditional banking activities. The agencies reviewed the notional derivative exposures reported by banking organizations with less than $10 billion in total consolidated assets and determined that a significant majority of such banking organizations currently either do not report any derivative exposure or report notional derivative amounts of less than $500 million, which would require relatively low amounts of regulatory capital under the generally applicable capital requirements. Therefore, except for the notional amount of sold credit protection in the form of a credit derivative, the agencies have not incorporated total notional derivatives exposure as a qualifying criterion under the proposed CBLR framework. Question 4: The agencies invite comment on the proposed trading activity criterion. What other alternatives to limiting trading activity should the agencies consider for purposes of defining a qualifying community banking organization and why? Question 5: What are the advantages and disadvantages of using total notional derivatives exposures or another measure as the basis for the qualifying criterion? If such a criterion were included in the CBLR framework, how should it be measured and why? At what level should any such qualifying criterion be set? 4. Mortgage Servicing Assets Under the proposal, a qualifying community banking organization would be required to have MSAs of 25 percent or less of its CBLR tangible equity. This qualifying criterion would be calculated as MSAs, calculated in accordance with VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 the reporting instructions to Schedules RC–M of the Call Report or HC–M of Form FR Y–9C, as applicable, divided by CBLR tangible equity, each measured as of the end of the most recent calendar quarter. High concentrations in MSAs are subject to stringent capital requirements through a deduction approach under the generally applicable capital requirements.16 The stringent capital requirements are designed to protect banking organizations from sudden fluctuations in the value of MSAs and from the potential inability of banking organizations to divest themselves of MSAs quickly at their full estimated value during periods of financial stress. The 25 percent threshold for holdings of MSAs in the CBLR framework would help to ensure that banking organizations with high concentrations of MSAs would remain subject to the generally applicable capital requirements. The proposed MSA qualifying criterion is aligned with the proposed threshold for MSAs in the simplifications proposal discussed above.17 As an alternative to the proposed qualifying criterion for MSAs, the agencies considered an approach that would instead require a qualifying community banking organization to deduct from its CBLR tangible equity MSAs in excess of 25 percent of CBLR tangible equity. However, the agencies are concerned that such an approach would unduly complicate the CBLR framework. Question 6: The agencies invite comment on the proposed qualifying criterion for MSAs. What are commenters’ views on the inclusion of such a qualifying criterion as opposed to an alternative deduction approach from CBLR tangible equity for purposes of the CBLR? 5. Temporary Difference Deferred Tax Assets Under the proposal, a qualifying community banking organization would have temporary difference DTAs, net of any related valuation allowances, of 25 percent or less of CBLR tangible equity. This criterion would be calculated as temporary difference DTAs, as described in the capital rule,18 divided by CBLR tangible equity, each measured 16 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d) (Board); 12 CFR 324.22(d) (FDIC). 17 82 FR 49984 (October 27, 2017). 18 12 CFR 3.22(d)(1)(i) (OCC); 12 CFR 217.22(d)(1)(i) (Board); 12 CFR 324.22(d)(1)(i) (FDIC). As described further below, this proposal would not include the option for netting deferred tax liabilities to maintain a simple calculation of CBLR tangible equity. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 3067 as of the end of the most recent calendar quarter. Temporary difference DTAs, net of any related valuation allowances, are assets that banking organizations may not be able to fully realize, especially under adverse financial conditions, because a banking organization’s ability to realize its temporary difference DTAs is dependent on future taxable income.19 This concern is particularly acute when banking organizations are experiencing financial difficulty. Question 7: The agencies invite comment on the treatment of temporary difference DTAs for purposes of the definition of a qualifying community banking organization. What are the advantages and disadvantages of the proposed qualifying criterion for temporary difference DTAs? What alternatives should the agencies consider in limiting exposures to DTAs and how would such alternatives affect the proposed calibration of the CBLR framework? 6. Advanced Approaches Banking Organizations Under the proposal, only non– advanced approaches banking organizations would be eligible to use the CBLR framework. Advanced approaches banking organizations are generally banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, or subsidiaries of such banking organizations.20 As such, a depository institution with less than $10 billion in total consolidated assets may be an advanced approaches banking organization. The agencies believe that, in general, the Act is designed to provide regulatory relief for banking organizations with less than $10 billion in total consolidated assets and that have a limited risk profile. While an advanced approaches banking organization with less than $10 billion in total consolidated assets is a relatively small banking organization, it is nonetheless part of a more complex banking organization. Consequently, such a banking organization would not be eligible to use the CBLR framework under this proposal. Question 8: The agencies invite comment on the exclusion of advanced approaches banking organizations from the CBLR framework. What other alternatives should the agencies consider with respect to a banking 19 Temporary differences arise when financial events or transactions are recognized in one period for financial reporting purposes and in another period, or periods, for tax purposes. 20 See footnote 4. E:\FR\FM\08FEP3.SGM 08FEP3 3068 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS3 organization’s affiliation with larger, more complex banking organizations? C. CBLR Tangible Equity Under the proposal, the numerator of the CBLR would be CBLR tangible equity. CBLR tangible equity would be calculated as a banking organization’s total bank equity capital or total holding company equity capital, as applicable, determined in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y–9C, prior to including minority interests, less: (i) Accumulated other comprehensive income (AOCI), (ii) all intangible assets (other than MSAs), and (iii) DTAs, net of any related valuation allowances, that arise from net operating loss and tax credit carryforwards, each as of the end of the most recent calendar quarter.21 CBLR tangible equity would not include minority interests (equity of a consolidated subsidiary that is not owned by the qualifying community banking organization) because minority interests do not have the same loss absorption capacity as other components of CBLR tangible equity at the consolidated banking organization level. The proposed definition is intended as a prudent, simple measure of CBLR tangible equity, which CBLR banking organizations can calculate using amounts reported on regulatory reports. The agencies believe that this simpler measure of capital is consistent with the goal of providing meaningful burden relief for qualifying community banking organizations. The agencies’ generally applicable capital requirements have long included restrictions on the types of capital instruments that can be included in tier 1 capital. Prior to 2013, the agencies’ capital rule required that voting common stock holders’ equity be the dominant form of tier 1 capital and that banking organizations should avoid undue reliance on nonvoting equity and preferred stock. Furthermore, cumulative perpetual preferred securities are generally not included in tier 1 capital. The definition of tier 1 capital under the generally applicable capital requirements excludes cumulative perpetual preferred securities as such instruments allow for the accumulation of interest payable and are not likely to absorb losses to the degree appropriate for inclusion in tier 21 Solely for purposes of the FDIC’s proposed definition of CBLR tangible equity, FDIC-supervised institutions that are CBLR banking organizations must deduct identified losses (to the extent that CBLR tangible equity would have been reduced if the appropriate accounting entries to reflect the identified losses had been recorded on the banking organization’s books). VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 1 capital. However, consistent with the intention to maintain a simple definition of CBLR tangible equity, the proposal does not include such restrictions and thus provides more flexibility with respect to the types of capital instruments that could qualify for CBLR tangible equity. The agencies believe providing such flexibility is consistent with safety and soundness when considering the overall proposed calibration of the CBLR framework for qualifying community banking organizations. Question 9: The agencies invite comment on the proposed definition of CBLR tangible equity. What changes, if any, would commenters suggest to the proposed definition of CBLR tangible equity? What are the advantages and disadvantages of a CBLR that closely aligns with the applicable reporting instructions to Schedules RC of the Call Report and HC of Form FR Y–9C measure of equity? What are the advantages and disadvantages of introducing additional adjustments and deductions from equity capital when defining CBLR tangible equity? Question 10: What are the advantages and disadvantages of not imposing specific eligibility criteria for capital instruments under the CBLR framework? If the agencies exclude certain types of capital instruments from CBLR tangible equity, how should the agencies incorporate such criteria in a simple manner? For example, what are the advantages and disadvantages of the agencies requiring that voting common equity be the dominant form of CBLR tangible equity? Question 11: What other alternative definitions of CBLR tangible equity should the agencies consider with respect to the CBLR, and how should such alternatives be considered in conjunction with the proposed 9 percent CBLR calibration? Would defining CBLR tangible equity to equal a measure of capital under the generally applicable capital requirements (e.g., tier 1 capital) be more appropriate, and if so, why? 1. Minority Interests Under the proposal, the definition of CBLR tangible equity would not include minority interests in consolidated subsidiaries because, while such minority interests are available to absorb losses at the subsidiary, they are not always available to absorb losses at the banking organization’s consolidated level. To address this concern, the generally applicable capital requirements limit the amount of minority interests that a banking organization may include in its PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 regulatory capital through a relatively complex calculation. To balance the agencies’ concern regarding the capacity of minority interests to absorb losses at the consolidated banking organization and to preserve the simplicity of the CBLR framework, the proposed definition of CBLR tangible equity would not include minority interests in consolidated subsidiaries. The agencies reviewed data regarding minority interests that banking organizations with less than $10 billion in total consolidated assets report in regulatory capital and found that only a small number of such banking organizations currently report any minority interests. Therefore, the exclusion of minority interests is not expected to have a material impact on the amount of CBLR tangible equity for the vast majority of banking organizations. Question 12: The agencies invite comment on the proposed exclusion of minority interests from the definition of CBLR tangible equity. What are the advantages and disadvantages of this approach? If minority interests were to be included, how should the agencies limit the amount of minority interests that could count toward a banking organization’s CBLR tangible equity without creating undue complexity? 2. Accumulated Other Comprehensive Income Under the proposal, the definition of CBLR tangible equity would exclude all components of AOCI, measured in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable. Under the generally applicable capital requirements, banking organizations, other than advanced approaches banking organizations, may exclude most components of AOCI from common equity tier 1 capital. AOCI generally includes accumulated unrealized gains and losses on certain assets and liabilities that are not included in net income, yet are included in equity under U.S. GAAP (for example, unrealized gains and losses on securities designated as available-for-sale). When the agencies revised the capital rule in 2013, they noted that smaller or relatively less complex banking organizations may not have sophisticated risk management techniques to hedge interest rate risk and that including AOCI in regulatory capital could introduce significant volatility in the capital ratios due to fluctuations in benchmark interest rates. The agencies therefore included an option for non-advanced approaches E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS3 banking organizations to neutralize the impact of AOCI on their regulatory capital calculations and the vast majority of banking organizations have made that election. Consistent with the generally applicable capital requirements’ treatment of AOCI for banking organizations other than advanced approaches banking organizations, the proposal would exclude all components of AOCI from CBLR tangible equity. The proposed adjustment for AOCI would be simpler than under the generally applicable capital requirements which allow certain banking organizations to neutralize some but not all AOCI, and thus should alleviate regulatory burden for banking organizations that qualify for and elect to use the CBLR, without meaningfully affecting the amount of the AOCI adjustment. Question 13: The agencies invite comment on the proposed treatment of AOCI for purposes of the CBLR. What are the advantages and disadvantages of making adjustments to CBLR tangible equity for all components of AOCI? What alternatives, if any, to the proposed treatment of AOCI should the agencies consider for purposes of the CBLR and why? 3. Intangible Assets Under the proposal, the definition of CBLR tangible equity would require deduction of goodwill and all other intangible assets (other than MSAs), which is consistent with long-standing requirements in the generally applicable capital requirements. This deduction would be calculated as goodwill and all other intangible assets (other than MSAs), measured in accordance with the reporting instructions to Schedules RC–M of the Call Report or HC–M of Form FR Y–9C, as applicable. All other intangible assets generally include, for example, core deposit intangibles, favorable leasehold rights, purchased credit card relationships, and nonmortgage servicing assets. During times of stress, it may be difficult to sell, or to calculate reliable values for, intangible assets. Fully deducting goodwill and all other intangible assets would help to retain the quality of CBLR tangible equity and would be consistent with safety and soundness and with the generally applicable capital requirements. Deducting these items is also consistent with section 201 of the Act, which requires the agencies to develop a CBLR using tangible equity capital. The proposed deduction for intangible assets is gross of associated deferred tax liabilities. The generally applicable capital requirements contain VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 an option for netting of deferred tax liabilities from the items subject to deduction, which may result in a complex calculation for banking organizations with limited deferred tax liabilities. The agencies propose to not include the same option for netting deferred tax liabilities to maintain a simple calculation of CBLR tangible equity. The agencies also analyzed the effect of netting deferred tax liabilities from intangible assets subject to deduction and observed that permitting netting of deferred tax liabilities would not meaningfully change the CBLR for qualifying banking organizations. Question 14: The agencies invite comment on the treatment of intangible assets in the proposed definition of CBLR tangible equity for purposes of the CBLR. What are the advantages and disadvantages of the proposed approach? What are commenters’ views on retaining the option to net deferred tax liabilities from items subject to deduction, as permitted under the generally applicable capital requirements? What alternatives, if any, to the proposed treatment of intangible assets should the agencies consider and why? 4. Deferred Tax Assets Under the proposal, DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, would be deducted from CBLR tangible equity. This deduction would supplement the qualifying criterion that requires a qualifying community banking organization to have temporary difference DTAs of 25 percent or less of its CBLR tangible equity. Under the proposal, DTAs that arise from net operating loss and tax credit carryforwards would be measured consistently with the generally applicable capital requirements,22 except that a banking organization would not have the option to reduce the amount of the deduction by deferred tax liabilities. The proposed approach for DTAs is similar to, but simpler than, the treatment of DTAs in the generally applicable capital requirements, which requires deduction from common equity tier 1 capital of the entire amount of DTAs that arise from net operating loss and tax credit carryforwards and requires the deduction of temporary difference DTAs above certain thresholds. The proposed approach for DTAs is intended to address the concern that DTAs that are generally dependent upon future taxable income may not be 22 12 CFR 3.22(a)(3) (OCC); 12 CFR 217.22(a)(3) (Board); 12 CFR 324.22(a)(3) (FDIC). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 3069 realizable. This concern is particularly acute when banking organizations are experiencing financial difficulty or when broad economic conditions change. In developing the proposal, the agencies considered alternative treatments of DTAs that arise from net operating loss and tax credit carryforwards and temporary difference DTAs that would have varying degrees of conservatism and complexity. One alternative for calculating CBLR tangible equity would be to deduct DTAs that arise from net operating loss and tax credit carryforwards from a banking organization’s total equity capital, and then to deduct temporary difference DTAs that exceed 25 percent of a threshold amount equal to a banking organization’s total equity capital less all other adjustments and deductions for CBLR tangible equity. The agencies decided against this alternative because such a threshold deduction would result in an unduly complex CBLR tangible equity calculation. Another alternative would be to deduct all net DTAs (i.e., DTAs that arise from net operating loss and tax credit carryforwards and temporary difference DTAs), net of any valuation allowances, measured in accordance with the reporting instructions to Schedule RC–F of the Call Report or Schedule HC–F of Form FR Y–9C, as applicable, from a banking organization’s total equity capital, which would be a more conservative treatment than under the generally applicable capital requirements. The agencies have not proposed this approach based on a concern that a deduction for all temporary difference DTAs could be unduly punitive. Question 15: The agencies invite comment on the treatment of DTAs that arise from net operating loss and tax credit carryforwards in the proposed definition of CBLR tangible equity. What are the advantages and disadvantages of not permitting the netting of deferred tax liabilities? What are commenters’ views on the complexity of netting deferred tax liabilities as compared to the simplicity of a gross deduction? What alternatives, if any, should the agencies consider and why? Question 16: The agencies invite comment on whether it would be more appropriate to deduct all net DTAs from CBLR tangible equity. What are the advantages and disadvantages of deducting all net DTAs from CBLR tangible equity? What are commenters’ views on the tradeoffs of simply deducting all net DTAs as compared to separate treatments for DTAs that arise from net operating loss and tax credit carryforwards and temporary difference E:\FR\FM\08FEP3.SGM 08FEP3 3070 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules DTAs? What alternatives, if any, should the agencies consider and why? amozie on DSK3GDR082PROD with PROPOSALS3 D. Average Total Consolidated Assets (CBLR Denominator) Consistent with the Act, the proposed CBLR denominator would be based on a banking organization’s average total consolidated assets. Specifically, average total consolidated assets for purposes of the CBLR denominator would be calculated in accordance with the reporting instructions to Schedules RC–K on the Call Report or HC–K on Form FR Y–9C, as applicable, less the items deducted from the CBLR numerator, except AOCI. The proposed calculation is similar to that used in determining the denominator of the tier 1 leverage ratio. Question 17: The agencies invite comment on the proposed definition of average total consolidated assets. What, if any, alternative definitions of average total consolidated assets should the agencies consider for purposes of the CBLR and why? E. Calibration of the Community Bank Leverage Ratio The agencies propose that a qualifying community banking organization may elect to use the CBLR framework if the CBLR of the banking organization is greater than 9 percent at the time of election. A qualifying community banking organization with a CBLR greater than 9 percent would be considered to have met: (i) The generally applicable capital requirements; (ii) the well capitalized capital ratio requirements under the agencies’ PCA framework for insured depository institutions or the well capitalized standards under the Board’s regulations for holding companies, as applicable; and (iii) any other capital or leverage requirements to which the banking organization is subject. Such banking organizations would not be required to calculate capital ratios under the generally applicable capital requirements. Additionally, to be considered well capitalized under the CBLR framework, and consistent with the agencies’ PCA framework, a qualifying community banking organization must not be subject to any written agreement, order, capital directive, or PCA directive to meet and maintain a specific capital level for any capital measure. The proposed calibration of the CBLR, in conjunction with the qualifying community banking organization and CBLR tangible equity definitions, seek to strike a balance among the following objectives: Maintaining strong capital levels in the banking system, ensuring VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 safety and soundness, and providing appropriate regulatory burden relief to as many banking organizations as possible. For example, an 8 percent CBLR would allow more banking organizations to opt into the CBLR framework but could incentivize a large number of CBLR banking organizations to hold less regulatory capital than they do today. Conversely, a significant number of banking organizations would not meet a 10 percent CBLR, which could preclude the use of the CBLR framework by banking organizations that are operating in a safe and sound manner with prudent levels of capital. The agencies estimate that as of the second quarter of 2018, the vast majority of banking organizations under $10 billion in total consolidated assets would meet the definition of a qualifying community banking organization and have a CBLR above 9 percent. Based on reported data as of June 30, 2018, there are 5,408 insured depository institutions with less than $10 billion in total consolidated assets and 151 depository institution holding companies with more than $3 billion and less than $10 billion in total consolidated assets.23 Approximately 83 percent of such insured depository institutions and 56 percent of such depository institution holding companies would qualify to use the CBLR framework under the proposed 9 percent calibration and qualifying criteria. The agencies believe the CBLR framework, including its proposed calibration, meets the objectives described above. Question 18: The agencies invite comment on the proposed CBLR calibration. What other factors should the agencies consider in calibrating the CBLR and why? The agencies request that commenters include discussion of how the proposed CBLR level should be affected by potential changes to other aspects of the proposed CBLR framework, such as the definition of CBLR tangible equity and the definition of a qualifying community banking organization. F. Election To Use the Community Bank Leverage Ratio Framework Under the proposal, a qualifying community banking organization with a CBLR greater than 9 percent may elect 23 As of June 30, 2018, there are 4,261 depository institution holding companies with less than $10 billion in total consolidated assets. More than 95 percent of such holding companies are not subject to the capital rule because they have less than $3 billion in total consolidated assets and meet certain additional criteria to qualify for the Board’s small bank holding company policy statement. See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR 238.9. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 to use the CBLR framework at any time. Such a banking organization would indicate its election by completing a CBLR reporting schedule in its Call Report or Form FR Y–9C, as applicable, which will be proposed at a later date, as discussed below in this Supplementary Information. Under the proposal, a CBLR banking organization may opt out of the CBLR framework and use the generally applicable capital requirements by completing the associated reporting requirements on Schedules RC–R of the Call Report or HC–R of Form FR Y–9C, as applicable. While the agencies would not place restrictions on the ability of qualifying community banking organizations to switch in and out of the CBLR framework, the agencies anticipate such changes to be rare and typically driven by significant changes in the banking organization’s business activities. The agencies believe that some flexibility to reverse the election to use the CBLR framework is warranted to ensure that banking organizations can adjust their business strategies and activities over time. The agencies would expect a CBLR banking organization to be able to provide a rationale for opting out of the CBLR framework to its appropriate regulators, if requested. Additionally, the agencies note that a CBLR banking organization may opt out of the CBLR framework between reporting periods by producing the capital ratios under the generally applicable capital requirements to its appropriate regulators at the time of opting out. This requirement is intended to remove any ambiguity relating to capital adequacy for either the banking organization or the appropriate regulators. A banking organization that has opted out of the CBLR framework would need to meet the qualifying criteria included in the definition of a qualifying community banking organization and have a CBLR of greater than 9 percent to be able to opt back into the CBLR framework. This proposed approach is intended to balance the need for flexibility in applying capital requirements tailored to banking organizations’ different and potentially shifting business models with the goal of discouraging arbitrage between capital frameworks. Question 19: The agencies invite comment on the proposed procedure a banking organization would use to opt into and out of the CBLR framework. What are commenters’ views on the frequency with which a qualifying community banking organizations may opt in and out of the CBLR framework? What other alternatives should the E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules agencies consider for purposes of qualifying community banking organizations’ election to use and report the CBLR and why? Do qualifying community banking organizations anticipate frequent switching between the CBLR framework and the generally applicable capital requirements, and if so, why? What are the operational or other challenges associated with frequent switching between frameworks? What are commenters’ views on the loss of comparability in capital ratios over time that may result from frequent switching between frameworks? How would the changes proposed in the simplifications proposal influence whether a banking organization elects to use the CBLR framework? amozie on DSK3GDR082PROD with PROPOSALS3 G. Compliance With the Proposed CBLR Framework 1. Definition of a Qualifying Community Banking Organization Under the proposal, a CBLR banking organization that no longer meets the proposed qualifying criteria would be required, within a limited grace period of two consecutive calendar quarters, either to once again meet the qualifying criteria or demonstrate compliance with the generally applicable capital requirements. The grace period would begin as of the end of the calendar quarter in which the CBLR banking organization ceases to satisfy the criteria to be a qualifying community banking organization and end after two consecutive calendar quarters. During the grace period, the banking organization could continue to be treated as a qualifying community banking organization and could, therefore, continue calculating and reporting a CBLR to determine its PCA category, in the case of an insured depository institution, and compliance with other statutes and regulations. A banking organization that grows to $10 billion or larger in total consolidated assets or no longer meets one or more of the other qualifying criteria (e.g., increased concentrations in MSAs) could use the grace period to again meet the qualifying criteria or revert to the generally applicable capital requirements. For example, if the CBLR banking organization exceeded one of the qualifying criteria as of February 15, the grace period for such a banking organization would begin as of the end of the quarter ending March 31. The banking organization could continue to use the CBLR framework as of June 30, but would need to fully comply with the generally applicable capital requirements (including the associated reporting requirements) as of September VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 30, unless at that time the banking organization once again met the qualifying criteria of the CBLR framework. The agencies believe that this limited grace period is appropriate to mitigate potential volatility in capital and associated regulatory reporting requirements based on temporary changes in a banking organization’s risk profile from quarter to quarter, while capturing more permanent changes in risk profile. A CBLR banking organization that ceases to meet the criteria to be a qualifying community banking organization as a result of a business combination would receive no grace period, however, and immediately would no longer be a qualifying community banking organization. The agencies believe this approach is appropriate as banking organizations would need to consider the regulatory capital implications of a planned business combination and be prepared to comply with the applicable requirements. A CBLR banking organization that expects that it would not meet the qualifying criteria as a result of a planned business combination would need to provide its pro-forma capital ratios under the generally applicable capital requirements to its appropriate regulator as part of its merger application, if applicable, and fully comply with the generally applicable capital requirements as of the completion of the transaction. Question 20: The agencies invite comment on the proposed treatment for a banking organization that no longer meets the definition of a qualifying community banking organization after making an election to use the CBLR framework. Specifically, what are the advantages and disadvantages of the proposed period of time a banking organization that no longer meets the qualifying criteria would be provided to transition to the generally applicable capital requirements? What other alternatives should the agencies consider with respect to a banking organization that no longer meets the definition of a qualifying community banking organization and why? 2. Treatment of a Community Banking Organization That Falls Below the CBLR Requirement Under the proposal, a CBLR banking organization that has a CBLR greater than 9 percent would be considered well capitalized. In addition, a CBLR banking organization would be considered to have met the minimum capital requirements under the agencies’ PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 3071 capital rule if its CBLR is 7.5 percent or greater.24 The Act requires that the agencies establish procedures for the treatment of a CBLR banking organization that experiences a decline in its CBLR below the percentage set by the agencies after exceeding such percentage. A CBLR banking organization’s CBLR may deteriorate due to a decline in its level of CBLR tangible equity, growth in its average total consolidated assets, or a combination of both. As described above, a CBLR banking organization may choose to stop using the CBLR framework and instead become subject to the generally applicable capital requirements. However, the agencies recognize that some banking organizations may find it unduly burdensome to begin complying with the more complex risk-based capital reporting requirements at the same time that the organization is experiencing a decline in its CBLR. Accordingly, in the case of CBLR banking organizations that are insured depository institutions and that no longer exceed the 9 percent CBLR, the agencies are proposing to establish the following CBLR levels to serve as proxies for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA capital categories and be deemed to satisfy statutory capital requirements: 25 • Adequately capitalized—CBLR of 7.5 percent or greater; • Undercapitalized—CBLR of less than 7.5 percent; and • Significantly undercapitalized—CBLR of less than 6 percent. The definition of critically undercapitalized would remain the same as under the PCA framework and the generally applicable capital requirements. The agencies are not proposing a proxy CBLR level for the critically undercapitalized category, which would continue to be calculated as the ratio of tangible equity to total assets (as defined under the PCA framework) of 2 percent or below. As discussed above, the agencies are proposing a CBLR level of greater than 9 percent for the well capitalized capital category pursuant to section 201 of the Act. 24 A CBLR banking organization that is a depository institution holding company would no longer be considered well capitalized if the holding company had a CBLR of 9 percent or less. 25 See, for example, 12 U.S.C. 5371 (establishing a capital floor for insured depository institutions and depository institution holding companies); section 201 of the Act (requiring development of a community bank leverage ratio for which a depository institution exceeding that ratio would be considered to meet the requirements to be treated as well capitalized under PCA); and 12 U.S.C. 1831o (PCA). E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 3072 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules a. CBLR Levels for Certain PCA Categories Under the proposal, the CBLR levels for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA capital categories would serve as proxies for the existing risk-based and leverage capital ratios that currently define these PCA capital categories. In setting the proposed proxy levels, the agencies sought to provide sufficient separation across categories such that a banking organization would not face frequent changes to its PCA category without a corresponding significant change in its CBLR. For reference, the agencies note that under the current PCA rules, there is a 2 percentage point difference between the risk-based capital ratios for the corresponding PCA capital categories and a 1 percentage point difference between the tier 1 leverage ratios for the corresponding PCA capital categories. The agencies performed data analysis on 5,408 insured depository institutions under $10 billion in total consolidated assets as of June 30, 2018, to calibrate the CBLR levels for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA capital categories, of which 4,469 insured depository institutions meet all the proposed qualifying criteria (eligible IDIs). The agencies’ data analysis has demonstrated that at the proposed PCA adequately capitalized requirement of 7.5 percent, about 0.5 percent of eligible IDIs would require less capital—in order to be deemed adequately capitalized— under the CBLR framework than under the generally applicable capital requirements. Thus, the data analysis by the agencies supports a conclusion that 7.5 percent results in an appropriate balance between the two considerations of (1) serving as an appropriate proxy for the adequately capitalized PCA ratio in the risk-based and leverage capital rules, and (2) providing sufficient separation between the adequately capitalized PCA ratio and the well capitalized and the undercapitalized PCA ratios. Similarly, at the proposed PCA significantly undercapitalized requirement of 6 percent, about 0.4 percent of eligible IDIs would require less capital—in order to be considered undercapitalized—under the CBLR framework than under the generally applicable capital requirements. Therefore, the agencies believe that the proposed 6 percent level would represent an appropriate balance between (1) serving as an appropriate proxy for the significantly VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 undercapitalized PCA ratio in the riskbased and leverage capital rules, and (2) providing sufficient separation between the significantly undercapitalized and the undercapitalized and critically undercapitalized PCA ratios. Under the proposal, a CBLR banking organization that maintains a CBLR of 7.5 percent or greater but less than or equal to 9 percent would be deemed to have met the minimum capital requirements and all of the capital ratio requirements for the adequately capitalized capital category under the PCA framework and therefore, treated as adequately capitalized. A CBLR banking organization whose CBLR falls below 7.5 percent but is greater than or equal to 6 percent would be deemed to have met all of the capital ratio requirements for the undercapitalized capital category under the PCA framework and therefore, treated as undercapitalized. A CBLR banking organization whose CBLR falls below 6 percent and tangible equity ratio is above 2 percent would be deemed to have met all of the capital ratio requirements for the significantly undercapitalized capital category under the PCA framework and therefore, considered and treated as significantly undercapitalized. The definition of critically undercapitalized would remain the same as under the PCA framework and the generally applicable capital requirements. Specifically, the critically undercapitalized category would continue to include banking organizations with a ratio of tangible equity to total assets (as defined under the PCA framework) of 2 percent or below. b. Critically Undercapitalized Capital Category Section 38 of the Federal Deposit Insurance Act 26 specifies that the critically undercapitalized capital category must be set at no less than 2 percent of the tangible equity ratio. Therefore, a CBLR depository institution with a ratio of tangible equity to total assets (as provided for under the agencies PCA framework) of 2 percent or below would be classified as critically undercapitalized. Because the information necessary to calculate the PCA tangible equity ratio under the current capital rule may not be readily available to a CBLR banking organization, a CBLR banking organization with a CBLR of less than 6 percent would be required to provide promptly to its appropriate regulators such information as is necessary to calculate the PCA tangible equity ratio so that the regulators may calculate and monitor the banking organization’s tangible equity ratio in the event that its condition deteriorates. Such deterioration can occur quickly depending on the particular circumstances and economic environment. Under the proposal and consistent with the current authorities, the appropriate regulators also may request the information necessary to determine the tangible equity ratio at any time, and the CBLR banking organization must provide it. The agencies considered proposing a CBLR level for the critically undercapitalized capital category. However, allowing two definitions for the critically undercapitalized capital category would create potential arbitrage between the generally applicable capital requirements and CBLR framework and legal uncertainty as to when a bank is critically undercapitalized for purposes of the FDIC being appointed as a conservator or receiver for a failing banking organization. c. Effect of CBLR Levels on Other Regulations The agencies would use the proxies described in the previous section to apply the regulatory, supervisory, and enforcement authorities under PCA and other statutes to CBLR banking organizations.27 A CBLR banking organization would be subject to all of the requirements and restrictions, including any capital restoration plan requirement and mandatory and discretionary supervisory actions, applicable to a banking organization in its PCA category. Similarly, agencies expect to continue applying the current supervisory standards for examining banking organizations for capital adequacy. For example, if a CBLR banking organization becomes less than well capitalized, it would become subject to applicable regulatory restrictions. For a CBLR banking organization that is a depository institution, these restrictions would include the brokered deposit and interest rate restrictions.28 For a CBLR banking organization that is a depository institution holding company, these restrictions would include limitations on financial activities under the Bank Holding Company Act and Regulation Y. A CBLR banking organization’s capital category can also affect various applications’ standards, procedures, and processing in the same way as a banking organization’s current PCA category based on the generally 27 See 26 12 PO 00000 U.S.C. 1831o. Frm 00012 Fmt 4701 28 12 Sfmt 4702 E:\FR\FM\08FEP3.SGM section 201(c)(2) of the Act. U.S.C 1831f; 12 CFR 337.6. 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules applicable capital requirements. These include the ability to conduct interstate mergers and to establish interstate branches, as well as eligibility for expedited applications processing. amozie on DSK3GDR082PROD with PROPOSALS3 d. Alternative Approach Consistent with the treatment of a CBLR banking organization that no longer meets the definition of a qualifying community banking organization, the agencies considered proposing to require CBLR banking organizations to report capital ratios under the generally applicable capital requirements if their CBLR fell to 9 percent or below, subject to a transition period. On the one hand, this approach is straightforward, avoids any potential ambiguity with respect to a banking organization’s capital category when it is less than well capitalized, and is consistent with the CBLR framework being available for highly capitalized community banking organizations. On the other hand, this approach is relatively inflexible compared to the proposal. The agencies believe that some additional flexibility in the implementation of the CBLR framework is not inconsistent with the Act’s purpose of relieving qualifying community banking organizations. Question 21: The agencies invite comment on the proposed treatment for a CBLR banking organization that no longer exceeds the 9 percent CBLR level. Specifically, what are commenters’ views on the proposed CBLR levels for all other PCA capital categories except for the critically undercapitalized capital category? What are the advantages and disadvantages of establishing proxies for the identified PCA capital categories? Question 22: The agencies invite comment on the proposal to require a CBLR banking organization to provide the information necessary for its regulators to calculate the banking organization’s tangible equity once the banking organization’s CBLR falls below 6 percent. What, if any, would be the burden of gathering and providing such information and how long would it take to generate such information? Question 23: What alternative procedures should the agencies consider with respect to the treatment of a CBLR banking organization whose CBLR has fallen to 9 percent or less and why? Question 24: The agencies invite comment on the proposed implementation of section 201 of the Act. How does the proposed definition of CBLR tangible equity interact with the risk profile criteria and the proposed CBLR ratio requirement? VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 H. Other Affected Federal Regulations Under the proposal, a CBLR banking organization would no longer be required to calculate or report the components of capital used in the calculation of risk-based capital ratios or the tier 1 leverage ratio, such as tier 1 capital, total capital, or risk-weighted assets. Various Federal banking regulations outside of the regulatory capital rule (non-capital rules) contain references to these regulatory capital terms and therefore would need to be updated to reflect the components of capital and related capital measures under the CBLR framework. To ensure that these non-capital rules continue to operate as intended, the agencies propose that standards using tier 1 capital or total capital be amended so that a CBLR banking organization would use CBLR tangible equity instead of tier 1 capital or total capital. The agencies propose that where applicable, standards referencing risk-weighted assets be amended so that a CBLR banking organization would use average total consolidated assets (i.e., the CBLR denominator) instead of risk-weighted assets. In addition, certain of the agencies’ non-capital rules refer to ‘‘capital stock and surplus’’ (or similar items), which is generally defined as tier 1 and tier 2 capital plus the amount of allowances for loan and lease losses not included in tier 2 capital.29 The agencies propose that a CBLR banking organization would calculate capital stock and surplus as CBLR tangible equity plus allowances for loan and lease losses. Thus, for example, for purposes of compliance with section 23A of the Federal Reserve Act, the proposal would amend the Board’s Regulation W to provide that, for a CBLR banking organization, ‘‘capital stock and surplus’’ would mean CBLR tangible equity plus allowances for loan and lease losses.30 At this time, the agencies are not proposing changes to their supervisory guidance which uses these capital terms. The agencies will consider how best to address affected supervisory guidance in conjunction with comments received on this proposal. Question 25: The agencies invite comment on the proposed amendments to their affected non-capital rules that would apply to CBLR banking 29 See e.g., 12 CFR 223.3(d). agencies issued a proposal in May 2018 to address pending changes to U.S. GAAP related to accounting for allowances under the agencies’ rules. See 83 FR 22312 (May 14, 2018). For purposes of any final rule, the agencies expect to match the treatment and terminology related to allowances under the agencies’ rules under this proposal and the May 2018 proposal. 30 The PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 3073 organizations under the CBLR framework. What are commenters’ views or concerns with the proposed amendments, including with regard to any unintended consequences? What are the advantages and disadvantages of retaining the current tier 1 capital measure for purposes of the other regulations that would be revised under this proposal or within the CBLR framework itself? What other approaches should the agencies consider in amending the affected regulations? Which other additional non-capital rules should the agencies consider and amend as a result of the CBLR framework and why? I. Deposit Insurance Assessments Regulations FDIC assessments regulations also would be affected by the proposed CBLR framework. For example, CBLR banking organizations would no longer be required to report tier 1 capital or the tier 1 leverage ratio. The FDIC, however, uses these measures as part of its deposit insurance assessment system. For established small institutions, the tier 1 leverage ratio is one of eight measures used to determine an institution’s assessment rate.31 For all institutions, tier 1 capital is used to determine an institution’s assessment base.32 The FDIC plans to publish a separate notice of proposed rulemaking to address the application of the CBLR framework as it relates to the deposit insurance assessment system. The rulemaking would address, among other things, how the CBLR framework can be applied in lieu of the tier 1 leverage ratio and in lieu of tier 1 capital when calculating a bank’s assessment. The FDIC plans to consider and discuss in the rulemaking reasonable and possible options that address the application of the CBLR framework in the assessment system. The FDIC does not expect that any changes to its deposit insurance assessment system would have a material impact on aggregate assessment 31 For assessments purposes, an established small bank is generally defined as one that has been federally insured for at least five years and has less than $10 billion in assets. 12 CFR 327.8(v). A bank no longer qualifies as a small bank once it reports assets of $10 billion of more in its quarterly reports of condition for four consecutive quarters. 32 The Dodd-Frank Act required the FDIC to amend its regulations to generally define an institution’s assessment base as average consolidated total assets of the institution minus average tangible equity during the assessment period. The FDIC chose to use tier 1 capital in lieu of tangible equity when implementing this requirement in part because it required no additional reporting. See 12 CFR 327.5(a)(2); 76 FR 10673, 10678 (Feb. 25, 2011). E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules revenue or on rates paid by individual institutions. J. Illustrative Reporting Form The agencies intend to separately seek comment on the proposed changes to regulatory reports for qualifying BILLING CODE 4810–33–C, 6210–01–C, 6714–01–C amozie on DSK3GDR082PROD with PROPOSALS3 K. Consultation With State Bank Supervisors The agencies have had discussions with state bank supervisors and staff of the Conference of State Bank Supervisors, during which the agencies received helpful input in connection with this proposal. The agencies expect to continue engaging with the state bank supervisors during the rulemaking VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 requirements for those banking organizations that elect to use the proposed CBLR framework, the agencies include an illustrative reporting form below, using the Call Report as an example. community banking organizations that elect to use the CBLR framework. To provide an indication of the potential reporting format and potential reporting burden relief relative to the regulatory reporting requirements under the generally applicable capital BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P process, in accordance with section 201 of the Act. Section 201 also requires that the agencies notify the applicable state bank supervisor if a qualifying community banking organization exceeds the CBLR established by the agencies or ceases to exceed the CBLR after having previously exceeded it. The agencies plan to incorporate the CBLR into the Call Report and Form FR Y–9C so that qualifying community banking organizations report their CBLR levels on a quarterly basis. These reports are, and would continue to be, released to the public. The agencies believe that this public release of the CBLR would provide an operable means of notifying the applicable state bank supervisor of the relevant information about a CBLR banking organization’s CBLR. Question 26: What other considerations should the agencies contemplate to help ensure that the PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP3.SGM 08FEP3 EP08FE19.006</GPH> 3074 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules applicable state bank supervisor is notified when supervised qualifying community banking organizations exceed or cease to exceed the CBLR and why? III. Regulatory Analyses amozie on DSK3GDR082PROD with PROPOSALS3 A. Paperwork Reduction Act Certain provisions of the proposed rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501–3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently-valid Office of Management and Budget (OMB) control number. The OMB control number for the OCC is 1557– 0318, Board is 7100–0313, and FDIC is 3064–0153. The OCC and the FDIC may need to request new control numbers if submissions are pending under their current respective control numbers at the time of this submission. These information collections will be extended for three years, with revision. The information collection requirements contained in this proposed rulemaking have been submitted by the OCC and FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB’s implementing regulations (5 CFR 1320). The Board reviewed the proposed rule under the authority delegated to the Board by OMB. Comments are invited on: a. Whether the collections of information are necessary for the proper performance of the agencies’ functions, including whether the information has practical utility; b. The accuracy or the estimate of the burden of the information collections, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this document. VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 A copy of the comments may also be submitted to the OMB desk officer by mail to U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503; facsimile to (202) 395–6974; or email to oira_ submission@omb.eop.gov, Attention, Federal Banking Agency Desk Officer. Proposed Information Collection Title of Information Collection: Recordkeeping and Disclosure Requirements Associated with Capital Adequacy. Frequency: Quarterly, annual. Affected Public: Businesses or other for-profit. Respondents OCC: National banks, state member banks, state nonmember banks, and state and federal savings associations. Board: State member banks (SMBs), bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), savings and loan holding companies (SLHCs), and global systemically important bank holding companies (GSIBs). FDIC: State nonmember banks, state savings associations, and certain subsidiaries of those entities. Current Actions: The proposal would revise sections _.2 and _.10 of the capital rule, add a new section _.12 to the capital rule, and revise the agencies’ PCA rules, to implement the community bank leverage ratio in accordance with the Act. These changes will not, however, result in changes to the burden. Nevertheless, in order to be consistent across the agencies, the agencies are applying a conforming methodology for calculating the burden estimates. The agencies are also updating the number of respondents based on the current number of supervised entities even though this proposal only affects a limited number of entities. The agencies believe that any changes to the information collections associated with the proposed rule are the result of the conforming methodology and updates to the respondent count and not the result of the proposed rule changes. 3075 Standardized Approach (1,365 Institutions Affected) Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach (18 Institutions Affected) Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—280. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—35. Estimated annual burden hours: 1,088 hours initial setup, 64,929 hours for ongoing. Board Agency form number: FR Q. OMB control number: 7100–0313. Estimated number of respondents: 1,431 (of which 17 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios (1,431 Institutions Affected) Recordkeeping (Ongoing)—16. Standardized Approach (1,431 Institutions Affected) Recordkeeping (Initial setup)—122. Recordkeeping (Ongoing)—20. Disclosure (Initial setup)—226.25. Disclosure (Ongoing quarterly)— 131.25. Advanced Approach (17 Institutions Affected) Recordkeeping (Initial setup)—460. Recordkeeping (Ongoing)—540.77. Recordkeeping (Ongoing quarterly)— 20. Disclosure (Initial setup)—280. Disclosure (Ongoing)—5.78. Disclosure (Ongoing quarterly)—35. Disclosure (Table 13 quarterly)—5. Risk-Based Capital Surcharge for GSIBs (21 Institutions Affected) PRA Burden Estimates Recordkeeping (Ongoing)—0.5. Estimated annual burden hours: 1,088 hours initial setup, 78,183 hours for ongoing. OCC FDIC OMB control number: 1557–0318. Estimated number of respondents: 1,365 (of which 18 are advanced approaches institutions). Estimated average hours per response: OMB control number: 3064–0153. Estimated number of respondents: 3,575 (of which 2 are advanced approaches institutions). Estimated average hours per response: Minimum Capital Ratios (1,365 Institutions Affected) Minimum Capital Ratios (3,575 Institutions Affected) Recordkeeping (Ongoing)—16. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 Recordkeeping (Ongoing)—16. E:\FR\FM\08FEP3.SGM 08FEP3 3076 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules elect to adopt the CBLR framework would be administrative costs that arise from modifying policies and procedures Recordkeeping (Initial setup)—122. and reporting the new CBLR schedule, Recordkeeping (Ongoing)—20. rather than the existing RC–R schedule. Disclosure (Initial setup)—226.25. OCC staff estimates that each national Disclosure (Ongoing quarterly)— bank or Federal savings association 131.25. would spend no more than 320 hours to Advanced Approach (2 Institutions modify their policies and procedures Affected) and switch to reporting the CBLR schedule. To estimate this cost, OCC Recordkeeping (Initial setup)—460. staff used a compensation rate of $117 Recordkeeping (Ongoing)—540.77. per hour.34 Therefore, OCC staff Recordkeeping (Ongoing quarterly)— estimate the cost per institution would 20. not exceed $37,440 (320 hours × $117 Disclosure (Initial setup)—280. per hour). In general, OCC staff Disclosure (Ongoing)—5.78. classifies the economic impact of Disclosure (Ongoing quarterly)—35. Estimated annual burden hours: 1,088 expected cost (to comply with a rule) on an individual national bank or Federal hours initial setup, 130,758 hours for savings association as significant if the ongoing. The proposed rule will also require total estimated monetized costs in one changes to the Consolidated Reports of year are greater than (1) 5 percent of the Condition and Income (Call Reports) national bank’s or Federal savings (FFIEC 031, FFIEC 041, and FFIEC 051; association’s total annual salaries and OMB No. 1557–0081 (OCC), 7100–0036 benefits or (2) 2.5 percent of the national (Board), and 3064–0052 (FDIC)) and bank’s or Federal savings association’s Consolidated Financial Statements for total annual non-interest expense. Based Holding Companies (FR Y–9C; OMB No. on this criteria, the estimated cost of the 7100–0128 (Board)), which will be rule would impose a significant addressed in one or more separate economic impact at only one of the 860 Federal Register notices. affected small institutions, which is not a substantial number. B. Regulatory Flexibility Act Additionally, a critical element of the OCC: The Regulatory Flexibility Act, proposed rule is its inherent optionality. 5 U.S.C. 601 et seq., (RFA), requires an OCC staff believe CBLR eligible national agency, in connection with a proposed banks and Federal savings associations rule, to prepare an Initial Regulatory would only choose to use the CBLR Flexibility Analysis describing the framework if the benefits outweighed impact of the rule on small entities the costs. (defined by the SBA for purposes of the Therefore, the OCC certifies that the RFA to include commercial banks and proposed rule would not have a savings institutions with total assets of significant economic impact on a $550 million or less and trust substantial number of OCC-supervised companies with total assets of $38.5 small entities. million of less) or to certify that the proposed rule would not have a Board: The Board is providing an significant economic impact on a initial regulatory flexibility analysis substantial number of small entities. with respect to this proposed rule. The As of June 30, 2018, the OCC Regulatory Flexibility Act, 5 U.S.C. 601 supervises 886 small entities,33 of which et seq. (RFA), requires an agency to 860 could be impacted by the proposed consider whether the rules it proposes rule. Thus, a substantial number of will have a significant economic impact small entities could be impacted by the on a substantial number of small proposed rule. OCC staff also consider whether the 34 The OCC’s cost estimate includes an estimate proposed rule would result in a of the time required to implement the mandates and significant economic impact on affected the estimated average hourly wage of the bank employees who might be responsible for tasks small entities. OCC staff believe the associated with achieving compliance with the primary cost to small institutions that proposal and other rules that would be affected by amozie on DSK3GDR082PROD with PROPOSALS3 Standardized Approach (3,575 Institutions Affected) 33 The OCC calculated the number of small entities using the SBA’s size thresholds for commercial banks and savings institutions, and trust companies, which are $550 million and $38.5 million, respectively. Consistent with the General Principles of Affiliation, 13 CFR 121.103(a), the OCC counted the assets of affiliated financial institutions when determining whether to classify a national bank or Federal savings association as a small entity. VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 implementation of the proposal. To estimate average hourly wages, OCC staff reviewed data from May 2017 for wages (by industry and occupation) from the U.S. Bureau of Labor Statistics (BLS) for depository credit intermediation (NAICS 522100). To estimate compensation costs associated with the rule, OCC staff used $117 per hour, which is based on the average of the 90th percentile for seven occupations adjusted for inflation, plus an additional 34.2 percent to cover private sector benefits. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 entities.35 In connection with a proposed rule, the RFA requires an agency to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. An initial regulatory flexibility analysis must contain (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and legal basis for, the proposed rule; (3) a description of, and, where feasible, an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; (5) an identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap with, or conflict with the proposed rule; and (6) a description of any significant alternatives to the proposed rule which accomplish its stated objectives. The Board has considered the potential impact of the proposed rule on small entities in accordance with the RFA. Based on its analysis and for the reasons stated below, the Board believes that this proposed rule will not have a significant economic impact on a substantial number of small entities. Nevertheless, the Board is publishing and inviting comment on this initial regulatory flexibility analysis. A final regulatory flexibility analysis will be conducted after comments received during the public comment period have been considered. As discussed in detail above, the proposed rule would establish a community bank leverage ratio for qualifying community banking organizations. Qualifying community banking organizations would consist of insured depository institutions, bank holding companies, and savings and loan holding companies with total consolidated assets of less than $10 billion that also satisfy certain qualifying criteria. The qualifying criteria are designed to ensure that 35 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 total assets of $550 million or less and trust companies with total assets of $38.5 million or less. As of June 30, 2018, there were approximately 3,053 small bank holding companies, 184 small savings and loan holding companies, and 541 small state member banks. E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS3 qualifying community banking organizations do not have significant levels of assets that would make the community bank leverage ratio a less appropriate capital standard for the risks presented by the firms’ portfolios. Qualifying community banking organizations that elect to be under the community bank leverage ratio generally would be exempt from the Board’s current capital framework, including risk-based capital requirements and capital conservation buffer requirements.36 The CBLR would be calibrated such that qualifying community banking organizations would not be required to raise significant additional capital and would not face materially less stringent capital requirements. The primary benefit of the CBLR for qualifying community banking organizations is therefore expected to be reduced calculation and reporting burdens. The Board has broad authority under the International Lending Supervision Act of 1983 (ILSA) 37 and the Prompt Corrective Action (PCA) provisions of the Federal Deposit Insurance Act 38 to establish regulatory capital requirements for the institutions it regulates. For example, ILSA directs each Federal banking agency to cause banking institutions to achieve and maintain adequate capital by establishing minimum capital requirements as well as by other means that the agency deems appropriate.39 The PCA provisions of the Federal Deposit Insurance Act direct each Federal banking agency to specify, for each relevant capital measure, the level at which an IDI subsidiary is well capitalized, adequately capitalized, undercapitalized, and significantly undercapitalized.40 In addition, the Board has broad authority to establish regulatory capital standards for bank holding companies, savings and loan holding companies, and U.S. intermediate holding companies of foreign banking organizations under the 36 Nearly all small bank holding companies and small savings and loan holding companies are currently exempt from the Board’s capital rule and are instead covered by the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement. The policy statement applies to bank holding companies and savings and loan holding companies with less than $3 billion in total consolidated assets that also satisfy specified eligibility criteria. See 12 CFR 217.1(c)(1)(ii) through (iii); 12 CFR part 225 app. C. The proposal is not expected to impact small bank holding companies and small savings and loan holding companies that are subject to the policy statement. 37 12 U.S.C. 3901–3911. 38 12 U.S.C. 1831o. 39 12 U.S.C. 3907(a)(1). 40 12 U.S.C. 1831o(c)(2). VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 Bank Holding Company Act of 1956, the Home Owners’ Loan Act, and the DoddFrank Act.41 The proposed rule would be an optional framework that qualifying community banking organizations could choose to apply instead of the Board’s current capital rule. A qualifying community banking organization would be able to remain subject to the current capital rule if it chose to do so. The proposed rule therefore would not impose mandatory requirements on any small entities. However, the proposal would allow Board-regulated institutions that are qualifying community banking organizations to elect to be under the community bank leverage ratio framework. Small entities that are subject to the Board’s capital rule could make such an election, which would require immediate changes to reporting, recordkeeping, and compliance systems. Further, as discussed previously in the Paperwork Reduction Act section, the proposal would make changes to the projected reporting, recordkeeping, and other compliance requirements of the rule by impacting the information that qualifying community banking organizations that elect to use the community bank leverage ratio would be required to collect. The agencies anticipate making changes through a separate notice to regulatory reporting forms that currently collect regulatory capital information (the Call Report (FFIEC 031, 041, and 051) and the Consolidated Financial Statements for Holding Companies (Form FR Y–9C)). Firms would be required to update their systems to implement these changes to reporting forms. Systems changes would be predominantly due to changes to the applicable reporting forms that are expected to be released in the near future, rather than the proposal described in this notice. The Board does not expect that the compliance, recordkeeping, and reporting updates from this proposal would impose a significant cost on small Boardregulated institutions. These changes would only impact small entities that elect to use the community bank leverage ratio and, while there would be limited upfront costs to update systems, an overall reduction in burden is expected. However, the reduction in burden will be predominantly due to changes in regulatory reporting forms, and these burden changes therefore are expected to be discussed in a regulatory reporting notice in the near future. In addition, the Board is aware of no other 41 See PO 00000 12 U.S.C. 1467a, 1844, 5365, 5371. Frm 00017 Fmt 4701 Sfmt 4702 3077 Federal rules that duplicate, overlap, or conflict with the proposed changes to the capital rule. Therefore, the Board believes that the proposed rule will not have a significant economic impact on small banking organizations supervised by the Board and therefore believes that there are no significant alternatives to the proposed rule that would reduce the economic impact on small banking organizations supervised by the Board. The Board welcomes comment on all aspects of its analysis. In particular, the Board requests that commenters describe the nature of any impact on small entities and provide empirical data to illustrate and support the extent of the impact. FDIC: The Regulatory Flexibility Act (RFA) generally requires that, in connection with a proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis describing the impact of the rulemaking on small entities.42 A regulatory flexibility analysis is not required, however, if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined ‘‘small entities’’ to include banking organizations with total assets less than or equal to $550 million.43 The FDIC supervises 3,575 depository institutions,44 of which 2,763 are defined as small banking entities by the terms of the RFA.45 Based on its analysis and for the reasons stated below, the FDIC believes that this proposal would not have a significant economic impact on a substantial number of small entities. Description of Need and Policy Objectives The policy objective of the proposed rule is to conform the FDIC’s regulations to the statutory language established by the Act. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) amended provisions in the Dodd-Frank 42 5 U.S.C. 601 et seq. SBA defines a small banking organization as having $550 million or less in assets, where ‘‘a financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ 13 CFR 121.201 n.8 (2018). ‘‘SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates. . . .’’ 13 CFR 121.103(a)(6) (2018). Following these regulations, the FDIC uses a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the covered entity is ‘‘small’’ for the purposes of RFA. 44 FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2). 45 Call Report: June 30, 2018. 43 The E:\FR\FM\08FEP3.SGM 08FEP3 3078 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 46 as well as certain other statutes administered by the agencies.47 Section 201 of the Act, titled ‘‘Capital Simplification for Qualifying Community Banks,’’ directs the agencies to develop a community bank leverage ratio (CBLR) of not less than 8 percent and not more than 10 percent for ‘‘qualifying community banks’’ (qualifying community banking organizations). The Act defines a qualifying community banking organization as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion. Other Federal Rules The FDIC has not identified any likely duplication, overlap, and/or potential conflict between the proposal and any Federal rule. amozie on DSK3GDR082PROD with PROPOSALS3 Economic Impacts on Small Entities As discussed previously in section II: Summary of the Proposal, a depository institution that is not an advanced approaches banking organization could be eligible to opt into the CBLR framework, if they meet the following criteria: • Have total consolidated assets of less than $10 billion; • Have total off-balance sheet exposures (excluding derivatives that are not credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets; • Have total trading assets and trading liabilities of 5 percent or less of total consolidated assets; • Have MSAs of 25 percent or less of CBLR tangible equity; and • Have temporary difference DTAs of 25 percent or less of CBLR tangible equity. As of June 30, 2018, there were 2,713 small, FDIC-supervised depository institutions who would be qualifying community banking organizations under the proposed rule. They comprise approximately 98 percent of small, FDIC-supervised depository institutions. Therefore, the proposed rule could affect an estimated 98 percent of small, FDIC-supervised institutions. Utilizing the CBLR framework is expected to reduce reporting costs for small, FDIC-supervised institutions. Opting into the CBLR framework would enable institutions to no longer report Schedule RC–R of the Call Report, 46 Public Law 111–203, 124 Stat. 1391, 12 U.S.C. 5301 et seq. 47 Public Law 115–174 (May 24, 2018). VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 resulting in a reduction in reporting costs for institutions. As described in section II.J. of this preamble, Illustrative Reporting Form, the agencies intend to separately seek comment on the proposed changes to regulatory reports for qualifying community banking organizations that opt into the CBLR framework. To provide an indication of the potential reporting format and potential reporting burden relief for qualifying community banking organizations that opt into the proposed CBLR framework, the agencies included an illustrative report with this rulemaking, using the Call Report as an example. Depository institutions that may benefit from reduced reporting costs because of the proposed rule could employ those resources in ways the institution believes is more beneficial. It is difficult to accurately estimate the size of this potential effect because it depends on the characteristics of the individual institution and the future decisions of senior management. As noted previously, by opting into the CBLR framework, the capital levels of some small, FDIC-supervised institutions could be marginally affected, but it is unlikely to significantly affect the quantity of regulatory capital in the banking system. The FDIC estimates that 2,296 small, FDIC-supervised institutions are qualifying community banking organizations. Of those entities, 2,027 report holding a volume of CBLR tangible equity to total consolidated assets in excess of nine percent, plus an additional buffer of 50 basis points. Some eligible small, FDIC-supervised institutions that opt into the CBLR framework could employ any CBLR tangible equity in excess of the level required to achieve nine percent of total consolidated assets in other ways the institution decides is more beneficial. It is difficult to accurately estimate what these institutions will do with the tangible equity that exceeds nine percent because it depends on the characteristics of each individual institution, the decisions of senior management, current and future economic conditions, as well as current and future financial conditions. Additionally, some institutions who are not qualifying community banking organizations because their CBLR tangible equity is less than nine percent of total consolidated assets may elect to raise additional tangible equity in order to become eligible. In such cases, each entity will have determined that the value of attaining a level of CBLR tangible equity necessary to meet or exceed nine percent of total PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 consolidated assets outweighs the cost incurred in doing so. However, the statutory changes established by the Act will enable certain institutions to utilize the CBLR framework. The proposed rule amends the FDIC’s regulations to conform with the CBLR framework authorized under the Act. Therefore, this component of the proposal would not have a direct effect on small, FDICsupervised institutions. As noted previously, the proposed rule could affect the deposit insurance assessments of qualifying small, FDICsupervised institutions that elect to use the CBLR framework. The extent of this effect is difficult to quantify with available information. The proposed rule removes the requirement for small, FDIC-supervised institutions that opt into the CBLR framework from reporting tier 1 capital or the tier 1 leverage ratio. The FDIC, however, uses these measures as part of its deposit insurance assessment system. The FDIC plans to publish a separate notice of proposed rulemaking to address the application of the CBLR framework as it relates to the deposit insurance assessment system. The rulemaking would address, among other things, how the CBLR framework can be applied in lieu of the leverage ratio and in lieu of tier 1 capital when calculating a bank’s assessment. However, since the final form of that rule is unknown, the potential effects on small, FDIC-supervised institutions are unknown. As one option, the FDIC may consider using the definitions in this proposal in the deposit insurance assessment system. For most qualifying community banking organizations, pursuing this option would result in no change, or would result in a reduction, in an institution’s assessment. In particular, based on June 30, 2018 Call Report data, replacing the leverage ratio with the CBLR, and replacing tier 1 capital with CBLR tangible equity in the calculation of the assessment base, would result in the same or lower assessments for more than 90 percent of institutions that could be qualifying community banking organizations under this proposal. For other institutions, application of the CBLR framework to deposit insurance assessments would result in higher assessments; however, for over three-quarters of those institutions, that increase would represent less than one percent of their deposit insurance assessment for the second quarter of 2018. Alternatives Considered As previously discussed in section II.E. Calibration of the Community Bank Leverage Ratio, other alternatives including calibrating the CBLR to eight E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules percent were considered by the FDIC. This alternative would allow more banking organizations to opt into the CBLR framework but would potentially allow a large number of CBLR banking organizations to hold less capital than under the generally applicable capital requirements. The proposed calibration of the CBLR, in conjunction with the qualifying community banking organization and CBLR tangible equity definitions, seeks to strike a balance among the following objectives: Maintaining strong capital levels in the banking system, ensuring safety and soundness, and providing appropriate regulatory burden relief to as many banking organizations as possible. The FDIC invites comments on all aspects of the supporting information provided in this RFA section. In particular, would this proposal have any significant effects on small entities that the FDIC has not identified? C. Plain Language Section 722 of the Gramm-Leach Bliley Act 48 requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies invite comments on how to make these notices of proposed rulemaking easier to understand. For example: • Have the agencies presented the material in an organized manner that meets your needs? If not, how could this material be better organized? • Are the requirements in the notice of proposed rulemaking clearly stated? If not, how could the proposal be more clearly stated? • Does the proposal contain language that is not clear? If so, which language requires clarification? • Would a different format (grouping and order of sections, use of headings, paragraphing) make the proposal easier to understand? If so, what changes to the format would make the proposal easier to understand? • What else could the agencies do to make the proposal easier to understand? amozie on DSK3GDR082PROD with PROPOSALS3 D. OCC Unfunded Mandates Reform Act of 1995 The OCC analyzed the proposed rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the 48 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 private sector, of $100 million or more in any one year (adjusted for inflation). The OCC has determined that this proposed rule would not result in expenditures by State, local, and Tribal governments, or the private sector, of $100 million or more in any one year. Accordingly, the OCC has not prepared a written statement to accompany this proposal. E. Riegle Community Development and Regulatory Improvement Act of 1994 Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),49 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.50 The agencies note that comment on these matters has been solicited in other sections of this Supplementary Information section, and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. In addition, the agencies also invite any other comments that further will inform the agencies’ consideration of RCDRIA. List of Subjects 12 CFR Part 1 Banks, banking, National banks, Reporting and recordkeeping requirements, Securities. Administrative practice and procedure, Federal Reserve System, National banks, Reporting and recordkeeping requirements. Frm 00019 Fmt 4701 Administrative practice and procedure, National banks, Reporting and recordkeeping requirements, Securities. 12 CFR Part 6 Federal Reserve System, National banks. 12 CFR Part 23 National banks. 12 CFR Part 24 Community development, Credit, Investments, Low and moderate income housing, National banks, Reporting and recordkeeping requirements, Rural areas, Small businesses. 12 CFR Part 32 National banks, Reporting and recordkeeping requirements. 12 CFR Part 34 Mortgages, National banks, Reporting and recordkeeping requirements. 12 CFR Part 160 Consumer protection, Investments, Manufactured homes, Mortgages, Reporting and recordkeeping requirements, Savings associations, Securities. 12 CFR Part 192 Reporting and recordkeeping requirements, Savings associations, Securities. 12 CFR Part 206 Banks, Banking, Interbank liability, Lending limits, Savings associations. 12 CFR Part 208 Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, reporting and recordkeeping requirements, Securities. 12 CFR Part 211 Exports, Federal Reserve System, Foreign banking, Holding companies, Investments, Reporting and recordkeeping requirements. 12 CFR Part 215 Credit, Penalties, Reporting and recordkeeping requirements. Administrative practice and procedure, Banks, banking, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 223 Banks, Banking, Federal Reserve System. U.S.C. 4802(a). 50 Id. PO 00000 12 CFR Part 5 12 CFR Part 217 12 CFR Part 3 49 12 3079 Sfmt 4702 E:\FR\FM\08FEP3.SGM 08FEP3 3080 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules 12 CFR Part 225 DEPARTMENT OF THE TREASURY Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. Office of the Comptroller of the Currency 12 CFR Chapter I Authority and Issuance 12 CFR Part 238 Savings and loan holding companies (Regulation LL). 12 CFR Part 251 PART 1—INVESTMENT SECURITIES Administrative practice and procedure, Banks, banking, Concentration Limit, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 303 Administrative practice and procedure, Bank deposit insurance, Banks, banking, Reporting and recordkeeping requirements, State nonmember banks, Savings associations. 12 CFR Part 324 Administrative practice and procedure, Banks, banking, Capital adequacy, Reporting and recordkeeping requirements, State non-member banks, Savings associations. 12 CFR Part 337 Banks, banking, Reporting and recordkeeping requirements, Securities. 12 CFR Part 347 Authority delegations (Government agencies), Bank deposit insurance, Banks, banking, Credit, Foreign banking, Investments, Reporting and recordkeeping requirements, U.S. Investments abroad. 12 CFR Part 362 Administrative practice and procedure, Authority delegations (Government agencies), Bank deposit insurance, Banks, banking, Investments, Reporting and recordkeeping requirements. 12 CFR Part 365 Banks, banking, Mortgages. amozie on DSK3GDR082PROD with PROPOSALS3 Jkt 247001 Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a. 2. Section 1.2 is amended by revising paragraph (a) to read as follows: ■ § 1.2 Definitions. (a) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses as reported in the bank’s Consolidated Report of Condition and Income (Call Report); or (2) For all other banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in 12 CFR part 3, as applicable (or comparable capital guidelines of the appropriate Federal banking agency), as reported in the bank’s Call Report; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (a)(2)(i) of this section, as reported in the bank’s Call Report. * * * * * PART 3—CAPITAL ADEQUACY STANDARDS 3. The authority citation for part 3 continues to read as follows: Administrative practice and procedure, Advertising, Aged, Civil rights, Conflict of interests, Credit, Crime, Equal employment opportunity, Fair housing, Government employees, Individuals with disabilities, Reporting and recordkeeping requirements, Savings associations. 18:23 Feb 07, 2019 1. The authority citation for part 1 continues to read as follows: ■ ■ 12 CFR Part 390 VerDate Sep<11>2014 For the reasons stated in the Supplementary Information, Chapter I of title 12 of the Code of Federal Regulations is proposed to be amended as follows: Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B). 4. Section 3.10 is amended by revising paragraph (a) to read as follows: ■ § 3.10 Minimum capital requirements. (a) Minimum capital requirements. (1) A national bank or Federal savings PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 association must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches FDICsupervised institutions, a supplementary leverage ratio of 3 percent. (vi) For state savings associations, a tangible capital ratio of 1.5 percent. (2) A qualifying community banking organization (as defined in § 3.12), that is subject to the community bank leverage ratio (as defined in § 3.12), is considered to have met the minimum capital requirements in this paragraph (a) only if the qualifying community banking organization maintains a community bank leverage ratio of at least 7.5 percent. * * * * * ■ 5. Add section 3.12 to read as follows: § 3.12 Community bank leverage ratio. (a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 3.10, the capital ratio requirements for the well capitalized capital category under 12 CFR part 6, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a community bank leverage ratio greater than 9.0 percent. (2) For purposes of this section, a qualifying community banking organization means a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association and that satisfies all of the following criteria: (i) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to Schedule RC of the Call Report as of the end of the most recent calendar quarter; (ii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(ii)(A) through (I) of this section-, divided by total consolidated assets, each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through (1) Guarantees; and (2) Credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to Schedule RC– L of the Call Report; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; (iii) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to Schedule RC of the Call Report of 5 percent or less of the national bank’s or Federal savings association’s total consolidated assets, each as of the end of the most recent calendar quarter; (iv) Has mortgage servicing assets, calculated in accordance with the reporting instructions to Schedule RC– M of the Call Report, of 25 percent or less of the national bank’s or Federal savings association’s CBLR tangible equity, each as of the end of the most recent calendar quarter; and (v) Has DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks, net of any related valuation allowances, of 25 percent or less of the national bank’s or Federal savings association’s CBLR tangible equity, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) A qualifying community banking organization may elect to use the community bank leverage ratio framework only if it has a community bank leverage ratio that exceeds 9 percent at the time of the election. (iii) For purposes of paragraph (a)(3) of this section, a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the community bank leverage ratio reporting schedule in its Call Report. (iv)(A) A qualifying community banking organization that has elected to VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 use the community bank leverage ratio may opt-out of using the community bank leverage ratio by completing Schedule RC–R in its Call Report or by otherwise providing the information required in Schedule RC–R to the OCC. (B) A qualifying community banking organization that opts out of using the community bank leverage ratio pursuant to paragraph (a)(3)(iv)(A) of this section must comply with § 3.10 immediately. (b) Calculation of the community bank leverage ratio. (1) A qualifying community banking organization’s community bank leverage ratio is the ratio of the banking organization’s CBLR tangible equity as defined in paragraph (b)(2) of this section, to its average total consolidated assets, as defined in paragraph (b)(3) of this section. (2) CBLR tangible equity means total bank equity capital, calculated in accordance with the reporting instructions to Schedule RC of the Call Report, before the inclusion of noncontrolling (minority) interests in consolidated subsidiaries, as of the end of the most recent calendar quarter less the following (each as of the end of the most recent calendar quarter): (i) Accumulated other comprehensive income calculated in accordance with the reporting instructions to Schedule RC of the Call Report; (ii) Intangible Assets, calculated in accordance with the reporting instructions to Schedule RC of the Call Report, other than mortgage servicing assets; and (iii) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances. (3) Average total consolidated assets means total assets calculated in accordance with the reporting instructions to Schedule RC–K of the Call Report as of the end of the most recent calendar quarter less the amounts deducted from CBLR tangible equity under paragraphs (b)(2)(ii) and (iii) of this section. (c) Treatment when ceasing to be a qualifying community banking organization requirements. (1) Except as provided in paragraph (c)(4) of this section, if a national bank or Federal savings association ceases to meet the definition of a qualifying community banking organization, the national bank or Federal savings association has two reporting periods (grace period) to either satisfy the requirements to be a qualifying community banking organization or to comply with § 3.10 and report the required capital measures under section 10 on its Call Report. (2) The grace period begins as of the end of the calendar quarter in which the PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 3081 national bank or Federal savings association ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the national bank or Federal savings association continues to be a qualifying community banking organization for the purposes of this part and must continue calculating and reporting its community bank leverage ratio unless the national bank or Federal savings association has opted out of using the community bank leverage ratio under paragraph (a)(3) of this section. (4) Notwithstanding paragraphs (c)(1) through (3) of this section, a national bank or Federal savings association that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such a national bank or Federal savings association must comply with § 3.10 and must report the required capital measures under § 3.10 on its next Call Report. (d) Tangible equity information. (1) A qualifying community banking organization, that has elected to use the community bank leverage ratio under this section and has a community bank leverage ratio that falls below 6.0 percent, must promptly provide to the OCC the information necessary for the calculation of its tangible equity, as defined under 12 CFR 6.2, for purposes of determining the capital category of the national bank or Federal savings association under 12 CFR part 6. (2) Notwithstanding paragraph (d)(1), upon request by the OCC, a qualifying community banking organization must provide the information necessary for the calculation of its tangible equity, as defined under 12 CFR part 6, to the OCC. PART 5—RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES 6. The authority citation for part 5 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a–2, 215a–3, 481, 1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B). 7. Section 5.3 is amended by revising paragraph (e) to read as follows: ■ § 5.3 * Definitions. * * * * (e) Capital and surplus means: E:\FR\FM\08FEP3.SGM 08FEP3 3082 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Consolidated Report of Condition and Income (Call Report); or (2) For all other national banks and Federal savings associations: (i) A national bank’s or Federal savings association’s tier 1 and tier 2 capital calculated under the OCC’s riskbased capital standards set forth in 12 CFR part 3, as applicable, as reported in the bank’s or savings association’s Consolidated Reports of Condition and Income (Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus (ii) The balance of the national bank’s or Federal savings association’s allowances for loan and lease losses not included in the institution’s tier 2 capital, for purposes of the calculation of risk-based capital reported in the institution’s Call Reports, described in paragraph (e)(2)(i) of this section. * * * * * ■ 8. Section 5.37 is amended by revising paragraph (c)(3) to read as follows: amozie on DSK3GDR082PROD with PROPOSALS3 * * * * (c) * * * (3) Capital and surplus means: (i) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (A) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (B) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Call Report; or (ii) For all other national banks and Federal savings associations: (A) A national bank’s or Federal savings association’s tier 1 and tier 2 capital calculated under 12 CFR part 3, as applicable, as reported in the national bank’s or Federal savings association’s Consolidated Reports of Condition and Income (Call Reports) filed under 12 VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 § 5.58 Pass-through investments by a Federal savings association. * * * * * (h) * * * (2) The Federal savings association is not investing more than 10 percent of its total capital (in the case of a Federal savings association that is a qualifying community banking organization that has elected to use the community bank leverage ratio framework, 10 percent of its tangible equity capital, calculated under 12 CFR 3.12) in one company; * * * * * PART 6—PROMPT CORRECTIVE ACTION 10. The authority citation for part 6 continues to read as follows: ■ Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B). 11. Section 6.4 is amended by: a. Revising the heading to read as set forth below, ■ b. Removing paragraph (c), ■ c. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d), respectively, and ■ d. Revising paragraphs (a) and (b). The revisions read as follows. ■ ■ § 5.37 Investment in national bank or Federal savings association premises. * U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus (B) The balance of a national bank’s or Federal savings association’s allowances for loan and lease losses not included in the bank’s or savings association’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(3)(ii)(A) of this section, as reported in the national bank’s or Federal savings association’s Call Reports filed under 12 U.S.C. 161 or 1464(v), respectively. * * * * * ■ 9. Section 5.58 is amended by revising paragraph (h)(2) to read as follows: § 6.4 Capital measures and capital categories. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this part, the relevant capital measures shall be: (i) Total Risk-Based Capital Measure: The total risk-based capital ratio; (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based capital ratio; (iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 riskbased capital ratio; (iv) The Leverage Measure: (A) The leverage ratio; and (B) With respect to an advanced approaches national bank or advanced approaches Federal savings association, on January 1, 2018, and thereafter, the supplementary leverage ratio; and PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 (2) For a qualifying community banking organization (as defined in 12 CFR 3.12), that is subject to the community bank leverage ratio (as defined in 12 CFR 3.12), the community bank leverage ratio, as defined under 12 CFR 3.12 is used to determine the applicable capital category under paragraphs (b)(1) through (4) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this part, a national bank or Federal savings association shall be deemed to be: (1)(i) ‘‘Well capitalized’’ if: (A) Total Risk-Based Capital Measure: the national bank or Federal savings association has a total risk-based capital ratio of 10.0 percent or greater; (B) Tier 1 Risk-Based Capital Measure: The national bank or Federal savings association has a tier 1 risk-based capital ratio of 8.0 percent or greater; (C) Common Equity Tier 1 Capital Measure: The national bank or Federal savings association has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; (D) Leverage Measure: (1) The national bank or Federal savings association has a leverage ratio of 5.0 percent or greater; and (2) With respect to a national bank or Federal savings association that is a subsidiary of a U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on the company’s most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y– 9C) or more than $10 trillion in assets under custody as reported on the company’s most recent Banking Organization Systemic Risk Report (Form FR Y–15), on Jan. 1, 2018 and thereafter, the national bank or Federal savings association has a supplementary leverage ratio of 6.0 percent or greater; and (E) The national bank or Federal savings association is not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by the OCC pursuant to section 8 of the FDI Act, the International Lending Supervision Act of 1983 (12 U.S.C. 3907), the Home Owners’ Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)), or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure. (ii) A qualifying community banking organization, as defined under 12 CFR 3.12, that has elected to use the community bank leverage ratio framework under section 12 CFR 3.12 and that has a community bank leverage ratio, as defined under 12 CFR 3.12, E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules greater than 9.0 percent, shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraphs (b)(1)(i)(A) through (D) of this section. (2)(i) ‘‘Adequately capitalized’’ if: (A) Total Risk-Based Capital Measure: The national bank or Federal savings association has a total risk-based capital ratio of 8.0 percent or greater; (B) Tier 1 Risk-Based Capital Measure: The national bank or Federal savings association has a tier 1 risk-based capital ratio of 6.0 percent or greater; (C) Common Equity Tier 1 Capital Measure: The national bank or Federal savings association has a common equity tier 1 risk-based capital ratio of 4.5 percent or greater; (D) Leverage Measure: (1) The national bank or Federal savings association has a leverage ratio of 4.0 percent or greater; and (2) With respect to an advanced approaches national bank or advanced approaches Federal savings association, on January 1, 2018 and thereafter, the national bank or Federal savings association has an supplementary leverage ratio of 3.0 percent or greater; and (E) The national bank or Federal savings association does not meet the definition of a ‘‘well capitalized’’ national bank or Federal savings association. (ii) A qualifying community banking organization, as defined under 12 CFR 3.12, that has elected to use the community bank leverage ratio framework under 12 CFR 3.12 and that has a community bank leverage ratio, as defined under 12 CFR 3.12, of 7.5 percent or greater, shall be considered to have met the requirements for the adequately capitalized capital category in paragraphs (b)(2)(i)(A) through (D) of this section. (3)(i) ‘‘Undercapitalized’’ if: (A) Total Risk-Based Capital Measure: The national bank or Federal savings association has a total risk-based capital ratio of less than 8.0 percent; (B) Tier 1 Risk-Based Capital Measure: The national bank or Federal savings association has a tier 1 risk-based capital ratio of less than 6.0 percent; (C) Common Equity Tier 1 Capital Measure: The national bank or Federal savings association has a common equity tier 1 risk-based capital ratio of less than 4.5 percent; or (D) Leverage Measure: (1) The national bank or Federal savings association has a leverage ratio of less than 4.0 percent; or (2) With respect to an advanced approaches national bank or advanced approaches Federal savings association, VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 on January 1, 2018, and thereafter, the national bank or Federal savings association has a supplementary leverage ratio of less than 3.0 percent. (ii) A qualifying community banking organization, as defined under 12 CFR 3.12, that has elected to use the community bank leverage ratio framework under section 12 CFR 3.12 and that has a community bank leverage ratio, as defined under 12 CFR 3.12, of less than 7.5 percent, shall be considered to have met the requirements for the undercapitalized capital category in paragraph (b)(3)(1)(A) through (D) of this section. (4)(i) ‘‘Significantly undercapitalized’’ if: (A) Total Risk-Based Capital Measure: The national bank or Federal savings association has a total risk-based capital ratio of less than 6.0 percent; (B) Tier 1 Risk-Based Capital Measure: The national bank or Federal savings association has a tier 1 risk-based capital ratio of less than 4.0 percent; (C) Common Equity Tier 1 Capital Measure: The national bank or Federal savings association has a common equity tier 1 risk-based capital ratio of less than 3.0 percent; or (D) Leverage Ratio: The national bank or Federal savings association has a leverage ratio of less than 3.0 percent. (ii) A qualifying community banking organization, as defined under 12 CFR 3.12, that has elected to use the community bank leverage ratio framework under section 12 CFR 3.12 and that has a community bank leverage ratio, as defined under 12 CFR 3.12, of less than 6.0 percent, shall be considered to have met the requirements for the significantly undercapitalized capital category in paragraphs (b)(4)(i)(A) through (D) of this section. (5) ‘‘Critically undercapitalized’’ if the insured depository institution has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent. * * * * * PART 23—LEASING 12. The authority citation for part 23 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a. 13. Section 23.2 is amended by revising paragraph (b) to read as follows: ■ § 23.2 Definitions. * * * * * (b) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 3083 Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in 12 CFR part 3, as applicable, as reported in the bank’s Consolidated Reports of Condition and Income (Call Report) filed under 12 U.S.C. 161; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (b)(2)(i) of this section, as reported in the bank’s Consolidated Report of Condition and Income filed under 12 U.S.C. 161. * * * * * PART 24—COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS 14. The authority citation for part 24 continues to read as follows: ■ Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818. 15. Section 24.2 is amended by revising paragraph (b) to read as follows: ■ § 24.2 Definitions. * * * * * (b) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in 12 CFR part 3, as applicable, as reported in the bank’s Consolidated Reports of Condition and Income (Call Report) as filed under 12 U.S.C. 161; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s tier 2 capital, for E:\FR\FM\08FEP3.SGM 08FEP3 3084 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules purposes of the calculation of risk-based capital described in paragraph (b)(2)(i) of this section, as reported in the bank’s Call Report as filed under 12 U.S.C. 161. * * * * * PART 32—LENDING LIMITS 16. The authority citation for part 32 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h. 17. Section 32.2 is amended by revising paragraph (c) to read as follows: ■ § 32.2 Definitions. * * * * (c) Capital and surplus means— (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Call Report; or (2) For all other national banks and Federal savings associations: (i) A national bank’s or savings association’s Tier 1 and Tier 2 capital calculated under the risk-based capital standards applicable to the institution as reported in the bank’s or savings association’s Consolidated Reports of Condition and Income (Call Report); plus (ii) The balance of a national bank’s or Federal savings association’s allowances for loan and lease losses not included in the bank’s or savings association’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(2)(i) of this section, as reported in the national bank’s or savings association’s Call Report. * * * * * amozie on DSK3GDR082PROD with PROPOSALS3 * (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3: (i) A qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); plus (ii) A qualifying community banking organization’s allowances for loan and lease losses, or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in 12 CFR part 3, as applicable, as reported in the bank’s Call Report; plus (ii) The balance of a bank’s allowances for loan and lease losses, or allowance for credit losses, as applicable, not included in the bank’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (a)(2)(i) of this section, as reported in the bank’s Call Report. * * * * * PART 160—LENDING AND INVESTMENT 20. The authority citation for part 160 continues to read as follows: ■ Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106. PART 34—REAL ESTATE LENDING AND APPRAISALS ■ 18. The authority citation for part 34 continues to read as follows: PART 192—CONVERSIONS FROM MUTUAL TO STOCK FORM Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463, 1464, 1465, 1701j–3, 1828(o), 3331 et seq., 5101 et seq., and 5412(b)(2)(B) and 15 U.S.C. 1639h. ■ 19. Section 34.81 is amended by revising paragraph (a) to read as follows: § 34.81 Definitions. (a) Capital and surplus means: VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 ■ 22. The authority citation for part 192 continues to read as follows: Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 2901, 5412(b)(2)(B); 15 U.S.C. 78c, 78l, 78m, 78n, 78w. 23. Section 192.500 is amended by adding paragraph (a)(3)(iii) to read as follows: ■ PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 (a) * * * (3) * * * (iii) For a qualifying community banking organization that has elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3, the term tangible capital, as it is used in this paragraph (a)(3), refers to the qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2). * * * * * FEDERAL RESERVE SYSTEM 12 CFR Chapter II Authority and Issuance For the reasons set forth in the preamble, chapter II of title 12 of the Code of Federal Regulations is proposed to be amended as set forth below: PART 206—LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F) 24. The authority citation for part 206 continues to read as follows: ■ Authority: 12 U.S.C. 371b–2. 21. Section 160.3 is amended by adding the definition of total capital in alphabetical order to read as follows: * * * * * Total capital means: (1) For a qualifying community banking organization that has elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards set forth at 12 CFR part 3, total capital refers to the qualifying community banking organization’s tangible equity capital, as calculated under 12 CFR 3.12(b)(2); (2) For all other Federal savings associations, total capital means the sum of tier 1 capital and tier 2 capital, as calculated under 12 CFR part 3. ■ § 192.500 What management stock benefit plans may I implement? 25. Section 206.2 is amended by revising paragraph (g) to read as follows: ■ § 206.2 Definitions. * * * * * (g) Total capital means the total of a bank’s Tier 1 and Tier 2 capital under the risk-based capital guidelines provided by the bank’s primary federal supervisor. For a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), total capital means the bank’s CBLR tangible equity (as defined in 12 CFR 217.12). For an insured branch of a foreign bank organized under the laws of a country that subscribes to the principles of the Basel Capital Accord, ‘‘total capital’’ means total Tier 1 and Tier 2 capital as calculated under the standards of that country. For an insured branch of a foreign bank organized under the laws of a country that does not subscribe to the principles of the Basel Capital Accord, ‘‘total capital’’ means total Tier 1 and Tier 2 capital as calculated under the provisions of the Accord. * * * * * ■ 26. Section 206.5 is amended by adding paragraph (a)(4) to read as follows: § 206.5 Capital levels of correspondents. (a) * * * E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules (4) Notwithstanding paragraphs (a)(1) through (3) of this section, a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), is adequately capitalized if it has a community bank leverage ratio of 7.5 percent or greater. * * * * * PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 27. The authority citation for part 208 is revised to read as follows: ■ Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321–338a, 371d, 461, 481–486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p–1, 1831r–1, 1831w, 1831x, 1835a, 1882, 2901– 2907, 3105, 3310, 3331–3351, 3905–3909, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780–4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128. 28. Section 208.2 is amended by revising paragraph (d) to read as follows: ■ § 208.2 Definitions. * * * * (d) Capital stock and surplus means, unless otherwise provided in this part, or by statute, tier 1 and tier 2 capital included in a member bank’s risk-based capital (as defined in 12 CFR 217.2 of Regulation Q) and the balance of a member bank’s allowances for loan and lease losses not included in its tier 2 capital for calculation of risk-based capital, based on the bank’s most recent Report of Condition and Income filed under 12 U.S.C. 324. For a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), capital stock and surplus means the bank’s CBLR tangible equity (as defined in 12 CFR 217.12) plus allowances for loan and lease losses (as defined in 12 CFR 217.2). * * * * * ■ 29. Section 208.43 is amended by revising paragraphs (a) and (b) to read as follows: amozie on DSK3GDR082PROD with PROPOSALS3 * § 208.43 Capital measures and capital category definitions. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this subpart, the relevant capital measures are: (i) Total Risk-Based Capital Measure: The total risk-based capital ratio; (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based capital ratio; VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 (iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 riskbased capital ratio; and (iv) Leverage Measure: (A) The leverage ratio; and (B) With respect to an advanced approaches bank, on January 1, 2018, and thereafter, the supplementary leverage ratio. (C) With respect to any bank that is a subsidiary (as defined in § 217.2 of Regulation Q (12 CFR 217.2)) of a global systemically important BHC, on Jan. 1, 2018, and thereafter, the supplementary leverage ratio. (2) For a qualifying community banking organization (as defined in 12 CFR 217.12), that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), the community bank leverage ratio is used to determine the applicable capital category under paragraphs (b)(1) through (4) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, a member bank is deemed to be: (1)(i) ‘‘Well capitalized’’ if: (A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of 10.0 percent or greater; and (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of 8.0 percent or greater; and (C) Common Equity Tier 1 Capital Measure: the bank has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; and (D) Leverage Measure: (1) The bank has a leverage ratio of 5.0 percent or greater; and (2) Beginning on Jan. 1, 2018, with respect to any bank that is a subsidiary of a global systemically important BHC under the definition of ‘‘subsidiary’’ in § 217.2 of Regulation Q (12 CFR 217.2), the bank has a supplementary leverage ratio of 6.0 percent or greater; and (E) The bank is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board pursuant to section 8 of the FDI Act, the International Lending Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure. (ii) A bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that has elected to use the community bank leverage ratio (as defined in 12 CFR 217.12) and that has a community bank leverage ratio greater than 9 percent, is considered to have met the capital ratio requirements for the well capitalized PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 3085 capital category in paragraphs (b)(1)(i)(A) through (D) of this section. (2)(i) ‘‘Adequately capitalized’’ if: (A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of 8.0 percent or greater; and (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of 6.0 percent or greater; and (C) Common Equity Tier 1 Capital Measure: The bank has a common equity tier 1 risk-based capital ratio of 4.5 percent or greater; and (D) Leverage Measure: (1) The bank has a leverage ratio of 4.0 percent or greater; and (2) With respect to an advanced approaches bank, on January 1, 2018, and thereafter, the bank has a supplementary leverage ratio of 3.0 percent or greater; and (E) The bank does not meet the definition of a ‘‘well capitalized’’ bank. (ii) A bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that has elected to use the community bank leverage ratio (as defined in 12 CFR 217.12) and that has a community bank leverage ratio of 7.5 percent or greater, is considered to have met the requirements for the adequately capitalized capital category in paragraphs (b)(2)(i)(A) through (D) of this section. (3)(i) ‘‘Undercapitalized’’ if: (A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of less than 8.0 percent; or (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of less than 6.0 percent; or (C) Common Equity Tier 1 Capital Measure: The bank has a common equity tier 1 risk-based capital ratio of less than 4.5 percent; or (D) Leverage Measure: (1) The bank has a leverage ratio of less than 4.0 percent; or (2) With respect to an advanced approaches bank, on January 1, 2018, and thereafter, the bank has a supplementary leverage ratio of less than 3.0 percent. (ii) A bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that has elected to use the community bank leverage ratio (as defined in 12 CFR 217.12) and that has a community bank leverage ratio of less than 7.5 percent, is considered to have met the requirements for the undercapitalized capital category in paragraphs (b)(3)(i)(A) through (D) of this section. (4)(i) ‘‘Significantly undercapitalized’’ if: (A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of less than 6.0 percent; or E:\FR\FM\08FEP3.SGM 08FEP3 3086 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of less than 4.0 percent; or (C) Common Equity Tier 1 Capital Measure: The bank has a common equity tier 1 risk-based capital ratio of less than 3.0 percent; or (D) Leverage Measure: The bank has a leverage ratio of less than 3.0 percent. (ii) A bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that has elected to use the community bank leverage ratio (as defined in 12 CFR 217.12) and that has a community bank leverage ratio of less than 6 percent, is considered to have met the requirements for the significantly undercapitalized capital category in paragraphs (b)(4)(i)(A) through (D) of this section. (5) ‘‘Critically undercapitalized’’ if the bank has a ratio of tangible equity, as defined in § 208.41, to total assets that is equal to or less than 2.0 percent. * * * * * ■ 30. Section 208.73 is amended by removing paragraph (a), redesignating paragraphs (b) through (f) as paragraphs (a) through (e), respectively, and revising newly redesignated paragraph (a) to read as follows: § 208.73 What additional provisions are applicable to state member banks with financial subsidiaries? (a) Capital requirements for state member banks. A state member bank other than a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) that controls or holds an interest in a financial subsidiary must comply with the rules set forth in § 217.22(a)(7) of Regulation Q (12 CFR 217.22(a)(7)) in determining its compliance with applicable regulatory capital standards (including the well capitalized standard of § 208.71(a)(1)). * * * * * PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K) 31. The authority citation for part 211 continues to read as follows: amozie on DSK3GDR082PROD with PROPOSALS3 Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s, 1681w, 6801 and 6805. 32. In part 211, remove the words ‘‘Capital Adequacy Guidelines’’ wherever they appear and add in their place the words ‘‘capital rule’’. ■ 33. Section 211.2 is amended by revising paragraphs (b), (c), and (x) to read as follows: VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 Definitions. * * * * * (b) Capital rule means 12 CFR part 217. (c) Capital and surplus means, unless otherwise provided in this part: (1) For organizations subject to the capital rule (other than qualifying community banking organizations (as defined in 12 CFR 217.12) that are subject to the community bank leverage ratio (as defined in 12 CFR 217.12)): (i) Tier 1 and tier 2 capital included in an organization’s risk-based capital ratios (under the capital rule); and (ii) The balance of allowances for loan and lease losses not included in an organization’s tier 2 capital for calculation of risk-based capital ratios, based on the organization’s most recent consolidated Report of Condition and Income. (2) For qualifying community banking organizations (as defined in 12 CFR 217.12) that are subject to the community bank leverage ratio (as defined in 12 CFR 217.12), CBLR tangible equity (as defined in 12 CFR 217.12) plus allowances for loan and lease losses (as defined in 12 CFR 217.2). (3) For all other organizations, paid-in and unimpaired capital and surplus, and includes undivided profits but does not include the proceeds of capital notes or debentures. * * * * * (x) Tier 1 capital has the same meaning as provided under 12 CFR part 217, except that for a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), tier 1 capital means CBLR tangible equity (as defined in 12 CFR 217.12). * * * * * ■ 34. Section 211.9 is amended by redesignating footnote 5 to paragraph (a) as footnote 1 to paragraph (a) andrevising paragraph (a)(1) to read as follows: § 211.9 ■ ■ § 211.2 Investment procedures. (a) * * * (1) Minimum capital adequacy standards. Except as the Board may otherwise determine, in order for an investor to make investments pursuant to the procedures set out in this section, the investor, the bank holding company, and the member bank shall be in compliance with applicable minimum standards for capital adequacy set out in the capital rule; provided that, if the investor is an Edge or agreement corporation, the minimum capital PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 required is total and tier 1 capital ratios of 8 percent and 4 percent, respectively. * * * * * PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O) 35. The authority citation for part 215 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 1817(k), 5412; and Pub. L. 102–242, 105 Stat. 2236 (1991). 36. Section 215.2 is amended by revising paragraphs (i)(1) and (i)(2) and adding paragraph (i)(3) to read as follows: ■ § 215.2 Definitions. * * * * * (i) * * * (1) The bank’s Tier 1 and Tier 2 capital included in the bank’s risk-based capital under the capital guidelines of the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and (2) The balance of the bank’s allowances for loan and lease losses not included in the bank’s Tier 2 capital for purposes of the calculation of risk-based capital by the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3). (3) Notwithstanding paragraphs (i)(1) through (2) of this section, for a member bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), unimpaired capital and unimpaired surplus equals CBLR tangible equity (as defined in 12 CFR 217.12) plus allowances for loan and lease losses (as defined in 12 CFR 217.2). * * * * * PART 217—CAPITAL ADEQUACY OF BANKING HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q) 37. The authority citation for part 217 is revised to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371, and 5371 note. 38. Section 217.10 is amended by revising paragraph (a) to read as follows: ■ E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules § 217.10 Minimum capital requirements. (a) Minimum capital requirements. (1) A Board-regulated institution must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches Boardregulated institutions, a supplementary leverage ratio of 3 percent. (2) A qualifying community banking organization (as defined in 12 CFR 217.12), that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), is considered to have met the minimum capital requirements in this paragraph (a) only if the qualifying community banking organization has a community bank leverage ratio of at least 7.5 percent or more. * * * * * ■ 39. Section 217.12 is added as to read as follows: amozie on DSK3GDR082PROD with PROPOSALS3 § 217.12 Community bank leverage ratio. (a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under 12 CFR 208.43(b)(1), and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a community bank leverage ratio greater than 9 percent. (2) For purposes of this section, a qualifying community banking organization means a Board-regulated institution that is not an advanced approaches Board-regulated institution and that satisfies all of the following criteria: (i) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable, as of the end of the most recent calendar quarter; (ii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(ii)(A) through (I) of this section, divided by total consolidated assets, VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through guarantees and credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to Schedule RC– L of the Call Report or Schedule HC–L of Form FR Y–9C, as applicable; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; (iii) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable, of 5 percent or less of the Board-regulated institution’s total consolidated assets, each as of the end of the most recent calendar quarter; (iv) Has mortgage servicing assets, calculated in accordance with the reporting instructions to Schedule RC– M of the Call Report or Schedule HC– M of Form FR Y–9C, as applicable, of 25 percent or less of the Board-regulated institution’s CBLR tangible equity, each as of the end of the most recent calendar quarter; and (v) Has DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks, net of any related valuation allowances, of 25 percent or less of the Board-regulated institution’s CBLR tangible equity, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) A qualifying community banking organization may elect to use the community bank leverage ratio framework only if it has a community bank leverage ratio that exceeds 9 percent at the time of the election. (iii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 3087 framework by completing the community bank leverage ratio reporting schedule in its Call Report or Form FR Y–9C, as applicable. (iv)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio may opt out of using the community bank leverage ratio by completing Schedule RC–R in its Call Report or Schedule HC–R of Form FR Y–9C, as applicable, or by otherwise providing the information required in Schedule RC–R or Schedule HC–R, as applicable, to the Board. (B) A qualifying community banking organization that opts out of using the community bank leverage ratio pursuant to paragraph (a)(3)(iv)(A) of this section must comply with § 217.10 immediately. (b) Calculation of the community bank leverage ratio. (1) A qualifying community banking organization’s community bank leverage ratio is the ratio of the banking organization’s CBLR tangible equity, as defined in paragraph (b)(2) of this section, to its average total consolidated assets, as defined in paragraph (b)(3) of this section. (2) CBLR tangible equity means total bank equity capital, calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable, before the inclusion of noncontrolling (minority) interests in consolidated subsidiaries, as of the end of the most recent calendar quarter less the following (each as of the end of the most recent calendar quarter): (i) Accumulated other comprehensive income calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y–9C, as applicable; (ii) Intangible Assets, calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable, other than mortgage servicing assets; and (iii) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances. (3) Average total consolidated assets means total assets calculated in accordance with the reporting instructions to Schedule RC–K of the Call Report or Schedule HC–K of Form FR Y–9C, as applicable, as of the end of the most recent calendar quarter less the amounts deducted from CBLR tangible equity under paragraphs (b)(2)(ii) and (iii) of this section. (c) Treatment when ceasing to be a qualifying community banking organization requirements. (1) Except as E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 3088 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules provided in paragraph (c)(4) of this section, if an Board-regulated institution ceases to meet the definition of a qualifying community banking organization, the Board-regulated institution has two reporting periods (grace period) to either satisfy the requirements to be a qualifying community banking organization or to comply with§ 217.10and report the required capital measures under § 217.10 on its Call Report or Form FR Y–9C, as applicable. (2) The grace period begins as of the end of the calendar quarter in which the Board-regulated institution ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the Boardregulated institution continues to be a qualifying community banking organization for purposes of this part and must continue calculating and reporting its community bank leverage ratio unless the Board-regulated institution has opted out of using the community bank leverage ratio under paragraph (a)(3). (4) Notwithstanding paragraphs (c)(1) through (3), an Board-regulated institution that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such an Board-regulated institution comply with § 217.10 and must report the required capital measures under § 217.10 on its next Call Report or Form FR Y–9C. (d) Tangible equity information. (1) A qualifying community banking organization that has elected to use the community bank leverage ratio under this section and has a community bank leverage ratio that falls below 6 percent, must promptly provide to the Board the information necessary for the calculation of its tangible equity, as defined under section 12 CFR 208.41, for purposes of determining the capital category of the banking organization under 12 CFR 208.43. (2) Notwithstanding paragraph (d)(1) of this section, upon request by the Board, a qualifying community banking organization must provide the information necessary for the calculation of its tangible equity, as defined under 12 CFR 208.41, to the Board. * * * * * VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 PART 223—TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W) 40. The authority citation for part 223 continues to read as follows: ■ Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c–1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412). 41. Section 223.3 is amended by adding paragraph (d)(4) to read as follows: ■ § 223.3 What are the meanings of the other terms used in sections 23A and 23B and this part? * * * * * (d) * * * (4) Notwithstanding paragraphs (d)(1) through (3) of this section, for a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), capital stock and surplus equals CBLR tangible equity (as defined in 12 CFR 217.12) plus allowances for loan and lease losses (as defined in 12 CFR 217.2). * * * * * PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 42. The authority citation for part 225 continues to read as follows: ■ Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331–3351, 3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805. 43. Section 225.2 is amended by by revising paragraph (h), redesignating footnote 2 to paragraph (r)(1) as footnote 1 to paragraph (r)(1), and adding paragraph (r)(4) to read as follows: ■ § 225.2 Definitions. * * * * * (h) Lead insured depository institution means the largest insured depository institution controlled by the bank holding company as of the quarter ending immediately prior to the proposed filing, based on a comparison of the average total risk-weighted assets controlled during the previous 12month period be each insured depository institution subsidiary of the holding company. For purposes of this paragraph, for a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), average total risk-weighted assets equal the qualifying community banking organization’s PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 average total consolidated assets (as defined in 12 CFR 217.12). * * * * * (r) * * * (4) Notwithstanding paragraphs (r)(1) through (3) of this section: (i) A bank holding company that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), is well capitalized if: (A) It has a community bank leverage ratio greater than 9.0 percent; and (B) It satisfies the requirements of paragraph (r)(1)(iii) of this section. (ii) A depository institution that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) is well capitalized if it has a community bank leverage ratio greater than 9.0 percent. * * * * * ■ 44. Section 225.14 is amended by: ■ a. Redesignating footnote 3 to paragraph (a)(1)(ii) as footnote 1 to paragraph (a)(1)(ii); ■ b. Revising paragraphs (a)(1)(v)(A) and (vii), and . (c)(6)(i); and ■ c. Adding paragraphs (c)(6)(iii; and (f). The revisions and additions read as follows: § 225.14 Expedited action for certain bank acquisitions by well-run bank holding companies. (a) * * * (1) * * * (v) (A) If the bank holding company is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), and: (1) If the bank holding company has consolidated assets of $3 billion or more, an abbreviated consolidated pro forma balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma risk-based capital ratios for the acquiring bank holding company as of the most recent quarter, and a description of the purchase price and the terms and sources of funding for the transaction; or (2) If the bank holding company has consolidated assets of less than $3 billion, a pro forma parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, and a description of the purchase price, the terms and sources of funding for the transaction, and the sources and schedule for retiring any debt incurred in the transaction; E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules (B) If the bank holding company is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), an abbreviated consolidated pro forma balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma community bank leverage ratio for the acquiring bank holding company as of the most recent quarter, and a description of the purchase price and the terms and sources of funding for the transaction; * * * * * (vii)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total riskweighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or total assets change as a result of the transaction, the total assets, and CBLR tangible equity of the institution on a pro forma basis; and * * * * * (c) * * * (6) * * * (i) * * * (A) Limited Growth. Except as provided in paragraphs (c)(6)(ii) and (iii) of this section, the sum of the aggregate risk-weighted assets to be acquired in the proposal and the aggregate riskweighted assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes of this paragraph other qualifying transactions means any transaction approved under this section or § 225.23 during the 12 months prior to filing the notice under this section; and (B) Individual size limitation. Except as provided in paragraph (c)(6)(iii) of this section, the total risk-weighted assets to be acquired do not exceed $7.5 billion; * * * * * (iii) Qualifying community banking organizations. Paragraphs (c)(6)(i)(A) VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 and (B) of this section shall not apply if: (A) The acquiring bank holding company is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12); (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as defined in 12 CFR 217.12) of the acquiring bank holding company as last reported to the Board. For purposes of this paragraph other qualifying transactions means any transaction approved under this section or § 225.23 during the 12 months prior to filing the notice under this section; and (C) The total assets to be acquired do not exceed $7.5 billion; * * * * * (f) Qualifying community banking organizations. For purposes of this section, a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) controls total risk-weighted assets equal to the qualifying community banking organization’s average total consolidated assets (as defined in 12 CFR 217.12) as last reported to its primary banking supervisor. ■ 45. Section 225.22 is amended by adding paragraph (d)(8)(vi) to read as follows: § 225.22 Exempt nonbanking activities and acquisitions. * * * * * (d) * * * (8) * * * (vi) Qualifying community banking organizations. For purposes of paragraph (d)(8)(ii) of this section, a lending company or industrial bank that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), or is a subsidiary of such a qualifying community banking organization, has risk-weighted assets equal to: (A) Its average total consolidated assets (as defined in 12 CFR 217.12) as most recently reported to its primary banking supervisor (as defined in § 225.14(d)(5)); or (B) Its total assets, if the company or industrial bank does not report such average total consolidated assets. * * * * * ■ 46. Section 225.23 is amended by: PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 3089 a .Redesignating footnote 2 to paragraph (a)(1) as footnote 1 to paragraph (a)(1); ■ b. Revising paragraphs (a)(1)(iii) and (c)(5)(i); and ■ c. Adding paragraphs (c)(5)(iii) and (e). The revisions and additions read as follows: ■ § 225.23 Expedited action for certain nonbanking proposals by well-run bank holding companies. (a) * * * (1) * * * (iii) If the proposal involves an acquisition of a going concern: (A) If the acquiring bank holding company is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12): (1) If the bank holding company has consolidated assets of $3 billion or more, an abbreviated consolidated pro forma balance sheet for the acquiring bank holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma riskbased capital ratios for the acquiring bank holding company as of the most recent quarter, a description of the purchase price and the terms and sources of funding for the transaction, and the total revenue and net income of the company to be acquired; or (2) If the bank holding company has consolidated assets of less than $3 billion, a pro forma parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, a description of the purchase price and the terms and sources of funding for the transaction and the sources and schedule for retiring any debt incurred in the transaction, and the total assets, off-balance sheet items, revenue and net income of the company to be acquired; (B) If the acquiring bank holding company is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), an abbreviated consolidated pro forma balance sheet for the acquiring bank holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma community bank leverage ratio for the acquiring bank holding company as of the most recent quarter, a description of the purchase price and the terms and sources of funding for the transaction, E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 3090 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules and the total revenue and net income of the company to be acquired; (C) For each insured depository institution (that is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total riskweighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (D) For each insured depository institution that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or total assets change as a result of the transaction, the total assets and CBLR tangible equity of the institution on a pro forma basis; * * * * * (c) * * * (5) * * * (i) In general— (A) Limited growth. Except as provided in paragraphs (c)(5)(ii) and (iii) of this section, the sum of aggregate riskweighted assets to be acquired in the proposal and the aggregate riskweighted assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes of this paragraph, ‘‘other qualifying transactions’’ means any transaction approved under this section or § 225.14 during the 12 months prior to filing the notice under this section; (B) Consideration paid. Except as provided in paragraph (c)(5)(iii) of this section, the gross consideration to be paid by the acquiring bank holding company in the proposal does not exceed 15 percent of the consolidated Tier 1 capital of the acquiring bank holding company; and (C) Individual size limitation. Except as provided in paragraph (c)(5)(iii) of this section, the total risk-weighted assets to be acquired do not exceed $7.5 billion; * * * * * (iii) Qualifying community banking organizations. Paragraphs (c)(5)(i)(A), (B), and (C) of this section shall not apply if: (A) The acquiring bank holding company is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12); and VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as defined in 12 CFR 217.12) of the acquiring bank holding company as last reported to the Board. For purposes of this paragraph ‘‘other qualifying transactions’’ means any transaction approved under this section or § 225.14 during the 12 months prior to filing the notice under this section; (C) The gross consideration to be paid by the acquiring bank holding company in the proposal does not exceed 15 percent of the CBLR tangible equity (as defined in 12 CFR 217.12) of the acquiring bank holding company; and (D) The total assets to be acquired do not exceed $7.5 billion; * * * * * (e) Qualifying community banking organizations. For purposes of this section, a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) controls total risk-weighted assets equal to the qualifying community banking organization’s average total consolidated assets (as defined in 12 CFR 217.12) as last reported to its primary banking supervisor. ■ 47. Section 225.24 is amended byrevising paragraphs (a)(2)(iv)(B) and (a)(2)(vi) to read as follows: § 225.24 Procedures for other nonbanking proposals. (a) * * * (2) * * * (iv) * * * (B) Consolidated pro forma risk-based capital and leverage ratio calculations for the acquiring bank holding company as of the most recent quarter (or, in the case of a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), consolidated pro forma community bank leverage ratio calculations for the acquiring bank holding company as of the most recent quarter); and * * * * * (vi) (A) For each insured depository institution (that is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total riskweighted assets, total assets, Tier 1 PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 capital and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or total assets change as a result of the transaction, the total assets and CBLR tangible equity of the institution on a pro forma basis; * * * * * ■ 48. Section 225.87 is amended by adding paragraph (b)(4)(iv) to read as follows: § 225.87 Is notice to the Board required after engaging in a financial activity? * * * * * (b) * * * (4) * * * (iv) For purposes of paragraph (b)(4) of this section, a financial holding company that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) has Tier 1 capital equal to its CBLR tangible equity (as defined in 12 CFR 217.12). ■ 49. Section 225.174 is amended by adding paragraph (d) to read as follows: § 225.174 What aggregate thresholds apply to merchant banking investments? * * * * * (d) Qualifying community banking organizations. For purposes of this section, a financial holding company that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) has Tier 1 capital equal to its CBLR tangible equity (as defined in 12 CFR 217.12). ■ 50. Section 225.175 is amended by adding paragraph (c)(3) to read as follows: § 225.175 What risk management, record keeping and reporting policies are required to make merchant banking investments? * * * * * (c) * * * (3) Qualifying community banking organizations. For purposes of this paragraph (c), a financial holding company that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12) has Tier 1 capital equal to its CBLR tangible equity (as defined in 12 CFR 217.12). E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules PART 238—SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL) 51. The authority citation for part 238 continues to read as follows: ■ Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464, 1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C. 78l. 52. Section 238.53 is amended by revising paragraphs (c)(2)(iii)(B) and (v) to read as follows: ■ § 238.53 Prescribed services and activities of savings and loan holding companies. * * * * (c) * * * (2) * * * (iii) * * * (B) Consolidated pro forma risk-based capital and leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter (or, in the case of a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), consolidated pro forma community bank leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter); and * * * * * (v) (A) For each insured depository institution (that is not a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total riskweighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or total assets change as a result of the transaction, the total assets and CBLR tangible equity of the institution on a pro forma basis; * * * * * amozie on DSK3GDR082PROD with PROPOSALS3 * PART 251—CONCENTRATION LIMIT (REGULATION XX) 53. The authority citation for part 251 continues to read as follows: ■ Authority: 12 U.S.C. 1818, 1844(b), 1852, 3101 et seq. 54. Section 251.3 is amended by revising paragraph (c)(2) and adding paragraph (c)(3) to read as follows: ■ VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 § 251.3 Concentration limit. * * * * * (c) * * * (2) U.S. company not subject to applicable risk-based capital rules. For a U.S. company that is not subject to applicable risk-based capital rules (other than a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12)), consolidated liabilities are equal to the total liabilities of such company on a consolidated basis, as determined under applicable accounting standards. (3) Qualifying community banking organizations. For a U.S. company that is a qualifying community banking organization (as defined in 12 CFR 217.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 217.12), consolidated liabilities are equal to: (i) Average total consolidated assets (as defined in 12 CFR 217.12) of the company as last reported on the qualifying community banking organization’s applicable regulatory filing with the qualifying community banking organization’s appropriate Federal banking agency; minus (ii) The company’s CBLR tangible equity (as defined in 12 CFR 217.12). * * * * * 3091 means the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * PART 324—Capital Adequacy of FDICSupervised Institutions 57. The authority citation for part 324 continues to read as follows: ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub.L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.L. 102–242, 105 Stat. 2236, 2355, as amended by Pub.L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub.L. 102–242, 105 Stat. 2236, 2386, as amended by Pub.L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub.L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note); Pub. L. 115–174 § 201. 58. Section 324.10 is amended by revising paragraph (a) to read as follows: ■ § 324.10 Minimum capital requirements. (a) Minimum capital requirements. (1) An FDIC-supervised institution must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches FDICFEDERAL DEPOSIT INSURANCE supervised institutions, a CORPORATION supplementary leverage ratio of 3 12 CFR Chapter III percent. (vi) For state savings associations, a Authority and Issuance tangible capital ratio of 1.5 percent. For the reasons stated in the (2) A qualifying community banking preamble, the Federal Deposit Insurance organization (as defined in 12 CFR Corporation proposes to amend chapter 324.12), that is subject to the III of Title 12, Code of Federal community bank leverage ratio (as Regulations as follows: defined in 12 CFR 324.12), is considered to have met the minimum capital PART 303—Filing Procedures requirements in this paragraph (a) only ■ 55. The authority citation for part 303 if the qualifying community banking continues to read as follows: organization has a community bank leverage ratio of at least 7.5 percent or Authority: 12 U.S.C. 378, 1464, 1813, more. 1815, 1817, 1818, 1819(a) (Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, * * * * * 1831o, 1831p–1, 1831w, 1835a, 1843(l), 3104, ■ 59. Section 324.12 is added to read as 3105, 3108, 3207, 5414; 15 U.S.C. 1601–1607. follows: ■ 56. Section 303.2 is amended by § 324.12 Community bank leverage ratio. revising paragraph (ee) to read as (a) Community bank leverage ratio follows: framework. (1) Notwithstanding any § 303.2 Definitions. other provision in this part, a qualifying community banking organization that * * * * * (ee) Tier 1 capital shall have the same has made an election to use the community bank leverage ratio meaning as provided in § 324.2 of this framework under paragraph (a)(3) of this chapter. For a qualifying community section shall be considered to have met banking organization (as defined in 12 the minimum capital requirements CFR 324.12) that is subject to the under § 324.10, the capital ratio community bank leverage ratio (as defined in 12 CFR 324.12), Tier 1 capital requirements for the well capitalized PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP3.SGM 08FEP3 amozie on DSK3GDR082PROD with PROPOSALS3 3092 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules capital category under § 324.403(b)(1)(i)(A) through (D) of this part, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a community bank leverage ratio greater than 9 percent. (2) For purposes of this section, a qualifying community banking organization means an FDIC-supervised institution that is not an advanced approaches FDIC-supervised institution and that satisfies all of the following criteria: (i) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to Schedule RC of the Call Report as of the end of the most recent calendar quarter; (ii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(ii)(A) through (I), divided by total consolidated assets, each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through guarantees and credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to Schedule RC– L of the Call Report; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; (iii) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to Schedule RC of the Call Report of 5 percent or less of the FDICsupervised institution’s total consolidated assets, each as of the end of the most recent calendar quarter; (iv) Has mortgage servicing assets, calculated in accordance with the reporting instructions to Schedule RC– M of the Call Report, of 25 percent or less of the FDIC-supervised institution’s CBLR tangible equity, each as of the end of the most recent calendar quarter; and VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 (v) Has DTAs arising from temporary differences that the FDIC-supervised institution could not realize through net operating loss carrybacks, net of any related valuation allowances, of 25 percent or less of the FDIC-supervised institution’s CBLR tangible equity, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) A qualifying community banking organization may elect to use the community bank leverage ratio framework only if it has a community bank leverage ratio that exceeds 9 percent at the time of the election. (iii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the community bank leverage ratio reporting schedule in its Call Report. (iv)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio may opt out of using the community bank leverage ratio by completing Schedule RC–R in its Call Report or by otherwise providing the information required in Schedule RC–R to the FDIC. (B) A qualifying community banking organization that opts out of using the community bank leverage ratio pursuant to paragraph (a)(3)(iv)(A) of this section must comply with § 324.10 immediately. (b) Calculation of the community bank leverage ratio. (1) A qualifying community banking organization’s community bank leverage ratio is the ratio of the banking organization’s CBLR tangible equity, as defined in paragraph (b)(2) of this section, to its average total consolidated assets, as defined in paragraph (b)(3) of this section. (2) CBLR tangible equity means total bank equity capital, calculated in accordance with the reporting instructions to Schedule RC of the Call Report, before the inclusion of noncontrolling (minority) interests in consolidated subsidiaries, as of the end of the most recent calendar quarter less the following (each as of the end of the most recent calendar quarter): (i) Accumulated other comprehensive income calculated in accordance with the reporting instructions to Schedule RC of the Call Report; (ii) Intangible Assets, calculated in accordance with the reporting instructions to Schedule RC of the Call Report, other than mortgage servicing assets; PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 (iii) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances; and (iv) Identified losses. A qualifying community banking organization must deduct identified losses (to the extent that CBLR tangible equity would have been reduced if the appropriate accounting entries to reflect the identified losses had been recorded on the banking organization’s books). (3) Average total consolidated assets means total assets calculated in accordance with the reporting instructions to Schedule RC–K of the Call Report as of the end of the most recent calendar quarter less the amounts deducted from CBLR tangible equity under paragraphs (b)(2)(ii) through (iv) of this section. (c) Treatment when ceasing to be a qualifying community banking organization requirements. (1) Except as provided in paragraph (c)(4) of this section, if an FDIC-supervised institution ceases to meet the definition of a qualifying community banking organization, the FDIC-supervised institution has two reporting periods (grace period) to either satisfy the requirements to be a qualifying community banking organization or to comply with § 324.10 and report the required capital measures under § 324.10 on its Call Report. (2) The grace period begins as of the end of the calendar quarter in which the FDIC-supervised institution ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the FDICsupervised institution continues to be a qualifying community banking organization for purposes of this part and must continue calculating and reporting its community bank leverage ratio unless the FDIC-supervised institution has opted out of using the community bank leverage ratio under paragraph (a)(3). (4) Notwithstanding paragraphs (c)(1) through (3), an FDIC-supervised institution that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such an FDIC-supervised institution comply with § 324.10 and must report the required capital measures under § 324.10 on its next Call Report. E:\FR\FM\08FEP3.SGM 08FEP3 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules (d) Tangible equity information. (1) A qualifying community banking organization that has elected to use the community bank leverage ratio under this section and has a community bank leverage ratio that falls below 6 percent, must promptly provide to the FDIC the information necessary for the calculation of its tangible equity, as defined under § 324.2, for purposes of determining the capital category of the banking organization under subpart H of this part. (2) Notwithstanding paragraph (d)(1), upon request by the FDIC, a qualifying community banking organization must provide the information necessary for the calculation of its tangible equity, as defined under § 324.2, to the FDIC. ■ 60. Section 324.403is amended by revising paragraphs (a) and (b) to read as follows: amozie on DSK3GDR082PROD with PROPOSALS3 § 324.403 Capital measures and capital category definitions. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this subpart H, the relevant capital measures shall be: (i) The total risk-based capital ratio; (ii) The Tier 1 risk-based capital ratio; (iii) The common equity tier 1 ratio; (iv) The leverage ratio; (v) The tangible equity to total assets ratio; and (vi) Beginning January 1, 2018, the supplementary leverage ratio calculated in accordance with § 324.11 for advanced approaches FDIC–supervised institutions that are subject to subpart E of this part. (2) For a qualifying community banking organization (as defined under § 324.12), that is subject to the community bank leverage ratio (as defined under § 324.12), the community bank leverage ratio (as defined under § 324.12), is used to determine the applicable capital category under paragraphs (b)(1) through (4) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, an FDIC–supervised institution shall be deemed to be: (1) (i) ‘‘Well capitalized’’ if it: (A) Has a total risk-based capital ratio of 10.0 percent or greater; and (B) Has a Tier 1 risk-based capital ratio of 8.0 percent or greater; and (C) Has a common equity tier 1 capital ratio of 6.5 percent or greater; and (D) Has a leverage ratio of 5.0 percent or greater; and (E) Is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC pursuant to section 8 of the FDI Act (12 U.S.C. 1818), the VerDate Sep<11>2014 18:23 Feb 07, 2019 Jkt 247001 International Lending Supervision Act of 1983 (12 U.S.C. 3907), or the Home Owners’ Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)), or section 38 of the FDI Act (12 U.S.C. 1831o), or any regulation thereunder, to meet and maintain a specific capital level for any capital measure. (ii) Beginning on January 1, 2018 and thereafter, an FDIC–supervised institution that is a subsidiary of a covered BHC will be deemed to be well capitalized if the FDIC–supervised institution satisfies paragraphs (b)(1)(i)(A) through (E) of this section and has a supplementary leverage ratio of 6.0 percent or greater. For purposes of this paragraph, a covered BHC means a U.S. top-tier bank holding company with more than $700 billion in total assets as reported on the company’s most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y–9C) or more than $10 trillion in assets under custody as reported on the company’s most recent Banking Organization Systemic Risk Report (Form FR Y–15). (iii) A qualifying community banking organization, as defined under § 324.12, that has elected to use the community bank leverage ratio framework under § 324.12 and that has a community bank leverage ratio, as defined under § 324.12, greater than 9 percent, shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraphs (b)(1)(i)(A) through (D) of this section. (2)(i) ‘‘Adequately capitalized’’ if it: (A) Has a total risk-based capital ratio of 8.0 percent or greater; and (B) Has a Tier 1 risk-based capital ratio of 6.0 percent or greater; and (C) Has a common equity tier 1 capital ratio of 4.5 percent or greater; and (D) Has a leverage ratio of 4.0 percent or greater; and (E) Does not meet the definition of a well capitalized bank. (ii) Beginning January 1, 2018, an advanced approaches FDIC–supervised institution will be deemed to be ‘‘adequately capitalized’’ if it satisfies paragraphs (b)(2)(i)(A) through (E) of this section and has a supplementary leverage ratio of 3.0 percent or greater, as calculated in accordance with § 324.11 of subpart B of this part. (iii) A qualifying community banking organization, as defined under § 324.12, that has elected to use the community bank leverage ratio framework under section § 324.12 and that has a community bank leverage ratio, as defined under § 324.12, of 7.5 percent or greater, shall be considered to have met the requirements for the adequately capitalized capital category in PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 3093 paragraphs (b)(2)(i)(A) through (D) of this section. (3)(i) ‘‘Undercapitalized’’ if it: (A) Has a total risk-based capital ratio that is less than 8.0 percent; or (B) Has a Tier 1 risk-based capital ratio that is less than 6.0 percent; or (C) Has a common equity tier 1 capital ratio that is less than 4.5 percent; or (D) Has a leverage ratio that is less than 4.0 percent. (ii) Beginning January 1, 2018, an advanced approaches FDIC–supervised institution will be deemed to be ‘‘undercapitalized’’ if it has a supplementary leverage ratio of less than 3.0 percent, as calculated in accordance with § 324.11. (iii) A qualifying community banking organization, as defined under § 324.12, that has elected to use the community bank leverage ratio framework under section § 324.12 and that has a community bank leverage ratio, as defined under § 324.12, of less than 7.5 percent, shall be considered to have met the requirements for the undercapitalized capital category in paragraphs (b)(3)(i)(A) through (D) of this section. (4)(i) ‘‘Significantly undercapitalized’’ if it has: (A) A total risk-based capital ratio that is less than 6.0 percent; or (B) A Tier 1 risk-based capital ratio that is less than 4.0 percent; or (C) A common equity tier 1 capital ratio that is less than 3.0 percent; or (D) A leverage ratio that is less than 3.0 percent. (ii) A qualifying community banking organization, as defined under § 324.12, that has elected to use the community bank leverage ratio framework under section § 324.12 and that has a community bank leverage ratio, as defined under § 324.12, of less than 6 percent, shall be considered to have met the requirements for the significantly undercapitalized capital category in paragraphs (b)(4)(i)(A) through (D) of this section. (5) ‘‘Critically undercapitalized’’ if the insured depository institution has a ratio of tangible equity, as defined in § 324.2, to total assets that is equal to or less than 2.0 percent. PART 337—UNSAFE AND UNSOUND BANKING PRACTICES 61. The authority citation for part 337 continues to read as follows: ■ Authority: 12 U.S.C. 375a(4), 375b, 1463(a)(1), 1816, 1818(a), 1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412. 62. Section 337.3 is amended by redesignating footnote 3 to paragraph (b) as footnote 1 and revising newly to read as follows: ■ E:\FR\FM\08FEP3.SGM 08FEP3 3094 Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / Proposed Rules § 337.3 Limits on extensions of credit to executive officers, directors, and principal shareholders of insured nonmember banks. * * * * * (b) * * * 1 For the purposes of § 337.3, an insured nonmember bank’s capital and unimpaired surplus shall have the same meaning as found in § 215.2(f) of Federal Reserve Board Regulation O (12 CFR 215.2(f)). For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), capital and unimpaired surplus shall mean the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12) plus allowances for loan and lease losses (as defined in 12 CFR 324. 2). * * * * * PART 347—INTERNATIONAL BANKING 63. The authority citation for part 347 continues to read as follows: ■ Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 3104, 3105, 3108, 3109; Pub L. No. 111–203, section 939A, 124 Stat. 1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o–7 note). 64. Section 347.102 is amended by revising paragraph (u) to read as follows: ■ § 347.102 Definitions. * * * * * (u) Tier 1 capital means Tier 1 capital as defined in § 324.2 of this chapter. For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), Tier 1 capital means the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * PART 362—ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS ASSOCIATIONS 65. The authority citation for part 362 continues to read as follows: ■ Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(j), 1828(m), 1828a, 1831a, 1831e, 1831w, 1843(l). PART 365—REAL ESTATE LENDING STANDARDS 67. The authority citation for part 365 continues to read as follows: ■ Authority: 12 U.S.C. 1828(o) and 5101 et seq. 68. Appendix A to subpart A of part 365 is amended by: ■ a. Following the heading ‘‘Supervisory Loan-to-Value-Limits’’, in the table, redesignating footnotes 1 and 2 as footnotes 2 and 3; ■ b. In the first paragraph of the appendix, redesignating footnote 5 as footnote 1; and ■ c. Following the heading ‘‘Loans in Excess of the Supervisory Loan-toValue-Limits’’, redesignating the second footnote 2 as footnote 4 and revising newly redesignated footnote 4. The revision reads as follows: ■ Appendix A to Subpart A of Part 365— Interagency Guidelines for Real Estate Lending Policies * * * * * 4 For state non-member banks and state savings associations, ‘‘total capital’’ refers to that term described in 12 CFR 324.2. For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), ‘‘total capital’’ refers to the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * 66. Section 362.2 is amended by revision paragraph (s) to read as follows: PART 390—REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT SUPERVISION § 362.2 ■ ■ amozie on DSK3GDR082PROD with PROPOSALS3 (s) Tier one capital has the same meaning as set forth in part 324 of this chapter for an insured State nonmember bank or insured state savings association. For other state-chartered depository institutions, the term ‘‘tier one capital’’ has the same meaning as set forth in the capital regulations adopted by the appropriate Federal banking agency. For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), Tier one capital means the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * * * Definitions. * VerDate Sep<11>2014 * 69. The authority citation for part 390 continues to read as follows: * 18:23 Feb 07, 2019 Jkt 247001 PO 00000 Frm 00034 Fmt 4701 Sfmt 9990 Authority: 12 U.S.C. 1819. 70. Section 390.265 is amended by revising footnote 4 to read as follows: * * * * * 4 For the state member banks, the term ‘‘total capital’’ is defined at 12 CFR 217.2. For insured state non-member banks, the term ‘‘total capital’’ is defined at 12 CFR 324.2. For national banks, the term ‘‘total capital’’ is defined at 12 CFR 3.2. For state savings associations, the term ‘‘total capital’’ is defined at 12 CFR 324.2. For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), ‘‘total capital’’ means the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * ■ 71. Section 390.344 is amended by revising the definition of ‘‘Capital’’ to read as follows: * * * * * ■ § 390.344 Definitions applicable to capital distributions. * * * * * Capital means total capital, as computed under part 324 of this chapter. For a qualifying community banking organization (as defined in 12 CFR 324.12) that is subject to the community bank leverage ratio (as defined in 12 CFR 324.12), total capital means the FDIC-supervised institution’s CBLR tangible equity (as defined in 12 CFR 324.12). * * * * * Dated: November 15, 2018. Joseph M. Otting, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, November 21, 2018. Margaret McCloskey Shanks, Deputy Secretary of the Board. Dated at Washington, DC, on November 20, 2018. By order of the Board of Directors. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. [FR Doc. 2018–27002 Filed 2–7–19; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P E:\FR\FM\08FEP3.SGM 08FEP3

Agencies

[Federal Register Volume 84, Number 27 (Friday, February 8, 2019)]
[Proposed Rules]
[Pages 3062-3094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27002]

[[Page 3061]]

Vol. 84

Friday,

No. 27

February 8, 2019

Part IV

Department of the Treasury

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Office of the Comptroller of the Currency

12 CFR Parts 1, 3, 5, et al.

Federal Reserve System

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12 CFR Parts 206, 208, 211, et al.

Federal Deposit Insurance Corporation

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12 CFR parts 303, 324, 337, et al.

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Regulatory Capital Rule: Capital Simplification for Qualifying
Community Banking Organizations; Proposed Rule

Federal Register / Vol. 84 , No. 27 / Friday, February 8, 2019 /
Proposed Rules

[[Page 3062]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 3, 5, 6, 23, 24, 32, 34, 160, and 192

[Docket ID OCC-2018-0040]
RIN 1557-AE59

FEDERAL RESERVE SYSTEM

12 CFR Parts 206, 208, 211, 215, 217, 223, 225, 238, and 251

[Regulation Q; Docket No. R-1638]
RIN 7100-AF29

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303, 324, 337, 347, 362, 365, and 390

RIN 3064-AE91

Regulatory Capital Rule: Capital Simplification for Qualifying
Community Banking Organizations

AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) are inviting public comment on a
notice of proposed rulemaking (proposal) that would provide for a
simple measure of capital adequacy for certain community banking
organizations, consistent with section 201 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act. Under the proposal,
most depository institutions and depository institution holding
companies that have less than $10 billion in total consolidated assets,
that meet risk-based qualifying criteria, and that have a community
bank leverage ratio (as defined in the proposal) of greater than 9
percent would be eligible to opt into a community bank leverage ratio
framework. Such banking organizations that elect to use the community
bank leverage ratio and that maintain a community bank leverage ratio
of greater than 9 percent would not be subject to other risk-based and
leverage capital requirements and would be considered to have met the
well capitalized ratio requirements for purposes of section 38 of the
Federal Deposit Insurance Act and regulations implementing that
section, as applicable, and the generally applicable capital
requirements under the agencies' capital rule.

DATES: Comments must be received by April 9, 2019.

ADDRESSES: Comments should be directed to:
OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Regulatory Capital Rule: Capital Simplification for Qualifying
Community Banking Organizations'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0040'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-
218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2018-0040'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0040'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen. Comments and supporting materials can be viewed and
filtered by clicking on ``View all documents and comments in this
docket'' and then using the filtering tools on the left side of the
screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. The docket may be viewed
after the close of the comment period in the same manner as during the
comment period.
Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 649-6700 or, for
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon
arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to
inspect comments.
Board: You may submit comments, identified by Docket No. R-1638, by
any of the following methods:
Agency website: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. All public comments are available from the
Board's website at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper form in Room 3515, 1801 K Street NW (between 18th and 19th
Street NW), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on
weekdays.
FDIC: You may submit comments, identified by RIN 3064-AE91 by any
of the following methods:
Agency website: https://www.FDIC.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency
website.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal

[[Page 3063]]

ESS, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
Hand Delivered/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street NW, building
(located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
Email: comments@FDIC.gov. Include the RIN 3064-AE91 on the
subject line of the message.
Public Inspection: All comments received must include the
agency name and RIN 3064-AE91 for this rulemaking. All comments
received will be posted without change to https://www.fdic.gov/regulations/laws/federal/, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT:
OCC: Christine A. Smith, Risk Analyst; or David Elkes, Risk Expert;
or JungSup Kim, Risk Specialist, Capital Policy (202-649-6370); or Carl
Kaminski, Special Counsel; or Daniel Perez, Attorney; or Rima Kundnani,
Attorney, Chief Counsel's Office, (202) 649-5490, for persons who are
deaf or hearing impaired, TTY, (202) 649-5597, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; Sviatlana Phelan, Senior
Supervisory Financial Analyst, (202) 912-4306; Andrew Willis, Senior
Supervisory Financial Analyst, (202) 912-4323; Division of Supervision
and Regulation; or Benjamin McDonough, Assistant General Counsel, (202)
452-2036; Mark Buresh, Counsel, (202) 452-5270; or Andrew Hartlage,
Counsel, (202) 452-6483; Legal Division, Board of Governors of the
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
For the hearing impaired only, Telecommunication Device for the Deaf
(TDD), (202) 263-4869.
FDIC: Benedetto Bosco, Chief, Capital Policy Section,
bbosco@fdic.gov; Stephanie Lorek, Senior Capital Markets Policy
Analyst, slorek@fdic.gov; Dushan Gorechan, Financial Analyst,
dgorechan@fdic.gov; Kyle McCormick, Financial Analyst,
kmccormick@fdic.gov; Capital Markets Branch, Division of Risk
Management Supervision, (202) 898-6888; or Michael Phillips, Counsel,
mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; Alexander
Bonander, Attorney, abonander@fdic.gov; Supervision Branch, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of the Proposal
A. Overview of the Community Bank Leverage Ratio Framework
B. Qualifying Community Banking Organization
1. Total Consolidated Assets
2. Total Off-balance Sheet Exposures
3. Total Trading Assets and Trading Liabilities
4. Mortgage Servicing Assets
5. Temporary Difference Deferred Tax Assets
6. Advanced Approaches Banking Organization
C. CBLR Tangible Equity
1. Minority Interests
2. Accumulated Other Comprehensive Income
3. Intangible Assets
4. Deferred Tax Assets
D. Average Total Consolidated Assets (CBLR Denominator)
E. Calibration of the Community Bank Leverage Ratio
F. Election to Use the Community Bank Leverage Ratio Framework
G. Compliance with the Proposed CBLR Framework
1. Definition of a qualifying community banking organization
2. Treatment of a community banking organization that falls
below the CBLR Requirement
a. CBLR Levels for Certain PCA Categories
b. Critically Undercapitalized Capital Category
c. Effect of CBLR Levels on Other Regulations
d. Alternative Approach
H. Other Affected Regulations
I. Deposit Insurance Assessment Regulations
J. Illustrative Reporting Form
K. Consultation with State Bank Supervisors
III. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995
E. Riegle Community Development and Regulatory Improvement Act
of 1994

I. Background

In 2013, the Office of the Comptroller of the Currency (OCC), the
Board of Governors of the Federal Reserve System (Board), and the
Federal Deposit Insurance Corporation (FDIC) (collectively, the
agencies) revised the regulatory capital rule (capital rule) to address
weaknesses in the capital framework that became apparent in the
financial crisis of 2007-09.\1\ The capital rule strengthened the
capital requirements applicable to banking organizations \2\ supervised
by the agencies by improving both the quality and quantity of
regulatory capital and increasing risk-sensitivity. For example, the
capital rule introduced a minimum common equity tier 1 capital
requirement of 4.5 percent and strengthened the qualifying criteria for
regulatory capital instruments, which had the effect of making the
existing capital requirements more stringent.\3\ The capital rule also
raised the minimum tier 1 risk-based capital requirement from 4 percent
to 6 percent and, for advanced approaches banking organizations
only,\4\ established a supplementary leverage ratio of 3 percent.\5\
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\1\ The Board and OCC issued a joint final rule on October 11,
2013 (78 FR 62018), and the FDIC issued a substantially identical
interim final rule on September 10, 2013 (78 FR 55340). On April 14,
2014 (79 FR 20754), the FDIC adopted the interim final rule as a
final rule with no substantive changes.
\2\ Banking organizations subject to the agencies' capital rule
include national banks, state member banks, insured state nonmember
banks, savings associations, and top-tier bank holding companies and
savings and loan holding companies domiciled in the United States
not subject to the Board's Small Bank Holding Company and Savings
and Loan Holding Company Policy Statement (12 CFR part 225, appendix
C), excluding certain savings and loan holding companies that are
substantially engaged in insurance underwriting or commercial
activities or that are estate trusts, and bank holding companies and
savings and loan holding companies that are employee stock ownership
plans.
\3\ 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20
(FDIC).
\4\ A banking organization is an advanced approaches banking
organization if it has consolidated assets of at least $250 billion
or if it has consolidated on-balance sheet foreign exposures of at
least $10 billion, or if it is a subsidiary of a depository
institution, bank holding company, savings and loan holding company,
or intermediate holding company that is an advanced approaches
banking organization. See 12 CFR 3.100 (OCC); 12 CFR 217.100
(Board); 12 CFR 324.100 (FDIC). The agencies are seeking comment on
the definition of an advanced approaches banking organization. See
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm
\5\ 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); 12 CFR
324.10(a) (FDIC).
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Since the issuance of the capital rule in 2013, community banking
organizations have raised concerns regarding the regulatory burden,
complexity, and costs associated with certain aspects of the capital
rule. In March 2017, the agencies published the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA) Joint Report to
Congress.\6\ In

[[Page 3064]]

the EGRPRA report, the agencies stated they are considering
simplifications to the capital rule with the goal of meaningfully
reducing regulatory burden on community banking organizations while
maintaining safety and soundness and the quality and quantity of
regulatory capital in the banking system. In September 2017, the
agencies proposed simplifying certain capital requirements for all
banking organizations, except advanced approaches banking organizations
(simplifications proposal).\7\ In an effort to provide immediate
relief, the agencies also extended transition provisions for certain
regulatory capital requirements that would be affected by the
simplifications proposal.\8\
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\6\ See Joint Report to Congress; Economic Growth and Regulatory
Paperwork Reduction Act (March 2017), https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf. EGRPRA, Public Law
104-208, 110 Stat. 3009.
\7\ 82 FR 49984 (October 27, 2017).
\8\ 83 FR 55309 (November 21, 2017). The agencies continue to
evaluate comments on the simplifications proposal.
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On May 24, 2018, the Economic Growth, Regulatory Relief, and
Consumer Protection Act (the Act) amended provisions in the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) \9\ as
well as certain other statutes administered by the agencies.\10\
Section 201 of the Act, titled ``Capital Simplification for Qualifying
Community Banks,'' directs the agencies to develop a community bank
leverage ratio (CBLR) of not less than 8 percent and not more than 10
percent for qualifying community banks (qualifying community banking
organizations). The Act defines a qualifying community banking
organization as a depository institution or depository institution
holding company with total consolidated assets of less than $10
billion. A qualifying community banking organization that exceeds the
CBLR level established by the agencies is considered to have met: (i)
The generally applicable leverage and risk-based capital requirements
under the agencies' capital rule; (ii) the capital ratio requirements
in order to be considered well capitalized under the agencies' prompt
corrective action (PCA) framework (in the case of insured depository
institutions); and (iii) any other applicable capital or leverage
requirements. In addition, the Act directs the agencies to establish
procedures for the treatment of qualifying community banking
organizations that fall below the CBLR level established by the
agencies.\11\
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\9\ Public Law 111-203, 124 Stat. 1376.
\10\ See Public Law 115-174, 132 Stat. 1296.
\11\ The agencies note that under existing legal requirements
applicable to holding companies and insured depository institutions,
to be considered well capitalized a banking organization must
demonstrate that it is not subject to any written agreement, order,
capital directive, or as applicable, prompt corrective action
directive, to meet and maintain a specific capital level for any
capital measure. See, e.g., 12 CFR 225.2. The same legal
requirements would continue to apply under the CBLR framework.
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Section 201 of the Act defines the CBLR as the ratio of a
qualifying community banking organization's CBLR tangible equity to its
average total consolidated assets, both as reported on the qualifying
community banking organization's applicable regulatory filing. In
addition, the Act states that the agencies may determine that a banking
organization is not a qualifying community banking organization based
on the banking organization's risk profile. The Act states that such a
determination shall be based on consideration of off-balance sheet
exposures, trading assets and liabilities, total notional derivatives
exposures, and such other factors as the agencies determine
appropriate. The Act also specifies that the CBLR framework developed
by the agencies does not limit the authority of the Federal banking
agencies in effect as of the date of enactment of the Act.
Finally, the Act directs the agencies to consult with applicable
state bank supervisors in carrying out section 201 of the Act and to
notify the applicable state bank supervisor of any qualifying community
banking organization that exceeds, or does not exceed after previously
exceeding, the CBLR.

II. Summary of the Proposal

A. Overview of the Community Bank Leverage Ratio Framework

The proposed CBLR framework, based on the requirements of section
201 of the Act, is a simple alternative methodology to measure capital
adequacy for qualifying community banking organizations. The proposal
together with associated reporting requirement changes that the
agencies anticipate proposing would simplify regulatory requirements
and provide material regulatory relief to qualifying community banking
organizations that opt into the CBLR framework.
The agencies designed the CBLR framework taking into account
multiple considerations, seeking to balance the simplicity of the
framework with safety and soundness goals. First, the CBLR framework is
intended to be available to a meaningful number of well capitalized
banking organizations with less than $10 billion in total consolidated
assets. Second, the CBLR should be calibrated to not reduce the amount
of capital currently held by qualifying community banking
organizations. Third, the agencies intend for banking organizations
with higher risk profiles to remain subject to the generally applicable
capital requirements \12\ to ensure that such banking organizations
hold capital commensurate with the risk of their exposures and
activities. Fourth, consistent with the Act, the agencies would
maintain the supervisory actions applicable under the PCA framework and
other statutes and regulations based on the capital ratios and risk
profile of a banking organization. Finally, the CBLR framework is
intended to provide meaningful regulatory compliance burden relief and
be relatively simple for banking organizations to implement.
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\12\ 12 CFR 3.10(a)-(b) (OCC); 12 CFR 217.10(a)-(b) (Board); 12
CFR 324.10(a)-(b) (FDIC).
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Under the proposal, a qualifying community banking organization
would be defined as a depository institution or depository institution
holding company with less than $10 billion in total consolidated assets
with limited amounts of off-balance sheet exposures, trading assets and
liabilities, mortgage servicing assets (MSAs), and deferred tax assets
(DTAs) arising from temporary differences that a banking organization
could not realize through net operating loss carrybacks (temporary
difference DTAs). In addition, an advanced approaches banking
organization would not be a qualifying community banking organization.
The CBLR would be calculated as the ratio of tangible equity
capital (CBLR tangible equity) divided by average total consolidated
assets. Under the proposal, CBLR tangible equity would be defined as
total bank equity capital or total holding company equity capital, as
applicable, prior to including minority interests, and excluding
accumulated other comprehensive income (AOCI), DTAs arising from net
operating loss and tax credit carryforwards, goodwill, and other
intangible assets (other than MSAs), each as of the most recent
calendar quarter and calculated in accordance with a qualifying
community banking organization's regulatory reports. Average total
consolidated assets would be calculated in a manner similar to the
current tier 1 leverage ratio denominator in that amounts deducted from
the CBLR numerator would also be excluded from the CBLR denominator.
Under the proposal, a qualifying community banking organization may
elect to use the CBLR framework if its CBLR is greater than 9 percent.
A CBLR greater than 9 percent, in conjunction with the proposed
definitions of a qualifying community banking organization and CBLR
tangible equity,

[[Page 3065]]

should generally maintain the current level of capital held by these
banking organizations, while supporting the agencies' goals of reducing
regulatory burden for community banking organizations and retaining
safety and soundness in the banking system.
The proposal provides a regulatory capital treatment for a
qualifying community banking organization that elects to use the CBLR
framework (CBLR banking organization), but whose CBLR subsequently
falls to 9 percent or less, and continues to provide for the agencies'
supervisory actions under PCA and other applicable statutes and
regulations. Specifically, for insured depository institutions, the
proposal incorporates CBLR levels as proxies for the following PCA
categories: Adequately capitalized, undercapitalized and significantly
undercapitalized. If a CBLR banking organization's CBLR meets the
corresponding CBLR levels, it would be considered to have met the
capital ratio requirements within the applicable PCA category and be
subject to the same restrictions that currently apply to any other
insured depository institution in the same PCA category. Further, the
proposal would not limit the agencies' authority to take any
supervisory actions consistent with their supervisory authority under
the PCA framework or other statutes or regulations.
The agencies are not proposing changes to the definition of the
critically undercapitalized category under their PCA rules. Therefore,
under the proposal, if an insured depository institution is considered
significantly undercapitalized, based on its CBLR, the insured
depository institution would be required to provide promptly to its
appropriate regulators such information as is necessary to calculate
the tangible equity ratio as defined under the PCA framework for
insured depository institutions.
The CBLR calculation would require significantly less data than are
used to calculate the generally applicable capital requirements. The
agencies therefore expect that a CBLR banking organization would report
its CBLR and other relevant information on a simpler regulatory capital
schedule, relative to Schedules RC-R of the Consolidated Reports of
Condition and Income (Call Report) and HC-R of Form FR Y-9C. The
agencies are including in this Supplementary Information an
illustrative CBLR reporting schedule. The illustrative schedule
reflects potential reduced reporting requirements and is intended to
aid commenters in understanding the proposal. The agencies intend to
publish a separate information collection proposal in the Federal
Register to seek comment on revising the reporting schedules and
instructions for purposes of the CBLR framework.
The agencies are monitoring the impact of the upcoming
implementation of the current expected credit losses methodology (CECL)
on community banking organizations. In May 2018, the agencies issued a
notice of proposed rulemaking to amend the capital rule in response to
CECL (CECL transitions NPR).\13\ The CECL transitions NPR proposed an
optional three-year transition arrangement that would allow a banking
organization to phase in any adverse day-one regulatory capital effects
of CECL adoption on retained earnings, DTAs, allowance for credit
losses, and average total consolidated assets. These day-one regulatory
capital effects would be phased in over the transition period on a
straight line basis.
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\13\ 83 FR 22312 (May 14, 2018).
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Question 1: The agencies invite comment on the impact to the CBLR
framework due to the upcoming implementation of CECL. What changes
should the agencies consider? For example, what are the advantages and
disadvantages of providing CBLR banking organizations an optional
transition arrangement to phase in any adverse day-one effects on the
CBLR due to the implementation of CECL? How could any phase-in be
included in the CBLR framework without creating undue burden?

B. Qualifying Community Banking Organization

Under the proposal, a qualifying community banking organization
would be defined as a depository institution or depository institution
holding company that is not an advanced approaches banking organization
and that meets the following criteria (qualifying criteria), each as
described further below:
Total consolidated assets of less than $10 billion;
Total off-balance sheet exposures (excluding derivatives
other than credit derivatives and unconditionally cancelable
commitments) of 25 percent or less of total consolidated assets;
Total trading assets and trading liabilities of 5 percent
or less of total consolidated assets;
MSAs of 25 percent or less of CBLR tangible equity; and
Temporary difference DTAs of 25 percent or less of CBLR
tangible equity.\14\
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\14\ In addition, the agencies would reserve the authority to
disallow the use of the CBLR framework by a depository institution
or depository institution holding company, based on the risk profile
of the banking organization. This authority would be reserved under
the general reservation of authority included in the capital rule,
in which the CBLR framework would be codified. See 12 CFR 3.1(d)
(OCC); 12 CFR 217.1(d) (Board); 12 CFR 324.1(d) (FDIC). In addition,
for purposes of the capital rule and section 201 of the Act, the
agencies would reserve the authority to take action under other
provisions of law, including action to address unsafe or unsound
practices or conditions, deficient capital levels, or violations of
law or regulation. See 12 CFR 3.1(b) (OCC); 12 CFR 217.1(b) (Board);
12 CFR 324.1(b) (FDIC).
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The agencies believe that banking organizations that do not meet
these qualifying criteria should remain subject to the generally
applicable capital requirements to ensure that such banking
organizations hold capital commensurate with the risk profile of their
activities. The agencies would monitor the appropriateness of the
proposed qualifying criteria over time to ensure that they remain
effective in excluding banking organizations with complex or
potentially risky off-balance sheet activities from the CBLR framework.
As mentioned previously, the agencies developed these qualifying
criteria in conjunction with the proposed CBLR of greater than 9
percent and the CBLR tangible equity definition to create a simple
alternative framework to the generally applicable capital requirements.
Question 2: The agencies invite comment on the definition of a
qualifying community banking organization. What are the advantages and
disadvantages of the qualifying criteria? What is the burden associated
with determining whether a banking organization meets the proposed
qualifying criteria? What other criteria, if any, should the agencies
consider in the proposed definition of a qualifying community banking
organization? What are commenters' views on the tradeoffs between
simplicity and having additional risk profile criteria? In specifying
any alternative qualifying criteria regarding a banking organization's
risk profile, please provide information on how alternative qualifying
criteria should be considered in conjunction with the calibration of
the CBLR level and why the agencies should consider such alternative
criteria.
1. Total Consolidated Assets
Under the proposal, a qualifying community banking organization
would be required to have less than $10 billion in total consolidated
assets as of the end of the most recent calendar quarter, in accordance
with the Act. Total consolidated assets would be calculated in
accordance with the reporting

[[Page 3066]]

instructions to Schedule RC of the Call Report or Schedule HC of Form
FR Y-9C, as applicable.
2. Total Off-Balance Sheet Exposures
Under the proposal, a qualifying community banking organization
would be required to have total off-balance sheet exposures of 25
percent or less of its total consolidated assets, as of the end of the
most recent calendar quarter. The agencies are including this
qualifying criterion in the CBLR framework because the CBLR includes
only on-balance sheet assets in its denominator and thus would not
require a qualifying banking organization to hold capital against its
off-balance sheet exposures. This qualifying criterion is intended to
reduce the likelihood that a qualifying community banking organization
with significant off-balance sheet exposures would hold less capital
under the CBLR framework than under the generally applicable capital
requirements.
Under the proposal, total off-balance sheet exposures would be
calculated as the sum of the notional amounts of certain off-balance
sheet items as of the end of the most recent calendar quarter. Total
off-balance sheet exposures would include the unused portions of
commitments (except for unconditionally cancellable commitments); self-
liquidating, trade-related contingent items that arise from the
movement of goods; transaction-related contingent items (i.e.,
performance bonds, bid bonds and warranties); sold credit protection in
the form of guarantees and credit derivatives; credit-enhancing
representations and warranties; off-balance sheet securitization
exposures; letters of credit; forward agreements that are not
derivative contracts; and securities lending and borrowing transactions
(total off-balance sheet exposures). Total off-balance sheet exposures
would exclude derivatives that are not credit derivatives, such as
foreign exchange swaps and interest rate swaps. The agencies believe
the notional amount for such derivatives is not an appropriate
indicator of credit risk and could inadvertently disqualify a banking
organization from using the CBLR framework if the banking organization
is appropriately hedging its credit risks.
The proposed components of total off-balance sheet exposures would
be generally consistent with off-balance sheet items in the generally
applicable capital requirements, except for securities lending and
borrowing transactions. Securities lending and borrowing transactions
would include the sum of off-balance sheet securities lent and borrowed
measured in accordance with the reporting instructions for these items
in Schedules RC-L of the Call Report or HC-L of Form FR Y-9C, as
applicable. The proposed calculation of total off-balance sheet
exposures is significantly simpler than under the generally applicable
capital requirements, which require that off-balance sheet exposures be
converted to on-balance sheet equivalents and assigned the appropriate
risk weight.
As mentioned previously, the agencies also intend to ensure that
the regulatory relief included in the CBLR framework is available to a
meaningful number of community banking organizations. As a result, the
agencies do not believe that traditional banking activities, such as
extending loan commitments to customers, should necessarily preclude a
banking organization from qualifying to use the CBLR framework. The
agencies analyzed average off-balance sheet exposures, relative to
total consolidated assets, for banking organizations with less than $10
billion in total consolidated assets and observed that the vast
majority of such banking organizations report off-balance sheet
exposures totaling less than 25 percent of total consolidated assets.
Accordingly, the agencies have determined that the proposed 25 percent
qualifying criterion of total off-balance sheet exposures to total
consolidated assets would allow a meaningful number of banking
organizations to use the CBLR framework without unduly restricting
lending practices. The proposed criterion would help to prevent banking
organizations from engaging in excessive off-balance sheet exposures
without a commensurate capital requirement under the CBLR framework.
Question 3: The agencies invite comment on the proposed off-balance
sheet qualifying criterion. What aspects of the off-balance sheet
qualifying criterion, including definitions, require further clarity?
For example, what aspects, if any, of the generally applicable capital
requirement's definition of credit enhancing representations and
warranties or the reporting instructions to Schedules RC-L of the Call
Report or HC-L of Form FR Y-9C for securities lent and borrowed require
further clarity? What other alternatives should the agencies consider
for purposes of defining the proposed qualifying criterion? For
example, what are the advantages and disadvantages of using off-balance
sheet items reported on Schedules RC-L of the Call Report or HC-L of
Form FR Y-9C in place of the off-balance sheet items as currently
reported on Schedules RC-R of the Call Report or HC-R of Form FR Y-9C?
What impact would the proposed qualifying criterion have on a banking
organization's business strategies and lending decisions?
3. Total Trading Assets and Trading Liabilities
Under the proposal, a qualifying banking organization would be
required to have total trading assets and liabilities of 5 percent or
less of its total consolidated assets, each measured as of the end of
the most recent calendar quarter. Total trading assets and liabilities
would be calculated as the sum of those exposures, in accordance with
the reporting instructions for these items on Schedules RC of the Call
Report or HC of Form FR Y-9C, as applicable. A banking organization
would divide the sum of its total trading assets and trading
liabilities by its total consolidated assets to determine its
percentage of total trading assets and liabilities.
The agencies recognize the potential elevated levels of risk and
complexity that can be associated with certain trading activities. For
this reason, banking organizations with significant trading assets and
liabilities are subject to a market risk capital requirement under the
generally applicable risk-based capital requirements.\15\ In contrast,
CBLR banking organizations would not be required to calculate
additional market risk capital requirements and, as a result, the CBLR
framework may not appropriately capitalize for material amounts of
trading assets and trading liabilities. In addition, elevated levels of
trading activity can produce a heightened level of earnings volatility,
which has implications for capital adequacy. Therefore, the agencies
have concerns about making the CBLR framework available to banking
organizations with material market risk exposure. At the same time, the
agencies do not believe that low levels of trading activity should
preclude a banking organization from using the CBLR framework.
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\15\ 12 CFR part 3, subpart F (OCC); 12 CFR part 217, subpart F
(Board); 12 CFR part 324, subpart F (FDIC).
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Based on the agencies' analysis, the vast majority of banking
organizations with less than $10 billion in total consolidated assets
have total trading assets and liabilities well below 5 percent of their
total consolidated assets. The agencies believe that the

[[Page 3067]]

proposed 5 percent threshold would help to ensure that banking
organizations under the CBLR framework would not engage in significant
trading activity. Further, this criterion is generally consistent with
section 203 of the Act, which excludes a community banking organization
from proprietary trading restrictions if its trading assets and
liabilities are 5 percent or less of its total consolidated assets.
The agencies considered adopting an additional qualifying criterion
in the CBLR framework based on a banking organization's total notional
derivatives exposures. However, as described above, the agencies are
concerned that such additional criterion may inadvertently disqualify a
banking organization from using the CBLR framework if the banking
organization engages in prudent risk management by appropriately
hedging its risks associated with traditional banking activities. The
agencies reviewed the notional derivative exposures reported by banking
organizations with less than $10 billion in total consolidated assets
and determined that a significant majority of such banking
organizations currently either do not report any derivative exposure or
report notional derivative amounts of less than $500 million, which
would require relatively low amounts of regulatory capital under the
generally applicable capital requirements. Therefore, except for the
notional amount of sold credit protection in the form of a credit
derivative, the agencies have not incorporated total notional
derivatives exposure as a qualifying criterion under the proposed CBLR
framework.
Question 4: The agencies invite comment on the proposed trading
activity criterion. What other alternatives to limiting trading
activity should the agencies consider for purposes of defining a
qualifying community banking organization and why?
Question 5: What are the advantages and disadvantages of using
total notional derivatives exposures or another measure as the basis
for the qualifying criterion? If such a criterion were included in the
CBLR framework, how should it be measured and why? At what level should
any such qualifying criterion be set?
4. Mortgage Servicing Assets
Under the proposal, a qualifying community banking organization
would be required to have MSAs of 25 percent or less of its CBLR
tangible equity. This qualifying criterion would be calculated as MSAs,
calculated in accordance with the reporting instructions to Schedules
RC-M of the Call Report or HC-M of Form FR Y-9C, as applicable, divided
by CBLR tangible equity, each measured as of the end of the most recent
calendar quarter.
High concentrations in MSAs are subject to stringent capital
requirements through a deduction approach under the generally
applicable capital requirements.\16\ The stringent capital requirements
are designed to protect banking organizations from sudden fluctuations
in the value of MSAs and from the potential inability of banking
organizations to divest themselves of MSAs quickly at their full
estimated value during periods of financial stress. The 25 percent
threshold for holdings of MSAs in the CBLR framework would help to
ensure that banking organizations with high concentrations of MSAs
would remain subject to the generally applicable capital requirements.
The proposed MSA qualifying criterion is aligned with the proposed
threshold for MSAs in the simplifications proposal discussed above.\17\
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\16\ 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d) (Board); 12 CFR
324.22(d) (FDIC).
\17\ 82 FR 49984 (October 27, 2017).
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As an alternative to the proposed qualifying criterion for MSAs,
the agencies considered an approach that would instead require a
qualifying community banking organization to deduct from its CBLR
tangible equity MSAs in excess of 25 percent of CBLR tangible equity.
However, the agencies are concerned that such an approach would unduly
complicate the CBLR framework.
Question 6: The agencies invite comment on the proposed qualifying
criterion for MSAs. What are commenters' views on the inclusion of such
a qualifying criterion as opposed to an alternative deduction approach
from CBLR tangible equity for purposes of the CBLR?
5. Temporary Difference Deferred Tax Assets
Under the proposal, a qualifying community banking organization
would have temporary difference DTAs, net of any related valuation
allowances, of 25 percent or less of CBLR tangible equity. This
criterion would be calculated as temporary difference DTAs, as
described in the capital rule,\18\ divided by CBLR tangible equity,
each measured as of the end of the most recent calendar quarter.
Temporary difference DTAs, net of any related valuation allowances, are
assets that banking organizations may not be able to fully realize,
especially under adverse financial conditions, because a banking
organization's ability to realize its temporary difference DTAs is
dependent on future taxable income.\19\ This concern is particularly
acute when banking organizations are experiencing financial difficulty.
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\18\ 12 CFR 3.22(d)(1)(i) (OCC); 12 CFR 217.22(d)(1)(i) (Board);
12 CFR 324.22(d)(1)(i) (FDIC). As described further below, this
proposal would not include the option for netting deferred tax
liabilities to maintain a simple calculation of CBLR tangible
equity.
\19\ Temporary differences arise when financial events or
transactions are recognized in one period for financial reporting
purposes and in another period, or periods, for tax purposes.
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Question 7: The agencies invite comment on the treatment of
temporary difference DTAs for purposes of the definition of a
qualifying community banking organization. What are the advantages and
disadvantages of the proposed qualifying criterion for temporary
difference DTAs? What alternatives should the agencies consider in
limiting exposures to DTAs and how would such alternatives affect the
proposed calibration of the CBLR framework?
6. Advanced Approaches Banking Organizations
Under the proposal, only non-advanced approaches banking
organizations would be eligible to use the CBLR framework. Advanced
approaches banking organizations are generally banking organizations
with $250 billion or more in total consolidated assets or $10 billion
or more in on-balance sheet foreign exposure, or subsidiaries of such
banking organizations.\20\ As such, a depository institution with less
than $10 billion in total consolidated assets may be an advanced
approaches banking organization.
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\20\ See footnote 4.
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The agencies believe that, in general, the Act is designed to
provide regulatory relief for banking organizations with less than $10
billion in total consolidated assets and that have a limited risk
profile. While an advanced approaches banking organization with less
than $10 billion in total consolidated assets is a relatively small
banking organization, it is nonetheless part of a more complex banking
organization. Consequently, such a banking organization would not be
eligible to use the CBLR framework under this proposal.
Question 8: The agencies invite comment on the exclusion of
advanced approaches banking organizations from the CBLR framework. What
other alternatives should the agencies consider with respect to a
banking

[[Page 3068]]

organization's affiliation with larger, more complex banking
organizations?

C. CBLR Tangible Equity

Under the proposal, the numerator of the CBLR would be CBLR
tangible equity. CBLR tangible equity would be calculated as a banking
organization's total bank equity capital or total holding company
equity capital, as applicable, determined in accordance with the
reporting instructions to Schedule RC of the Call Report or Schedule HC
of Form FR Y-9C, prior to including minority interests, less: (i)
Accumulated other comprehensive income (AOCI), (ii) all intangible
assets (other than MSAs), and (iii) DTAs, net of any related valuation
allowances, that arise from net operating loss and tax credit
carryforwards, each as of the end of the most recent calendar
quarter.\21\ CBLR tangible equity would not include minority interests
(equity of a consolidated subsidiary that is not owned by the
qualifying community banking organization) because minority interests
do not have the same loss absorption capacity as other components of
CBLR tangible equity at the consolidated banking organization level.
The proposed definition is intended as a prudent, simple measure of
CBLR tangible equity, which CBLR banking organizations can calculate
using amounts reported on regulatory reports. The agencies believe that
this simpler measure of capital is consistent with the goal of
providing meaningful burden relief for qualifying community banking
organizations.
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\21\ Solely for purposes of the FDIC's proposed definition of
CBLR tangible equity, FDIC-supervised institutions that are CBLR
banking organizations must deduct identified losses (to the extent
that CBLR tangible equity would have been reduced if the appropriate
accounting entries to reflect the identified losses had been
recorded on the banking organization's books).
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The agencies' generally applicable capital requirements have long
included restrictions on the types of capital instruments that can be
included in tier 1 capital. Prior to 2013, the agencies' capital rule
required that voting common stock holders' equity be the dominant form
of tier 1 capital and that banking organizations should avoid undue
reliance on nonvoting equity and preferred stock. Furthermore,
cumulative perpetual preferred securities are generally not included in
tier 1 capital. The definition of tier 1 capital under the generally
applicable capital requirements excludes cumulative perpetual preferred
securities as such instruments allow for the accumulation of interest
payable and are not likely to absorb losses to the degree appropriate
for inclusion in tier 1 capital. However, consistent with the intention
to maintain a simple definition of CBLR tangible equity, the proposal
does not include such restrictions and thus provides more flexibility
with respect to the types of capital instruments that could qualify for
CBLR tangible equity. The agencies believe providing such flexibility
is consistent with safety and soundness when considering the overall
proposed calibration of the CBLR framework for qualifying community
banking organizations.
Question 9: The agencies invite comment on the proposed definition
of CBLR tangible equity. What changes, if any, would commenters suggest
to the proposed definition of CBLR tangible equity? What are the
advantages and disadvantages of a CBLR that closely aligns with the
applicable reporting instructions to Schedules RC of the Call Report
and HC of Form FR Y-9C measure of equity? What are the advantages and
disadvantages of introducing additional adjustments and deductions from
equity capital when defining CBLR tangible equity?
Question 10: What are the advantages and disadvantages of not
imposing specific eligibility criteria for capital instruments under
the CBLR framework? If the agencies exclude certain types of capital
instruments from CBLR tangible equity, how should the agencies
incorporate such criteria in a simple manner? For example, what are the
advantages and disadvantages of the agencies requiring that voting
common equity be the dominant form of CBLR tangible equity?
Question 11: What other alternative definitions of CBLR tangible
equity should the agencies consider with respect to the CBLR, and how
should such alternatives be considered in conjunction with the proposed
9 percent CBLR calibration? Would defining CBLR tangible equity to
equal a measure of capital under the generally applicable capital
requirements (e.g., tier 1 capital) be more appropriate, and if so,
why?
1. Minority Interests
Under the proposal, the definition of CBLR tangible equity would
not include minority interests in consolidated subsidiaries because,
while such minority interests are available to absorb losses at the
subsidiary, they are not always available to absorb losses at the
banking organization's consolidated level. To address this concern, the
generally applicable capital requirements limit the amount of minority
interests that a banking organization may include in its regulatory
capital through a relatively complex calculation.
To balance the agencies' concern regarding the capacity of minority
interests to absorb losses at the consolidated banking organization and
to preserve the simplicity of the CBLR framework, the proposed
definition of CBLR tangible equity would not include minority interests
in consolidated subsidiaries. The agencies reviewed data regarding
minority interests that banking organizations with less than $10
billion in total consolidated assets report in regulatory capital and
found that only a small number of such banking organizations currently
report any minority interests. Therefore, the exclusion of minority
interests is not expected to have a material impact on the amount of
CBLR tangible equity for the vast majority of banking organizations.
Question 12: The agencies invite comment on the proposed exclusion
of minority interests from the definition of CBLR tangible equity. What
are the advantages and disadvantages of this approach? If minority
interests were to be included, how should the agencies limit the amount
of minority interests that could count toward a banking organization's
CBLR tangible equity without creating undue complexity?
2. Accumulated Other Comprehensive Income
Under the proposal, the definition of CBLR tangible equity would
exclude all components of AOCI, measured in accordance with the
reporting instructions to Schedule RC of the Call Report or Schedule HC
of Form FR Y-9C, as applicable. Under the generally applicable capital
requirements, banking organizations, other than advanced approaches
banking organizations, may exclude most components of AOCI from common
equity tier 1 capital. AOCI generally includes accumulated unrealized
gains and losses on certain assets and liabilities that are not
included in net income, yet are included in equity under U.S. GAAP (for
example, unrealized gains and losses on securities designated as
available-for-sale). When the agencies revised the capital rule in
2013, they noted that smaller or relatively less complex banking
organizations may not have sophisticated risk management techniques to
hedge interest rate risk and that including AOCI in regulatory capital
could introduce significant volatility in the capital ratios due to
fluctuations in benchmark interest rates. The agencies therefore
included an option for non-advanced approaches

[[Page 3069]]

banking organizations to neutralize the impact of AOCI on their
regulatory capital calculations and the vast majority of banking
organizations have made that election.
Consistent with the generally applicable capital requirements'
treatment of AOCI for banking organizations other than advanced
approaches banking organizations, the proposal would exclude all
components of AOCI from CBLR tangible equity. The proposed adjustment
for AOCI would be simpler than under the generally applicable capital
requirements which allow certain banking organizations to neutralize
some but not all AOCI, and thus should alleviate regulatory burden for
banking organizations that qualify for and elect to use the CBLR,
without meaningfully affecting the amount of the AOCI adjustment.
Question 13: The agencies invite comment on the proposed treatment
of AOCI for purposes of the CBLR. What are the advantages and
disadvantages of making adjustments to CBLR tangible equity for all
components of AOCI? What alternatives, if any, to the proposed
treatment of AOCI should the agencies consider for purposes of the CBLR
and why?
3. Intangible Assets
Under the proposal, the definition of CBLR tangible equity would
require deduction of goodwill and all other intangible assets (other
than MSAs), which is consistent with long-standing requirements in the
generally applicable capital requirements. This deduction would be
calculated as goodwill and all other intangible assets (other than
MSAs), measured in accordance with the reporting instructions to
Schedules RC-M of the Call Report or HC-M of Form FR Y-9C, as
applicable. All other intangible assets generally include, for example,
core deposit intangibles, favorable leasehold rights, purchased credit
card relationships, and non-mortgage servicing assets. During times of
stress, it may be difficult to sell, or to calculate reliable values
for, intangible assets. Fully deducting goodwill and all other
intangible assets would help to retain the quality of CBLR tangible
equity and would be consistent with safety and soundness and with the
generally applicable capital requirements. Deducting these items is
also consistent with section 201 of the Act, which requires the
agencies to develop a CBLR using tangible equity capital.
The proposed deduction for intangible assets is gross of associated
deferred tax liabilities. The generally applicable capital requirements
contain an option for netting of deferred tax liabilities from the
items subject to deduction, which may result in a complex calculation
for banking organizations with limited deferred tax liabilities. The
agencies propose to not include the same option for netting deferred
tax liabilities to maintain a simple calculation of CBLR tangible
equity. The agencies also analyzed the effect of netting deferred tax
liabilities from intangible assets subject to deduction and observed
that permitting netting of deferred tax liabilities would not
meaningfully change the CBLR for qualifying banking organizations.
Question 14: The agencies invite comment on the treatment of
intangible assets in the proposed definition of CBLR tangible equity
for purposes of the CBLR. What are the advantages and disadvantages of
the proposed approach? What are commenters' views on retaining the
option to net deferred tax liabilities from items subject to deduction,
as permitted under the generally applicable capital requirements? What
alternatives, if any, to the proposed treatment of intangible assets
should the agencies consider and why?
4. Deferred Tax Assets
Under the proposal, DTAs that arise from net operating loss and tax
credit carryforwards, net of any related valuation allowances, would be
deducted from CBLR tangible equity. This deduction would supplement the
qualifying criterion that requires a qualifying community banking
organization to have temporary difference DTAs of 25 percent or less of
its CBLR tangible equity.
Under the proposal, DTAs that arise from net operating loss and tax
credit carryforwards would be measured consistently with the generally
applicable capital requirements,\22\ except that a banking organization
would not have the option to reduce the amount of the deduction by
deferred tax liabilities. The proposed approach for DTAs is similar to,
but simpler than, the treatment of DTAs in the generally applicable
capital requirements, which requires deduction from common equity tier
1 capital of the entire amount of DTAs that arise from net operating
loss and tax credit carryforwards and requires the deduction of
temporary difference DTAs above certain thresholds. The proposed
approach for DTAs is intended to address the concern that DTAs that are
generally dependent upon future taxable income may not be realizable.
This concern is particularly acute when banking organizations are
experiencing financial difficulty or when broad economic conditions
change.
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\22\ 12 CFR 3.22(a)(3) (OCC); 12 CFR 217.22(a)(3) (Board); 12
CFR 324.22(a)(3) (FDIC).
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In developing the proposal, the agencies considered alternative
treatments of DTAs that arise from net operating loss and tax credit
carryforwards and temporary difference DTAs that would have varying
degrees of conservatism and complexity. One alternative for calculating
CBLR tangible equity would be to deduct DTAs that arise from net
operating loss and tax credit carryforwards from a banking
organization's total equity capital, and then to deduct temporary
difference DTAs that exceed 25 percent of a threshold amount equal to a
banking organization's total equity capital less all other adjustments
and deductions for CBLR tangible equity. The agencies decided against
this alternative because such a threshold deduction would result in an
unduly complex CBLR tangible equity calculation. Another alternative
would be to deduct all net DTAs (i.e., DTAs that arise from net
operating loss and tax credit carryforwards and temporary difference
DTAs), net of any valuation allowances, measured in accordance with the
reporting instructions to Schedule RC-F of the Call Report or Schedule
HC-F of Form FR Y-9C, as applicable, from a banking organization's
total equity capital, which would be a more conservative treatment than
under the generally applicable capital requirements. The agencies have
not proposed this approach based on a concern that a deduction for all
temporary difference DTAs could be unduly punitive.
Question 15: The agencies invite comment on the treatment of DTAs
that arise from net operating loss and tax credit carryforwards in the
proposed definition of CBLR tangible equity. What are the advantages
and disadvantages of not permitting the netting of deferred tax
liabilities? What are commenters' views on the complexity of netting
deferred tax liabilities as compared to the simplicity of a gross
deduction? What alternatives, if any, should the agencies consider and
why?
Question 16: The agencies invite comment on whether it would be
more appropriate to deduct all net DTAs from CBLR tangible equity. What
are the advantages and disadvantages of deducting all net DTAs from
CBLR tangible equity? What are commenters' views on the tradeoffs of
simply deducting all net DTAs as compared to separate treatments for
DTAs that arise from net operating loss and tax credit carryforwards
and temporary difference

[[Page 3070]]

DTAs? What alternatives, if any, should the agencies consider and why?

D. Average Total Consolidated Assets (CBLR Denominator)

Consistent with the Act, the proposed CBLR denominator would be
based on a banking organization's average total consolidated assets.
Specifically, average total consolidated assets for purposes of the
CBLR denominator would be calculated in accordance with the reporting
instructions to Schedules RC-K on the Call Report or HC-K on Form FR Y-
9C, as applicable, less the items deducted from the CBLR numerator,
except AOCI. The proposed calculation is similar to that used in
determining the denominator of the tier 1 leverage ratio.
Question 17: The agencies invite comment on the proposed definition
of average total consolidated assets. What, if any, alternative
definitions of average total consolidated assets should the agencies
consider for purposes of the CBLR and why?

E. Calibration of the Community Bank Leverage Ratio

The agencies propose that a qualifying community banking
organization may elect to use the CBLR framework if the CBLR of the
banking organization is greater than 9 percent at the time of election.
A qualifying community banking organization with a CBLR greater than 9
percent would be considered to have met: (i) The generally applicable
capital requirements; (ii) the well capitalized capital ratio
requirements under the agencies' PCA framework for insured depository
institutions or the well capitalized standards under the Board's
regulations for holding companies, as applicable; and (iii) any other
capital or leverage requirements to which the banking organization is
subject. Such banking organizations would not be required to calculate
capital ratios under the generally applicable capital requirements.
Additionally, to be considered well capitalized under the CBLR
framework, and consistent with the agencies' PCA framework, a
qualifying community banking organization must not be subject to any
written agreement, order, capital directive, or PCA directive to meet
and maintain a specific capital level for any capital measure.
The proposed calibration of the CBLR, in conjunction with the
qualifying community banking organization and CBLR tangible equity
definitions, seek to strike a balance among the following objectives:
Maintaining strong capital levels in the banking system, ensuring
safety and soundness, and providing appropriate regulatory burden
relief to as many banking organizations as possible. For example, an 8
percent CBLR would allow more banking organizations to opt into the
CBLR framework but could incentivize a large number of CBLR banking
organizations to hold less regulatory capital than they do today.
Conversely, a significant number of banking organizations would not
meet a 10 percent CBLR, which could preclude the use of the CBLR
framework by banking organizations that are operating in a safe and
sound manner with prudent levels of capital.
The agencies estimate that as of the second quarter of 2018, the
vast majority of banking organizations under $10 billion in total
consolidated assets would meet the definition of a qualifying community
banking organization and have a CBLR above 9 percent. Based on reported
data as of June 30, 2018, there are 5,408 insured depository
institutions with less than $10 billion in total consolidated assets
and 151 depository institution holding companies with more than $3
billion and less than $10 billion in total consolidated assets.\23\
Approximately 83 percent of such insured depository institutions and 56
percent of such depository institution holding companies would qualify
to use the CBLR framework under the proposed 9 percent calibration and
qualifying criteria. The agencies believe the CBLR framework, including
its proposed calibration, meets the objectives described above.
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\23\ As of June 30, 2018, there are 4,261 depository institution
holding companies with less than $10 billion in total consolidated
assets. More than 95 percent of such holding companies are not
subject to the capital rule because they have less than $3 billion
in total consolidated assets and meet certain additional criteria to
qualify for the Board's small bank holding company policy statement.
See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C;
12 CFR 238.9.
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Question 18: The agencies invite comment on the proposed CBLR
calibration. What other factors should the agencies consider in
calibrating the CBLR and why? The agencies request that commenters
include discussion of how the proposed CBLR level should be affected by
potential changes to other aspects of the proposed CBLR framework, such
as the definition of CBLR tangible equity and the definition of a
qualifying community banking organization.

F. Election To Use the Community Bank Leverage Ratio Framework

Under the proposal, a qualifying community banking organization
with a CBLR greater than 9 percent may elect to use the CBLR framework
at any time. Such a banking organization would indicate its election by
completing a CBLR reporting schedule in its Call Report or Form FR Y-
9C, as applicable, which will be proposed at a later date, as discussed
below in this Supplementary Information.
Under the proposal, a CBLR banking organization may opt out of the
CBLR framework and use the generally applicable capital requirements by
completing the associated reporting requirements on Schedules RC-R of
the Call Report or HC-R of Form FR Y-9C, as applicable. While the
agencies would not place restrictions on the ability of qualifying
community banking organizations to switch in and out of the CBLR
framework, the agencies anticipate such changes to be rare and
typically driven by significant changes in the banking organization's
business activities. The agencies believe that some flexibility to
reverse the election to use the CBLR framework is warranted to ensure
that banking organizations can adjust their business strategies and
activities over time. The agencies would expect a CBLR banking
organization to be able to provide a rationale for opting out of the
CBLR framework to its appropriate regulators, if requested.
Additionally, the agencies note that a CBLR banking organization
may opt out of the CBLR framework between reporting periods by
producing the capital ratios under the generally applicable capital
requirements to its appropriate regulators at the time of opting out.
This requirement is intended to remove any ambiguity relating to
capital adequacy for either the banking organization or the appropriate
regulators.
A banking organization that has opted out of the CBLR framework
would need to meet the qualifying criteria included in the definition
of a qualifying community banking organization and have a CBLR of
greater than 9 percent to be able to opt back into the CBLR framework.
This proposed approach is intended to balance the need for flexibility
in applying capital requirements tailored to banking organizations'
different and potentially shifting business models with the goal of
discouraging arbitrage between capital frameworks.
Question 19: The agencies invite comment on the proposed procedure
a banking organization would use to opt into and out of the CBLR
framework. What are commenters' views on the frequency with which a
qualifying community banking organizations may opt in and out of the
CBLR framework? What other alternatives should the

[[Page 3071]]

agencies consider for purposes of qualifying community banking
organizations' election to use and report the CBLR and why? Do
qualifying community banking organizations anticipate frequent
switching between the CBLR framework and the generally applicable
capital requirements, and if so, why? What are the operational or other
challenges associated with frequent switching between frameworks? What
are commenters' views on the loss of comparability in capital ratios
over time that may result from frequent switching between frameworks?
How would the changes proposed in the simplifications proposal
influence whether a banking organization elects to use the CBLR
framework?

G. Compliance With the Proposed CBLR Framework

1. Definition of a Qualifying Community Banking Organization
Under the proposal, a CBLR banking organization that no longer
meets the proposed qualifying criteria would be required, within a
limited grace period of two consecutive calendar quarters, either to
once again meet the qualifying criteria or demonstrate compliance with
the generally applicable capital requirements. The grace period would
begin as of the end of the calendar quarter in which the CBLR banking
organization ceases to satisfy the criteria to be a qualifying
community banking organization and end after two consecutive calendar
quarters. During the grace period, the banking organization could
continue to be treated as a qualifying community banking organization
and could, therefore, continue calculating and reporting a CBLR to
determine its PCA category, in the case of an insured depository
institution, and compliance with other statutes and regulations.
A banking organization that grows to $10 billion or larger in total
consolidated assets or no longer meets one or more of the other
qualifying criteria (e.g., increased concentrations in MSAs) could use
the grace period to again meet the qualifying criteria or revert to the
generally applicable capital requirements. For example, if the CBLR
banking organization exceeded one of the qualifying criteria as of
February 15, the grace period for such a banking organization would
begin as of the end of the quarter ending March 31. The banking
organization could continue to use the CBLR framework as of June 30,
but would need to fully comply with the generally applicable capital
requirements (including the associated reporting requirements) as of
September 30, unless at that time the banking organization once again
met the qualifying criteria of the CBLR framework. The agencies believe
that this limited grace period is appropriate to mitigate potential
volatility in capital and associated regulatory reporting requirements
based on temporary changes in a banking organization's risk profile
from quarter to quarter, while capturing more permanent changes in risk
profile.
A CBLR banking organization that ceases to meet the criteria to be
a qualifying community banking organization as a result of a business
combination would receive no grace period, however, and immediately
would no longer be a qualifying community banking organization. The
agencies believe this approach is appropriate as banking organizations
would need to consider the regulatory capital implications of a planned
business combination and be prepared to comply with the applicable
requirements. A CBLR banking organization that expects that it would
not meet the qualifying criteria as a result of a planned business
combination would need to provide its pro-forma capital ratios under
the generally applicable capital requirements to its appropriate
regulator as part of its merger application, if applicable, and fully
comply with the generally applicable capital requirements as of the
completion of the transaction.
Question 20: The agencies invite comment on the proposed treatment
for a banking organization that no longer meets the definition of a
qualifying community banking organization after making an election to
use the CBLR framework. Specifically, what are the advantages and
disadvantages of the proposed period of time a banking organization
that no longer meets the qualifying criteria would be provided to
transition to the generally applicable capital requirements? What other
alternatives should the agencies consider with respect to a banking
organization that no longer meets the definition of a qualifying
community banking organization and why?
2. Treatment of a Community Banking Organization That Falls Below the
CBLR Requirement
Under the proposal, a CBLR banking organization that has a CBLR
greater than 9 percent would be considered well capitalized. In
addition, a CBLR banking organization would be considered to have met
the minimum capital requirements under the agencies' capital rule if
its CBLR is 7.5 percent or greater.\24\
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\24\ A CBLR banking organization that is a depository
institution holding company would no longer be considered well
capitalized if the holding company had a CBLR of 9 percent or less.
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The Act requires that the agencies establish procedures for the
treatment of a CBLR banking organization that experiences a decline in
its CBLR below the percentage set by the agencies after exceeding such
percentage. A CBLR banking organization's CBLR may deteriorate due to a
decline in its level of CBLR tangible equity, growth in its average
total consolidated assets, or a combination of both. As described
above, a CBLR banking organization may choose to stop using the CBLR
framework and instead become subject to the generally applicable
capital requirements. However, the agencies recognize that some banking
organizations may find it unduly burdensome to begin complying with the
more complex risk-based capital reporting requirements at the same time
that the organization is experiencing a decline in its CBLR.
Accordingly, in the case of CBLR banking organizations that are insured
depository institutions and that no longer exceed the 9 percent CBLR,
the agencies are proposing to establish the following CBLR levels to
serve as proxies for the adequately capitalized, undercapitalized, and
significantly undercapitalized PCA capital categories and be deemed to
satisfy statutory capital requirements: \25\
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\25\ See, for example, 12 U.S.C. 5371 (establishing a capital
floor for insured depository institutions and depository institution
holding companies); section 201 of the Act (requiring development of
a community bank leverage ratio for which a depository institution
exceeding that ratio would be considered to meet the requirements to
be treated as well capitalized under PCA); and 12 U.S.C. 1831o
(PCA).
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Adequately capitalized--CBLR of 7.5 percent or greater;
Undercapitalized--CBLR of less than 7.5 percent; and
Significantly undercapitalized--CBLR of less than 6
percent.
The definition of critically undercapitalized would remain the same
as under the PCA framework and the generally applicable capital
requirements. The agencies are not proposing a proxy CBLR level for the
critically undercapitalized category, which would continue to be
calculated as the ratio of tangible equity to total assets (as defined
under the PCA framework) of 2 percent or below. As discussed above, the
agencies are proposing a CBLR level of greater than 9 percent for the
well capitalized capital category pursuant to section 201 of the Act.

[[Page 3072]]

a. CBLR Levels for Certain PCA Categories
Under the proposal, the CBLR levels for the adequately capitalized,
undercapitalized, and significantly undercapitalized PCA capital
categories would serve as proxies for the existing risk-based and
leverage capital ratios that currently define these PCA capital
categories. In setting the proposed proxy levels, the agencies sought
to provide sufficient separation across categories such that a banking
organization would not face frequent changes to its PCA category
without a corresponding significant change in its CBLR. For reference,
the agencies note that under the current PCA rules, there is a 2
percentage point difference between the risk-based capital ratios for
the corresponding PCA capital categories and a 1 percentage point
difference between the tier 1 leverage ratios for the corresponding PCA
capital categories.
The agencies performed data analysis on 5,408 insured depository
institutions under $10 billion in total consolidated assets as of June
30, 2018, to calibrate the CBLR levels for the adequately capitalized,
undercapitalized, and significantly undercapitalized PCA capital
categories, of which 4,469 insured depository institutions meet all the
proposed qualifying criteria (eligible IDIs).
The agencies' data analysis has demonstrated that at the proposed
PCA adequately capitalized requirement of 7.5 percent, about 0.5
percent of eligible IDIs would require less capital--in order to be
deemed adequately capitalized--under the CBLR framework than under the
generally applicable capital requirements. Thus, the data analysis by
the agencies supports a conclusion that 7.5 percent results in an
appropriate balance between the two considerations of (1) serving as an
appropriate proxy for the adequately capitalized PCA ratio in the risk-
based and leverage capital rules, and (2) providing sufficient
separation between the adequately capitalized PCA ratio and the well
capitalized and the undercapitalized PCA ratios.
Similarly, at the proposed PCA significantly undercapitalized
requirement of 6 percent, about 0.4 percent of eligible IDIs would
require less capital--in order to be considered undercapitalized--under
the CBLR framework than under the generally applicable capital
requirements. Therefore, the agencies believe that the proposed 6
percent level would represent an appropriate balance between (1)
serving as an appropriate proxy for the significantly undercapitalized
PCA ratio in the risk-based and leverage capital rules, and (2)
providing sufficient separation between the significantly
undercapitalized and the undercapitalized and critically
undercapitalized PCA ratios.
Under the proposal, a CBLR banking organization that maintains a
CBLR of 7.5 percent or greater but less than or equal to 9 percent
would be deemed to have met the minimum capital requirements and all of
the capital ratio requirements for the adequately capitalized capital
category under the PCA framework and therefore, treated as adequately
capitalized. A CBLR banking organization whose CBLR falls below 7.5
percent but is greater than or equal to 6 percent would be deemed to
have met all of the capital ratio requirements for the undercapitalized
capital category under the PCA framework and therefore, treated as
undercapitalized. A CBLR banking organization whose CBLR falls below 6
percent and tangible equity ratio is above 2 percent would be deemed to
have met all of the capital ratio requirements for the significantly
undercapitalized capital category under the PCA framework and
therefore, considered and treated as significantly undercapitalized.
The definition of critically undercapitalized would remain the same as
under the PCA framework and the generally applicable capital
requirements. Specifically, the critically undercapitalized category
would continue to include banking organizations with a ratio of
tangible equity to total assets (as defined under the PCA framework) of
2 percent or below.
b. Critically Undercapitalized Capital Category
Section 38 of the Federal Deposit Insurance Act \26\ specifies that
the critically undercapitalized capital category must be set at no less
than 2 percent of the tangible equity ratio. Therefore, a CBLR
depository institution with a ratio of tangible equity to total assets
(as provided for under the agencies PCA framework) of 2 percent or
below would be classified as critically undercapitalized. Because the
information necessary to calculate the PCA tangible equity ratio under
the current capital rule may not be readily available to a CBLR banking
organization, a CBLR banking organization with a CBLR of less than 6
percent would be required to provide promptly to its appropriate
regulators such information as is necessary to calculate the PCA
tangible equity ratio so that the regulators may calculate and monitor
the banking organization's tangible equity ratio in the event that its
condition deteriorates. Such deterioration can occur quickly depending
on the particular circumstances and economic environment. Under the
proposal and consistent with the current authorities, the appropriate
regulators also may request the information necessary to determine the
tangible equity ratio at any time, and the CBLR banking organization
must provide it.
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\26\ 12 U.S.C. 1831o.
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The agencies considered proposing a CBLR level for the critically
undercapitalized capital category. However, allowing two definitions
for the critically undercapitalized capital category would create
potential arbitrage between the generally applicable capital
requirements and CBLR framework and legal uncertainty as to when a bank
is critically undercapitalized for purposes of the FDIC being appointed
as a conservator or receiver for a failing banking organization.
c. Effect of CBLR Levels on Other Regulations
The agencies would use the proxies described in the previous
section to apply the regulatory, supervisory, and enforcement
authorities under PCA and other statutes to CBLR banking
organizations.\27\ A CBLR banking organization would be subject to all
of the requirements and restrictions, including any capital restoration
plan requirement and mandatory and discretionary supervisory actions,
applicable to a banking organization in its PCA category. Similarly,
agencies expect to continue applying the current supervisory standards
for examining banking organizations for capital adequacy.
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\27\ See section 201(c)(2) of the Act.
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For example, if a CBLR banking organization becomes less than well
capitalized, it would become subject to applicable regulatory
restrictions. For a CBLR banking organization that is a depository
institution, these restrictions would include the brokered deposit and
interest rate restrictions.\28\ For a CBLR banking organization that is
a depository institution holding company, these restrictions would
include limitations on financial activities under the Bank Holding
Company Act and Regulation Y. A CBLR banking organization's capital
category can also affect various applications' standards, procedures,
and processing in the same way as a banking organization's current PCA
category based on the generally

[[Page 3073]]

applicable capital requirements. These include the ability to conduct
interstate mergers and to establish interstate branches, as well as
eligibility for expedited applications processing.
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\28\ 12 U.S.C 1831f; 12 CFR 337.6.
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d. Alternative Approach
Consistent with the treatment of a CBLR banking organization that
no longer meets the definition of a qualifying community banking
organization, the agencies considered proposing to require CBLR banking
organizations to report capital ratios under the generally applicable
capital requirements if their CBLR fell to 9 percent or below, subject
to a transition period. On the one hand, this approach is
straightforward, avoids any potential ambiguity with respect to a
banking organization's capital category when it is less than well
capitalized, and is consistent with the CBLR framework being available
for highly capitalized community banking organizations. On the other
hand, this approach is relatively inflexible compared to the proposal.
The agencies believe that some additional flexibility in the
implementation of the CBLR framework is not inconsistent with the Act's
purpose of relieving qualifying community banking organizations.
Question 21: The agencies invite comment on the proposed treatment
for a CBLR banking organization that no longer exceeds the 9 percent
CBLR level. Specifically, what are commenters' views on the proposed
CBLR levels for all other PCA capital categories except for the
critically undercapitalized capital category? What are the advantages
and disadvantages of establishing proxies for the identified PCA
capital categories?
Question 22: The agencies invite comment on the proposal to require
a CBLR banking organization to provide the information necessary for
its regulators to calculate the banking organization's tangible equity
once the banking organization's CBLR falls below 6 percent. What, if
any, would be the burden of gathering and providing such information
and how long would it take to generate such information?
Question 23: What alternative procedures should the agencies
consider with respect to the treatment of a CBLR banking organization
whose CBLR has fallen to 9 percent or less and why?
Question 24: The agencies invite comment on the proposed
implementation of section 201 of the Act. How does the proposed
definition of CBLR tangible equity interact with the risk profile
criteria and the proposed CBLR ratio requirement?

H. Other Affected Federal Regulations

Under the proposal, a CBLR banking organization would no longer be
required to calculate or report the components of capital used in the
calculation of risk-based capital ratios or the tier 1 leverage ratio,
such as tier 1 capital, total capital, or risk-weighted assets. Various
Federal banking regulations outside of the regulatory capital rule
(non-capital rules) contain references to these regulatory capital
terms and therefore would need to be updated to reflect the components
of capital and related capital measures under the CBLR framework. To
ensure that these non-capital rules continue to operate as intended,
the agencies propose that standards using tier 1 capital or total
capital be amended so that a CBLR banking organization would use CBLR
tangible equity instead of tier 1 capital or total capital. The
agencies propose that where applicable, standards referencing risk-
weighted assets be amended so that a CBLR banking organization would
use average total consolidated assets (i.e., the CBLR denominator)
instead of risk-weighted assets.
In addition, certain of the agencies' non-capital rules refer to
``capital stock and surplus'' (or similar items), which is generally
defined as tier 1 and tier 2 capital plus the amount of allowances for
loan and lease losses not included in tier 2 capital.\29\ The agencies
propose that a CBLR banking organization would calculate capital stock
and surplus as CBLR tangible equity plus allowances for loan and lease
losses. Thus, for example, for purposes of compliance with section 23A
of the Federal Reserve Act, the proposal would amend the Board's
Regulation W to provide that, for a CBLR banking organization,
``capital stock and surplus'' would mean CBLR tangible equity plus
allowances for loan and lease losses.\30\
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\29\ See e.g., 12 CFR 223.3(d).
\30\ The agencies issued a proposal in May 2018 to address
pending changes to U.S. GAAP related to accounting for allowances
under the agencies' rules. See 83 FR 22312 (May 14, 2018). For
purposes of any final rule, the agencies expect to match the
treatment and terminology related to allowances under the agencies'
rules under this proposal and the May 2018 proposal.
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At this time, the agencies are not proposing changes to their
supervisory guidance which uses these capital terms. The agencies will
consider how best to address affected supervisory guidance in
conjunction with comments received on this proposal.
Question 25: The agencies invite comment on the proposed amendments
to their affected non-capital rules that would apply to CBLR banking
organizations under the CBLR framework. What are commenters' views or
concerns with the proposed amendments, including with regard to any
unintended consequences? What are the advantages and disadvantages of
retaining the current tier 1 capital measure for purposes of the other
regulations that would be revised under this proposal or within the
CBLR framework itself? What other approaches should the agencies
consider in amending the affected regulations? Which other additional
non-capital rules should the agencies consider and amend as a result of
the CBLR framework and why?

I. Deposit Insurance Assessments Regulations

FDIC assessments regulations also would be affected by the proposed
CBLR framework. For example, CBLR banking organizations would no longer
be required to report tier 1 capital or the tier 1 leverage ratio. The
FDIC, however, uses these measures as part of its deposit insurance
assessment system. For established small institutions, the tier 1
leverage ratio is one of eight measures used to determine an
institution's assessment rate.\31\ For all institutions, tier 1 capital
is used to determine an institution's assessment base.\32\
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\31\ For assessments purposes, an established small bank is
generally defined as one that has been federally insured for at
least five years and has less than $10 billion in assets. 12 CFR
327.8(v). A bank no longer qualifies as a small bank once it reports
assets of $10 billion of more in its quarterly reports of condition
for four consecutive quarters.
\32\ The Dodd-Frank Act required the FDIC to amend its
regulations to generally define an institution's assessment base as
average consolidated total assets of the institution minus average
tangible equity during the assessment period. The FDIC chose to use
tier 1 capital in lieu of tangible equity when implementing this
requirement in part because it required no additional reporting. See
12 CFR 327.5(a)(2); 76 FR 10673, 10678 (Feb. 25, 2011).
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The FDIC plans to publish a separate notice of proposed rulemaking
to address the application of the CBLR framework as it relates to the
deposit insurance assessment system. The rulemaking would address,
among other things, how the CBLR framework can be applied in lieu of
the tier 1 leverage ratio and in lieu of tier 1 capital when
calculating a bank's assessment. The FDIC plans to consider and discuss
in the rulemaking reasonable and possible options that address the
application of the CBLR framework in the assessment system. The FDIC
does not expect that any changes to its deposit insurance assessment
system would have a material impact on aggregate assessment

[[Page 3074]]

revenue or on rates paid by individual institutions.

J. Illustrative Reporting Form

The agencies intend to separately seek comment on the proposed
changes to regulatory reports for qualifying community banking
organizations that elect to use the CBLR framework. To provide an
indication of the potential reporting format and potential reporting
burden relief relative to the regulatory reporting requirements under
the generally applicable capital requirements for those banking
organizations that elect to use the proposed CBLR framework, the
agencies include an illustrative reporting form below, using the Call
Report as an example.
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
[GRAPHIC] [TIFF OMITTED] TP08FE19.006

BILLING CODE 4810-33-C, 6210-01-C, 6714-01-C

K. Consultation With State Bank Supervisors

The agencies have had discussions with state bank supervisors and
staff of the Conference of State Bank Supervisors, during which the
agencies received helpful input in connection with this proposal. The
agencies expect to continue engaging with the state bank supervisors
during the rulemaking process, in accordance with section 201 of the
Act.
Section 201 also requires that the agencies notify the applicable
state bank supervisor if a qualifying community banking organization
exceeds the CBLR established by the agencies or ceases to exceed the
CBLR after having previously exceeded it. The agencies plan to
incorporate the CBLR into the Call Report and Form FR Y-9C so that
qualifying community banking organizations report their CBLR levels on
a quarterly basis. These reports are, and would continue to be,
released to the public. The agencies believe that this public release
of the CBLR would provide an operable means of notifying the applicable
state bank supervisor of the relevant information about a CBLR banking
organization's CBLR.
Question 26: What other considerations should the agencies
contemplate to help ensure that the

[[Page 3075]]

applicable state bank supervisor is notified when supervised qualifying
community banking organizations exceed or cease to exceed the CBLR and
why?

III. Regulatory Analyses

A. Paperwork Reduction Act

Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid Office of Management
and Budget (OMB) control number. The OMB control number for the OCC is
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. The OCC and the
FDIC may need to request new control numbers if submissions are pending
under their current respective control numbers at the time of this
submission. These information collections will be extended for three
years, with revision. The information collection requirements contained
in this proposed rulemaking have been submitted by the OCC and FDIC to
OMB for review and approval under section 3507(d) of the PRA (44 U.S.C.
3507(d)) and section 1320.11 of the OMB's implementing regulations (5
CFR 1320). The Board reviewed the proposed rule under the authority
delegated to the Board by OMB.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer by mail to
U.S. Office of Management and Budget, 725 17th Street NW, #10235,
Washington, DC 20503; facsimile to (202) 395-6974; or email to
oira_submission@omb.eop.gov, Attention, Federal Banking Agency Desk
Officer.
Proposed Information Collection
Title of Information Collection: Recordkeeping and Disclosure
Requirements Associated with Capital Adequacy.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents
OCC: National banks, state member banks, state nonmember banks, and
state and federal savings associations.
Board: State member banks (SMBs), bank holding companies (BHCs),
U.S. intermediate holding companies (IHCs), savings and loan holding
companies (SLHCs), and global systemically important bank holding
companies (GSIBs).
FDIC: State nonmember banks, state savings associations, and
certain subsidiaries of those entities.
Current Actions: The proposal would revise sections _.2 and _.10 of
the capital rule, add a new section _.12 to the capital rule, and
revise the agencies' PCA rules, to implement the community bank
leverage ratio in accordance with the Act. These changes will not,
however, result in changes to the burden. Nevertheless, in order to be
consistent across the agencies, the agencies are applying a conforming
methodology for calculating the burden estimates. The agencies are also
updating the number of respondents based on the current number of
supervised entities even though this proposal only affects a limited
number of entities. The agencies believe that any changes to the
information collections associated with the proposed rule are the
result of the conforming methodology and updates to the respondent
count and not the result of the proposed rule changes.
PRA Burden Estimates
OCC
OMB control number: 1557-0318.
Estimated number of respondents: 1,365 (of which 18 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,365 Institutions Affected)
Recordkeeping (Ongoing)--16.
Standardized Approach (1,365 Institutions Affected)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (18 Institutions Affected)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Estimated annual burden hours: 1,088 hours initial setup, 64,929
hours for ongoing.
Board
Agency form number: FR Q.
OMB control number: 7100-0313.
Estimated number of respondents: 1,431 (of which 17 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,431 Institutions Affected)
Recordkeeping (Ongoing)--16.
Standardized Approach (1,431 Institutions Affected)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (17 Institutions Affected)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Disclosure (Table 13 quarterly)--5.
Risk-Based Capital Surcharge for GSIBs (21 Institutions Affected)
Recordkeeping (Ongoing)--0.5.
Estimated annual burden hours: 1,088 hours initial setup, 78,183
hours for ongoing.
FDIC
OMB control number: 3064-0153.
Estimated number of respondents: 3,575 (of which 2 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (3,575 Institutions Affected)
Recordkeeping (Ongoing)--16.

[[Page 3076]]

Standardized Approach (3,575 Institutions Affected)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (2 Institutions Affected)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Estimated annual burden hours: 1,088 hours initial setup, 130,758
hours for ongoing.
The proposed rule will also require changes to the Consolidated
Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041,
and FFIEC 051; OMB No. 1557-0081 (OCC), 7100-0036 (Board), and 3064-
0052 (FDIC)) and Consolidated Financial Statements for Holding
Companies (FR Y-9C; OMB No. 7100-0128 (Board)), which will be addressed
in one or more separate Federal Register notices.

B. Regulatory Flexibility Act

OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a proposed rule, to prepare an
Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities (defined by the SBA for purposes of the RFA to
include commercial banks and savings institutions with total assets of
$550 million or less and trust companies with total assets of $38.5
million of less) or to certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
As of June 30, 2018, the OCC supervises 886 small entities,\33\ of
which 860 could be impacted by the proposed rule. Thus, a substantial
number of small entities could be impacted by the proposed rule.
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\33\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $550 million and $38.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or Federal savings association as a small entity.
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OCC staff also consider whether the proposed rule would result in a
significant economic impact on affected small entities. OCC staff
believe the primary cost to small institutions that elect to adopt the
CBLR framework would be administrative costs that arise from modifying
policies and procedures and reporting the new CBLR schedule, rather
than the existing RC-R schedule. OCC staff estimates that each national
bank or Federal savings association would spend no more than 320 hours
to modify their policies and procedures and switch to reporting the
CBLR schedule. To estimate this cost, OCC staff used a compensation
rate of $117 per hour.\34\ Therefore, OCC staff estimate the cost per
institution would not exceed $37,440 (320 hours x $117 per hour). In
general, OCC staff classifies the economic impact of expected cost (to
comply with a rule) on an individual national bank or Federal savings
association as significant if the total estimated monetized costs in
one year are greater than (1) 5 percent of the national bank's or
Federal savings association's total annual salaries and benefits or (2)
2.5 percent of the national bank's or Federal savings association's
total annual non-interest expense. Based on this criteria, the
estimated cost of the rule would impose a significant economic impact
at only one of the 860 affected small institutions, which is not a
substantial number.
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\34\ The OCC's cost estimate includes an estimate of the time
required to implement the mandates and the estimated average hourly
wage of the bank employees who might be responsible for tasks
associated with achieving compliance with the proposal and other
rules that would be affected by implementation of the proposal. To
estimate average hourly wages, OCC staff reviewed data from May 2017
for wages (by industry and occupation) from the U.S. Bureau of Labor
Statistics (BLS) for depository credit intermediation (NAICS
522100). To estimate compensation costs associated with the rule,
OCC staff used $117 per hour, which is based on the average of the
90th percentile for seven occupations adjusted for inflation, plus
an additional 34.2 percent to cover private sector benefits.
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Additionally, a critical element of the proposed rule is its
inherent optionality. OCC staff believe CBLR eligible national banks
and Federal savings associations would only choose to use the CBLR
framework if the benefits outweighed the costs.
Therefore, the OCC certifies that the proposed rule would not have
a significant economic impact on a substantial number of OCC-supervised
small entities.
Board: The Board is providing an initial regulatory flexibility
analysis with respect to this proposed rule. The Regulatory Flexibility
Act, 5 U.S.C. 601 et seq. (RFA), requires an agency to consider whether
the rules it proposes will have a significant economic impact on a
substantial number of small entities.\35\ In connection with a proposed
rule, the RFA requires an agency to prepare an Initial Regulatory
Flexibility Analysis describing the impact of the rule on small
entities or to certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
An initial regulatory flexibility analysis must contain (1) a
description of the reasons why action by the agency is being
considered; (2) a succinct statement of the objectives of, and legal
basis for, the proposed rule; (3) a description of, and, where
feasible, an estimate of the number of small entities to which the
proposed rule will apply; (4) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities that will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (5) an
identification, to the extent practicable, of all relevant Federal
rules which may duplicate, overlap with, or conflict with the proposed
rule; and (6) a description of any significant alternatives to the
proposed rule which accomplish its stated objectives.
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\35\ 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 total
assets of $550 million or less and trust companies with total assets
of $38.5 million or less. As of June 30, 2018, there were
approximately 3,053 small bank holding companies, 184 small savings
and loan holding companies, and 541 small state member banks.
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The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. A
final regulatory flexibility analysis will be conducted after comments
received during the public comment period have been considered.
As discussed in detail above, the proposed rule would establish a
community bank leverage ratio for qualifying community banking
organizations. Qualifying community banking organizations would consist
of insured depository institutions, bank holding companies, and savings
and loan holding companies with total consolidated assets of less than
$10 billion that also satisfy certain qualifying criteria. The
qualifying criteria are designed to ensure that

[[Page 3077]]

qualifying community banking organizations do not have significant
levels of assets that would make the community bank leverage ratio a
less appropriate capital standard for the risks presented by the firms'
portfolios. Qualifying community banking organizations that elect to be
under the community bank leverage ratio generally would be exempt from
the Board's current capital framework, including risk-based capital
requirements and capital conservation buffer requirements.\36\ The CBLR
would be calibrated such that qualifying community banking
organizations would not be required to raise significant additional
capital and would not face materially less stringent capital
requirements. The primary benefit of the CBLR for qualifying community
banking organizations is therefore expected to be reduced calculation
and reporting burdens.
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\36\ Nearly all small bank holding companies and small savings
and loan holding companies are currently exempt from the Board's
capital rule and are instead covered by the Board's Small Bank
Holding Company and Savings and Loan Holding Company Policy
Statement. The policy statement applies to bank holding companies
and savings and loan holding companies with less than $3 billion in
total consolidated assets that also satisfy specified eligibility
criteria. See 12 CFR 217.1(c)(1)(ii) through (iii); 12 CFR part 225
app. C. The proposal is not expected to impact small bank holding
companies and small savings and loan holding companies that are
subject to the policy statement.
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The Board has broad authority under the International Lending
Supervision Act of 1983 (ILSA) \37\ and the Prompt Corrective Action
(PCA) provisions of the Federal Deposit Insurance Act \38\ to establish
regulatory capital requirements for the institutions it regulates. For
example, ILSA directs each Federal banking agency to cause banking
institutions to achieve and maintain adequate capital by establishing
minimum capital requirements as well as by other means that the agency
deems appropriate.\39\ The PCA provisions of the Federal Deposit
Insurance Act direct each Federal banking agency to specify, for each
relevant capital measure, the level at which an IDI subsidiary is well
capitalized, adequately capitalized, undercapitalized, and
significantly undercapitalized.\40\ In addition, the Board has broad
authority to establish regulatory capital standards for bank holding
companies, savings and loan holding companies, and U.S. intermediate
holding companies of foreign banking organizations under the Bank
Holding Company Act of 1956, the Home Owners' Loan Act, and the Dodd-
Frank Act.\41\
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\37\ 12 U.S.C. 3901-3911.
\38\ 12 U.S.C. 1831o.
\39\ 12 U.S.C. 3907(a)(1).
\40\ 12 U.S.C. 1831o(c)(2).
\41\ See 12 U.S.C. 1467a, 1844, 5365, 5371.
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The proposed rule would be an optional framework that qualifying
community banking organizations could choose to apply instead of the
Board's current capital rule. A qualifying community banking
organization would be able to remain subject to the current capital
rule if it chose to do so. The proposed rule therefore would not impose
mandatory requirements on any small entities. However, the proposal
would allow Board-regulated institutions that are qualifying community
banking organizations to elect to be under the community bank leverage
ratio framework. Small entities that are subject to the Board's capital
rule could make such an election, which would require immediate changes
to reporting, recordkeeping, and compliance systems.
Further, as discussed previously in the Paperwork Reduction Act
section, the proposal would make changes to the projected reporting,
recordkeeping, and other compliance requirements of the rule by
impacting the information that qualifying community banking
organizations that elect to use the community bank leverage ratio would
be required to collect.
The agencies anticipate making changes through a separate notice to
regulatory reporting forms that currently collect regulatory capital
information (the Call Report (FFIEC 031, 041, and 051) and the
Consolidated Financial Statements for Holding Companies (Form FR Y-
9C)). Firms would be required to update their systems to implement
these changes to reporting forms. Systems changes would be
predominantly due to changes to the applicable reporting forms that are
expected to be released in the near future, rather than the proposal
described in this notice. The Board does not expect that the
compliance, recordkeeping, and reporting updates from this proposal
would impose a significant cost on small Board-regulated institutions.
These changes would only impact small entities that elect to use the
community bank leverage ratio and, while there would be limited upfront
costs to update systems, an overall reduction in burden is expected.
However, the reduction in burden will be predominantly due to changes
in regulatory reporting forms, and these burden changes therefore are
expected to be discussed in a regulatory reporting notice in the near
future. In addition, the Board is aware of no other Federal rules that
duplicate, overlap, or conflict with the proposed changes to the
capital rule. Therefore, the Board believes that the proposed rule will
not have a significant economic impact on small banking organizations
supervised by the Board and therefore believes that there are no
significant alternatives to the proposed rule that would reduce the
economic impact on small banking organizations supervised by the Board.
The Board welcomes comment on all aspects of its analysis. In
particular, the Board requests that commenters describe the nature of
any impact on small entities and provide empirical data to illustrate
and support the extent of the impact.
FDIC: The Regulatory Flexibility Act (RFA) generally requires that,
in connection with a proposed rulemaking, an agency prepare and make
available for public comment an initial regulatory flexibility analysis
describing the impact of the rulemaking on small entities.\42\ A
regulatory flexibility analysis is not required, however, if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities. The Small Business
Administration (SBA) has defined ``small entities'' to include banking
organizations with total assets less than or equal to $550 million.\43\
The FDIC supervises 3,575 depository institutions,\44\ of which 2,763
are defined as small banking entities by the terms of the RFA.\45\
Based on its analysis and for the reasons stated below, the FDIC
believes that this proposal would not have a significant economic
impact on a substantial number of small entities.
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\42\ 5 U.S.C. 601 et seq.
\43\ The SBA defines a small banking organization as having $550
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' 13 CFR
121.201 n.8 (2018). ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates. . . .'' 13 CFR 121.103(a)(6)
(2018). Following these regulations, the FDIC uses a covered
entity's affiliated and acquired assets, averaged over the preceding
four quarters, to determine whether the covered entity is ``small''
for the purposes of RFA.
\44\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\45\ Call Report: June 30, 2018.
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Description of Need and Policy Objectives
The policy objective of the proposed rule is to conform the FDIC's
regulations to the statutory language established by the Act. On May
24, 2018, the Economic Growth, Regulatory Relief, and Consumer
Protection Act (the Act) amended provisions in the Dodd-Frank

[[Page 3078]]

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) \46\ as
well as certain other statutes administered by the agencies.\47\
Section 201 of the Act, titled ``Capital Simplification for Qualifying
Community Banks,'' directs the agencies to develop a community bank
leverage ratio (CBLR) of not less than 8 percent and not more than 10
percent for ``qualifying community banks'' (qualifying community
banking organizations). The Act defines a qualifying community banking
organization as a depository institution or depository institution
holding company with total consolidated assets of less than $10
billion.
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\46\ Public Law 111-203, 124 Stat. 1391, 12 U.S.C. 5301 et seq.
\47\ Public Law 115-174 (May 24, 2018).
---------------------------------------------------------------------------

Other Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict between the proposal and any Federal rule.
Economic Impacts on Small Entities
As discussed previously in section II: Summary of the Proposal, a
depository institution that is not an advanced approaches banking
organization could be eligible to opt into the CBLR framework, if they
meet the following criteria:
Have total consolidated assets of less than $10 billion;
Have total off-balance sheet exposures (excluding
derivatives that are not credit derivatives and unconditionally
cancelable commitments) of 25 percent or less of total consolidated
assets;
Have total trading assets and trading liabilities of 5
percent or less of total consolidated assets;
Have MSAs of 25 percent or less of CBLR tangible equity;
and
Have temporary difference DTAs of 25 percent or less of
CBLR tangible equity.
As of June 30, 2018, there were 2,713 small, FDIC-supervised
depository institutions who would be qualifying community banking
organizations under the proposed rule. They comprise approximately 98
percent of small, FDIC-supervised depository institutions. Therefore,
the proposed rule could affect an estimated 98 percent of small, FDIC-
supervised institutions.
Utilizing the CBLR framework is expected to reduce reporting costs
for small, FDIC-supervised institutions. Opting into the CBLR framework
would enable institutions to no longer report Schedule RC-R of the Call
Report, resulting in a reduction in reporting costs for institutions.
As described in section II.J. of this preamble, Illustrative Reporting
Form, the agencies intend to separately seek comment on the proposed
changes to regulatory reports for qualifying community banking
organizations that opt into the CBLR framework. To provide an
indication of the potential reporting format and potential reporting
burden relief for qualifying community banking organizations that opt
into the proposed CBLR framework, the agencies included an illustrative
report with this rulemaking, using the Call Report as an example.
Depository institutions that may benefit from reduced reporting costs
because of the proposed rule could employ those resources in ways the
institution believes is more beneficial. It is difficult to accurately
estimate the size of this potential effect because it depends on the
characteristics of the individual institution and the future decisions
of senior management.
As noted previously, by opting into the CBLR framework, the capital
levels of some small, FDIC-supervised institutions could be marginally
affected, but it is unlikely to significantly affect the quantity of
regulatory capital in the banking system. The FDIC estimates that 2,296
small, FDIC-supervised institutions are qualifying community banking
organizations. Of those entities, 2,027 report holding a volume of CBLR
tangible equity to total consolidated assets in excess of nine percent,
plus an additional buffer of 50 basis points. Some eligible small,
FDIC-supervised institutions that opt into the CBLR framework could
employ any CBLR tangible equity in excess of the level required to
achieve nine percent of total consolidated assets in other ways the
institution decides is more beneficial. It is difficult to accurately
estimate what these institutions will do with the tangible equity that
exceeds nine percent because it depends on the characteristics of each
individual institution, the decisions of senior management, current and
future economic conditions, as well as current and future financial
conditions. Additionally, some institutions who are not qualifying
community banking organizations because their CBLR tangible equity is
less than nine percent of total consolidated assets may elect to raise
additional tangible equity in order to become eligible. In such cases,
each entity will have determined that the value of attaining a level of
CBLR tangible equity necessary to meet or exceed nine percent of total
consolidated assets outweighs the cost incurred in doing so. However,
the statutory changes established by the Act will enable certain
institutions to utilize the CBLR framework. The proposed rule amends
the FDIC's regulations to conform with the CBLR framework authorized
under the Act. Therefore, this component of the proposal would not have
a direct effect on small, FDIC-supervised institutions.
As noted previously, the proposed rule could affect the deposit
insurance assessments of qualifying small, FDIC-supervised institutions
that elect to use the CBLR framework. The extent of this effect is
difficult to quantify with available information. The proposed rule
removes the requirement for small, FDIC-supervised institutions that
opt into the CBLR framework from reporting tier 1 capital or the tier 1
leverage ratio. The FDIC, however, uses these measures as part of its
deposit insurance assessment system. The FDIC plans to publish a
separate notice of proposed rulemaking to address the application of
the CBLR framework as it relates to the deposit insurance assessment
system. The rulemaking would address, among other things, how the CBLR
framework can be applied in lieu of the leverage ratio and in lieu of
tier 1 capital when calculating a bank's assessment. However, since the
final form of that rule is unknown, the potential effects on small,
FDIC-supervised institutions are unknown. As one option, the FDIC may
consider using the definitions in this proposal in the deposit
insurance assessment system. For most qualifying community banking
organizations, pursuing this option would result in no change, or would
result in a reduction, in an institution's assessment. In particular,
based on June 30, 2018 Call Report data, replacing the leverage ratio
with the CBLR, and replacing tier 1 capital with CBLR tangible equity
in the calculation of the assessment base, would result in the same or
lower assessments for more than 90 percent of institutions that could
be qualifying community banking organizations under this proposal. For
other institutions, application of the CBLR framework to deposit
insurance assessments would result in higher assessments; however, for
over three-quarters of those institutions, that increase would
represent less than one percent of their deposit insurance assessment
for the second quarter of 2018.
Alternatives Considered
As previously discussed in section II.E. Calibration of the
Community Bank Leverage Ratio, other alternatives including calibrating
the CBLR to eight

[[Page 3079]]

percent were considered by the FDIC. This alternative would allow more
banking organizations to opt into the CBLR framework but would
potentially allow a large number of CBLR banking organizations to hold
less capital than under the generally applicable capital requirements.
The proposed calibration of the CBLR, in conjunction with the
qualifying community banking organization and CBLR tangible equity
definitions, seeks to strike a balance among the following objectives:
Maintaining strong capital levels in the banking system, ensuring
safety and soundness, and providing appropriate regulatory burden
relief to as many banking organizations as possible.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would this
proposal have any significant effects on small entities that the FDIC
has not identified?

C. Plain Language

Section 722 of the Gramm-Leach Bliley Act \48\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies invite comments on how to
make these notices of proposed rulemaking easier to understand. For
example:
---------------------------------------------------------------------------

\48\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------

Have the agencies presented the material in an organized
manner that meets your needs? If not, how could this material be better
organized?
Are the requirements in the notice of proposed rulemaking
clearly stated? If not, how could the proposal be more clearly stated?
Does the proposal contain language that is not clear? If
so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposal easier to understand?
If so, what changes to the format would make the proposal easier to
understand?
What else could the agencies do to make the proposal
easier to understand?

D. OCC Unfunded Mandates Reform Act of 1995

The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under
this analysis, the OCC considered whether the proposed rule includes a
Federal mandate that may result in the expenditure by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation).
The OCC has determined that this proposed rule would not result in
expenditures by State, local, and Tribal governments, or the private
sector, of $100 million or more in any one year. Accordingly, the OCC
has not prepared a written statement to accompany this proposal.

E. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\49\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, each Federal banking agency must
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\50\
---------------------------------------------------------------------------

\49\ 12 U.S.C. 4802(a).
\50\ Id.
---------------------------------------------------------------------------

The agencies note that comment on these matters has been solicited
in other sections of this Supplementary Information section, and that
the requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that further will inform the agencies' consideration of
RCDRIA.

List of Subjects

12 CFR Part 1

Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.

12 CFR Part 3

Administrative practice and procedure, Federal Reserve System,
National banks, Reporting and recordkeeping requirements.

12 CFR Part 5

Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements, Securities.

12 CFR Part 6

Federal Reserve System, National banks.

12 CFR Part 23

National banks.

12 CFR Part 24

Community development, Credit, Investments, Low and moderate income
housing, National banks, Reporting and recordkeeping requirements,
Rural areas, Small businesses.

12 CFR Part 32

National banks, Reporting and recordkeeping requirements.

12 CFR Part 34

Mortgages, National banks, Reporting and recordkeeping
requirements.

12 CFR Part 160

Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.

12 CFR Part 192

Reporting and recordkeeping requirements, Savings associations,
Securities.

12 CFR Part 206

Banks, Banking, Interbank liability, Lending limits, Savings
associations.

12 CFR Part 208

Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, reporting and recordkeeping requirements,
Securities.

12 CFR Part 211

Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 215

Credit, Penalties, Reporting and recordkeeping requirements.

12 CFR Part 217

Administrative practice and procedure, Banks, banking, Holding
companies, Reporting and recordkeeping requirements, Securities.

12 CFR Part 223

Banks, Banking, Federal Reserve System.

[[Page 3080]]

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.

12 CFR Part 238

Savings and loan holding companies (Regulation LL).

12 CFR Part 251

Administrative practice and procedure, Banks, banking,
Concentration Limit, Federal Reserve System, Holding companies,
Reporting and recordkeeping requirements, Securities.

12 CFR Part 303

Administrative practice and procedure, Bank deposit insurance,
Banks, banking, Reporting and recordkeeping requirements, State non-
member banks, Savings associations.

12 CFR Part 324

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

12 CFR Part 337

Banks, banking, Reporting and recordkeeping requirements,
Securities.

12 CFR Part 347

Authority delegations (Government agencies), Bank deposit
insurance, Banks, banking, Credit, Foreign banking, Investments,
Reporting and recordkeeping requirements, U.S. Investments abroad.

12 CFR Part 362

Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking,
Investments, Reporting and recordkeeping requirements.

12 CFR Part 365

Banks, banking, Mortgages.

12 CFR Part 390

Administrative practice and procedure, Advertising, Aged, Civil
rights, Conflict of interests, Credit, Crime, Equal employment
opportunity, Fair housing, Government employees, Individuals with
disabilities, Reporting and recordkeeping requirements, Savings
associations.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons stated in the Supplementary Information, Chapter I
of title 12 of the Code of Federal Regulations is proposed to be
amended as follows:

PART 1--INVESTMENT SECURITIES

0
1. The authority citation for part 1 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.

0
2. Section 1.2 is amended by revising paragraph (a) to read as follows:

Sec. 1.2 Definitions.

(a) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses as reported in the bank's Consolidated Report of
Condition and Income (Call Report); or
(2) For all other banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in 12 CFR part 3, as applicable
(or comparable capital guidelines of the appropriate Federal banking
agency), as reported in the bank's Call Report; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's Tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (a)(2)(i) of
this section, as reported in the bank's Call Report.
* * * * *

PART 3--CAPITAL ADEQUACY STANDARDS

0
3. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).

0
4. Section 3.10 is amended by revising paragraph (a) to read as
follows:

Sec. 3.10 Minimum capital requirements.

(a) Minimum capital requirements. (1) A national bank or Federal
savings association must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches FDIC-supervised institutions, a
supplementary leverage ratio of 3 percent.
(vi) For state savings associations, a tangible capital ratio of
1.5 percent.
(2) A qualifying community banking organization (as defined in
Sec. 3.12), that is subject to the community bank leverage ratio (as
defined in Sec. 3.12), is considered to have met the minimum capital
requirements in this paragraph (a) only if the qualifying community
banking organization maintains a community bank leverage ratio of at
least 7.5 percent.
* * * * *
0
5. Add section 3.12 to read as follows:

Sec. 3.12 Community bank leverage ratio.

[[Page 3081]]

unconditionally cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through
(1) Guarantees; and
(2) Credit derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to Schedule RC-L of the Call Report;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures;
(iii) Has total trading assets and trading liabilities, calculated
in accordance with the reporting instructions to Schedule RC of the
Call Report of 5 percent or less of the national bank's or Federal
savings association's total consolidated assets, each as of the end of
the most recent calendar quarter;
(iv) Has mortgage servicing assets, calculated in accordance with
the reporting instructions to Schedule RC-M of the Call Report, of 25
percent or less of the national bank's or Federal savings association's
CBLR tangible equity, each as of the end of the most recent calendar
quarter; and
(v) Has DTAs arising from temporary differences that the national
bank or Federal savings association could not realize through net
operating loss carrybacks, net of any related valuation allowances, of
25 percent or less of the national bank's or Federal savings
association's CBLR tangible equity, each as of the end of the most
recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) A qualifying community banking organization may elect to use
the community bank leverage ratio framework only if it has a community
bank leverage ratio that exceeds 9 percent at the time of the election.
(iii) For purposes of paragraph (a)(3) of this section, a
qualifying community banking organization makes an election to use the
community bank leverage ratio framework by completing the community
bank leverage ratio reporting schedule in its Call Report.
(iv)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio may opt-out of using
the community bank leverage ratio by completing Schedule RC-R in its
Call Report or by otherwise providing the information required in
Schedule RC-R to the OCC.
(B) A qualifying community banking organization that opts out of
using the community bank leverage ratio pursuant to paragraph
(a)(3)(iv)(A) of this section must comply with Sec. 3.10 immediately.
(b) Calculation of the community bank leverage ratio. (1) A
qualifying community banking organization's community bank leverage
ratio is the ratio of the banking organization's CBLR tangible equity
as defined in paragraph (b)(2) of this section, to its average total
consolidated assets, as defined in paragraph (b)(3) of this section.
(2) CBLR tangible equity means total bank equity capital,
calculated in accordance with the reporting instructions to Schedule RC
of the Call Report, before the inclusion of non-controlling (minority)
interests in consolidated subsidiaries, as of the end of the most
recent calendar quarter less the following (each as of the end of the
most recent calendar quarter):
(i) Accumulated other comprehensive income calculated in accordance
with the reporting instructions to Schedule RC of the Call Report;
(ii) Intangible Assets, calculated in accordance with the reporting
instructions to Schedule RC of the Call Report, other than mortgage
servicing assets; and
(iii) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances.
(3) Average total consolidated assets means total assets calculated
in accordance with the reporting instructions to Schedule RC-K of the
Call Report as of the end of the most recent calendar quarter less the
amounts deducted from CBLR tangible equity under paragraphs (b)(2)(ii)
and (iii) of this section.
(c) Treatment when ceasing to be a qualifying community banking
organization requirements. (1) Except as provided in paragraph (c)(4)
of this section, if a national bank or Federal savings association
ceases to meet the definition of a qualifying community banking
organization, the national bank or Federal savings association has two
reporting periods (grace period) to either satisfy the requirements to
be a qualifying community banking organization or to comply with Sec.
3.10 and report the required capital measures under section 10 on its
Call Report.
(2) The grace period begins as of the end of the calendar quarter
in which the national bank or Federal savings association ceases to
satisfy the criteria to be a qualifying community banking organization
provided in paragraph (a)(2) of this section. The grace period ends on
the last day of the second consecutive calendar quarter following the
beginning of the grace period.
(3) During the grace period, the national bank or Federal savings
association continues to be a qualifying community banking organization
for the purposes of this part and must continue calculating and
reporting its community bank leverage ratio unless the national bank or
Federal savings association has opted out of using the community bank
leverage ratio under paragraph (a)(3) of this section.
(4) Notwithstanding paragraphs (c)(1) through (3) of this section,
a national bank or Federal savings association that no longer meets the
definition of a qualifying community banking organization as a result
of a merger or acquisition has no grace period and immediately ceases
to be a qualifying community banking organization. Such a national bank
or Federal savings association must comply with Sec. 3.10 and must
report the required capital measures under Sec. 3.10 on its next Call
Report.
(d) Tangible equity information. (1) A qualifying community banking
organization, that has elected to use the community bank leverage ratio
under this section and has a community bank leverage ratio that falls
below 6.0 percent, must promptly provide to the OCC the information
necessary for the calculation of its tangible equity, as defined under
12 CFR 6.2, for purposes of determining the capital category of the
national bank or Federal savings association under 12 CFR part 6.
(2) Notwithstanding paragraph (d)(1), upon request by the OCC, a
qualifying community banking organization must provide the information
necessary for the calculation of its tangible equity, as defined under
12 CFR part 6, to the OCC.

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

0
6. The authority citation for part 5 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a-2, 215a-3, 481,
1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B).

0
7. Section 5.3 is amended by revising paragraph (e) to read as follows:

Sec. 5.3 Definitions.

* * * * *
(e) Capital and surplus means:

[[Page 3082]]

(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's
Consolidated Report of Condition and Income (Call Report); or
(2) For all other national banks and Federal savings associations:
(i) A national bank's or Federal savings association's tier 1 and
tier 2 capital calculated under the OCC's risk-based capital standards
set forth in 12 CFR part 3, as applicable, as reported in the bank's or
savings association's Consolidated Reports of Condition and Income
(Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v),
respectively; plus
(ii) The balance of the national bank's or Federal savings
association's allowances for loan and lease losses not included in the
institution's tier 2 capital, for purposes of the calculation of risk-
based capital reported in the institution's Call Reports, described in
paragraph (e)(2)(i) of this section.
* * * * *
0
8. Section 5.37 is amended by revising paragraph (c)(3) to read as
follows:

Sec. 5.37 Investment in national bank or Federal savings association
premises.

* * * * *
(c) * * *
(3) Capital and surplus means:
(i) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(A) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(B) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's Call
Report; or
(ii) For all other national banks and Federal savings associations:
(A) A national bank's or Federal savings association's tier 1 and
tier 2 capital calculated under 12 CFR part 3, as applicable, as
reported in the national bank's or Federal savings association's
Consolidated Reports of Condition and Income (Call Reports) filed under
12 U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus
(B) The balance of a national bank's or Federal savings
association's allowances for loan and lease losses not included in the
bank's or savings association's tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (c)(3)(ii)(A)
of this section, as reported in the national bank's or Federal savings
association's Call Reports filed under 12 U.S.C. 161 or 1464(v),
respectively.
* * * * *
0
9. Section 5.58 is amended by revising paragraph (h)(2) to read as
follows:

Sec. 5.58 Pass-through investments by a Federal savings association.

* * * * *
(h) * * *
(2) The Federal savings association is not investing more than 10
percent of its total capital (in the case of a Federal savings
association that is a qualifying community banking organization that
has elected to use the community bank leverage ratio framework, 10
percent of its tangible equity capital, calculated under 12 CFR 3.12)
in one company;
* * * * *

PART 6--PROMPT CORRECTIVE ACTION

0
10. The authority citation for part 6 continues to read as follows:

Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).

0
11. Section 6.4 is amended by:
0
a. Revising the heading to read as set forth below,
0
b. Removing paragraph (c),
0
c. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d),
respectively, and
0
d. Revising paragraphs (a) and (b).
The revisions read as follows.

Sec. 6.4 Capital measures and capital categories.

(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this part, the relevant capital measures shall be:
(i) Total Risk-Based Capital Measure: The total risk-based capital
ratio;
(ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based
capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier
1 risk-based capital ratio;
(iv) The Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches national bank or
advanced approaches Federal savings association, on January 1, 2018,
and thereafter, the supplementary leverage ratio; and
(2) For a qualifying community banking organization (as defined in
12 CFR 3.12), that is subject to the community bank leverage ratio (as
defined in 12 CFR 3.12), the community bank leverage ratio, as defined
under 12 CFR 3.12 is used to determine the applicable capital category
under paragraphs (b)(1) through (4) of this section.
(b) Capital categories. For purposes of section 38 of the FDI Act
and this part, a national bank or Federal savings association shall be
deemed to be:
(1)(i) ``Well capitalized'' if:
(A) Total Risk-Based Capital Measure: the national bank or Federal
savings association has a total risk-based capital ratio of 10.0
percent or greater;
(B) Tier 1 Risk-Based Capital Measure: The national bank or Federal
savings association has a tier 1 risk-based capital ratio of 8.0
percent or greater;
(C) Common Equity Tier 1 Capital Measure: The national bank or
Federal savings association has a common equity tier 1 risk-based
capital ratio of 6.5 percent or greater;
(D) Leverage Measure:
(1) The national bank or Federal savings association has a leverage
ratio of 5.0 percent or greater; and
(2) With respect to a national bank or Federal savings association
that is a subsidiary of a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statement for Bank Holding Companies
(Form FR Y-9C) or more than $10 trillion in assets under custody as
reported on the company's most recent Banking Organization Systemic
Risk Report (Form FR Y-15), on Jan. 1, 2018 and thereafter, the
national bank or Federal savings association has a supplementary
leverage ratio of 6.0 percent or greater; and
(E) The national bank or Federal savings association is not subject
to any written agreement, order or capital directive, or prompt
corrective action directive issued by the OCC pursuant to section 8 of
the FDI Act, the International Lending Supervision Act of 1983 (12
U.S.C. 3907), the Home Owners' Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)),
or section 38 of the FDI Act, or any regulation thereunder, to meet and
maintain a specific capital level for any capital measure.
(ii) A qualifying community banking organization, as defined under
12 CFR 3.12, that has elected to use the community bank leverage ratio
framework under section 12 CFR 3.12 and that has a community bank
leverage ratio, as defined under 12 CFR 3.12,

[[Page 3083]]

greater than 9.0 percent, shall be considered to have met the capital
ratio requirements for the well capitalized capital category in
paragraphs (b)(1)(i)(A) through (D) of this section.
(2)(i) ``Adequately capitalized'' if:
(A) Total Risk-Based Capital Measure: The national bank or Federal
savings association has a total risk-based capital ratio of 8.0 percent
or greater;
(B) Tier 1 Risk-Based Capital Measure: The national bank or Federal
savings association has a tier 1 risk-based capital ratio of 6.0
percent or greater;
(C) Common Equity Tier 1 Capital Measure: The national bank or
Federal savings association has a common equity tier 1 risk-based
capital ratio of 4.5 percent or greater;
(D) Leverage Measure:
(1) The national bank or Federal savings association has a leverage
ratio of 4.0 percent or greater; and
(2) With respect to an advanced approaches national bank or
advanced approaches Federal savings association, on January 1, 2018 and
thereafter, the national bank or Federal savings association has an
supplementary leverage ratio of 3.0 percent or greater; and
(E) The national bank or Federal savings association does not meet
the definition of a ``well capitalized'' national bank or Federal
savings association.
(ii) A qualifying community banking organization, as defined under
12 CFR 3.12, that has elected to use the community bank leverage ratio
framework under 12 CFR 3.12 and that has a community bank leverage
ratio, as defined under 12 CFR 3.12, of 7.5 percent or greater, shall
be considered to have met the requirements for the adequately
capitalized capital category in paragraphs (b)(2)(i)(A) through (D) of
this section.
(3)(i) ``Undercapitalized'' if:
(A) Total Risk-Based Capital Measure: The national bank or Federal
savings association has a total risk-based capital ratio of less than
8.0 percent;
(B) Tier 1 Risk-Based Capital Measure: The national bank or Federal
savings association has a tier 1 risk-based capital ratio of less than
6.0 percent;
(C) Common Equity Tier 1 Capital Measure: The national bank or
Federal savings association has a common equity tier 1 risk-based
capital ratio of less than 4.5 percent; or
(D) Leverage Measure:
(1) The national bank or Federal savings association has a leverage
ratio of less than 4.0 percent; or
(2) With respect to an advanced approaches national bank or
advanced approaches Federal savings association, on January 1, 2018,
and thereafter, the national bank or Federal savings association has a
supplementary leverage ratio of less than 3.0 percent.
(ii) A qualifying community banking organization, as defined under
12 CFR 3.12, that has elected to use the community bank leverage ratio
framework under section 12 CFR 3.12 and that has a community bank
leverage ratio, as defined under 12 CFR 3.12, of less than 7.5 percent,
shall be considered to have met the requirements for the
undercapitalized capital category in paragraph (b)(3)(1)(A) through (D)
of this section.
(4)(i) ``Significantly undercapitalized'' if:
(A) Total Risk-Based Capital Measure: The national bank or Federal
savings association has a total risk-based capital ratio of less than
6.0 percent;
(B) Tier 1 Risk-Based Capital Measure: The national bank or Federal
savings association has a tier 1 risk-based capital ratio of less than
4.0 percent;
(C) Common Equity Tier 1 Capital Measure: The national bank or
Federal savings association has a common equity tier 1 risk-based
capital ratio of less than 3.0 percent; or
(D) Leverage Ratio: The national bank or Federal savings
association has a leverage ratio of less than 3.0 percent.
(ii) A qualifying community banking organization, as defined under
12 CFR 3.12, that has elected to use the community bank leverage ratio
framework under section 12 CFR 3.12 and that has a community bank
leverage ratio, as defined under 12 CFR 3.12, of less than 6.0 percent,
shall be considered to have met the requirements for the significantly
undercapitalized capital category in paragraphs (b)(4)(i)(A) through
(D) of this section.
(5) ``Critically undercapitalized'' if the insured depository
institution has a ratio of tangible equity to total assets that is
equal to or less than 2.0 percent.
* * * * *

PART 23--LEASING

0
12. The authority citation for part 23 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a.

0
13. Section 23.2 is amended by revising paragraph (b) to read as
follows:

Sec. 23.2 Definitions.

* * * * *
(b) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in 12 CFR part 3, as applicable,
as reported in the bank's Consolidated Reports of Condition and Income
(Call Report) filed under 12 U.S.C. 161; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's Tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (b)(2)(i) of
this section, as reported in the bank's Consolidated Report of
Condition and Income filed under 12 U.S.C. 161.
* * * * *

PART 24--COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY
DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS

0
14. The authority citation for part 24 continues to read as follows:

Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818.

0
15. Section 24.2 is amended by revising paragraph (b) to read as
follows:

Sec. 24.2 Definitions.

* * * * *
(b) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in 12 CFR part 3, as applicable,
as reported in the bank's Consolidated Reports of Condition and Income
(Call Report) as filed under 12 U.S.C. 161; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's tier 2 capital, for

[[Page 3084]]

purposes of the calculation of risk-based capital described in
paragraph (b)(2)(i) of this section, as reported in the bank's Call
Report as filed under 12 U.S.C. 161.
* * * * *

PART 32--LENDING LIMITS

0
16. The authority citation for part 32 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463,
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.

0
17. Section 32.2 is amended by revising paragraph (c) to read as
follows:

Sec. 32.2 Definitions.

* * * * *
(c) Capital and surplus means--
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's Call
Report; or
(2) For all other national banks and Federal savings associations:
(i) A national bank's or savings association's Tier 1 and Tier 2
capital calculated under the risk-based capital standards applicable to
the institution as reported in the bank's or savings association's
Consolidated Reports of Condition and Income (Call Report); plus
(ii) The balance of a national bank's or Federal savings
association's allowances for loan and lease losses not included in the
bank's or savings association's Tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (c)(2)(i) of
this section, as reported in the national bank's or savings
association's Call Report.
* * * * *

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
18. The authority citation for part 34 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463,
1464, 1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B) and 15 U.S.C. 1639h.

0
19. Section 34.81 is amended by revising paragraph (a) to read as
follows:

Sec. 34.81 Definitions.

(a) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3:
(i) A qualifying community banking organization's tangible equity
capital, as calculated under 12 CFR 3.12(b)(2); plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses, or allowance for credit losses, as applicable,
as reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in 12 CFR part 3, as applicable,
as reported in the bank's Call Report; plus
(ii) The balance of a bank's allowances for loan and lease losses,
or allowance for credit losses, as applicable, not included in the
bank's tier 2 capital, for purposes of the calculation of risk-based
capital described in paragraph (a)(2)(i) of this section, as reported
in the bank's Call Report.
* * * * *

PART 160--LENDING AND INVESTMENT

0
20. The authority citation for part 160 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828,
3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.

0
21. Section 160.3 is amended by adding the definition of total capital
in alphabetical order to read as follows:
* * * * *
Total capital means:
(1) For a qualifying community banking organization that has
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3, total capital refers to the qualifying community banking
organization's tangible equity capital, as calculated under 12 CFR
3.12(b)(2);
(2) For all other Federal savings associations, total capital means
the sum of tier 1 capital and tier 2 capital, as calculated under 12
CFR part 3.

PART 192--CONVERSIONS FROM MUTUAL TO STOCK FORM

0
22. The authority citation for part 192 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 2901,
5412(b)(2)(B); 15 U.S.C. 78c, 78l, 78m, 78n, 78w.

0
23. Section 192.500 is amended by adding paragraph (a)(3)(iii) to read
as follows:

Sec. 192.500 What management stock benefit plans may I implement?

(a) * * *
(3) * * *
(iii) For a qualifying community banking organization that has
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards set forth at 12 CFR
part 3, the term tangible capital, as it is used in this paragraph
(a)(3), refers to the qualifying community banking organization's
tangible equity capital, as calculated under 12 CFR 3.12(b)(2).
* * * * *

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is proposed to be amended as set
forth below:

PART 206--LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)

0
24. The authority citation for part 206 continues to read as follows:

Authority: 12 U.S.C. 371b-2.

0
25. Section 206.2 is amended by revising paragraph (g) to read as
follows:

Sec. 206.2 Definitions.

* * * * *
(g) Total capital means the total of a bank's Tier 1 and Tier 2
capital under the risk-based capital guidelines provided by the bank's
primary federal supervisor. For a qualifying community banking
organization (as defined in 12 CFR 217.12) that is subject to the
community bank leverage ratio (as defined in 12 CFR 217.12), total
capital means the bank's CBLR tangible equity (as defined in 12 CFR
217.12). For an insured branch of a foreign bank organized under the
laws of a country that subscribes to the principles of the Basel
Capital Accord, ``total capital'' means total Tier 1 and Tier 2 capital
as calculated under the standards of that country. For an insured
branch of a foreign bank organized under the laws of a country that
does not subscribe to the principles of the Basel Capital Accord,
``total capital'' means total Tier 1 and Tier 2 capital as calculated
under the provisions of the Accord.
* * * * *
0
26. Section 206.5 is amended by adding paragraph (a)(4) to read as
follows:

Sec. 206.5 Capital levels of correspondents.

(a) * * *

[[Page 3085]]

(4) Notwithstanding paragraphs (a)(1) through (3) of this section,
a qualifying community banking organization (as defined in 12 CFR
217.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), is adequately capitalized if it has a
community bank leverage ratio of 7.5 percent or greater.
* * * * *

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)

0
27. The authority citation for part 208 is revised to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x,
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, 5371, and
5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1,
and 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106 and 4128.

0
28. Section 208.2 is amended by revising paragraph (d) to read as
follows:

Sec. 208.2 Definitions.

* * * * *
(d) Capital stock and surplus means, unless otherwise provided in
this part, or by statute, tier 1 and tier 2 capital included in a
member bank's risk-based capital (as defined in 12 CFR 217.2 of
Regulation Q) and the balance of a member bank's allowances for loan
and lease losses not included in its tier 2 capital for calculation of
risk-based capital, based on the bank's most recent Report of Condition
and Income filed under 12 U.S.C. 324. For a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12),
capital stock and surplus means the bank's CBLR tangible equity (as
defined in 12 CFR 217.12) plus allowances for loan and lease losses (as
defined in 12 CFR 217.2).
* * * * *
0
29. Section 208.43 is amended by revising paragraphs (a) and (b) to
read as follows:

Sec. 208.43 Capital measures and capital category definitions.

(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this subpart, the relevant capital measures are:
(i) Total Risk-Based Capital Measure: The total risk-based capital
ratio;
(ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based
capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier
1 risk-based capital ratio; and
(iv) Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches bank, on January 1,
2018, and thereafter, the supplementary leverage ratio.
(C) With respect to any bank that is a subsidiary (as defined in
Sec. 217.2 of Regulation Q (12 CFR 217.2)) of a global systemically
important BHC, on Jan. 1, 2018, and thereafter, the supplementary
leverage ratio.
(2) For a qualifying community banking organization (as defined in
12 CFR 217.12), that is subject to the community bank leverage ratio
(as defined in 12 CFR 217.12), the community bank leverage ratio is
used to determine the applicable capital category under paragraphs
(b)(1) through (4) of this section.
(b) Capital categories. For purposes of section 38 of the FDI Act
and this subpart, a member bank is deemed to be:
(1)(i) ``Well capitalized'' if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of 10.0 percent or greater; and
(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of 8.0 percent or greater; and
(C) Common Equity Tier 1 Capital Measure: the bank has a common
equity tier 1 risk-based capital ratio of 6.5 percent or greater; and
(D) Leverage Measure:
(1) The bank has a leverage ratio of 5.0 percent or greater; and
(2) Beginning on Jan. 1, 2018, with respect to any bank that is a
subsidiary of a global systemically important BHC under the definition
of ``subsidiary'' in Sec. 217.2 of Regulation Q (12 CFR 217.2), the
bank has a supplementary leverage ratio of 6.0 percent or greater; and
(E) The bank is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
Board pursuant to section 8 of the FDI Act, the International Lending
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act,
or any regulation thereunder, to meet and maintain a specific capital
level for any capital measure.
(ii) A bank that is a qualifying community banking organization (as
defined in 12 CFR 217.12) that has elected to use the community bank
leverage ratio (as defined in 12 CFR 217.12) and that has a community
bank leverage ratio greater than 9 percent, is considered to have met
the capital ratio requirements for the well capitalized capital
category in paragraphs (b)(1)(i)(A) through (D) of this section.
(2)(i) ``Adequately capitalized'' if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of 8.0 percent or greater; and
(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of 6.0 percent or greater; and
(C) Common Equity Tier 1 Capital Measure: The bank has a common
equity tier 1 risk-based capital ratio of 4.5 percent or greater; and
(D) Leverage Measure:
(1) The bank has a leverage ratio of 4.0 percent or greater; and
(2) With respect to an advanced approaches bank, on January 1,
2018, and thereafter, the bank has a supplementary leverage ratio of
3.0 percent or greater; and
(E) The bank does not meet the definition of a ``well capitalized''
bank.
(ii) A bank that is a qualifying community banking organization (as
defined in 12 CFR 217.12) that has elected to use the community bank
leverage ratio (as defined in 12 CFR 217.12) and that has a community
bank leverage ratio of 7.5 percent or greater, is considered to have
met the requirements for the adequately capitalized capital category in
paragraphs (b)(2)(i)(A) through (D) of this section.
(3)(i) ``Undercapitalized'' if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of less than 8.0 percent; or
(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of less than 6.0 percent; or
(C) Common Equity Tier 1 Capital Measure: The bank has a common
equity tier 1 risk-based capital ratio of less than 4.5 percent; or
(D) Leverage Measure:
(1) The bank has a leverage ratio of less than 4.0 percent; or
(2) With respect to an advanced approaches bank, on January 1,
2018, and thereafter, the bank has a supplementary leverage ratio of
less than 3.0 percent.
(ii) A bank that is a qualifying community banking organization (as
defined in 12 CFR 217.12) that has elected to use the community bank
leverage ratio (as defined in 12 CFR 217.12) and that has a community
bank leverage ratio of less than 7.5 percent, is considered to have met
the requirements for the undercapitalized capital category in
paragraphs (b)(3)(i)(A) through (D) of this section.
(4)(i) ``Significantly undercapitalized'' if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of less than 6.0 percent; or

[[Page 3086]]

(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of less than 4.0 percent; or
(C) Common Equity Tier 1 Capital Measure: The bank has a common
equity tier 1 risk-based capital ratio of less than 3.0 percent; or
(D) Leverage Measure: The bank has a leverage ratio of less than
3.0 percent.
(ii) A bank that is a qualifying community banking organization (as
defined in 12 CFR 217.12) that has elected to use the community bank
leverage ratio (as defined in 12 CFR 217.12) and that has a community
bank leverage ratio of less than 6 percent, is considered to have met
the requirements for the significantly undercapitalized capital
category in paragraphs (b)(4)(i)(A) through (D) of this section.
(5) ``Critically undercapitalized'' if the bank has a ratio of
tangible equity, as defined in Sec. 208.41, to total assets that is
equal to or less than 2.0 percent.
* * * * *
0
30. Section 208.73 is amended by removing paragraph (a), redesignating
paragraphs (b) through (f) as paragraphs (a) through (e), respectively,
and revising newly redesignated paragraph (a) to read as follows:

Sec. 208.73 What additional provisions are applicable to state member
banks with financial subsidiaries?

(a) Capital requirements for state member banks. A state member
bank other than a qualifying community banking organization (as defined
in 12 CFR 217.12) that is subject to the community bank leverage ratio
(as defined in 12 CFR 217.12) that controls or holds an interest in a
financial subsidiary must comply with the rules set forth in Sec.
217.22(a)(7) of Regulation Q (12 CFR 217.22(a)(7)) in determining its
compliance with applicable regulatory capital standards (including the
well capitalized standard of Sec. 208.71(a)(1)).
* * * * *

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

0
31. The authority citation for part 211 continues to read as follows:

Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq.,
3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s,
1681w, 6801 and 6805.
0
32. In part 211, remove the words ``Capital Adequacy Guidelines''
wherever they appear and add in their place the words ``capital rule''.
0
33. Section 211.2 is amended by revising paragraphs (b), (c), and (x)
to read as follows:

Sec. 211.2 Definitions.

* * * * *
(b) Capital rule means 12 CFR part 217.
(c) Capital and surplus means, unless otherwise provided in this
part: (1) For organizations subject to the capital rule (other than
qualifying community banking organizations (as defined in 12 CFR
217.12) that are subject to the community bank leverage ratio (as
defined in 12 CFR 217.12)):
(i) Tier 1 and tier 2 capital included in an organization's risk-
based capital ratios (under the capital rule); and
(ii) The balance of allowances for loan and lease losses not
included in an organization's tier 2 capital for calculation of risk-
based capital ratios, based on the organization's most recent
consolidated Report of Condition and Income.
(2) For qualifying community banking organizations (as defined in
12 CFR 217.12) that are subject to the community bank leverage ratio
(as defined in 12 CFR 217.12), CBLR tangible equity (as defined in 12
CFR 217.12) plus allowances for loan and lease losses (as defined in 12
CFR 217.2).
(3) For all other organizations, paid-in and unimpaired capital and
surplus, and includes undivided profits but does not include the
proceeds of capital notes or debentures.
* * * * *
(x) Tier 1 capital has the same meaning as provided under 12 CFR
part 217, except that for a qualifying community banking organization
(as defined in 12 CFR 217.12) that is subject to the community bank
leverage ratio (as defined in 12 CFR 217.12), tier 1 capital means CBLR
tangible equity (as defined in 12 CFR 217.12).
* * * * *
0
34. Section 211.9 is amended by redesignating footnote 5 to paragraph
(a) as footnote 1 to paragraph (a) andrevising paragraph (a)(1) to read
as follows:

Sec. 211.9 Investment procedures.

(a) * * *
(1) Minimum capital adequacy standards. Except as the Board may
otherwise determine, in order for an investor to make investments
pursuant to the procedures set out in this section, the investor, the
bank holding company, and the member bank shall be in compliance with
applicable minimum standards for capital adequacy set out in the
capital rule; provided that, if the investor is an Edge or agreement
corporation, the minimum capital required is total and tier 1 capital
ratios of 8 percent and 4 percent, respectively.
* * * * *

PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)

0
35. The authority citation for part 215 continues to read as follows:

Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468,
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991).
0
36. Section 215.2 is amended by revising paragraphs (i)(1) and (i)(2)
and adding paragraph (i)(3) to read as follows:

Sec. 215.2 Definitions.

* * * * *
(i) * * *
(1) The bank's Tier 1 and Tier 2 capital included in the bank's
risk-based capital under the capital guidelines of the appropriate
Federal banking agency, based on the bank's most recent consolidated
report of condition filed under 12 U.S.C. 1817(a)(3); and
(2) The balance of the bank's allowances for loan and lease losses
not included in the bank's Tier 2 capital for purposes of the
calculation of risk-based capital by the appropriate Federal banking
agency, based on the bank's most recent consolidated report of
condition filed under 12 U.S.C. 1817(a)(3).
(3) Notwithstanding paragraphs (i)(1) through (2) of this section,
for a member bank that is a qualifying community banking organization
(as defined in 12 CFR 217.12) that is subject to the community bank
leverage ratio (as defined in 12 CFR 217.12), unimpaired capital and
unimpaired surplus equals CBLR tangible equity (as defined in 12 CFR
217.12) plus allowances for loan and lease losses (as defined in 12 CFR
217.2).
* * * * *

PART 217--CAPITAL ADEQUACY OF BANKING HOLDING COMPANIES, SAVINGS
AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

0
37. The authority citation for part 217 is revised to read as follows:

Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371, and 5371 note.
0
38. Section 217.10 is amended by revising paragraph (a) to read as
follows:

[[Page 3087]]

Sec. 217.10 Minimum capital requirements.

(a) Minimum capital requirements. (1) A Board-regulated institution
must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches Board-regulated institutions, a
supplementary leverage ratio of 3 percent.
(2) A qualifying community banking organization (as defined in 12
CFR 217.12), that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), is considered to have met the minimum
capital requirements in this paragraph (a) only if the qualifying
community banking organization has a community bank leverage ratio of
at least 7.5 percent or more.
* * * * *
0
39. Section 217.12 is added as to read as follows:

Sec. 217.12 Community bank leverage ratio.

(a) Community bank leverage ratio framework. (1) Notwithstanding
any other provision in this part, a qualifying community banking
organization that has made an election to use the community bank
leverage ratio framework under paragraph (a)(3) of this section shall
be considered to have met the minimum capital requirements under Sec.
217.10, the capital ratio requirements for the well capitalized capital
category under 12 CFR 208.43(b)(1), and any other capital or leverage
requirements to which the qualifying community banking organization is
subject, if it has a community bank leverage ratio greater than 9
percent.
(2) For purposes of this section, a qualifying community banking
organization means a Board-regulated institution that is not an
advanced approaches Board-regulated institution and that satisfies all
of the following criteria:
(i) Has total consolidated assets of less than $10 billion,
calculated in accordance with the reporting instructions to Schedule RC
of the Call Report or Schedule HC of Form FR Y-9C, as applicable, as of
the end of the most recent calendar quarter;
(ii) Has off-balance sheet exposures of 25 percent or less of its
total consolidated assets as of the end of the most recent calendar
quarter, calculated as the sum of the notional amounts of the exposures
listed in paragraphs (a)(2)(ii)(A) through (I) of this section, divided
by total consolidated assets, each as of the end of the most recent
calendar quarter:
(A) The unused portion of commitments (except for unconditionally
cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through guarantees and credit
derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to Schedule RC-L of the Call Report or Schedule
HC-L of Form FR Y-9C, as applicable;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures;
(iii) Has total trading assets and trading liabilities, calculated
in accordance with the reporting instructions to Schedule RC of the
Call Report or Schedule HC of Form FR Y-9C, as applicable, of 5 percent
or less of the Board-regulated institution's total consolidated assets,
each as of the end of the most recent calendar quarter;
(iv) Has mortgage servicing assets, calculated in accordance with
the reporting instructions to Schedule RC-M of the Call Report or
Schedule HC-M of Form FR Y-9C, as applicable, of 25 percent or less of
the Board-regulated institution's CBLR tangible equity, each as of the
end of the most recent calendar quarter; and
(v) Has DTAs arising from temporary differences that the Board-
regulated institution could not realize through net operating loss
carrybacks, net of any related valuation allowances, of 25 percent or
less of the Board-regulated institution's CBLR tangible equity, each as
of the end of the most recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) A qualifying community banking organization may elect to use
the community bank leverage ratio framework only if it has a community
bank leverage ratio that exceeds 9 percent at the time of the election.
(iii) For purposes of this paragraph (a)(3), a qualifying community
banking organization makes an election to use the community bank
leverage ratio framework by completing the community bank leverage
ratio reporting schedule in its Call Report or Form FR Y-9C, as
applicable.
(iv)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio may opt out of using
the community bank leverage ratio by completing Schedule RC-R in its
Call Report or Schedule HC-R of Form FR Y-9C, as applicable, or by
otherwise providing the information required in Schedule RC-R or
Schedule HC-R, as applicable, to the Board.
(B) A qualifying community banking organization that opts out of
using the community bank leverage ratio pursuant to paragraph
(a)(3)(iv)(A) of this section must comply with Sec. 217.10
immediately.
(b) Calculation of the community bank leverage ratio. (1) A
qualifying community banking organization's community bank leverage
ratio is the ratio of the banking organization's CBLR tangible equity,
as defined in paragraph (b)(2) of this section, to its average total
consolidated assets, as defined in paragraph (b)(3) of this section.
(2) CBLR tangible equity means total bank equity capital,
calculated in accordance with the reporting instructions to Schedule RC
of the Call Report or Schedule HC of Form FR Y-9C, as applicable,
before the inclusion of noncontrolling (minority) interests in
consolidated subsidiaries, as of the end of the most recent calendar
quarter less the following (each as of the end of the most recent
calendar quarter):
(i) Accumulated other comprehensive income calculated in accordance
with the reporting instructions to Schedule RC of the Call Report or
Schedule HC of Form FR Y-9C, as applicable;
(ii) Intangible Assets, calculated in accordance with the reporting
instructions to Schedule RC of the Call Report or Schedule HC of Form
FR Y-9C, as applicable, other than mortgage servicing assets; and
(iii) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances.
(3) Average total consolidated assets means total assets calculated
in accordance with the reporting instructions to Schedule RC-K of the
Call Report or Schedule HC-K of Form FR Y-9C, as applicable, as of the
end of the most recent calendar quarter less the amounts deducted from
CBLR tangible equity under paragraphs (b)(2)(ii) and (iii) of this
section.
(c) Treatment when ceasing to be a qualifying community banking
organization requirements. (1) Except as

[[Page 3088]]

provided in paragraph (c)(4) of this section, if an Board-regulated
institution ceases to meet the definition of a qualifying community
banking organization, the Board-regulated institution has two reporting
periods (grace period) to either satisfy the requirements to be a
qualifying community banking organization or to comply withSec.
217.10and report the required capital measures under Sec. 217.10 on
its Call Report or Form FR Y-9C, as applicable.
(2) The grace period begins as of the end of the calendar quarter
in which the Board-regulated institution ceases to satisfy the criteria
to be a qualifying community banking organization provided in paragraph
(a)(2) of this section. The grace period ends on the last day of the
second consecutive calendar quarter following the beginning of the
grace period.
(3) During the grace period, the Board-regulated institution
continues to be a qualifying community banking organization for
purposes of this part and must continue calculating and reporting its
community bank leverage ratio unless the Board-regulated institution
has opted out of using the community bank leverage ratio under
paragraph (a)(3).
(4) Notwithstanding paragraphs (c)(1) through (3), an Board-
regulated institution that no longer meets the definition of a
qualifying community banking organization as a result of a merger or
acquisition has no grace period and immediately ceases to be a
qualifying community banking organization. Such an Board-regulated
institution comply with Sec. 217.10 and must report the required
capital measures under Sec. 217.10 on its next Call Report or Form FR
Y-9C.
(d) Tangible equity information. (1) A qualifying community banking
organization that has elected to use the community bank leverage ratio
under this section and has a community bank leverage ratio that falls
below 6 percent, must promptly provide to the Board the information
necessary for the calculation of its tangible equity, as defined under
section 12 CFR 208.41, for purposes of determining the capital category
of the banking organization under 12 CFR 208.43.
(2) Notwithstanding paragraph (d)(1) of this section, upon request
by the Board, a qualifying community banking organization must provide
the information necessary for the calculation of its tangible equity,
as defined under 12 CFR 208.41, to the Board.
* * * * *

PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES
(REGULATION W)

0
40. The authority citation for part 223 continues to read as follows:

Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).
0
41. Section 223.3 is amended by adding paragraph (d)(4) to read as
follows:

Sec. 223.3 What are the meanings of the other terms used in sections
23A and 23B and this part?

* * * * *
(d) * * *
(4) Notwithstanding paragraphs (d)(1) through (3) of this section,
for a qualifying community banking organization (as defined in 12 CFR
217.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), capital stock and surplus equals CBLR
tangible equity (as defined in 12 CFR 217.12) plus allowances for loan
and lease losses (as defined in 12 CFR 217.2).
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)

0
42. The authority citation for part 225 continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
43. Section 225.2 is amended by by revising paragraph (h),
redesignating footnote 2 to paragraph (r)(1) as footnote 1 to paragraph
(r)(1), and adding paragraph (r)(4) to read as follows:

Sec. 225.2 Definitions.

* * * * *
(h) Lead insured depository institution means the largest insured
depository institution controlled by the bank holding company as of the
quarter ending immediately prior to the proposed filing, based on a
comparison of the average total risk-weighted assets controlled during
the previous 12-month period be each insured depository institution
subsidiary of the holding company. For purposes of this paragraph, for
a qualifying community banking organization (as defined in 12 CFR
217.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), average total risk-weighted assets equal the
qualifying community banking organization's average total consolidated
assets (as defined in 12 CFR 217.12).
* * * * *
(r) * * *
(4) Notwithstanding paragraphs (r)(1) through (3) of this section:
(i) A bank holding company that is a qualifying community banking
organization (as defined in 12 CFR 217.12) that is subject to the
community bank leverage ratio (as defined in 12 CFR 217.12), is well
capitalized if:
(A) It has a community bank leverage ratio greater than 9.0
percent; and
(B) It satisfies the requirements of paragraph (r)(1)(iii) of this
section.
(ii) A depository institution that is a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12) is well
capitalized if it has a community bank leverage ratio greater than 9.0
percent.
* * * * *
0
44. Section 225.14 is amended by:
0
a. Redesignating footnote 3 to paragraph (a)(1)(ii) as footnote 1 to
paragraph (a)(1)(ii);
0
b. Revising paragraphs (a)(1)(v)(A) and (vii), and . (c)(6)(i); and
0
c. Adding paragraphs (c)(6)(iii; and (f).
The revisions and additions read as follows:

Sec. 225.14 Expedited action for certain bank acquisitions by well-
run bank holding companies.

(a) * * *
(1) * * *
(v) (A) If the bank holding company is not a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12), and:
(1) If the bank holding company has consolidated assets of $3
billion or more, an abbreviated consolidated pro forma balance sheet as
of the most recent quarter showing credit and debit adjustments that
reflect the proposed transaction, consolidated pro forma risk-based
capital ratios for the acquiring bank holding company as of the most
recent quarter, and a description of the purchase price and the terms
and sources of funding for the transaction; or
(2) If the bank holding company has consolidated assets of less
than $3 billion, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, and a description of the purchase price, the
terms and sources of funding for the transaction, and the sources and
schedule for retiring any debt incurred in the transaction;

[[Page 3089]]

(B) If the bank holding company is a qualifying community banking
organization (as defined in 12 CFR 217.12) that is subject to the
community bank leverage ratio (as defined in 12 CFR 217.12), an
abbreviated consolidated pro forma balance sheet as of the most recent
quarter showing credit and debit adjustments that reflect the proposed
transaction, consolidated pro forma community bank leverage ratio for
the acquiring bank holding company as of the most recent quarter, and a
description of the purchase price and the terms and sources of funding
for the transaction;
* * * * *
(vii)(A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in 12 CFR 217.12)
that is subject to the community bank leverage ratio (as defined in 12
CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-
weighted assets change as a result of the transaction, the total risk-
weighted assets, total assets, Tier 1 capital and total capital of the
institution on a pro forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or
total assets change as a result of the transaction, the total assets,
and CBLR tangible equity of the institution on a pro forma basis; and
* * * * *
(c) * * *
(6) * * *
(i) * * *
(A) Limited Growth. Except as provided in paragraphs (c)(6)(ii) and
(iii) of this section, the sum of the aggregate risk-weighted assets to
be acquired in the proposal and the aggregate risk-weighted assets
acquired by the acquiring bank holding company in all other qualifying
transactions does not exceed 35 percent of the consolidated risk-
weighted assets of the acquiring bank holding company. For purposes of
this paragraph other qualifying transactions means any transaction
approved under this section or Sec. 225.23 during the 12 months prior
to filing the notice under this section; and
(B) Individual size limitation. Except as provided in paragraph
(c)(6)(iii) of this section, the total risk-weighted assets to be
acquired do not exceed $7.5 billion;
* * * * *
(iii) Qualifying community banking organizations. Paragraphs
(c)(6)(i)(A) and (B) of this section shall not apply if:
(A) The acquiring bank holding company is a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12);
(B) The sum of the total assets to be acquired in the proposal and
the total assets acquired by the acquiring bank holding company in all
other qualifying transactions does not exceed 35 percent of the average
total consolidated assets (as defined in 12 CFR 217.12) of the
acquiring bank holding company as last reported to the Board. For
purposes of this paragraph other qualifying transactions means any
transaction approved under this section or Sec. 225.23 during the 12
months prior to filing the notice under this section; and
(C) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
(f) Qualifying community banking organizations. For purposes of
this section, a qualifying community banking organization (as defined
in 12 CFR 217.12) that is subject to the community bank leverage ratio
(as defined in 12 CFR 217.12) controls total risk-weighted assets equal
to the qualifying community banking organization's average total
consolidated assets (as defined in 12 CFR 217.12) as last reported to
its primary banking supervisor.
0
45. Section 225.22 is amended by adding paragraph (d)(8)(vi) to read as
follows:

Sec. 225.22 Exempt nonbanking activities and acquisitions.

* * * * *
(d) * * *
(8) * * *
(vi) Qualifying community banking organizations. For purposes of
paragraph (d)(8)(ii) of this section, a lending company or industrial
bank that is a qualifying community banking organization (as defined in
12 CFR 217.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), or is a subsidiary of such a qualifying
community banking organization, has risk-weighted assets equal to:
(A) Its average total consolidated assets (as defined in 12 CFR
217.12) as most recently reported to its primary banking supervisor (as
defined in Sec. 225.14(d)(5)); or
(B) Its total assets, if the company or industrial bank does not
report such average total consolidated assets.
* * * * *
0
46. Section 225.23 is amended by:
0
a .Redesignating footnote 2 to paragraph (a)(1) as footnote 1 to
paragraph (a)(1);
0
b. Revising paragraphs (a)(1)(iii) and (c)(5)(i); and
0
c. Adding paragraphs (c)(5)(iii) and (e).
The revisions and additions read as follows:

Sec. 225.23 Expedited action for certain nonbanking proposals by
well-run bank holding companies.

(a) * * *
(1) * * *
(iii) If the proposal involves an acquisition of a going concern:
(A) If the acquiring bank holding company is not a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12):
(1) If the bank holding company has consolidated assets of $3
billion or more, an abbreviated consolidated pro forma balance sheet
for the acquiring bank holding company as of the most recent quarter
showing credit and debit adjustments that reflect the proposed
transaction, consolidated pro forma risk-based capital ratios for the
acquiring bank holding company as of the most recent quarter, a
description of the purchase price and the terms and sources of funding
for the transaction, and the total revenue and net income of the
company to be acquired; or
(2) If the bank holding company has consolidated assets of less
than $3 billion, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, a description of the purchase price and the terms
and sources of funding for the transaction and the sources and schedule
for retiring any debt incurred in the transaction, and the total
assets, off-balance sheet items, revenue and net income of the company
to be acquired;
(B) If the acquiring bank holding company is a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12), an
abbreviated consolidated pro forma balance sheet for the acquiring bank
holding company as of the most recent quarter showing credit and debit
adjustments that reflect the proposed transaction, consolidated pro
forma community bank leverage ratio for the acquiring bank holding
company as of the most recent quarter, a description of the purchase
price and the terms and sources of funding for the transaction,

[[Page 3090]]

and the total revenue and net income of the company to be acquired;
(C) For each insured depository institution (that is not a
qualifying community banking organization (as defined in 12 CFR 217.12)
that is subject to the community bank leverage ratio (as defined in 12
CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-
weighted assets change as a result of the transaction, the total risk-
weighted assets, total assets, Tier 1 capital and total capital of the
institution on a pro forma basis; and
(D) For each insured depository institution that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or
total assets change as a result of the transaction, the total assets
and CBLR tangible equity of the institution on a pro forma basis;
* * * * *
(c) * * *
(5) * * *
(i) In general--
(A) Limited growth. Except as provided in paragraphs (c)(5)(ii) and
(iii) of this section, the sum of aggregate risk-weighted assets to be
acquired in the proposal and the aggregate risk-weighted assets
acquired by the acquiring bank holding company in all other qualifying
transactions does not exceed 35 percent of the consolidated risk-
weighted assets of the acquiring bank holding company. For purposes of
this paragraph, ``other qualifying transactions'' means any transaction
approved under this section or Sec. 225.14 during the 12 months prior
to filing the notice under this section;
(B) Consideration paid. Except as provided in paragraph (c)(5)(iii)
of this section, the gross consideration to be paid by the acquiring
bank holding company in the proposal does not exceed 15 percent of the
consolidated Tier 1 capital of the acquiring bank holding company; and
(C) Individual size limitation. Except as provided in paragraph
(c)(5)(iii) of this section, the total risk-weighted assets to be
acquired do not exceed $7.5 billion;
* * * * *
(iii) Qualifying community banking organizations. Paragraphs
(c)(5)(i)(A), (B), and (C) of this section shall not apply if:
(A) The acquiring bank holding company is a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12); and
(B) The sum of the total assets to be acquired in the proposal and
the total assets acquired by the acquiring bank holding company in all
other qualifying transactions does not exceed 35 percent of the average
total consolidated assets (as defined in 12 CFR 217.12) of the
acquiring bank holding company as last reported to the Board. For
purposes of this paragraph ``other qualifying transactions'' means any
transaction approved under this section or Sec. 225.14 during the 12
months prior to filing the notice under this section;
(C) The gross consideration to be paid by the acquiring bank
holding company in the proposal does not exceed 15 percent of the CBLR
tangible equity (as defined in 12 CFR 217.12) of the acquiring bank
holding company; and
(D) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
(e) Qualifying community banking organizations. For purposes of
this section, a qualifying community banking organization (as defined
in 12 CFR 217.12) that is subject to the community bank leverage ratio
(as defined in 12 CFR 217.12) controls total risk-weighted assets equal
to the qualifying community banking organization's average total
consolidated assets (as defined in 12 CFR 217.12) as last reported to
its primary banking supervisor.
0
47. Section 225.24 is amended byrevising paragraphs (a)(2)(iv)(B) and
(a)(2)(vi) to read as follows:

Sec. 225.24 Procedures for other nonbanking proposals.

(a) * * *
(2) * * *
(iv) * * *
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring bank holding company as of the most
recent quarter (or, in the case of a qualifying community banking
organization (as defined in 12 CFR 217.12) that is subject to the
community bank leverage ratio (as defined in 12 CFR 217.12),
consolidated pro forma community bank leverage ratio calculations for
the acquiring bank holding company as of the most recent quarter); and
* * * * *
(vi) (A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in 12 CFR 217.12)
that is subject to the community bank leverage ratio (as defined in 12
CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-
weighted assets change as a result of the transaction, the total risk-
weighted assets, total assets, Tier 1 capital and total capital of the
institution on a pro forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or
total assets change as a result of the transaction, the total assets
and CBLR tangible equity of the institution on a pro forma basis;
* * * * *
0
48. Section 225.87 is amended by adding paragraph (b)(4)(iv) to read as
follows:

Sec. 225.87 Is notice to the Board required after engaging in a
financial activity?

* * * * *
(b) * * *
(4) * * *
(iv) For purposes of paragraph (b)(4) of this section, a financial
holding company that is a qualifying community banking organization (as
defined in 12 CFR 217.12) that is subject to the community bank
leverage ratio (as defined in 12 CFR 217.12) has Tier 1 capital equal
to its CBLR tangible equity (as defined in 12 CFR 217.12).
0
49. Section 225.174 is amended by adding paragraph (d) to read as
follows:

Sec. 225.174 What aggregate thresholds apply to merchant banking
investments?

* * * * *
(d) Qualifying community banking organizations. For purposes of
this section, a financial holding company that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12) has Tier 1 capital equal to its CBLR tangible equity (as
defined in 12 CFR 217.12).
0
50. Section 225.175 is amended by adding paragraph (c)(3) to read as
follows:

Sec. 225.175 What risk management, record keeping and reporting
policies are required to make merchant banking investments?

* * * * *
(c) * * *
(3) Qualifying community banking organizations. For purposes of
this paragraph (c), a financial holding company that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12) has Tier 1 capital equal to its CBLR tangible equity (as
defined in 12 CFR 217.12).

[[Page 3091]]

PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)

0
51. The authority citation for part 238 continues to read as follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464,
1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C. 78l.

0
52. Section 238.53 is amended by revising paragraphs (c)(2)(iii)(B) and
(v) to read as follows:

Sec. 238.53 Prescribed services and activities of savings and loan
holding companies.

* * * * *
(c) * * *
(2) * * *
(iii) * * *
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring savings and loan holding company as of
the most recent quarter (or, in the case of a qualifying community
banking organization (as defined in 12 CFR 217.12) that is subject to
the community bank leverage ratio (as defined in 12 CFR 217.12),
consolidated pro forma community bank leverage ratio calculations for
the acquiring savings and loan holding company as of the most recent
quarter); and
* * * * *
(v) (A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in 12 CFR 217.12)
that is subject to the community bank leverage ratio (as defined in 12
CFR 217.12)) whose Tier 1 capital, total capital, total assets or risk-
weighted assets change as a result of the transaction, the total risk-
weighted assets, total assets, Tier 1 capital and total capital of the
institution on a pro forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in 12 CFR 217.12) that is
subject to the community bank leverage ratio (as defined in 12 CFR
217.12), whose CBLR tangible equity (as defined in 12 CFR 217.12) or
total assets change as a result of the transaction, the total assets
and CBLR tangible equity of the institution on a pro forma basis;
* * * * *

PART 251--CONCENTRATION LIMIT (REGULATION XX)

0
53. The authority citation for part 251 continues to read as follows:

Authority: 12 U.S.C. 1818, 1844(b), 1852, 3101 et seq.

0
54. Section 251.3 is amended by revising paragraph (c)(2) and adding
paragraph (c)(3) to read as follows:

Sec. 251.3 Concentration limit.

* * * * *
(c) * * *
(2) U.S. company not subject to applicable risk-based capital
rules. For a U.S. company that is not subject to applicable risk-based
capital rules (other than a qualifying community banking organization
(as defined in 12 CFR 217.12) that is subject to the community bank
leverage ratio (as defined in 12 CFR 217.12)), consolidated liabilities
are equal to the total liabilities of such company on a consolidated
basis, as determined under applicable accounting standards.
(3) Qualifying community banking organizations. For a U.S. company
that is a qualifying community banking organization (as defined in 12
CFR 217.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 217.12), consolidated liabilities are equal to:
(i) Average total consolidated assets (as defined in 12 CFR 217.12)
of the company as last reported on the qualifying community banking
organization's applicable regulatory filing with the qualifying
community banking organization's appropriate Federal banking agency;
minus
(ii) The company's CBLR tangible equity (as defined in 12 CFR
217.12).
* * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend chapter III of Title 12, Code
of Federal Regulations as follows:

PART 303--Filing Procedures

0
55. The authority citation for part 303 continues to read as follows:

Authority: 12 U.S.C. 378, 1464, 1813, 1815, 1817, 1818, 1819(a)
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,
1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207, 5414; 15 U.S.C. 1601-
1607.

0
56. Section 303.2 is amended by revising paragraph (ee) to read as
follows:

Sec. 303.2 Definitions.

* * * * *
(ee) Tier 1 capital shall have the same meaning as provided in
Sec. 324.2 of this chapter. For a qualifying community banking
organization (as defined in 12 CFR 324.12) that is subject to the
community bank leverage ratio (as defined in 12 CFR 324.12), Tier 1
capital means the FDIC-supervised institution's CBLR tangible equity
(as defined in 12 CFR 324.12).
* * * * *

PART 324--Capital Adequacy of FDIC-Supervised Institutions

0
57. The authority citation for part 324 continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub.L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.L. 102-242,
105 Stat. 2236, 2355, as amended by Pub.L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub.L. 102-242, 105 Stat. 2236, 2386, as
amended by Pub.L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub.L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note);
Pub. L. 115-174 Sec. 201.

0
58. Section 324.10 is amended by revising paragraph (a) to read as
follows:

Sec. 324.10 Minimum capital requirements.

(a) Minimum capital requirements. (1) An FDIC-supervised
institution must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches FDIC-supervised institutions, a
supplementary leverage ratio of 3 percent.
(vi) For state savings associations, a tangible capital ratio of
1.5 percent.
(2) A qualifying community banking organization (as defined in 12
CFR 324.12), that is subject to the community bank leverage ratio (as
defined in 12 CFR 324.12), is considered to have met the minimum
capital requirements in this paragraph (a) only if the qualifying
community banking organization has a community bank leverage ratio of
at least 7.5 percent or more.
* * * * *
0
59. Section 324.12 is added to read as follows:

Sec. 324.12 Community bank leverage ratio.

[[Page 3092]]

capital category under Sec. 324.403(b)(1)(i)(A) through (D) of this
part, and any other capital or leverage requirements to which the
qualifying community banking organization is subject, if it has a
community bank leverage ratio greater than 9 percent.
(2) For purposes of this section, a qualifying community banking
organization means an FDIC-supervised institution that is not an
advanced approaches FDIC-supervised institution and that satisfies all
of the following criteria:
(i) Has total consolidated assets of less than $10 billion,
calculated in accordance with the reporting instructions to Schedule RC
of the Call Report as of the end of the most recent calendar quarter;
(ii) Has off-balance sheet exposures of 25 percent or less of its
total consolidated assets as of the end of the most recent calendar
quarter, calculated as the sum of the notional amounts of the exposures
listed in paragraphs (a)(2)(ii)(A) through (I), divided by total
consolidated assets, each as of the end of the most recent calendar
quarter:
(A) The unused portion of commitments (except for unconditionally
cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through guarantees and credit
derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to Schedule RC-L of the Call Report;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures;
(iii) Has total trading assets and trading liabilities, calculated
in accordance with the reporting instructions to Schedule RC of the
Call Report of 5 percent or less of the FDIC-supervised institution's
total consolidated assets, each as of the end of the most recent
calendar quarter;
(iv) Has mortgage servicing assets, calculated in accordance with
the reporting instructions to Schedule RC-M of the Call Report, of 25
percent or less of the FDIC-supervised institution's CBLR tangible
equity, each as of the end of the most recent calendar quarter; and
(v) Has DTAs arising from temporary differences that the FDIC-
supervised institution could not realize through net operating loss
carrybacks, net of any related valuation allowances, of 25 percent or
less of the FDIC-supervised institution's CBLR tangible equity, each as
of the end of the most recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) A qualifying community banking organization may elect to use
the community bank leverage ratio framework only if it has a community
bank leverage ratio that exceeds 9 percent at the time of the election.
(iii) For purposes of this paragraph (a)(3), a qualifying community
banking organization makes an election to use the community bank
leverage ratio framework by completing the community bank leverage
ratio reporting schedule in its Call Report.
(iv)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio may opt out of using
the community bank leverage ratio by completing Schedule RC-R in its
Call Report or by otherwise providing the information required in
Schedule RC-R to the FDIC.
(B) A qualifying community banking organization that opts out of
using the community bank leverage ratio pursuant to paragraph
(a)(3)(iv)(A) of this section must comply with Sec. 324.10
immediately.
(b) Calculation of the community bank leverage ratio. (1) A
qualifying community banking organization's community bank leverage
ratio is the ratio of the banking organization's CBLR tangible equity,
as defined in paragraph (b)(2) of this section, to its average total
consolidated assets, as defined in paragraph (b)(3) of this section.
(2) CBLR tangible equity means total bank equity capital,
calculated in accordance with the reporting instructions to Schedule RC
of the Call Report, before the inclusion of noncontrolling (minority)
interests in consolidated subsidiaries, as of the end of the most
recent calendar quarter less the following (each as of the end of the
most recent calendar quarter):
(i) Accumulated other comprehensive income calculated in accordance
with the reporting instructions to Schedule RC of the Call Report;
(ii) Intangible Assets, calculated in accordance with the reporting
instructions to Schedule RC of the Call Report, other than mortgage
servicing assets;
(iii) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances;
and
(iv) Identified losses. A qualifying community banking organization
must deduct identified losses (to the extent that CBLR tangible equity
would have been reduced if the appropriate accounting entries to
reflect the identified losses had been recorded on the banking
organization's books).
(3) Average total consolidated assets means total assets calculated
in accordance with the reporting instructions to Schedule RC-K of the
Call Report as of the end of the most recent calendar quarter less the
amounts deducted from CBLR tangible equity under paragraphs (b)(2)(ii)
through (iv) of this section.
(c) Treatment when ceasing to be a qualifying community banking
organization requirements. (1) Except as provided in paragraph (c)(4)
of this section, if an FDIC-supervised institution ceases to meet the
definition of a qualifying community banking organization, the FDIC-
supervised institution has two reporting periods (grace period) to
either satisfy the requirements to be a qualifying community banking
organization or to comply with Sec. 324.10 and report the required
capital measures under Sec. 324.10 on its Call Report.
(2) The grace period begins as of the end of the calendar quarter
in which the FDIC-supervised institution ceases to satisfy the criteria
to be a qualifying community banking organization provided in paragraph
(a)(2) of this section. The grace period ends on the last day of the
second consecutive calendar quarter following the beginning of the
grace period.
(3) During the grace period, the FDIC-supervised institution
continues to be a qualifying community banking organization for
purposes of this part and must continue calculating and reporting its
community bank leverage ratio unless the FDIC-supervised institution
has opted out of using the community bank leverage ratio under
paragraph (a)(3).
(4) Notwithstanding paragraphs (c)(1) through (3), an FDIC-
supervised institution that no longer meets the definition of a
qualifying community banking organization as a result of a merger or
acquisition has no grace period and immediately ceases to be a
qualifying community banking organization. Such an FDIC-supervised
institution comply with Sec. 324.10 and must report the required
capital measures under Sec. 324.10 on its next Call Report.

[[Page 3093]]

(d) Tangible equity information. (1) A qualifying community banking
organization that has elected to use the community bank leverage ratio
under this section and has a community bank leverage ratio that falls
below 6 percent, must promptly provide to the FDIC the information
necessary for the calculation of its tangible equity, as defined under
Sec. 324.2, for purposes of determining the capital category of the
banking organization under subpart H of this part.
(2) Notwithstanding paragraph (d)(1), upon request by the FDIC, a
qualifying community banking organization must provide the information
necessary for the calculation of its tangible equity, as defined under
Sec. 324.2, to the FDIC.
0
60. Section 324.403is amended by revising paragraphs (a) and (b) to
read as follows:

Sec. 324.403 Capital measures and capital category definitions.

(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this subpart H, the relevant capital measures shall be:
(i) The total risk-based capital ratio;
(ii) The Tier 1 risk-based capital ratio;
(iii) The common equity tier 1 ratio;
(iv) The leverage ratio;
(v) The tangible equity to total assets ratio; and
(vi) Beginning January 1, 2018, the supplementary leverage ratio
calculated in accordance with Sec. 324.11 for advanced approaches
FDIC-supervised institutions that are subject to subpart E of this
part.
(2) For a qualifying community banking organization (as defined
under Sec. 324.12), that is subject to the community bank leverage
ratio (as defined under Sec. 324.12), the community bank leverage
ratio (as defined under Sec. 324.12), is used to determine the
applicable capital category under paragraphs (b)(1) through (4) of this
section.
(b) Capital categories. For purposes of section 38 of the FDI Act
and this subpart, an FDIC-supervised institution shall be deemed to be:
(1) (i) ``Well capitalized'' if it:
(A) Has a total risk-based capital ratio of 10.0 percent or
greater; and
(B) Has a Tier 1 risk-based capital ratio of 8.0 percent or
greater; and
(C) Has a common equity tier 1 capital ratio of 6.5 percent or
greater; and
(D) Has a leverage ratio of 5.0 percent or greater; and
(E) Is not subject to any written agreement, order, capital
directive, or prompt corrective action directive issued by the FDIC
pursuant to section 8 of the FDI Act (12 U.S.C. 1818), the
International Lending Supervision Act of 1983 (12 U.S.C. 3907), or the
Home Owners' Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)), or section 38 of
the FDI Act (12 U.S.C. 1831o), or any regulation thereunder, to meet
and maintain a specific capital level for any capital measure.
(ii) Beginning on January 1, 2018 and thereafter, an FDIC-
supervised institution that is a subsidiary of a covered BHC will be
deemed to be well capitalized if the FDIC-supervised institution
satisfies paragraphs (b)(1)(i)(A) through (E) of this section and has a
supplementary leverage ratio of 6.0 percent or greater. For purposes of
this paragraph, a covered BHC means a U.S. top-tier bank holding
company with more than $700 billion in total assets as reported on the
company's most recent Consolidated Financial Statement for Bank Holding
Companies (Form FR Y-9C) or more than $10 trillion in assets under
custody as reported on the company's most recent Banking Organization
Systemic Risk Report (Form FR Y-15).
(iii) A qualifying community banking organization, as defined under
Sec. 324.12, that has elected to use the community bank leverage ratio
framework under Sec. 324.12 and that has a community bank leverage
ratio, as defined under Sec. 324.12, greater than 9 percent, shall be
considered to have met the capital ratio requirements for the well
capitalized capital category in paragraphs (b)(1)(i)(A) through (D) of
this section.
(2)(i) ``Adequately capitalized'' if it:
(A) Has a total risk-based capital ratio of 8.0 percent or greater;
and
(B) Has a Tier 1 risk-based capital ratio of 6.0 percent or
greater; and
(C) Has a common equity tier 1 capital ratio of 4.5 percent or
greater; and
(D) Has a leverage ratio of 4.0 percent or greater; and
(E) Does not meet the definition of a well capitalized bank.
(ii) Beginning January 1, 2018, an advanced approaches FDIC-
supervised institution will be deemed to be ``adequately capitalized''
if it satisfies paragraphs (b)(2)(i)(A) through (E) of this section and
has a supplementary leverage ratio of 3.0 percent or greater, as
calculated in accordance with Sec. 324.11 of subpart B of this part.
(iii) A qualifying community banking organization, as defined under
Sec. 324.12, that has elected to use the community bank leverage ratio
framework under section Sec. 324.12 and that has a community bank
leverage ratio, as defined under Sec. 324.12, of 7.5 percent or
greater, shall be considered to have met the requirements for the
adequately capitalized capital category in paragraphs (b)(2)(i)(A)
through (D) of this section.
(3)(i) ``Undercapitalized'' if it:
(A) Has a total risk-based capital ratio that is less than 8.0
percent; or
(B) Has a Tier 1 risk-based capital ratio that is less than 6.0
percent; or
(C) Has a common equity tier 1 capital ratio that is less than 4.5
percent; or
(D) Has a leverage ratio that is less than 4.0 percent.
(ii) Beginning January 1, 2018, an advanced approaches FDIC-
supervised institution will be deemed to be ``undercapitalized'' if it
has a supplementary leverage ratio of less than 3.0 percent, as
calculated in accordance with Sec. 324.11.
(iii) A qualifying community banking organization, as defined under
Sec. 324.12, that has elected to use the community bank leverage ratio
framework under section Sec. 324.12 and that has a community bank
leverage ratio, as defined under Sec. 324.12, of less than 7.5
percent, shall be considered to have met the requirements for the
undercapitalized capital category in paragraphs (b)(3)(i)(A) through
(D) of this section.
(4)(i) ``Significantly undercapitalized'' if it has:
(A) A total risk-based capital ratio that is less than 6.0 percent;
or
(B) A Tier 1 risk-based capital ratio that is less than 4.0
percent; or
(C) A common equity tier 1 capital ratio that is less than 3.0
percent; or
(D) A leverage ratio that is less than 3.0 percent.
(ii) A qualifying community banking organization, as defined under
Sec. 324.12, that has elected to use the community bank leverage ratio
framework under section Sec. 324.12 and that has a community bank
leverage ratio, as defined under Sec. 324.12, of less than 6 percent,
shall be considered to have met the requirements for the significantly
undercapitalized capital category in paragraphs (b)(4)(i)(A) through
(D) of this section.
(5) ``Critically undercapitalized'' if the insured depository
institution has a ratio of tangible equity, as defined in Sec. 324.2,
to total assets that is equal to or less than 2.0 percent.

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

0
61. The authority citation for part 337 continues to read as follows:

Authority: 12 U.S.C. 375a(4), 375b, 1463(a)(1), 1816, 1818(a),
1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412.

0
62. Section 337.3 is amended by redesignating footnote 3 to paragraph
(b) as footnote 1 and revising newly to read as follows:

[[Page 3094]]

Sec. 337.3 Limits on extensions of credit to executive officers,
directors, and principal shareholders of insured nonmember banks.

* * * * *
(b) * * *
1 For the purposes of Sec. 337.3, an insured nonmember bank's
capital and unimpaired surplus shall have the same meaning as found in
Sec. 215.2(f) of Federal Reserve Board Regulation O (12 CFR 215.2(f)).
For a qualifying community banking organization (as defined in 12 CFR
324.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 324.12), capital and unimpaired surplus shall mean
the FDIC-supervised institution's CBLR tangible equity (as defined in
12 CFR 324.12) plus allowances for loan and lease losses (as defined in
12 CFR 324. 2).
* * * * *

PART 347--INTERNATIONAL BANKING

0
63. The authority citation for part 347 continues to read as follows:

Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103,
3104, 3105, 3108, 3109; Pub L. No. 111-203, section 939A, 124 Stat.
1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o-7 note).

0
64. Section 347.102 is amended by revising paragraph (u) to read as
follows:

Sec. 347.102 Definitions.

* * * * *
(u) Tier 1 capital means Tier 1 capital as defined in Sec. 324.2
of this chapter. For a qualifying community banking organization (as
defined in 12 CFR 324.12) that is subject to the community bank
leverage ratio (as defined in 12 CFR 324.12), Tier 1 capital means the
FDIC-supervised institution's CBLR tangible equity (as defined in 12
CFR 324.12).
* * * * *

PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS

0
65. The authority citation for part 362 continues to read as follows:

Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(j),
1828(m), 1828a, 1831a, 1831e, 1831w, 1843(l).

0
66. Section 362.2 is amended by revision paragraph (s) to read as
follows:

Sec. 362.2 Definitions.

* * * * *
(s) Tier one capital has the same meaning as set forth in part 324
of this chapter for an insured State nonmember bank or insured state
savings association. For other state-chartered depository institutions,
the term ``tier one capital'' has the same meaning as set forth in the
capital regulations adopted by the appropriate Federal banking agency.
For a qualifying community banking organization (as defined in 12 CFR
324.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 324.12), Tier one capital means the FDIC-supervised
institution's CBLR tangible equity (as defined in 12 CFR 324.12).
* * * * *

PART 365--REAL ESTATE LENDING STANDARDS

0
67. The authority citation for part 365 continues to read as follows:

Authority: 12 U.S.C. 1828(o) and 5101 et seq.

0
68. Appendix A to subpart A of part 365 is amended by:
0
a. Following the heading ``Supervisory Loan-to-Value-Limits'', in the
table, redesignating footnotes 1 and 2 as footnotes 2 and 3;
0
b. In the first paragraph of the appendix, redesignating footnote 5 as
footnote 1; and
0
c. Following the heading ``Loans in Excess of the Supervisory Loan-to-
Value-Limits'', redesignating the second footnote 2 as footnote 4 and
revising newly redesignated footnote 4.
The revision reads as follows:

Appendix A to Subpart A of Part 365--Interagency Guidelines for Real
Estate Lending Policies

* * * * *
4 For state non-member banks and state savings associations,
``total capital'' refers to that term described in 12 CFR 324.2. For a
qualifying community banking organization (as defined in 12 CFR 324.12)
that is subject to the community bank leverage ratio (as defined in 12
CFR 324.12), ``total capital'' refers to the FDIC-supervised
institution's CBLR tangible equity (as defined in 12 CFR 324.12).
* * * * *

PART 390--REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT
SUPERVISION

0
69. The authority citation for part 390 continues to read as follows:

Authority: 12 U.S.C. 1819.

0
70. Section 390.265 is amended by revising footnote 4 to read as
follows:
* * * * *
4 For the state member banks, the term ``total capital'' is defined
at 12 CFR 217.2. For insured state non-member banks, the term ``total
capital'' is defined at 12 CFR 324.2. For national banks, the term
``total capital'' is defined at 12 CFR 3.2. For state savings
associations, the term ``total capital'' is defined at 12 CFR 324.2.
For a qualifying community banking organization (as defined in 12 CFR
324.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 324.12), ``total capital'' means the FDIC-supervised
institution's CBLR tangible equity (as defined in 12 CFR 324.12).
* * * * *
0
71. Section 390.344 is amended by revising the definition of
``Capital'' to read as follows:
* * * * *

Sec. 390.344 Definitions applicable to capital distributions.

* * * * *
Capital means total capital, as computed under part 324 of this
chapter. For a qualifying community banking organization (as defined in
12 CFR 324.12) that is subject to the community bank leverage ratio (as
defined in 12 CFR 324.12), total capital means the FDIC-supervised
institution's CBLR tangible equity (as defined in 12 CFR 324.12).
* * * * *

Dated: November 15, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, November 21, 2018.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
Dated at Washington, DC, on November 20, 2018.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018-27002 Filed 2-7-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P

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