Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations, 13814-13838 [2019-06344]

Download as PDF 13814 Proposed Rules Federal Register Vol. 84, No. 67 Monday, April 8, 2019 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. DEPARTMENT OF AGRICULTURE Food and Nutrition Service 7 CFR Part 273 RIN 0584–AE57 Supplemental Nutrition Assistance Program: Requirements for AbleBodied Adults Without Dependents; Reopening of Comment Period FOR FURTHER INFORMATION CONTACT: Certification Policy Branch, Program Development Division, FNS, 3101 Park Center Drive, Alexandria, Virginia 22302. SNAPCPBRules@fns.usda.gov. Food and Nutrition Service (FNS), USDA. ACTION: Proposed rule; reopening of comment period. AGENCY: jbell on DSK30RV082PROD with PROPOSALS VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 The Food and Nutrition Service (FNS) is reopening the public comment period for this proposed rule, which was published on February 1, 2019. FNS believes that affected parties need to be informed as soon as possible of the extension and its length. SUPPLEMENTARY INFORMATION: This proposed rule seeks to amend the regulatory standards by which the U.S. Department of Agriculture evaluates State Supplemental Nutrition Assistance Program (SNAP) agency requests to waive the time limit and to end the unlimited carryover of able-bodied adults without dependents (ABAWD) percentage exemptions. The proposed rule would encourage broader application of the statutory ABAWD work requirement, consistent with the Administration’s focus on fostering selfsufficiency. The original comment period for this proposed rule ended on April 2, 2019. FNS seeks to reopen the comment period on April 8, 2019, for a period of 3 days ending April 10, 2019. DATES: The comment period for the information collection requirements published on February 2, 2019, 84 FR 980, has been reopened from April 8, 2019, through April 10, 2019. To be assured of consideration, comments must be received on or before April 10, 2019. ADDRESSES: The Food and Nutrition Service, USDA, invites interested persons to submit written comments on this proposed rule. Comments may be submitted in writing by one of the following methods: • Preferred Method: Federal eRulemaking Portal: Go to http:// www.regulations.gov. Follow the online instructions for submitting comments. SUMMARY: • Mail: Send comments to Certification Policy Branch, Program Development Division, FNS, 3101 Park Center Drive, Alexandria, Virginia 22302. • All written comments submitted in response to this proposed rule will be included in the record and will be made available to the public. Please be advised that the substance of the comments and the identity of the individuals or entities submitting the comments will be subject to public disclosure. FNS will make the written comments publicly available on the internet via http://www.regulations.gov. Dated: April 3, 2019. Brandon Lipps, Administrator, Food and Nutrition Service. [FR Doc. 2019–06878 Filed 4–5–19; 8:45 am] BILLING CODE 3410–30–P PO 00000 DEPARTMENT OF TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket ID OCC–2018–0019] RIN 1557–AE38 FEDERAL RESERVE SYSTEM 12 CFR Part 217 [Regulation Q; Docket No. R–1655] RIN 7100–AF43 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 324 RIN 3064–AE79 Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations Office of the Comptroller of the Currency, Treasury (OCC); the Board of Governors of the Federal Reserve System (Board); and the Federal Deposit Insurance Corporation (FDIC). ACTION: Notice of proposed rulemaking. AGENCY: The OCC, Board, and FDIC (collectively, the agencies) are inviting public comment on a notice of proposed rulemaking (proposal) that would address an advanced approaches banking organization’s regulatory capital treatment of an investment in unsecured debt instruments issued by foreign or U.S. global systemically important banking organizations (GSIBs) for the purposes of meeting minimum total loss absorbing capacity (TLAC) and, where applicable, long-term debt (LTD) requirements, or unsecured debt instruments issued by GSIBs that are pari passu or subordinated to such debt instruments. Under the proposal, investments by an advanced approaches banking organization in such unsecured debt instruments generally would be subject to deduction from the advanced approaches banking organization’s own regulatory capital. The proposal would reduce both interconnectedness within SUMMARY: Frm 00001 Fmt 4702 Sfmt 4702 E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules the financial system and systemic risk. The Board is proposing changes to regulatory reporting requirements resulting from the proposal. The Board is also proposing to require that banking organizations subject to minimum TLAC and LTD requirements under Board regulations publicly disclose their TLAC and LTD issuances in a manner described in this proposal. DATES: Comments must be received by June 7, 2019. ADDRESSES: Comments should be directed to: OCC: Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title ‘‘Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign 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–2018–0019’’ 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: Chief Counsel’s Office, 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–2018–0019’’ in your comment. In general, the OCC will enter all comments received into the docket and publish them 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. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 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–2018–0019’’ in the Search box and click ‘‘Search.’’ Click on ‘‘Open Docket Folder’’ on the right side of the screen and then ‘‘Comments.’’ Comments can be filtered by clicking on ‘‘View All’’ 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. Supporting materials may be viewed by clicking on ‘‘Open Docket Folder’’ and then clicking on ‘‘Supporting Documents.’’ 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–1655, RIN 7100–AF43, by any of the following methods: • Agency Website: http:// www.federalreserve.gov. Follow the instructions for submitting comments at http://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 http://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or to remove personally identifiable information at the commenter’s request. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room 146, PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 13815 1709 New York Avenue 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–AE79 by any of the following methods: • Agency Website: http:// www.fdic.gov/regulations/laws/federal/ Follow instructions for submitting comments on the Agency website. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal 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 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–AE79 on the subject line of the message. • Public Inspection: All comments received must include the agency name and RIN 3064–AE79 for this rulemaking. All comments received will be posted without change to http://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: David Elkes, Risk Expert (202) 649–6984; or Christine Smith, Risk Expert (202) 649–6985, Capital and Regulatory Policy; or Carl Kaminski, Special Counsel, 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; Mark Handzlik, Senior Supervisory Financial Analyst (202) 475–6636 or Sean Healey, Supervisory Financial Analyst, (202) 912–4611, Division of Supervision and Regulation; or Benjamin McDonough, Assistant General Counsel (202) 452–2036; or Mark Buresh, Counsel (202) 452–5270, 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. E:\FR\FM\08APP1.SGM 08APP1 13816 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules FDIC: Benedetto Bosco, Chief, Capital Policy Section; bbosco@fdic.gov; David Riley, Senior Policy Analyst, Capital Policy Section; dariley@fdic.gov; Stephanie Lorek, Senior Policy Analyst, slorek@fdic.gov; regulatorycapital @fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898–6888; or Michael Phillips, Counsel, mphillips@fdic.gov; or Catherine Wood, Counsel, cawood@ fdic.gov; Supervision and Legislation Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction and Summary of the Proposal A. Background on Capital Requirements B. Background on TLAC and LTD Requirements C. 2015 Proposal and General Summary of Comments D. Overview and Scope of Application of the Proposal II. Proposed Regulatory Capital Treatment for Advanced Approaches Banking Organizations’ Investments in Covered Debt Instruments A. Amendments to Definitions B. Investments in Covered Banking Organization’s Own Covered Debt Instruments and Reciprocal Cross Holdings C. Significant and Non-Significant Investments in Covered Debt Instruments D. Corresponding Deduction Approach E. Net Long Position III. Technical Amendment and Additional Requests for Comment IV. Proposed Changes to Regulatory Reporting A. Deductions from Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered IHCs V. Regulatory Analyses A. Paperwork Reduction Act B. Regulatory Flexibility Act Analysis C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 Determination E. Riegle Community Development and Regulatory Improvement Act of 1994 I. Introduction and Summary of the Proposal jbell on DSK30RV082PROD with PROPOSALS A. Background on Capital Requirements 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) impose minimum capital requirements on banking organizations.1 1 Banking organizations subject to the agencies’ capital rule include national banks, state member banks, insured state nonmember banks, savings VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 These requirements include minimum risk-based and leverage capital ratios. The regulatory capital ratios measure different definitions of regulatory capital relative to total and riskweighted assets.2 The numerators of the regulatory capital ratios include various adjustments and deductions to GAAPbased regulatory capital components. The agencies’ capital rule includes two broad categories of deductions related to investments in the capital instruments of financial institutions. First, it requires a banking organization to deduct any investment in its own regulatory capital instruments and any investment in regulatory capital instruments held reciprocally with another financial institution.3 Second, it requires a banking organization to deduct investments in capital instruments issued by unconsolidated financial institutions that would qualify as regulatory capital if issued by the banking organization itself.4 For the purpose of the latter deduction, a banking organization may be required to deduct the entire amount of the associations, and top-tier bank holding companies and savings and loan holding companies domiciled in the United States, but excluding banking organizations subject to the Board’s Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), and 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. A banking organization is an advanced approaches banking organization if it has total 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, 78 FR 62018, 62204 (October 11, 2013), 78 FR 55340, 55523 (September 10, 2013). See also 12 CFR part 3 (OCC); 12 CFR part 217 (Board); and 12 CFR part 324 (FDIC). The agencies recently proposed revisions to the capital rule that would amend the advanced approaches banking organization threshold and would tailor the application of capital requirements based on an institution’s risk profile (Interagency Tailoring NPR). If the Interagency Tailoring NPR is finalized as proposed, it would affect the scope of application of the deduction of investments in certain debt instruments issued by GSIBs in this notice of proposed rulemaking (NPR). See 83 FR 66024 (December 21, 2018). See discussion in section I.D of this NPR’s preamble. 2 See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12 CFR 324.10(a) (FDIC). In addition to the generally applicable leverage ratio, advanced approaches banking organizations are subject to a supplementary leverage ratio, which measures a banking organization’s tier 1 capital relative to its on-balance sheet and certain off-balance sheet exposures. 3 See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board); and 12 CFR 324.22(c)(1) (FDIC). 4 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 investment, or it may be required to deduct only the portion of the investment that exceeds a certain threshold.5 These deductions are intended to reduce interconnectedness and contagion risk among banks by discouraging banking organizations from investing in the regulatory capital of another financial institution. For purposes of the deductions related to investments in the capital instruments of financial institutions, a banking organization must make the deduction from the component of regulatory capital for which the instrument qualifies or would qualify if it were issued by the banking organization that is holding the exposure.6 For example, a banking organization that owns less than 10 percent of the common stock of an unaffiliated banking organization (nonsignificant investment in the capital of unconsolidated financial institution), and is invested in tier 2 instruments issued by the unaffiliated banking organization, must deduct from tier 2 capital the amount, if any, by which the investment exceeds 10 percent of its own common equity tier 1 capital when combined with other non-significant investments in the capital of unconsolidated financial institutions. Any non-significant investments in the capital of unconsolidated financial institutions below the 10 percent threshold must be assigned their appropriate risk-weight.7 B. Background on TLAC and LTD Requirements In October 2015, the Board invited public comment on a notice of proposed rulemaking (2015 proposal) to require the largest domestic and foreign banking organizations operating in the United States to maintain a minimum amount of total loss-absorbing capacity (TLAC), consisting of tier 1 capital (excluding minority interest) and certain long-term debt instruments (LTD).8 The proposal had two core objectives: (1) To improve the resiliency of covered banking organizations (as defined below); and (2) to enhance the resolvability of covered banking organizations in the event of their failure or material financial distress. In December 2016, the Board issued a final rule (TLAC Rule) that was 5 See 12 CFR 3.22(c)(3) through (5) (OCC); 12 CFR 217.22(c)(3) through (5) (Board); and 12 CFR 324.22(c)(3) through (5) (FDIC). 6 See 12 CFR 3.22(c)(1) and (2) (OCC); 12 CFR 217.22(c)(1) and (2) (Board); and 12 CFR 324.22(c)(1) and (2) (FDIC). 7 See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 12 CFR part 217, subparts D, E, and F, as applicable (FRB); and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC). 8 See 80 FR 74926 (November 30, 2015). E:\FR\FM\08APP1.SGM 08APP1 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules substantially consistent with the 2015 proposal.9 The TLAC and LTD requirements set forth in the TLAC Rule take effect on January 1, 2019. The TLAC and LTD requirements in the TLAC Rule build on, and serve as a complement to, the Board’s regulatory capital requirements.10 Regulatory capital requirements are intended to ensure that a banking organization has sufficient capital to remain a going concern. The objective of the TLAC and LTD requirements is to enhance financial stability by reducing the impact stemming from the failure of certain large and systemically important banking organizations by requiring such organizations to have sufficient lossabsorbing capacity on both a goingconcern and a gone-concern basis. The TLAC and LTD requirements in the TLAC Rule apply to a U.S. top-tier bank holding company identified under the Board’s rules as a global systemically important bank holding company (covered BHC) or a top-tier U.S. intermediate holding company subsidiary of a global systemically important foreign banking organization (foreign GSIB) with $50 billion or more in U.S. non-branch assets (covered IHC) (collectively, covered banking organizations) because the failure or material financial distress of covered banking organizations could substantially impair the functioning of the U.S. financial system.11 The requirements in the TLAC Rule use many of the same measures that are set forth in the capital rule. For example, the TLAC Rule includes both risk-based and leverage-based requirements, including buffers on top of the minimum TLAC requirements that function in a manner similar to the capital conservation buffer in the capital rule.12 The risk-based measures in the TLAC Rule help to ensure that the amount of TLAC maintained by a jbell on DSK30RV082PROD with PROPOSALS 9 See 82 FR 8266 (January 24, 2017). 10 See 12 CFR part 217. 11 In 2015, the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS), issued an international TLAC standard, titled, Principles on Loss-absorbing and Recapitalisation Capacity of G–SIBs in Resolution; Total Loss-absorbing Capacity Term Sheet (TLAC Term Sheet). The TLAC Term Sheet sets forth the minimum TLAC standards applicable to all global systemically important banking organizations (GSIBs), for consultation and implementation by member jurisdictions. The Board’s TLAC Rule is generally consistent with the TLAC Term Sheet. A foreign GSIB is subject to the TLAC requirements established by its home jurisdiction pursuant to the TLAC Term Sheet, which may vary in certain respects from the Board’s TLAC Rule. 12 Covered banking organizations that do not meet a TLAC buffer face limitations on capital distributions and discretionary bonus payments (in a manner similar to the capital conservation buffer restrictions in the capital rule). VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 covered banking organization is commensurate with its overall risks, while the leverage-based measures in the TLAC Rule act as a backstop to the risk-based measures. LTD, which count in regulatory capital in limited amounts if they comply with certain eligibility criteria, are capable of absorbing losses in resolution. This is because the debt holders’ claim on a company’s assets may not receive full payment in a resolution, receivership, insolvency, or similar proceeding, which would increase the size of a company’s assets relative to the size of its liabilities and thereby increase the company’s equity. This potential loss-absorbing capacity of LTD is part of the rationale for the deduction approach for investments in such debt instruments under this proposal. The TLAC Rule requires covered BHCs to maintain outstanding minimum levels of ‘‘external TLAC’’ and ‘‘external LTD.’’ External TLAC is the sum of the tier 1 capital instruments issued directly by the covered BHC (excluding minority interests) and the external LTD issued by the covered BHC. Under the TLAC Rule, external LTD is generally unsecured debt that is issued directly by a covered BHC, has no features that would interfere with a smooth resolution proceeding, has a remaining maturity of at least one year, and is governed by U.S. law, among other provisions.13 The TLAC Rule also requires covered IHCs to maintain minimum levels of TLAC and LTD. However, the specific requirements applicable to a covered IHC vary depending on the resolution strategy of the foreign GSIB parent of the covered IHC—either a single point-ofentry (SPOE) 14 resolution strategy or a multiple point-of-entry (MPOE) resolution strategy.15 Under the TLAC 13 External LTD excludes instruments with exotic features that could impact the loss absorbing capacity and thereby diminish the prospects for an orderly resolution of a covered BHC; excluded instruments include structured notes and most instruments that contain derivative-linked features. 14 Under a SPOE resolution strategy, the covered IHC would not be expected to enter resolution. In a SPOE resolution of a GSIB, only a single entity— the top-tier holding company of the GSIB—would enter a resolution proceeding. Thus, the effect of losses that led to a GSIB’s failure would pass up from the operating subsidiaries that incurred the losses to the holding company and then would be imposed on the equity holders and unsecured creditors of the holding company through resolution. 15 Under a MPOE resolution strategy, the covered IHC may be expected to go through resolution. In a MPOE strategy, entities within the consolidated banking organization may be resolved separately by their local authorities when the entity fails or is approaching failure. Thus, the losses that caused an entity within a consolidated banking organization PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 13817 Rule, a covered IHC that has a foreign GSIB parent with a SPOE strategy must issue LTD to the foreign GSIB parent or to a wholly owned subsidiary of the foreign GSIB parent, but a covered IHC that is expected to enter into resolution may issue LTD externally to third party investors, as well as internally to its foreign GSIB parent.16 Given the important role of LTD in absorbing the losses of a covered banking organization in bankruptcy or resolution, the Board proposed limitations on investments by Boardregulated banking organizations in LTD issued by covered BHCs in its 2015 proposal, which are discussed in further detail below.17 Such limitations already apply to investments in regulatory capital instruments of banking organizations in order to reduce interconnectedness and pro-cyclicality within the financial system in times of stress. The Board did not finalize these limitations when it issued the TLAC Rule because it needed additional time to work with the OCC and FDIC towards a proposed interagency approach regarding the regulatory capital treatment for investments in certain debt instruments issued by covered BHCs. Accordingly, the agencies are now jointly proposing a regulatory capital treatment for investments in covered debt instruments, as defined below, that would apply to all advanced approaches banking organizations. In addition, this proposal takes into consideration and incorporates public comments from the 2015 proposal. C. 2015 Proposal and General Summary of Comments To reduce the potential contagion risk stemming from the failure of a covered BHC, the 2015 proposal would have amended the Board’s capital rule to require a Board-regulated banking organization to deduct from its regulatory capital any direct, indirect, or synthetic investment in, or exposure to, LTD issued by a covered BHC as if they were investments in tier 2 capital to fail are passed directly to the equity holders and unsecured creditors of that entity through a separate resolution process. 16 An IHC that is expected to enter into resolution is deemed to be a ‘‘resolution covered IHC’’ under the TLAC Rule upon certification to the Board of the IHC’s resolution strategy. See 12 CFR 252.164. 17 The 2015 proposal was issued solely by the Board. Therefore, the proposed regulatory capital deductions in that proposal would have only applied to Board-regulated banking organizations, which include bank holding companies, intermediate holding companies, savings and loan holdings companies, and state member banks. E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13818 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules instruments.18 The form and amount of the deduction would have depended on the type of investment and various other factors, described below. The proposed deduction requirement in the 2015 proposal would have substantially reduced the incentive of a Board-regulated banking organization to invest in LTDs issued by a covered BHC, thereby reducing the risk of contagion spreading to other banking organizations in the event of distress or failure of the covered BHC. Analysis conducted by Board staff concurrent with the 2015 proposal did not indicate that Board-regulated banking organizations owned a substantial amount of debt issued by covered BHCs. The Board received approximately 37 comments on the 2015 proposal from banking and trade organizations, academic institutions, market advocacy groups, and an individual. A few of the commenters addressed the proposed deduction portion of the 2015 proposal. One commenter recommended an expansion of the proposed deductions to TLAC instruments issued by foreign GSIBs, while another commenter urged the Board to address its concerns through a different means than the capital rule. Some commenters supported the proposed deduction, and some suggested amending or abandoning the proposed deduction. Commenters made a number of recommendations regarding the specific details of how the deductions from regulatory capital should be implemented. The recommendations included increasing the capital rule’s deduction thresholds to reflect the increase in the scope of assets subject to deduction. Other commenters requested formal public guidance regarding the proposed deduction requirement to ensure that community banking organizations were aware of the requirement and could undertake the necessary preparations. One commenter requested that the Board exclude debt instruments that do not qualify as LTD under the TLAC Rule from the scope of the deduction in the capital rule. Another commenter advocated for a less stringent capital deduction for senior debt, relative to the deduction requirement for subordinated debt. With respect to the mechanics of the capital deduction, several commenters advocated for allowing a banking 18 Unsecured debt issued by a covered BHC may or may not qualify as tier 2 capital, depending on its characteristics. See 12 CFR 217.20(d). Similarly, unsecured debt issued by a covered BHC may or may not qualify as eligible external LTD under the TLAC Rule, depending on its characteristics. See 12 CFR 252.61 and 252.62, 252.161 and 252.162. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 organization to first deduct any investment in a LTD from the banking organization’s own LTD, before deducting such holdings from regulatory capital. Commenters argued that deducting LTD from regulatory capital would impose significant costs on issuers and adversely affect the market for these instruments. Some commenters also suggested that banking organizations be allowed to choose among several different treatments for investments in LTD, including the application of a higher risk weight rather than a capital deduction. A number of commenters sought an exemption for underwriting and market making positions in LTD. These commenters argued that requiring deduction in these contexts could negatively impact market making activities of GSIBs and increase the cost of market making while reducing liquidity, thereby adversely impacting customers of banking organizations and the global economy.19 D. Overview and Scope of Application of the Proposal The agencies are issuing this notice of proposed rulemaking (proposal or proposed rule) to recognize, for purposes of the agencies’ capital rule, the systemic risks posed by banking organizations’ investments in ‘‘covered debt instruments,’’ as defined below, and to create an incentive for advanced approaches banking organizations to limit their exposure to GSIBs. Absent the proposal, investments in covered debt instruments issued by covered BHCs, foreign GSIBs, and covered IHCs are generally subject to a risk weight of 100 percent and are not subject to deduction from regulatory capital. The deductions that would be required under the proposal would affect the capital ratios of advanced approaches banking organizations—that is, the risk-based capital ratios that include ‘‘standardized total riskweighted assets’’ and ‘‘advanced approaches total risk-weighted assets’’ in the denominator of the ratios, as well as the leverage ratio and the supplementary leverage ratio. The agencies believe such an approach appropriately reduces systemic risks. The agencies believe the proposed rule will have relatively small effects on advanced approaches banking organizations. It is difficult to calculate TLAC holdings of affected institutions using available data. As noted earlier, Board analysis suggests that debt instruments subject to the proposed rule 19 The comments received on the 2015 proposal have been considered in developing this proposal. PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 represent a minimal portion of the total assets of advanced approaches banking organizations. The proposed rule could pose some additional regulatory costs for advanced approaches banking organizations associated with changes to internal systems or processes. The agencies expect that the proposal will have the benefit of improving the resiliency and enhancing resolvability of advanced approaches banking organizations in the event that an entity required to issue LTD or TLAC fails or encounters material financial distress. While the systemic risk associated with banking organizations’ investments in covered debt instruments is greatest for large banking organizations, it is relevant for all banking organizations. Distress at a GSIB and the associated write-down or conversion into equity of its covered debt instruments could have a direct negative impact on the capital of investing banking organizations, potentially at a time when investing banking organizations are already experiencing financial stress. In order to strongly discourage smaller banking organizations from investing in covered debt instruments, the agencies intend to give further consideration on how to address these risks with respect to investments in covered debt instruments, as defined below, by nonadvanced approaches banking organizations. The agencies recognize that the proposed approach is relatively complex and, as a result, are only proposing to apply it to advanced approaches banking organizations at this time. In late 2018, the agencies issued the Interagency Tailoring NPR that would, among other changes, amend the scope of ‘‘advanced approaches banking organizations.’’ 20 Under the Interagency Tailoring NPR, the scope of ‘‘advanced approaches banking organizations’’ would be amended to include only those banking organizations subject to Category I or Category II standards.21 For purposes of considering and commenting on this NPR, the requirements that would apply to ‘‘advanced approaches banking organizations’’ would be included as Category I and II standards under the Interagency Tailoring NPR. Commenters should consider both proposals together 20 See 83 FR 66024 (December 21, 2018). the Interagency Tailoring NPR, Category I standards would apply to U.S. GSIBs and their subsidiary depository institutions. Category II standards would apply to banking organizations with $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity that are not subject to Category I standards and to their subsidiary depository institutions. 21 Under E:\FR\FM\08APP1.SGM 08APP1 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS for purposes of their comments to the agencies. Question 1: The agencies invite comment on all aspects of the proposed deduction approach for investments in covered debt instruments by advanced approaches banking organizations. Question 2: To what extent do nonadvanced approaches banking organizations have material holdings of covered debt instruments issued by covered BHCs, covered IHCs, and foreign GSIBs? The agencies invite data demonstrating the relative significance of such holdings. II. Proposed Regulatory Capital Treatment for Advanced Approaches Banking Organizations’ Investments in Covered Debt Instruments Under the existing capital rule, a banking organization must deduct from regulatory capital any investment in its own capital instruments and investments in the capital of other financial institutions that it holds reciprocally. Other investments in the capital of unconsolidated financial institutions are subject to deduction to the extent they exceed certain thresholds. Under the proposal, an investment in a covered debt instrument by an advanced approaches banking organization generally would be treated as an investment in a tier 2 capital instrument, and therefore, would be subject to deduction from the advanced approaches banking organization’s own tier 2 capital. The existing deduction approaches under the capital rule would therefore apply to a banking organization’s investments in its own covered debt instruments and to reciprocal cross-holdings of covered debt instruments; that is, an advanced approaches banking organization would deduct from its own tier 2 capital any investments in its own covered debt instruments and reciprocal crossholdings of covered debt instruments with another banking organization. In addition, the existing corresponding deduction approach in the capital rule would apply to any required deduction by advanced approaches banking organizations of an investment in a covered debt instrument that exceeds certain thresholds. The proposal would revise section ____.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments. Several new definitions would be added to section ___.2 in order to effectuate these deductions. Further, the definition of ‘‘investment in the capital of an unconsolidated financial institution’’ VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 would be amended to correct a typographical error. A. Amendments to Definitions Consistent with the Board’s 2015 proposal, the proposal would add or amend certain definitions in section &___.2 of the capital rule to implement the proposed deduction approach. Under the proposal, a ‘‘covered debt instrument’’ would be defined to include an unsecured debt instrument that is: (1) Issued by a covered BHC and that is an ‘‘eligible debt security’’ for purposes of the TLAC Rule,22 or that is pari passu or subordinated to any ‘‘eligible debt security’’ issued by the covered BHC; or (2) issued by a covered IHC and that is an ‘‘eligible Covered IHC debt security’’ for purposes of the TLAC Rule,23 or that is pari passu or subordinated to any ‘‘eligible Covered IHC debt security’’ issued by the covered IHC. A covered debt instrument would not include a debt instrument that qualifies as tier 2 capital under the capital rule. A ‘‘covered debt instrument’’ also would include any unsecured debt instrument issued by a foreign GSIB or any of its subsidiaries, other than its covered IHC, for the purpose of absorbing losses or recapitalizing the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency or similar proceeding of the issuer or any of its subsidiaries. Further, covered debt instruments would also include any debt instrument that is pari passu or subordinated to any unsecured debt instrument described above issued by the foreign GSIB or any of its subsidiaries, other than an unsecured debt instrument that is included in the regulatory capital of the issuer. Question 3: Under the proposed definition of ‘‘covered debt instrument,’’ unsecured debt instruments issued by a covered BHC or a covered IHC would be covered debt instruments—and thus potentially subject to deduction—if they were eligible debt securities or eligible Covered IHC debt securities, as applicable, under the TLAC Rule, or if they were pari passu or subordinated to any eligible debt security or eligible Covered IHC debt security. What would be a less burdensome way to include approximately the same debt instruments within the definition of ‘‘covered debt instrument?’’ For example, should ‘‘covered debt instrument’’ include any unsecured debt instrument issued by a covered BHC or a covered IHC, including, for example, 22 See 23 See PO 00000 12 CFR 252.61. 12 CFR 252.161. Frm 00006 Fmt 4702 13819 debt instruments that are senior to all eligible debt securities or eligible Covered IHC debt securities? In late 2016, the BCBS published its TLAC Holdings standard, which described the regulatory capital treatment under the BCBS Basel III framework applicable to investments in non-capital TLAC instruments.24 These investments are defined in the BCBS standards as ‘‘other TLAC liabilities.’’ Similar to the definition of ‘‘covered debt instrument’’ described in this proposal, ‘‘other TLAC liabilities’’ are defined by the BCBS to include all direct, indirect, and synthetic investments in the instruments of a GSIB resolution entity that are eligible to be recognized as external TLAC but that do not otherwise qualify as regulatory capital. Instruments pari passu to TLAC, aside from certain exemptions described below, are also included in the BCBS’s definition of ‘‘other TLAC liabilities.’’ In addition, similar to the proposal’s definition of ‘‘covered debt instruments,’’ ‘‘other TLAC liabilities’’ are subject to deduction from the investing bank’s regulatory capital, depending on the nature of the investment. However, there are several differences between the proposed definition of ‘‘covered debt instrument’’ and the BCBS’s definition of ‘‘other TLAC liabilities.’’ Under the FSB’s TLAC Term Sheet, certain ‘‘Excluded Liabilities’’ do not qualify as TLAC and therefore are not subject to deduction under the TLAC Holdings standard, even if they rank pari passu or subordinated to a TLAC instrument. Excluded Liabilities include deposits, liabilities arising from derivatives, and structured notes, among other items. The TLAC Rule prohibits or limits covered banking organizations from entering into financial arrangements that may compromise an orderly resolution process, including the issuance of Excluded Liabilities that rank pari passu or subordinated to LTD (referred to as ‘‘clean holding company’’ requirements in the TLAC Rule). Therefore, the definition of ‘‘covered debt instrument’’ in the proposal would not provide an exemption for Excluded Liabilities that rank pari passu or subordinated to LTD. An investment in a covered debt investment that constitutes an Excluded Liability may therefore be subject to deduction if it ranks pari passu or subordinated to LTD. To provide symmetrical treatment between liabilities issued by covered banking organizations and foreign GSIBs, the proposal also would not 24 See https://www.bis.org/bcbs/publ/d387.pdf (TLAC Holdings standard). Sfmt 4702 E:\FR\FM\08APP1.SGM 08APP1 13820 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS exempt Excluded Liabilities issued by foreign GSIBs from the proposed definition of ‘‘covered debt instrument.’’ In addition, the TLAC Holdings standard excludes from the definition of ‘‘other TLAC liabilities’’ instruments that are pari passu to (1) Excluded Liabilities and (2) other instruments that are eligible for recognition as external TLAC by virtue of the exemptions to the subordination requirements in the FSB’s TLAC Term Sheet.25 However, the TLAC Holdings standard also provide national discretion to recognize such pari passu debt instruments as external TLAC. In jurisdictions that have exercised this discretion, such instruments are subject to the proportional deduction approach set forth in the TLAC Holdings standard.26 The proposed definition of ‘‘covered debt instruments’’ would include all unsecured debt instruments that are pari passu or subordinated to instruments issued by a foreign GSIB for the purpose of satisfying the foreign GSIB’s homecountry TLAC requirements. This would include instruments that are pari passu to Excluded Liabilities if such instruments are recognized as external TLAC under home-country requirements as a matter of national discretion. In contrast to the BCBS standard, the proposal would not require proportional deduction for these instruments. Instead, the proposal would require deduction using the existing deduction approaches for tier 2 capital instruments under the capital rule. The agencies believe that implementation of the proportional deduction approach would introduce a 25 To ensure that TLAC absorbs losses prior to liabilities that are excluded from TLAC, eligible TLAC instruments must satisfy certain subordination requirements set forth in the FSB TLAC Term Sheet. However, an instrument may qualify as TLAC and not meet the subordination requirements if: (i) The amount of Excluded Liabilities on the balance sheet of the resolution entity that rank pari passu or junior to the TLACeligible liabilities does not exceed 5 percent of the GSIB’s eligible TLAC; (ii) the resolution authority of the GSIB has authority to differentiate among pari passu creditors in resolution; (iii) differentiation in resolution in favor of such excluded liabilities would not give rise to material risk of successful legal challenge or valid compensation claims; and (iv) this does not have a material adverse impact on resolvability. See section 11 of the FSB TLAC Term Sheet. 26 See ¶ 66.c of the TLAC Holdings standard. Only a proportion of instruments that are eligible to be recognized as external TLAC by virtue of the subordination exemptions may be considered TLAC under the TLAC Holdings standard. The proportion equals the ratio of (1) the debt instruments issued by a GSIB that rank pari passu to Excluded Liabilities and that are recognized as external TLAC by the GSIB, to (2) the debt instruments issued by the GSIB that rank pari passu to Excluded Liabilities and that would be recognized as external TLAC if the subordination requirement was not applied. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 high degree of complexity and operational burden because it would require a banking organization to track the full or partial recognition of TLAC instruments that may be pari passu to other liabilities in foreign jurisdictions. In addition, given that advanced approaches banking organizations are not expected to hold material investments in ‘‘covered debt instruments,’’ use of the existing deduction approaches for tier 2 capital instruments is unlikely to have a meaningful impact on banking organizations’ regulatory capital ratios relative to the proportional deduction approach. The proposal would also add a definition of ‘‘excluded covered debt instrument’’ to the capital rule in order to identify covered debt instruments held for short-term trading purposes that would not be subject to deduction, if below a certain threshold. The definition and prudential treatment of excluded covered debt instruments and their deduction are discussed in more detail in section II.C below. Question 4: How well does the proposed definition of covered debt instrument capture non-capital debt instruments issued by covered BHCs and covered IHCs for the purposes of meeting their TLAC requirements? The agencies invite comment on all aspects of the definition of covered debt instruments as it relates to instruments issued by covered BHCs and covered IHCs, particularly the scope of instruments that may be subject to deduction under the proposed definition. Question 5: To what degree does the proposed definition of covered debt instrument capture debt instruments issued by foreign GSIBs or their subsidiaries under foreign implementations of the international TLAC standard? The agencies invite comment on the definition of covered debt instrument, and whether it appropriately captures unsecured debt instruments that do not qualify as regulatory capital and that are issued by a foreign GSIB or any of its subsidiaries. Which method for identifying covered debt instruments would be simpler to apply in practice: (1.) Referring to the purpose of the debt instrument as to absorbing losses or recapitalizing the issuer, as proposed by the agencies, or (2.) referring to home country rules implementing the FSB’s TLAC Term Sheet? Question 6: What are possible alternatives to the definition of ‘‘excluded covered debt instrument?’’ For example, should the agencies consider as an alternative to ‘‘held for PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 the purpose of short-term or with the intent of benefiting from actual or expected short-term price movements’’ a different standard, such as held available-for-sale or classified as a trading asset for accounting purposes? Similar to the measurement of investments in financial institutions capital instruments, an ‘‘investment in a covered debt instrument’’ would be defined as a net long position in a covered debt instrument, including direct, indirect, and synthetic exposures to such covered debt instrument. Investments in covered debt instruments would exclude underwriting positions held for five business days or less. In addition, the proposal would amend the definitions of ‘‘indirect exposure’’ and ‘‘synthetic exposure’’ in the capital rule to add exposures to covered debt instruments.27 B. Investments in Covered Banking Organization’s Own Covered Debt Instruments and Reciprocal Cross Holdings Under the agencies’ capital rule, a banking organization must deduct from regulatory capital an investment in its own capital instruments and investments in the capital of other financial institutions that it holds reciprocally under sections____.22(c)(1) and (3). The proposal would amend sections____.22(c)(1) and (3) to require an advanced approaches banking organization to also deduct from its tier 2 capital investments in its own covered debt instruments and any investment in a covered debt instrument that is held reciprocally with another banking organization. C. Significant and Non-Significant Investments in Covered Debt Instruments Under sections___.22(c)(4) and (5) of the capital rule, a banking organization must deduct from regulatory capital certain investments in the capital of unconsolidated financial institutions. The calculation of the deduction depends on whether the banking organization has a ‘‘significant’’ or a ‘‘non-significant’’ investment, with ‘‘significant’’ defined as ownership of more than 10 percent of the common stock of the unconsolidated financial institution.28 When a banking 27 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2 (FDIC) (‘‘investment in the capital of an unconsolidated financial institution’’, ‘‘investment in the banking organization’s own capital instrument’’, and ‘‘synthetic exposure’’). 28 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) (‘‘significant investment in the capital of an unconsolidated financial institution’’). E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules organization has a ‘‘significant investment’’ in an unconsolidated financial institution, the banking organization must deduct from regulatory capital any investment in the capital of the unconsolidated financial institution that is not in the form of common stock.29 If the banking organization has one or more ‘‘nonsignificant investments’’ in unconsolidated financial institutions, it must aggregate such investments and deduct from regulatory capital any amount that exceeds 10 percent of the banking organization’s common equity tier 1 capital.30 The proposal would amend section ___.22(c)(4) of the capital rule to require an advanced approaches banking organization with a non-significant investment in a covered debt instrument to include such investment in the aggregate amount of non-significant investments in the capital of other unconsolidated financial institutions. As under the existing capital rule, the proposal would require a banking organization to deduct from regulatory capital the amount by which the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions exceeds 10 percent of the advanced approaches banking organization’s common equity tier 1 capital. Any investment in a covered debt instrument subject to deduction would be deducted according to the corresponding deduction approach described below in section II.D. The proposal includes limited exclusions from this approach. The specifics of the applicable exclusion would depend on whether a firm is a covered BHC or is a subsidiary of a GSIB, consistent with the TLAC Holdings standard. To help support a deep and liquid market for covered debt instruments, the proposal would allow advanced approaches banking organizations to hold limited amounts of, and conduct limited market making in, such instruments. The proposal would provide that, under certain circumstances, an advanced approaches banking organization that is a covered BHC or is a subsidiary of a GSIB (advanced approaches GSIB banking organization) could designate an investment in a covered debt instrument as an ‘‘excluded covered debt instrument’’ if it holds the covered debt instrument for 30 business days or less 29See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); and 12 CFR 324.22(c)(5) (FDIC). 30 See 12 CFR 3.22(c)(4) (OCC); 12 CFR 217.22(c)(4) (Board); and 12 CFR 324.2(c)(4) (FDIC). VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits. In this case, the advanced approaches GSIB banking organization could exclude each excluded covered debt instrument from the threshold calculation and potential deduction under section ___.22(c)(4) if the aggregate amount of excluded covered debt instruments, measured by their gross long position, is 5 percent or less of its common equity tier 1 capital. If the aggregate amount of excluded covered debt instruments is more than 5 percent of the common equity tier 1 capital of the advanced approaches GSIB banking organization, the excess over 5 percent would be subject to deduction from tier 2 capital. In addition, if an excluded covered debt instrument were held for more than 30 business days or ceased to be held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits, the excluded covered debt instrument would be subject to deduction from tier 2 capital. Consistent with the TLAC Holdings standard, the proposal includes a more simple materiality threshold for advanced approaches banking organizations that are not covered BHCs or subsidiaries of GSIBs (advanced approaches non-GSIB banking organizations) given that these banking organizations pose less systemic risk than GSIBs. Such banking organizations could exclude covered debt instruments from the threshold calculation and potential deduction under section ___ .22(c)(4) if the aggregate amount of covered debt instruments, measured by their gross long position, is 5 percent or less of its common equity tier 1 capital. If the aggregate amount of covered debt instruments is more than 5 percent of an advanced approaches non-GSIB banking organization’s common equity tier 1 capital, the excess over 5 percent would be included, on a net long position basis in accordance with section___.22(h), with other non-significant investments in the capital instruments of unconsolidated financial institutions as described above. The proposal would amend section ___.22(c)(5) of the capital rule to require an advanced approaches banking organization with an investment in a covered debt instrument issued by an unconsolidated financial institution to deduct the investment from tier 2 capital, in accordance with the corresponding deduction approach, if the advanced approaches banking PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 13821 organization has a significant investment in the capital of the unconsolidated financial institution. Question 7: Do the proposed exclusions from deduction for certain investments in covered debt instruments of an unconsolidated financial institution appropriately align with the treatment set forth in the TLAC Holdings standard? Should all banking organizations subject to the rule be subject to uniform exclusion requirements, and if so, why? Would the exclusion applicable only to GSIBs and the 5 percent threshold below which deduction is not required allow for sufficient market making activity to support a deep and liquid market for covered debt instruments? D. Corresponding Deduction Approach Under the corresponding deduction approach, a banking organization must apply any required deduction to the component of capital for which the underlying instrument would qualify if it were issued by the banking organization.31 If the banking organization does not have enough of the component of capital to give full effect to the deduction, the corresponding deduction approach provides that any amount of the investment that has not already been deducted would be deducted from the next, more subordinated component of capital.32 If, for example, a banking organization has insufficient amounts of tier 2 capital and additional tier 1 capital to effect a required deduction, the banking organization would need to deduct from common equity tier 1 capital the amount of the investment that exceeds the tier 2 and additional tier 1 capital of the banking organization.33 The proposal would amend the corresponding deduction approach in section ___.22(c)(2) of the capital rule to specify that an investment in a covered debt instrument by an advanced approaches banking organization would be subject to the corresponding deduction approach. Question 8: Are there simpler alternatives to the proposed deduction approach for investments in covered debt instruments that would achieve the same objectives of reducing both interconnectedness within the financial system and systemic risk? 31 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). 32 See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2) and (f) (Board); and 12 CFR 324.(c)(2) and (f) (FDIC). 33 See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12 CFR 324.22(f) (FDIC). E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13822 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules E. Net Long Position The proposal would follow the same general approach as currently provided under the agencies’ capital rule regarding the calculation of the amount of any deduction and the treatment of guarantees and indirect investments for purposes of the deductions. Under the capital rule, the amount of a banking organization’s investment in its own capital instrument or in the capital instrument of an unconsolidated financial institution is the banking organization’s net long position in the capital instrument as calculated under section____.22(h) of the capital rule. Under section___.22(h), a banking organization may net certain gross short positions in a capital instrument against a gross long position in the instrument to determine the net long position. The amount of an investment potentially subject to deduction under section ___ .22(c) is the net long position. The proposal would modify section ___.22(h) of the capital rule such that an advanced approaches banking organization would determine its net long position in an exposure to its own covered debt instrument or in a covered debt instrument issued by an unconsolidated financial institution in the same manner as currently provided for investments in the capital of an unconsolidated financial institution or investments in an institution’s own capital instruments. Consistent with the current capital rule, the calculation of a net long position would take into account direct investments in covered debt instruments as well as indirect exposures to covered debt instruments held through investment funds. A banking organization has three options under the capital rule to measure its gross long position in a capital instrument held indirectly through an investment fund.34 The proposal would amend section___ 22(h)(2)(ii) of the capital rule to provide the same three options to determine the gross long position in a covered debt instrument held through an investment fund. The first option would be to use the entire carrying value of the investment in the fund. The second option would be, with prior supervisory approval, for the advanced approaches banking organization to use a conservative estimate of the amount of the investment in the covered debt instrument held through the fund. The third option would be to multiply the carrying value of the advanced approaches banking organization’s investment in the fund by the exact percentage of the covered debt instrument held by the investment fund or by the highest stated prospectus limit for such an investment. In each case, the amount of the gross long position may be reduced by the advanced approaches banking organization’s qualifying short positions to reach the net long position.35 For purposes of any deduction required for an advanced approaches banking organization’s investment in the capital of an unconsolidated financial institution, the amount of a covered debt instrument would include any contractual obligations the advanced approaches banking organization has to purchase such covered debt instruments. 34 See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.12(h)(2) (Board); and 12 CFR 324.22(h)(2) (FDIC). 35 See 12 CFR 3.22(h)(1) (OCC); 12 CFR 217.22(h)(1) (Board); and 12 CFR 324.22(h)(1) (FDIC). VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 III. Technical Amendment and Additional Requests for Comment The agencies are amending the definition of investment in the capital of an unconsolidated financial institution in section___.2 of the capital rule in order to correct a drafting error. The agencies’ capital rule currently defines investment in the capital of an unconsolidated financial institution as ‘‘ . . . an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution and is an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution . . . . ’’ The proposal would change ‘‘and is’’ to ‘‘or’’ to reflect the agencies’ original intent. The agencies invite comment on all aspects of the proposed deduction approaches for investments in covered debt instruments by advanced approaches banking organizations, and the technical amendment to the agencies’ capital rule. Comments are requested about the potential advantages of the proposal in ensuring the safety and soundness of advanced approaches banking organizations as well as the stability of the financial system. Comments are also requested about the capital impact of the proposal and the nature and extent of costs and benefits to the affected institutions or the broader economy. PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 IV. Proposed Changes to Regulatory Reporting A. Deductions From Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments The Board is proposing to modify the instructions to the Consolidated Financial Statements for Holding Companies (FR Y–9C), Schedule HC–R, Part I and Part II, to effectuate the deductions from regulatory capital for Board-regulated advanced approaches banking organizations related to investments in covered debt instruments and excluded covered debt instruments as described above. Specifically, the Board would modify the instructions of the FR Y–9C for Schedule HC–R, Part I, item 33, ‘‘Tier 2 capital deductions.’’ On the FR Y–9C, a Board-regulated advanced approaches GSIB banking organization would be required to deduct from tier 2 capital the aggregate amount of its investments in covered debt instruments that, when combined with the banking organization’s other non-significant investments in unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. Also, if an excluded covered debt instrument is held by a Board-regulated advanced approaches GSIB banking organization for more than 30 business days, or is no longer held for the purpose of shortterm resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits, the excluded covered debt instrument would be deducted from tier 2 capital. In addition, for purposes of the deduction requirements related to nonsignificant investments in unconsolidated financial institutions, Board-regulated advanced approaches non-GSIB banking organizations would be required to deduct from tier 2 capital those investments in covered debt instruments that exceed 5 percent of common equity tier 1 capital, and that also, when combined with the banking organization’s other non-significant investments in unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. The Board would also modify the instructions for calculating other deduction-related and risk-weighted asset line items to incorporate investments in covered debt instruments and excluded debt instruments, as applicable, by Boardregulated advanced approaches banking organizations. E:\FR\FM\08APP1.SGM 08APP1 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules The agencies would propose to modify in a future interagency reporting proposal the Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices (FFIEC 031), Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only (FFEIC 041) (collectively with the FFIEC 031, the Call Report 36), and Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101) in a manner consistent with the changes described above to the FR Y– 9C. B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered IHCs The Board is proposing to modify Schedule HC–R, Part I of the FR Y–9C by adding new data items that would publicly disclose: (1) The LTD and TLAC for covered BHCs and covered IHCs; (2) these firms’ LTD and TLAC ratios to ensure compliance with the TLAC Rule; (3) TLAC buffers; and (4) amendments to the instructions for the calculation of eligible retained income (item 47), institution-specific capital buffer (items 46.a and 46.b), and distributions and discretionary bonus payments (item 48) for covered BHCs and covered IHCs. jbell on DSK30RV082PROD with PROPOSALS V. Regulatory Analyses A. Paperwork Reduction Act Certain provisions of the proposed rule contain ‘‘collection of information’’ 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 proposal would revise sections __.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments. Several new definitions would be added to section __.2 in order to effectuate these deductions. Further, the definition of ‘‘investment in the capital of an unconsolidated financial institution’’ would be amended to correct a typographical error. The proposal will require changes to the Consolidated Financial Statements 36 The proposed modifications would not affect the Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only and Total Assets Less than $1 Billion (FFIEC 051) because banks and savings associations that are advanced approaches banking organizations are not eligible to file the FFIEC 051 report. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 for Holding Companies (FR Y–9C; OMB No. 7100–0128). 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 Collection (Board Only) Title of information collection: Consolidated Financial Statements for Holding Companies. Agency form number: FR Y–9C, FR Y– 9LP, FR Y–9SP, FR Y–9ES, and FR Y– 9CS. OMB control number: 7100–0128. Frequency: Quarterly, semiannually, and annually. Affected public: Businesses or other for-profit. Respondents: Bank holding companies (BHCs), savings and loan holding companies (SLHCs), securities holding companies (SHCs), and U.S. Intermediate Holding Companies (IHCs) (collectively, holding companies (HCs)). Estimated number of respondents: FR Y–9C (non-advanced approaches holding companies): 292; FR Y–9C (advanced approached holding companies): 18; FR Y–9LP: 338; FR Y– 9SP: 4,238; FR Y–9ES: 82; FR Y–9CS: 236. General description of report: The FR Y–9 family of reporting forms continues PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 13823 to be the primary source of financial data on HCs on which examiners rely between on-site inspections. Financial data from these reporting forms is used to detect emerging financial problems, review performance, conduct preinspection analysis, monitor and evaluate capital adequacy, evaluate HC mergers and acquisitions, and analyze an HC’s overall financial condition to ensure the safety and soundness of its operations. The FR Y–9C serves as the standardized financial statements for certain consolidated holding companies. The Board requires HCs to provide standardized financial statements to fulfill the Board’s statutory obligation to supervise these organizations. HCs file the FR Y–9C on a quarterly basis. Legal authorization and confidentiality: The FR Y–9 family of reports is authorized by section 5(c) of the Bank Holding Company Act,37 section 10(b) of the Home Owners’ Loan Act,38 section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),39 and section 165 of the Dodd-Frank Act.40 The obligation of covered institutions to report this information is mandatory. With respect to FR Y–9C, Schedule HI’s item 7(g) ‘‘FDIC deposit insurance assessments,’’ Schedule HC–P’s item 7(a) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to U.S. government agencies and government sponsored agencies,’’ and Schedule HC–P’s item 7(b) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to other parties’’ are considered confidential. Such treatment is appropriate because the data is not publicly available and the public release of this data is likely to impair the Board’s ability to collect necessary information in the future and could cause substantial harm to the competitive position of the respondent. Thus, this information may be kept confidential under exemptions (b)(4) of the Freedom of Information Act, which exempts from disclosure ‘‘trade secrets and commercial or financial information obtained from a person and privileged or confidential’’ (5 U.S.C. 552(b)(4)), and (b)(8) of the Freedom of Information Act, which exempts from disclosure information related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions (5 U.S.C. 552(b)(8)). 37 See 12 U.S.C. 1844(c). 12 U.S.C. 1467a(b). 39 See 12 U.S.C. 1850a(c)(1). 40 See 12 U.S.C. 5365. 38 See E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13824 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules Current actions: To implement the reporting requirements of the proposed rule, the Board proposes to revise the FR Y–9C, Schedule HC–R, Part I, Regulatory Capital Components and Ratios, to amend instructions for line items 11, 17, 24, and 33 to effectuate the deductions from regulatory capital for advanced approaches holding companies related to investments in covered debt instruments and excluded covered debt instruments as described above. Further, the Board proposes to revise the FR Y–9C, Schedule HC–R, Part II, Risk-Weighted Assets, to amend instructions for line items 2(a), 2(b), 7, and 8 to incorporate investments in covered debt instruments and excluded debt instruments, as applicable, by advanced approaches holding companies in their calculation of riskweighted assets. In addition, the Board proposes to revise the FR Y–9C, Schedule HC–R, Part I, Regulatory Capital Components and Ratios, to create new line items and instructions to allow the BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to publicly report their long-term debt (LTD) and total loss absorbing capacity (TLAC) in accordance, respectively, with 12 CFR 252, Subpart G and 12 CFR 252, Subpart P. Specifically, new line items would be created to report, as applicable, BHCs of U.S GSIBs’ and IHCs of foreign GSIBs’ (1.) outstanding eligible LTD (item 46); (2.) TLAC (item 47); (3.) LTD standardized risk-weighted asset ratio (item 48, column A); (4.) TLAC standardized risk-weighted asset ratio (item 48, column B); (5.) LTD advanced approaches risk-weighted asset ratio (item 49, column A); (6.) TLAC advanced approaches riskweighted asset ratio (item 49, column B); (7.) LTD leverage ratio (item 50, column A); (8.) TLAC leverage ratio (item 50, column B); (9.) LTD supplementary leverage ratio (item 51, column A); (10.) TLAC supplementary leverage ratio (item 51, column B); (11.) institution-specific TLAC risk-weighted asset buffer necessary to avoid limitations on distributions and discretionary bonus payments (item 53(a)); and (12.) TLAC leverage buffer necessary to avoid limitations on distributions and discretionary bonus payments (item 53(b)). Existing line items 46, 46(a), 46(b), 47, and 48 would be re-numbered, and respective instructions’ references updated, to account for the proposed inclusion of the new data collection items described above. Finally, the instructions for renumbered line item 55, ‘‘Distributions and discretionary bonus payments during the quarter,’’ would be amended VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 for the BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to reflect maximum payout amounts that take into account a firm’s TLAC risk-weighted and leverage buffers reported in proposed line items 53(a) and 53(b), respectively. The draft reporting forms and instructions are available on the Board’s public website at https:// www.federalreserve.gov/apps/ reportforms/review.aspx. Estimated average hours per response: FR Y–9C (non-advanced approaches holding companies): 46.43; FR Y–9C (advanced approached holding companies): 48.31; FR Y–9LP: 5.27; FR Y–9SP: 5.40; FR Y–9ES: 0.50; FR Y– 9CS: 0.50. Estimated annual burden hours: FR Y–9C (non advanced approaches holding companies): 54,230; FR Y–9C (advanced approached holding companies): 3,478; FR Y–9LP: 7,125; FR Y–9SP: 45,770; FR Y–9ES: 41; FR Y– 9CS: 472. In addition to the collection of information discussed above, the agencies would propose to modify in a future interagency reporting proposal the Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031 and FFIEC 041; OMB No. 1557–0081 (OCC), 7100–0036 (Board), and 3064– 0052) (FDIC)) and Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 1557–0239 (OCC), 7100–0319 (Board), and 3064–0159 (FDIC)) in a manner consistent with the changes described above to the FR Y– 9C. The Board would also propose to modify the Capital Assessments and Stress Testing (FR Y–14A and Q; OMB No. 7100–0341) in a manner consistent with the changes described above to the FR Y–9C. These modifications will be addressed in one or more separate Federal Register notice(s). B. Regulatory Flexibility Act Analysis 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 Small Business Administration (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. PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 As of December 31, 2017, the OCC supervises 886 small entities.41 As part of our analysis, we consider whether the proposal will have a significant economic impact on a substantial number of small entities, pursuant to the RFA Because the proposal only applies to advanced approaches banking organizations it will not impact any OCC-supervised small entities. Therefore, the proposal will not have a significant economic impact on a substantial number of small entities. 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.42 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 41 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. 42 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 3,304 small bank holding companies, 216 small savings and loan holding companies, and 566 small state member banks. E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules 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. The proposal would also make corresponding changes to the Board’s reporting forms. As discussed in detail above, the proposed rule would amend the capital rule. Under the proposed rule, the Board would require advanced approaches banking organizations to deduct investments in and exposures to covered debt instruments issued by covered BHCs, covered IHCs, and foreign GSIBs and their subsidiaries. These deductions may be subject to regulatory thresholds, as described in the Supplemental Information above. Deductions related to investments in and exposures to covered debt instruments would be effectuated by deduction from tier 2 capital according to the corresponding deduction approach, subject to applicable deduction thresholds. The Board has broad authority under the International Lending Supervision Act (ILSA) 43 and the PCA provisions of the Federal Deposit Insurance Act 44 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.45 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.46 In addition, the Board has broad authority to establish U.S.C. 3901–3911. U.S.C. 1831o. 45 12 U.S.C. 3907(a)(1). 46 12 U.S.C. 1831o(c)(2). regulatory capital standards for bank holding companies under the Bank Holding Company Act and the DoddFrank Reform and Consumer Protection Act (Dodd-Frank Act).47 The proposed rule would apply only to an advanced approaches Boardregulated institution. This is a depository institution, bank holding company, savings and loan holding company, or intermediate holding company with at least $250 billion in total consolidated assets or has consolidated on-balance sheet foreign exposures of at least $10 billion, or 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. The proposed rule would not apply to any small entities. 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 proposing to collect information from firms identified as advanced approaches banking organizations. These changes would include limited revisions to the Consolidated Financial Statements for Holding Companies (FR Y–9C) to provide for reporting of investments in covered debt securities and, as necessary, to reflect deduction of such investments. In addition, the FR Y–9C would be revised to provide for reporting of TLAC and LTD ratios and TLAC buffers under the TLAC Rule by covered BHCs and covered IHCs. These changes would not impact small entities. 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), 5 U.S.C. 601 et seq., generally requires 43 12 44 12 VerDate Sep<11>2014 16:27 Apr 05, 2019 47 See, e.g., sections 165 and 171 of the DoddFrank Act (12 U.S.C. 5365 and 12 U.S.C. 5371). Public Law 111–203, 124 Stat. 1376 (2010). Jkt 247001 PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 13825 an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities.48 However, a regulatory flexibility analysis is not required 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 of less than or equal to $550 million who are independently owned and operated or owned by a holding company with less than $550 million in total assets.49 For the reasons described below and under section 605(b) of the RFA, the FDIC certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. The FDIC supervises 3,604 institutions, of which 2,804 are considered small entities for the purposes of RFA.50 This proposed rule will affect all institutions subject to the advanced approaches regulations and their subsidiaries. The FDIC supervises two institutions that are subsidiaries of advanced approaches institutions and have $550 million or less in total assets.51 However, neither institution is considered a small entity for the purposes of RFA since they are owned by holding companies with over $550 million in total assets. Since this proposal does not affect any institutions that are defined as small entities for the purposes of the RFA, the FDIC certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. The FDIC invites comments on all aspects of the supporting information provided in this RFA section. In particular, would this rule have any significant effects on small entities that the FDIC has not identified? 48 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.’’ See 13 CFR 121.201 (as amended, effective December 2, 2014). ‘‘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.’’ See 13 CFR 121.103. 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. 50 Call Report data, March 2018. 51 Call Report data, March 2018. 49 The E:\FR\FM\08APP1.SGM 08APP1 13826 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules C. Plain Language Section 722 of the Gramm-LeachBliley Act 52 requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the proposed rule in a simple and straightforward manner, and invite comment on the use of plain language. For example: • Have the agencies organized the material to suit your needs? If not, how could they present the proposed rule more clearly? • Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated? • Do the regulations contain technical language or jargon 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 regulation easier to understand? If so, what changes would achieve that? • Would more, but shorter, sections be better? If so, which sections should be changed?’’ • What other changes can the agencies incorporate to make the regulation easier to understand? D. OCC Unfunded Mandates Reform Act of 1995 Determination jbell on DSK30RV082PROD with PROPOSALS 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.53 Accordingly, the OCC has not prepared a written statement to accompany this proposal. 52 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). 53 Based on available supervisory information, the OCC determined that no OCC-supervised advanced approaches institutions currently hold TLAC instruments. Thus, there would no cost of capital associated with the implementation of this proposal. The OCC estimates that, if implemented, non-mandated, but anticipated compliance costs associated with activities such as modifying procedures and internal audit would be less than $1 million. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 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),54 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.55 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 3 Administrative practice and procedure, Capital, National banks, Risk. 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Capital, Federal Reserve System, Holding companies. 12 CFR Part 324 Administrative practice and procedure, Banks, Banking, Capital adequacy, Savings associations, State non-member banks. Office of the Comptroller of the Currency For the reasons set out in the joint preamble, the OCC proposes to amend 12 CFR part 3 as follows. 54 12 55 12 PO 00000 U.S.C. 4802(a). U.S.C. 4802. Frm 00013 Fmt 4702 Sfmt 4702 PART 3—CAPITAL ADEQUACY STANDARDS 1. 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). 2. Amend § 3.2 by: a. Adding in alphabetical order the definitions of ‘‘Covered debt instrument’’ and ‘‘Excluded covered debt instrument;’’ ■ b. Revising the definition of ‘‘Indirect exposure;’’ ■ c. Adding in alphabetical order the definition of ‘‘Investment in a covered debt instrument;’’ and ■ d. Revising the definitions of ‘‘Investment in the capital of an unconsolidated financial institution’’ and ‘‘Synthetic exposure’’. The additions and revisions read as follows: ■ ■ § 3.2 Definitions. * * * * * Covered debt instrument means an unsecured debt instrument that is: (1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or, (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where, (i) The instrument has the purpose of absorbing losses or recapitalizing the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means a covered debt instrument held by a national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, for 30 business days or less for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits. * * * * * Indirect exposure means an exposure that arises from the national bank’s or Federal savings association’s investment in an investment fund which holds an investment in the national bank’s or Federal savings association’s own capital instrument, or an investment in the capital of an unconsolidated financial institution. For an advanced approaches national bank or Federal savings association, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means a national bank’s or Federal savings association’s net long position calculated in accordance with § 3.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the national bank or Federal savings association for five or fewer business days. * * * * * Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with § 3.22(h) in an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution or an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution, including direct, indirect, and synthetic exposures to capital instruments, excluding underwriting positions held by the national bank or Federal savings association for five or fewer business days. * * * * * Synthetic exposure means an exposure whose value is linked to the value of an investment in the national bank or Federal savings association’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 an advanced approaches national bank or Federal savings association, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * ■ 3. In § 3.22, revise paragraphs (c), (f), and (h) to read as follows: § 3.22 Regulatory capital adjustments and deductions. * * * * * (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the national bank’s or Federal savings association’s own capital instruments. A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own capital instruments, as follows: (i) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 3.20(b)(1); (ii) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own additional tier 1 capital instruments from its additional tier 1 capital elements; and (iii) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own tier 2 capital instruments from its tier 2 capital elements. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, a national bank or Federal savings association must make deductions from the component of capital for which the 23 The national bank or Federal savings association must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under § 3.20(d)(3). PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 13827 underlying instrument would qualify if it were issued by the national bank or Federal savings association itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the national bank or Federal savings association does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 3.20, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches national bank or Federal savings association, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 3.300(c)), the national bank or Federal savings association must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. E:\FR\FM\08APP1.SGM 08APP1 13828 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS (3) Reciprocal cross-holdings in the capital of financial institutions. (i) A national bank or Federal savings association must deduct an investment in the capital of another financial institution that the national bank or Federal savings association holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches national bank or Federal savings association must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Non-significant investments in the capital of unconsolidated financial institutions. (i) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 3.2) that, in the aggregate, exceed 10 percent of the sum of the national bank or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, a national bank or Federal savings association that underwrites a failed underwriting, for the period of time stipulated by the OCC, is not required to deduct a non24 With the prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 significant investment in the capital of an unconsolidated financial institution.25 (ii) An advanced approaches national bank or Federal savings association must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 3.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 3.2) issued by a financial institution in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 3.2), exceeds 10 percent of the sum of the advanced approaches national bank’s or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, an advanced approaches national bank or Federal savings association that underwrites a failed underwriting, for the period of time stipulated by the OCC, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(4) to the extent the investment is related to the failed underwriting.27 For any calculation under this paragraph (c)(4)(ii), an advanced approaches national bank or Federal savings association may exclude 25 Any non-significant investments in the capital of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. 26 With the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches a national bank or Federal savings association is not required to deduct a nonsignificant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 the amount of an investment in a covered debt instrument under paragraphs (c)(4)(iv) or (c)(4)(v) of this section, as applicable. (iii)(A) The amount to be deducted under this section from a specific capital component by a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association is equal to: (1) The national bank’s or Federal savings association’s aggregate nonsignificant investments in the capital of an unconsolidated financial institution exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the national bank’s or Federal savings association’s aggregate non-significant investments in the capital of unconsolidated financial institutions (in the form of such capital component) to the national bank’s or Federal savings association’s total nonsignificant investments in unconsolidated financial institutions. (B) For an advanced approaches national bank or Federal savings association, the amount to be deducted under this section from a specific capital component is equal to: (1) The national bank’s or Federal savings association’s aggregate nonsignificant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(4), exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the national bank’s or Federal savings association’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the national bank’s or Federal savings association’s total nonsignificant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iv) For purposes of applying the deduction under paragraph (c)(4)(ii) of this section, an advanced approaches national bank or Federal savings association that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must only include the amount of investments in covered debt instruments issued by financial institutions in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institutions to the extent that the E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules national bank’s or Federal savings association’s gross long position, in accordance with § 3.22(h)(2), in such covered debt instruments exceeds 5 percent of the common equity tier 1 capital of the national bank or Federal savings association. (v) Prior to applying the deduction under paragraph (c)(4)(ii): (A) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 3.2. (B) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) above, but is no longer held for the purpose of shortterm resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. (C) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, and has been held for more than thirty business days. (D) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with § 3.22(h)(2), of its aggregate investment in excluded covered debt instruments that exceeds 5 percent of the national bank’s or Federal savings association’s common equity tier 1 capital. (5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If a national bank or Federal savings association has a significant investment in the capital of an unconsolidated financial institution, the national bank or Federal savings association must deduct from capital any such investment issued by the VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 unconsolidated financial institution that is held by the institution other than an investment in the form of common stock by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association that underwrites a failed underwriting is not required to deduct a significant investment in the capital of an unconsolidated financial institution or an investment in covered debt instruments pursuant to this paragraph (c) if such investment is related to such failed underwriting. (ii) If an advanced approaches national bank or Federal savings association has a significant investment in the capital of an unconsolidated financial institution and has an investment in a covered debt instrument issued by the unconsolidated financial institution, the national bank or Federal savings association must also deduct its investment in the covered debt instrument by applying the corresponding deduction approach in paragraph (c)(2) of this section.29 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association that underwrites a failed underwriting is not required to deduct the investment in the covered debt instrument pursuant to this paragraph (c)(5) if such investment is related to such failed underwriting. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a national bank or Federal savings association does not 28 With prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association is not required to deduct a significant investment in the capital instrument of an unconsolidated financial institution under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the OCC. 29 With prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the OCC. PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 13829 have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the national bank or Federal savings association must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches national bank or Federal savings association in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph when applied to the capital ratio calculations in section 3.10(c). * * * * * (h) Net long position. (1) For purposes of calculating the amount of a national bank’s or Federal savings association’s investment in the national bank’s or Federal savings association’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the national bank or Federal savings association in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the national bank or Federal savings association, the adjusted carrying value of the exposure as that term is defined in § 3.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 3.2; (iii) For each indirect exposure, the national bank’s or Federal savings association’s carrying value of its investment in an investment fund or, alternatively: (A) A national bank or Federal savings association may, with the prior approval of the OCC, use a conservative estimate of the amount of its investment in the national bank’s or Federal savings association’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) A national bank or Federal savings association may calculate the gross long position for an indirect exposure by multiplying the national bank’s or Federal savings association’s carrying E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13830 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in the national bank’s or Federal savings association’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings of the investment in the national bank’s or Federal savings association’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in an covered debt instrument, as applicable; and (iv) For a synthetic exposure, the amount of the national bank’s or Federal savings association’s loss on the exposure if the reference capital instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the national bank’s or Federal savings association’s Call Report, if the national bank or Federal savings association has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the national bank or Federal savings association exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in a national bank’s or Federal savings association’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and an investment in a covered debt instrument under paragraphs (c)(4) and (c)(5) of this section: (A) The national bank or Federal savings association may only net a short VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 position against a long position in an investment in the national bank’s or Federal savings association’s own capital instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the national bank’s or Federal savings association’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the national bank’s or Federal savings association’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the national bank’s or Federal savings association’s Call Report, and the hedge is deemed effective by the national bank’s or Federal savings association’s internal control processes, which have not been found to be inadequate by the OCC. * * * * * Board of Governors of the Federal Reserve System For the reasons set forth in the joint preamble, the Board proposes to amend part 217 of chapter II of title 12 of the Code of Federal Regulations as follows: PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q). 1. The authority citation for part 217 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371. 2. Amend § 217.2 by: a. Adding in alphabetical order the definitions of ‘‘Covered debt ■ ■ PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 instrument’’ and ‘‘Excluded covered debt instrument;’’ ■ b. Revising the definition of ‘‘Indirect exposure;’’ ■ c. Adding in alphabetical order the definition of ‘‘Investment in a covered debt instrument;’’ and ■ d. Revising the definitions of ‘‘Investment in the capital of an unconsolidated financial institution’’ and ‘‘Synthetic exposure’’. The additions and revisions to read as follows: § 217.2 Definitions. * * * * * Covered debt instrument means an unsecured debt instrument that is: (1) Issued by a global systemically important BHC and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where, (i) The instrument has the purpose of absorbing losses or recapitalizing the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means a covered debt instrument held by a global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 for 30 business days or less for the purpose of short- E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules term resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. * * * * * Indirect exposure means an exposure that arises from the Board-regulated institution’s investment in an investment fund which holds an investment in the Board-regulated institution’s own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches Boardregulated institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means a Board-regulated institution’s net long position calculated in accordance with § 217.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the Board-regulated institution for five or fewer business days. * * * * * Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with § 217.22(h) in an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution or an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution, including direct, indirect, and synthetic exposures to capital instruments, excluding underwriting positions held by the Board-regulated institution for five or fewer business days. * * * * * Synthetic exposure means an exposure whose value is linked to the value of an investment in the Boardregulated institution’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches Boardregulated institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * ■ 3. In § 217.22, re-designate footnote 28 as footnote 30 in paragraph (d)(2) and revise paragraphs (c), (f), and (h) to read as follows: § 217.22 Regulatory capital adjustments and deductions. * * * VerDate Sep<11>2014 * * 16:27 Apr 05, 2019 Jkt 247001 (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the Board-regulated institution’s own capital or covered debt instruments. A Board-regulated institution must deduct an investment in the Board-regulated institution’s own capital instruments, and an advanced approaches Boardregulated institution also must deduct an investment in the Board-regulated institution’s own covered debt instruments, as follows: 23 The Board-regulated institution must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under §217.20(d)(3). (i) A Board-regulated institution must deduct an investment in the Boardregulated institution’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 217.20(b)(1); (ii) A Board-regulated institution must deduct an investment in the Boardregulated institution’s own additional tier 1 capital instruments from its additional tier 1 capital elements; (iii) A Board-regulated institution must deduct an investment in the Board-regulated institution’s own tier 2 capital instruments from its tier 2 capital elements; and (iv) An advanced approaches Boardregulated institution must deduct an investment in the institution’s own covered debt instruments from its tier 2 capital elements. If the advanced approaches Board-regulated institution does not have a sufficient amount of tier 2 capital to effect this deduction, the institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, a Board-regulated institution must make deductions from the component of PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 13831 capital for which the underlying instrument would qualify if it were issued by the Board-regulated institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the Boardregulated institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 217.20, the Board-regulated institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches Board-regulated institution, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 217.300(c)), the Boardregulated institution must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer’s E:\FR\FM\08APP1.SGM 08APP1 13832 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross-holdings in the capital of financial institutions. (i) A Board-regulated institution must deduct an investment in the capital of another financial institution that the Board-regulated institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches Boardregulated institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Non-significant investments in the capital of unconsolidated financial institutions. (i) A Board-regulated institution that is not an advanced approaches Board-regulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that, in the aggregate, exceed 10 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, a Board-regulated institution that underwrites a failed underwriting, for the period of time stipulated by the Board, is not required to deduct a non-significant investment in the capital of an unconsolidated financial institution.25 24 With the prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board. 25 Any non-significant investments in the capital of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. (ii) An advanced approaches Boardregulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 217.2) issued by a financial institution in which the Boardregulated institution does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 217.2), exceeds 10 percent of the sum of the advanced approaches Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, an advanced approaches Board-regulated institution that underwrites a failed underwriting, for the period of time stipulated by the Board, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(4) to the extent the investment is related to the failed underwriting.27 For any calculation under paragraph (c)(4)(ii) of this section, an advanced approaches Board-regulated institution may exclude the amount of an investment in a covered debt instrument under paragraphs (c)(4)(iv) or (c)(4)(v) of this section, as applicable. 26 With the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Boardregulated institution is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board. PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. (iii)(A) The amount to be deducted under this section from a specific capital component by a Board-regulated institution that is not an advanced approaches Board-regulated institution is equal to: (1) The Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the Board-regulated institution’s aggregate non-significant investments in the capital of unconsolidated financial institutions (in the form of such capital component) to the Board-regulated institution’s total non-significant investments in unconsolidated financial institutions. (B) For an advanced approaches Board-regulated institution, the amount to be deducted under this section from a specific capital component is equal to: (1) The Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(4), exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the Board-regulated institution’s total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iv) For purposes of applying the deduction under paragraph (c)(4)(ii) of this section, an advanced approaches Board-regulated institution that is not a global systemically important BHC or a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must only include the amount of investments in covered debt instruments issued by financial institutions in which the Board-regulated institution does not have a significant investment in the capital of the unconsolidated financial institutions to the extent that the Boardregulated institution’s gross long position, in accordance with E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules § 217.22(h)(2), in such covered debt instruments exceeds 5 percent of the common equity tier 1 capital of the Board-regulated institution. (v) Prior to applying the deduction under paragraph (c)(4)(ii) of this section: (A) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 217.2. (B) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, but is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. (C) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, and has been held for more than thirty business days. (D) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with § 217.22(h)(2), of its aggregate investment in excluded covered debt instruments that exceeds 5 percent of the Board-regulated institution’s common equity tier 1 capital. (5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If a Board-regulated institution has a significant investment in the capital of an unconsolidated financial institution, the Boardregulated institution must deduct from capital any such investment issued by VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 the unconsolidated financial institution that is held by the institution other than an investment in the form of common stock by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, for the period of time stipulated by the Board, a Boardregulated institution that underwrites a failed underwriting is not required to deduct a significant investment in the capital of an unconsolidated financial institution or an investment in covered debt instruments pursuant to this paragraph (c) if such investment is related to such failed underwriting. 28 With prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution is not required to deduct a significant investment in the capital instrument of an unconsolidated financial institution under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the Board. (ii) If an advanced approaches Boardregulated institution has a significant investment in the capital of an unconsolidated financial institution and has an investment in a covered debt instrument issued by the unconsolidated financial institution, the Board-regulated institution must also deduct its investment in the covered debt instrument by applying the corresponding deduction approach in paragraph (c)(2) of this section.29 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Board-regulated institution that underwrites a failed underwriting is not required to deduct the investment in the covered debt instrument pursuant to this paragraph (c)(5) if such investment is related to such failed underwriting. 29 With prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Boardregulated institution is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the Board. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 13833 deduction approach, if a Boardregulated institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the Board-regulated institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches Board-regulated institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph when applied to the capital ratio calculations in section 217.10(c). * * * * * (h) Net long position. (1) For purposes of calculating the amount of a Boardregulated institution’s investment in the Board regulated institution’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the Board-regulated institution in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the Board-regulated institution, the adjusted carrying value of the exposure as that term is defined in § 217.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 217.2; (iii) For each indirect exposure, the Board-regulated institution’s carrying value of its investment in an investment fund or, alternatively: (A) A Board-regulated institution may, with the prior approval of the Board, use a conservative estimate of the amount of its investment in the Boardregulated institution’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) A Board-regulated institution may calculate the gross long position for an indirect exposure by multiplying the Board-regulated institution’s carrying value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13834 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules the Board-regulated institution’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings of the investment in the Boardregulated institution’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in an covered debt instrument, as applicable; and (iv) For a synthetic exposure, the amount of the Board-regulated institution’s loss on the exposure if the reference capital instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the Board-regulated institution’s Call Report, for a state member bank, or FR Y–9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, if the Board-regulated institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the Board-regulated institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in a Boardregulated institution’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and an investment in a covered debt instrument under paragraphs (c)(1), (c)(4), and (c)(5) of this section: (A) The Board-regulated institution may only net a short position against a long position in an investment in the Board-regulated institution’s own VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 capital instrument or own covered debt instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the Board-regulated institution’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the Boardregulated institution’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or offbalance sheet) on the Board-regulated institution’s Call Report, for a state member bank, or FR Y–9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, and the hedge is deemed effective by the Boardregulated institution’s internal control processes, which have not been found to be inadequate by the Board. * * * * * 12 CFR Part 324 Federal Deposit Insurance Corporation For the reasons set out in the joint preamble, the FDIC proposes to amend 12 CFR part 324 as follows. PART 324—CAPITAL ADEQUACY OF FDIC—SUPERVISED INSTITUTIONS * * * * * 12 CFR Part 324 Authority and Issuance For the reasons set out in the joint preamble, the FDIC proposes to amend 12 CFR part 324 as follows: PART 324—CAPITAL ADEQUACY OF FDIC–SUPERVISED INSTITUTIONS 1. The authority citation for part 324 continues to read as follows: ■ PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 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). 2. In § 324.2: a. Add in alphabetical order the definitions of ‘‘Covered debt instrument’’ and ‘‘Excluded covered debt instrument;’’ ■ b. Revise the definition of ‘‘Indirect exposure’’; ■ c. Add in alphabetical order the definition of ‘‘Investment in a covered debt instrument’’; ■ d. Revise the definitions of ‘‘Investment in the capital of an unconsolidated financial institution’’ and ‘‘Synthetic exposure’’. The additions and revisions read as follows: ■ ■ § 324.2 Definitions. * * * * * Covered debt instrument means an unsecured debt instrument that is: (1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where, (i) The instrument has the purpose of absorbing losses or recapitalizing the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means a covered debt instrument held by an FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, for 30 business days or less for the purpose of shortterm resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. * * * * * Indirect exposure means an exposure that arises from the FDIC-supervised institution’s investment in an investment fund which holds an investment in the FDIC-supervised institution’s own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches FDICsupervised institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means an FDIC-supervised institution’s net long position calculated in accordance with § 324.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the FDIC-supervised institution for five or fewer business days. * * * * * Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with § 324.22(h) in an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution or an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution, including direct, indirect, and synthetic exposures to capital instruments, excluding underwriting positions held by the FDIC-supervised institution for five or fewer business days. * * * * * Synthetic exposure means an exposure whose value is linked to the value of an investment in the FDICsupervised institution’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches FDIC- VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 supervised institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * ■ 3. Amend § 324.22 by re-designating footnotes 27 and 28 in paragraph (d) as footnotes 30 and 31, and revising paragraphs (c) (f), and (h) to read as follows. § 324.22 Regulatory capital adjustments and deductions. * * * * * (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the FDIC-supervised institution’s own capital instruments. An FDICsupervised institution must deduct an investment in the FDIC-supervised institution’s own capital instruments, as follows: (i) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 324.20(b)(1); (ii) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own additional tier 1 capital instruments from its additional tier 1 capital elements; and (iii) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own tier 2 capital instruments from its tier 2 capital elements. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, an FDIC-supervised institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the FDIC-supervised 23 The FDIC-supervised institution must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under § 324.20(d)(3). PO 00000 Frm 00022 Fmt 4702 Sfmt 4702 13835 institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the FDIC-supervised institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the FDICsupervised institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 324.20, the FDIC-supervised institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches FDIC-supervised institution, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 324.300(c)), the FDICsupervised institution must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross-holdings in the capital of financial institutions. (i) An E:\FR\FM\08APP1.SGM 08APP1 13836 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS FDIC-supervised institution must deduct an investment in the capital of another financial institution that the FDIC-supervised institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches FDICsupervised institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Non-significant investments in the capital of unconsolidated financial institutions. (i) An FDIC-supervised institution that is not an advanced approaches FDIC-supervised institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 324.2) that, in the aggregate, exceed 10 percent of the sum of the FDIC-supervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, an FDICsupervised institution that underwrites a failed underwriting, for the period of time stipulated by the FDIC, is not required to deduct a non-significant investment in the capital of an unconsolidated financial institution.25 24 With the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an FDICsupervised institution is not required to deduct a non-significant investment in the captial instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the FDIC. 25 Any non-significant investments in the captial of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 (ii) An advanced approaches FDICsupervised institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 324.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 324.2) issued by a financial institution in which the FDICsupervised institution does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 324.2), exceeds 10 percent of the sum of the advanced approaches FDIC-supervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, an advanced approaches FDIC-supervised institution that underwrites a failed underwriting, for the period of time stipulated by the FDIC, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(4) to the extent the investment is related to the failed underwriting.27 For any calculation under this paragraph (c)(4)(ii), an advanced approaches FDICsupervised institution may exclude the amount of an investment in a covered debt instrument under paragraphs (c)(4)(iv) or (c)(4)(v) of this section, as applicable. (iii)(A) The amount to be deducted under this section from a specific capital component by an FDICsupervised institution that is not an or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. 26 With the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDIC-supervised institution is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the FDIC. 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 advanced approaches FDIC-supervised institution is equal to: (1) The FDIC-supervised institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the FDIC-supervised institution’s aggregate non-significant investments in the capital of unconsolidated financial institutions (in the form of such capital component) to the FDIC-supervised institution’s total non-significant investments in unconsolidated financial institutions. (B) For an advanced approaches FDICsupervised institution, the amount to be deducted under this section from a specific capital component is equal to: (1) The FDIC-supervised institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(4), exceeding the 10 percent threshold for non-significant investments, multiplied by (2) The ratio of the FDIC-supervised institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the FDIC-supervised institution’s total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iv) For purposes of applying the deduction under paragraph (c)(4)(ii), an advanced approaches FDIC-supervised institution that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must only include the amount of investments in covered debt instruments issued by financial institutions in which the FDICsupervised institution does not have a significant investment in the capital of the unconsolidated financial institutions to the extent that the FDICsupervised institution’s gross long position, in accordance with § 324.22(h)(2), in such covered debt instruments exceeds 5 percent of the common equity tier 1 capital of the FDIC-supervised institution. (v) Prior to applying the deduction under paragraph (c)(4)(ii): (A) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an E:\FR\FM\08APP1.SGM 08APP1 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules jbell on DSK30RV082PROD with PROPOSALS excluded covered debt instrument, as defined in § 324.2. (B) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, but is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. (C) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) above, and has been held for more than thirty business days. (D) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with § 324.22(h)(2), of its aggregate investment in excluded covered debt instruments that exceeds 5 percent of the FDIC-supervised institution’s common equity tier 1 capital. (5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If an FDIC-supervised institution has a significant investment in the capital of an unconsolidated financial institution, the FDICsupervised institution must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the institution other than an investment in the form of common stock by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of 28 With prior written approval of the FDIC, for the period of time stipulated by the FDIC, and FDICsupervised institution is not required to deduct a significant investment in the capital instrument of an unconsolidated financial institution under this paragraph (c)(5) or otherwise under this ssection if such investment is made for the purpose of providing financial support to the financial institution as determined by the FDIC. VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an FDICsupervised institution that underwrites a failed underwriting is not required to deduct a significant investment in the capital of an unconsolidated financial institution or an investment in covered debt instruments pursuant to this paragraph (c) if such investment is related to such failed underwriting. (ii) If an advanced approaches FDICsupervised institution has a significant investment in the capital of an unconsolidated financial institution and has an investment in a covered debt instrument issued by the unconsolidated financial institution, the FDIC-supervised institution must also deduct its investment in the covered debt instrument by applying the corresponding deduction approach in paragraph (c)(2) of this section.29 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDIC-supervised institution that underwrites a failed underwriting is not required to deduct the investment in the covered debt instrument pursuant to this paragraph (c)(5) if such investment is related to such failed underwriting. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if an FDICsupervised institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the FDIC-supervised institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches FDIC-supervised institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph when applied to the capital ratio calculations in section 324.10(c). * * * * * 29 With prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDIC-supervised institution is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the FDIC. PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 13837 (h) Net long position. (1) For purposes of calculating the amount of an FDICsupervised institution’s investment in the FDIC-supervised institution’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the FDIC-supervised institution in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the FDIC-supervised institution, the adjusted carrying value of the exposure as that term is defined in § 324.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 324.2; (iii) For each indirect exposure, the FDIC-supervised institution’s carrying value of its investment in an investment fund or, alternatively: (A) An FDIC-supervised institution may, with the prior approval of the FDIC, use a conservative estimate of the amount of its investment in the FDICsupervised institution’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) An FDIC-supervised institution may calculate the gross long position for an indirect exposure by multiplying the FDIC-supervised institution’s carrying value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in the FDIC-supervised institution’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings of the investment in the FDICsupervised institution’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in an covered debt instrument, as applicable; and (iv) For a synthetic exposure, the amount of the FDIC-supervised E:\FR\FM\08APP1.SGM 08APP1 jbell on DSK30RV082PROD with PROPOSALS 13838 Federal Register / Vol. 84, No. 67 / Monday, April 8, 2019 / Proposed Rules institution’s loss on the exposure if the reference capital instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the FDIC-supervised institution’s Call Report, if the FDIC-supervised institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the FDIC-supervised institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in an FDICsupervised institution’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and an investment in a covered debt instrument under paragraphs (c)(4) and (c)(5) of this section: (A) The FDIC-supervised institution may only net a short position against a long position in an investment in the FDIC-supervised institution’s own capital instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the FDIC-supervised institution’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the FDICsupervised institution’s own capital instrument, an investment in the capital instrument of an unconsolidated VerDate Sep<11>2014 16:27 Apr 05, 2019 Jkt 247001 financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or offbalance sheet) on the FDIC-supervised institution’s Call Report, and the hedge is deemed effective by the FDICsupervised institution’s internal control processes, which have not been found to be inadequate by the FDIC. * * * * * Dated: September 11, 2018. Joseph M. Otting, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, March 22, 2019. Ann E. Misback, Secretary of the Board. Dated at Washington, DC on September 19, 2018. By order of the Board of Directors. Federal Deposit Insurance Corporation. Valerie J. Best, Assistant Executive Secretary. [FR Doc. 2019–06344 Filed 4–5–19; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 25 [Docket No. FAA–2013–0772; Notice No. 25– 19–01–SC] Special Conditions: Embraer EMB–550 Airplane; Flight Envelope Protection: Normal Load Factor (g) Limiting Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed special conditions. AGENCY: This action proposes an amendment to special conditions for the Embraer EMB–550 airplane. This airplane will have novel or unusual design features when compared to the state of technology envisioned in the airworthiness standards for transport category airplanes. This design feature is associated with an electronic flight control system that prevents the pilot from inadvertently or intentionally exceeding the positive or negative airplane limit load factor. The applicable airworthiness regulations do not contain adequate or appropriate SUMMARY: PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 safety standards for this design feature. These proposed special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards. DATES: Send comments on or before April 29, 2019. ADDRESSES: Send comments identified by Docket No. FAA–2013–0772 using any of the following methods: • Federal eRegulations Portal: Go to http://www.regulations.gov/ and follow the online instructions for sending your comments electronically. • Mail: Send comments to Docket Operations, M–30, U.S. Department of Transportation (DOT), 1200 New Jersey Avenue SE., Room W12–140, West Building Ground Floor, Washington, DC, 20590–0001. • Hand Delivery or Courier: Take comments to Docket Operations in Room W12–140 of the West Building Ground Floor at 1200 New Jersey Avenue SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • Fax: Fax comments to Docket Operations at 202–493–2251. Privacy: The FAA will post all comments it receives, without change, to http://www.regulations.gov/, including any personal information the commenter provides. Using the search function of the docket website, anyone can find and read the electronic form of all comments received into any FAA docket, including the name of the individual sending the comment (or signing the comment for an association, business, labor union, etc.). DOT’s complete Privacy Act Statement can be found in the Federal Register published on April 11, 2000 (65 FR 19477–19478). Docket: Background documents or comments received may be read at http://www.regulations.gov/ at any time. Follow the online instructions for accessing the docket or go to Docket Operations in Room W12–140 of the West Building Ground Floor at 1200 New Jersey Avenue SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. FOR FURTHER INFORMATION CONTACT: Joe Jacobsen, Airplane & Flight Crew Interface Section, AIR–671, Transport Standards Branch, Policy and Innovation Division, Aircraft Certification Service, Federal Aviation Administration, 2200 South 216th Street, Des Moines, Washington 98198; telephone and fax 206–231–3158; email joe.jacobsen@faa.gov. SUPPLEMENTARY INFORMATION: E:\FR\FM\08APP1.SGM 08APP1

Agencies

[Federal Register Volume 84, Number 67 (Monday, April 8, 2019)]
[Proposed Rules]
[Pages 13814-13838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06344]


=======================================================================
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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2018-0019]
RIN 1557-AE38

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q; Docket No. R-1655]
RIN 7100-AF43

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AE79


Regulatory Capital Treatment for Investments in Certain Unsecured 
Debt Instruments of Global Systemically Important U.S. Bank Holding 
Companies, Certain Intermediate Holding Companies, and Global 
Systemically Important Foreign Banking Organizations

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

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are 
inviting public comment on a notice of proposed rulemaking (proposal) 
that would address an advanced approaches banking organization's 
regulatory capital treatment of an investment in unsecured debt 
instruments issued by foreign or U.S. global systemically important 
banking organizations (GSIBs) for the purposes of meeting minimum total 
loss absorbing capacity (TLAC) and, where applicable, long-term debt 
(LTD) requirements, or unsecured debt instruments issued by GSIBs that 
are pari passu or subordinated to such debt instruments. Under the 
proposal, investments by an advanced approaches banking organization in 
such unsecured debt instruments generally would be subject to deduction 
from the advanced approaches banking organization's own regulatory 
capital. The proposal would reduce both interconnectedness within

[[Page 13815]]

the financial system and systemic risk. The Board is proposing changes 
to regulatory reporting requirements resulting from the proposal. The 
Board is also proposing to require that banking organizations subject 
to minimum TLAC and LTD requirements under Board regulations publicly 
disclose their TLAC and LTD issuances in a manner described in this 
proposal.

DATES: Comments must be received by June 7, 2019.

ADDRESSES: Comments should be directed to:
    OCC: Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Regulatory Capital Treatment for Investments in Certain Unsecured 
Debt Instruments of Global Systemically Important U.S. Bank Holding 
Companies, Certain Intermediate Holding Companies, and Global 
Systemically Important Foreign 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-2018-0019'' 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: [email protected].
     Mail: Chief Counsel's Office, 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-2018-0019'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them 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-2018-0019'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments can be filtered by 
clicking on ``View All'' 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. Supporting 
materials may be viewed by clicking on ``Open Docket Folder'' and then 
clicking on ``Supporting Documents.'' 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-1655, 
RIN 7100-AF43, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. 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 http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or 
to remove personally identifiable information at the commenter's 
request. Accordingly, comments will not be edited to remove any 
identifying or contact information. Public comments may also be viewed 
electronically or in paper in Room 146, 1709 New York Avenue 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-AE79 by any 
of the following methods:
     Agency Website: http://www.fdic.gov/regulations/laws/federal/ Follow instructions for submitting comments on the Agency 
website.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal 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 Building (located 
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Include the RIN 3064-AE79 on the 
subject line of the message.
     Public Inspection: All comments received must include the 
agency name and RIN 3064-AE79 for this rulemaking. All comments 
received will be posted without change to http://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: David Elkes, Risk Expert (202) 649-6984; or Christine Smith, 
Risk Expert (202) 649-6985, Capital and Regulatory Policy; or Carl 
Kaminski, Special Counsel, 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; Mark Handzlik, Senior 
Supervisory Financial Analyst (202) 475-6636 or Sean Healey, 
Supervisory Financial Analyst, (202) 912-4611, Division of Supervision 
and Regulation; or Benjamin McDonough, Assistant General Counsel (202) 
452-2036; or Mark Buresh, Counsel (202) 452-5270, 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.

[[Page 13816]]

    FDIC: Benedetto Bosco, Chief, Capital Policy Section; 
[email protected]; David Riley, Senior Policy Analyst, Capital Policy 
Section; [email protected]; Stephanie Lorek, Senior Policy Analyst, 
[email protected]; [email protected]; Capital Markets Branch, 
Division of Risk Management Supervision, (202) 898-6888; or Michael 
Phillips, Counsel, [email protected]; or Catherine Wood, Counsel, 
[email protected]; Supervision and Legislation Branch, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction and Summary of the Proposal
    A. Background on Capital Requirements
    B. Background on TLAC and LTD Requirements
    C. 2015 Proposal and General Summary of Comments
    D. Overview and Scope of Application of the Proposal
II. Proposed Regulatory Capital Treatment for Advanced Approaches 
Banking Organizations' Investments in Covered Debt Instruments
    A. Amendments to Definitions
    B. Investments in Covered Banking Organization's Own Covered 
Debt Instruments and Reciprocal Cross Holdings
    C. Significant and Non-Significant Investments in Covered Debt 
Instruments
    D. Corresponding Deduction Approach
    E. Net Long Position
III. Technical Amendment and Additional Requests for Comment
IV. Proposed Changes to Regulatory Reporting
    A. Deductions from Tier 2 Capital Related to Investments in 
Covered Debt Instruments and Excluded Covered Debt Instruments
    B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered 
IHCs
V. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Riegle Community Development and Regulatory Improvement Act 
of 1994

I. Introduction and Summary of the Proposal

A. Background on Capital Requirements

    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) 
impose minimum capital requirements on banking organizations.\1\ These 
requirements include minimum risk-based and leverage capital ratios. 
The regulatory capital ratios measure different definitions of 
regulatory capital relative to total and risk-weighted assets.\2\ The 
numerators of the regulatory capital ratios include various adjustments 
and deductions to GAAP-based regulatory capital components.
---------------------------------------------------------------------------

    \1\ 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, 
but excluding banking organizations subject to the Board's Small 
Bank Holding Company Policy Statement (12 CFR part 225, appendix C), 
and 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.
    A banking organization is an advanced approaches banking 
organization if it has total 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, 78 FR 62018, 62204 (October 11, 2013), 78 FR 
55340, 55523 (September 10, 2013). See also 12 CFR part 3 (OCC); 12 
CFR part 217 (Board); and 12 CFR part 324 (FDIC). The agencies 
recently proposed revisions to the capital rule that would amend the 
advanced approaches banking organization threshold and would tailor 
the application of capital requirements based on an institution's 
risk profile (Interagency Tailoring NPR). If the Interagency 
Tailoring NPR is finalized as proposed, it would affect the scope of 
application of the deduction of investments in certain debt 
instruments issued by GSIBs in this notice of proposed rulemaking 
(NPR). See 83 FR 66024 (December 21, 2018). See discussion in 
section I.D of this NPR's preamble.
    \2\ See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12 
CFR 324.10(a) (FDIC). In addition to the generally applicable 
leverage ratio, advanced approaches banking organizations are 
subject to a supplementary leverage ratio, which measures a banking 
organization's tier 1 capital relative to its on-balance sheet and 
certain off-balance sheet exposures.
---------------------------------------------------------------------------

    The agencies' capital rule includes two broad categories of 
deductions related to investments in the capital instruments of 
financial institutions. First, it requires a banking organization to 
deduct any investment in its own regulatory capital instruments and any 
investment in regulatory capital instruments held reciprocally with 
another financial institution.\3\ Second, it requires a banking 
organization to deduct investments in capital instruments issued by 
unconsolidated financial institutions that would qualify as regulatory 
capital if issued by the banking organization itself.\4\ For the 
purpose of the latter deduction, a banking organization may be required 
to deduct the entire amount of the investment, or it may be required to 
deduct only the portion of the investment that exceeds a certain 
threshold.\5\ These deductions are intended to reduce 
interconnectedness and contagion risk among banks by discouraging 
banking organizations from investing in the regulatory capital of 
another financial institution.
---------------------------------------------------------------------------

    \3\ See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board); 
and 12 CFR 324.22(c)(1) (FDIC).
    \4\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 
and 12 CFR 324.22(c)(2) (FDIC).
    \5\ See 12 CFR 3.22(c)(3) through (5) (OCC); 12 CFR 217.22(c)(3) 
through (5) (Board); and 12 CFR 324.22(c)(3) through (5) (FDIC).
---------------------------------------------------------------------------

    For purposes of the deductions related to investments in the 
capital instruments of financial institutions, a banking organization 
must make the deduction from the component of regulatory capital for 
which the instrument qualifies or would qualify if it were issued by 
the banking organization that is holding the exposure.\6\ For example, 
a banking organization that owns less than 10 percent of the common 
stock of an unaffiliated banking organization (non-significant 
investment in the capital of unconsolidated financial institution), and 
is invested in tier 2 instruments issued by the unaffiliated banking 
organization, must deduct from tier 2 capital the amount, if any, by 
which the investment exceeds 10 percent of its own common equity tier 1 
capital when combined with other non-significant investments in the 
capital of unconsolidated financial institutions. Any non-significant 
investments in the capital of unconsolidated financial institutions 
below the 10 percent threshold must be assigned their appropriate risk-
weight.\7\
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    \6\ See 12 CFR 3.22(c)(1) and (2) (OCC); 12 CFR 217.22(c)(1) and 
(2) (Board); and 12 CFR 324.22(c)(1) and (2) (FDIC).
    \7\ See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 
12 CFR part 217, subparts D, E, and F, as applicable (FRB); and 12 
CFR part 324, subparts D, E, or F, as applicable (FDIC).
---------------------------------------------------------------------------

B. Background on TLAC and LTD Requirements

    In October 2015, the Board invited public comment on a notice of 
proposed rulemaking (2015 proposal) to require the largest domestic and 
foreign banking organizations operating in the United States to 
maintain a minimum amount of total loss-absorbing capacity (TLAC), 
consisting of tier 1 capital (excluding minority interest) and certain 
long-term debt instruments (LTD).\8\ The proposal had two core 
objectives: (1) To improve the resiliency of covered banking 
organizations (as defined below); and (2) to enhance the resolvability 
of covered banking organizations in the event of their failure or 
material financial distress. In December 2016, the Board issued a final 
rule (TLAC Rule) that was

[[Page 13817]]

substantially consistent with the 2015 proposal.\9\ The TLAC and LTD 
requirements set forth in the TLAC Rule take effect on January 1, 2019.
---------------------------------------------------------------------------

    \8\ See 80 FR 74926 (November 30, 2015).
    \9\ See 82 FR 8266 (January 24, 2017).
---------------------------------------------------------------------------

    The TLAC and LTD requirements in the TLAC Rule build on, and serve 
as a complement to, the Board's regulatory capital requirements.\10\ 
Regulatory capital requirements are intended to ensure that a banking 
organization has sufficient capital to remain a going concern. The 
objective of the TLAC and LTD requirements is to enhance financial 
stability by reducing the impact stemming from the failure of certain 
large and systemically important banking organizations by requiring 
such organizations to have sufficient loss-absorbing capacity on both a 
going-concern and a gone-concern basis. The TLAC and LTD requirements 
in the TLAC Rule apply to a U.S. top-tier bank holding company 
identified under the Board's rules as a global systemically important 
bank holding company (covered BHC) or a top-tier U.S. intermediate 
holding company subsidiary of a global systemically important foreign 
banking organization (foreign GSIB) with $50 billion or more in U.S. 
non-branch assets (covered IHC) (collectively, covered banking 
organizations) because the failure or material financial distress of 
covered banking organizations could substantially impair the 
functioning of the U.S. financial system.\11\
---------------------------------------------------------------------------

    \10\ See 12 CFR part 217.
    \11\ In 2015, the Financial Stability Board (FSB), in 
consultation with the Basel Committee on Banking Supervision (BCBS), 
issued an international TLAC standard, titled, Principles on Loss-
absorbing and Recapitalisation Capacity of G-SIBs in Resolution; 
Total Loss-absorbing Capacity Term Sheet (TLAC Term Sheet). The TLAC 
Term Sheet sets forth the minimum TLAC standards applicable to all 
global systemically important banking organizations (GSIBs), for 
consultation and implementation by member jurisdictions. The Board's 
TLAC Rule is generally consistent with the TLAC Term Sheet. A 
foreign GSIB is subject to the TLAC requirements established by its 
home jurisdiction pursuant to the TLAC Term Sheet, which may vary in 
certain respects from the Board's TLAC Rule.
---------------------------------------------------------------------------

    The requirements in the TLAC Rule use many of the same measures 
that are set forth in the capital rule. For example, the TLAC Rule 
includes both risk-based and leverage-based requirements, including 
buffers on top of the minimum TLAC requirements that function in a 
manner similar to the capital conservation buffer in the capital 
rule.\12\ The risk-based measures in the TLAC Rule help to ensure that 
the amount of TLAC maintained by a covered banking organization is 
commensurate with its overall risks, while the leverage-based measures 
in the TLAC Rule act as a backstop to the risk-based measures.
---------------------------------------------------------------------------

    \12\ Covered banking organizations that do not meet a TLAC 
buffer face limitations on capital distributions and discretionary 
bonus payments (in a manner similar to the capital conservation 
buffer restrictions in the capital rule).
---------------------------------------------------------------------------

    LTD, which count in regulatory capital in limited amounts if they 
comply with certain eligibility criteria, are capable of absorbing 
losses in resolution. This is because the debt holders' claim on a 
company's assets may not receive full payment in a resolution, 
receivership, insolvency, or similar proceeding, which would increase 
the size of a company's assets relative to the size of its liabilities 
and thereby increase the company's equity. This potential loss-
absorbing capacity of LTD is part of the rationale for the deduction 
approach for investments in such debt instruments under this proposal.
    The TLAC Rule requires covered BHCs to maintain outstanding minimum 
levels of ``external TLAC'' and ``external LTD.'' External TLAC is the 
sum of the tier 1 capital instruments issued directly by the covered 
BHC (excluding minority interests) and the external LTD issued by the 
covered BHC. Under the TLAC Rule, external LTD is generally unsecured 
debt that is issued directly by a covered BHC, has no features that 
would interfere with a smooth resolution proceeding, has a remaining 
maturity of at least one year, and is governed by U.S. law, among other 
provisions.\13\
---------------------------------------------------------------------------

    \13\ External LTD excludes instruments with exotic features that 
could impact the loss absorbing capacity and thereby diminish the 
prospects for an orderly resolution of a covered BHC; excluded 
instruments include structured notes and most instruments that 
contain derivative-linked features.
---------------------------------------------------------------------------

    The TLAC Rule also requires covered IHCs to maintain minimum levels 
of TLAC and LTD. However, the specific requirements applicable to a 
covered IHC vary depending on the resolution strategy of the foreign 
GSIB parent of the covered IHC--either a single point-of-entry (SPOE) 
\14\ resolution strategy or a multiple point-of-entry (MPOE) resolution 
strategy.\15\ Under the TLAC Rule, a covered IHC that has a foreign 
GSIB parent with a SPOE strategy must issue LTD to the foreign GSIB 
parent or to a wholly owned subsidiary of the foreign GSIB parent, but 
a covered IHC that is expected to enter into resolution may issue LTD 
externally to third party investors, as well as internally to its 
foreign GSIB parent.\16\
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    \14\ Under a SPOE resolution strategy, the covered IHC would not 
be expected to enter resolution. In a SPOE resolution of a GSIB, 
only a single entity--the top-tier holding company of the GSIB--
would enter a resolution proceeding. Thus, the effect of losses that 
led to a GSIB's failure would pass up from the operating 
subsidiaries that incurred the losses to the holding company and 
then would be imposed on the equity holders and unsecured creditors 
of the holding company through resolution.
    \15\ Under a MPOE resolution strategy, the covered IHC may be 
expected to go through resolution. In a MPOE strategy, entities 
within the consolidated banking organization may be resolved 
separately by their local authorities when the entity fails or is 
approaching failure. Thus, the losses that caused an entity within a 
consolidated banking organization to fail are passed directly to the 
equity holders and unsecured creditors of that entity through a 
separate resolution process.
    \16\ An IHC that is expected to enter into resolution is deemed 
to be a ``resolution covered IHC'' under the TLAC Rule upon 
certification to the Board of the IHC's resolution strategy. See 12 
CFR 252.164.
---------------------------------------------------------------------------

    Given the important role of LTD in absorbing the losses of a 
covered banking organization in bankruptcy or resolution, the Board 
proposed limitations on investments by Board-regulated banking 
organizations in LTD issued by covered BHCs in its 2015 proposal, which 
are discussed in further detail below.\17\ Such limitations already 
apply to investments in regulatory capital instruments of banking 
organizations in order to reduce interconnectedness and pro-cyclicality 
within the financial system in times of stress. The Board did not 
finalize these limitations when it issued the TLAC Rule because it 
needed additional time to work with the OCC and FDIC towards a proposed 
interagency approach regarding the regulatory capital treatment for 
investments in certain debt instruments issued by covered BHCs.
---------------------------------------------------------------------------

    \17\ The 2015 proposal was issued solely by the Board. 
Therefore, the proposed regulatory capital deductions in that 
proposal would have only applied to Board-regulated banking 
organizations, which include bank holding companies, intermediate 
holding companies, savings and loan holdings companies, and state 
member banks.
---------------------------------------------------------------------------

    Accordingly, the agencies are now jointly proposing a regulatory 
capital treatment for investments in covered debt instruments, as 
defined below, that would apply to all advanced approaches banking 
organizations. In addition, this proposal takes into consideration and 
incorporates public comments from the 2015 proposal.

C. 2015 Proposal and General Summary of Comments

    To reduce the potential contagion risk stemming from the failure of 
a covered BHC, the 2015 proposal would have amended the Board's capital 
rule to require a Board-regulated banking organization to deduct from 
its regulatory capital any direct, indirect, or synthetic investment 
in, or exposure to, LTD issued by a covered BHC as if they were 
investments in tier 2 capital

[[Page 13818]]

instruments.\18\ The form and amount of the deduction would have 
depended on the type of investment and various other factors, described 
below.
---------------------------------------------------------------------------

    \18\ Unsecured debt issued by a covered BHC may or may not 
qualify as tier 2 capital, depending on its characteristics. See 12 
CFR 217.20(d). Similarly, unsecured debt issued by a covered BHC may 
or may not qualify as eligible external LTD under the TLAC Rule, 
depending on its characteristics. See 12 CFR 252.61 and 252.62, 
252.161 and 252.162.
---------------------------------------------------------------------------

    The proposed deduction requirement in the 2015 proposal would have 
substantially reduced the incentive of a Board-regulated banking 
organization to invest in LTDs issued by a covered BHC, thereby 
reducing the risk of contagion spreading to other banking organizations 
in the event of distress or failure of the covered BHC. Analysis 
conducted by Board staff concurrent with the 2015 proposal did not 
indicate that Board-regulated banking organizations owned a substantial 
amount of debt issued by covered BHCs.
    The Board received approximately 37 comments on the 2015 proposal 
from banking and trade organizations, academic institutions, market 
advocacy groups, and an individual. A few of the commenters addressed 
the proposed deduction portion of the 2015 proposal. One commenter 
recommended an expansion of the proposed deductions to TLAC instruments 
issued by foreign GSIBs, while another commenter urged the Board to 
address its concerns through a different means than the capital rule. 
Some commenters supported the proposed deduction, and some suggested 
amending or abandoning the proposed deduction.
    Commenters made a number of recommendations regarding the specific 
details of how the deductions from regulatory capital should be 
implemented. The recommendations included increasing the capital rule's 
deduction thresholds to reflect the increase in the scope of assets 
subject to deduction. Other commenters requested formal public guidance 
regarding the proposed deduction requirement to ensure that community 
banking organizations were aware of the requirement and could undertake 
the necessary preparations.
    One commenter requested that the Board exclude debt instruments 
that do not qualify as LTD under the TLAC Rule from the scope of the 
deduction in the capital rule. Another commenter advocated for a less 
stringent capital deduction for senior debt, relative to the deduction 
requirement for subordinated debt.
    With respect to the mechanics of the capital deduction, several 
commenters advocated for allowing a banking organization to first 
deduct any investment in a LTD from the banking organization's own LTD, 
before deducting such holdings from regulatory capital. Commenters 
argued that deducting LTD from regulatory capital would impose 
significant costs on issuers and adversely affect the market for these 
instruments. Some commenters also suggested that banking organizations 
be allowed to choose among several different treatments for investments 
in LTD, including the application of a higher risk weight rather than a 
capital deduction.
    A number of commenters sought an exemption for underwriting and 
market making positions in LTD. These commenters argued that requiring 
deduction in these contexts could negatively impact market making 
activities of GSIBs and increase the cost of market making while 
reducing liquidity, thereby adversely impacting customers of banking 
organizations and the global economy.\19\
---------------------------------------------------------------------------

    \19\ The comments received on the 2015 proposal have been 
considered in developing this proposal.
---------------------------------------------------------------------------

D. Overview and Scope of Application of the Proposal

    The agencies are issuing this notice of proposed rulemaking 
(proposal or proposed rule) to recognize, for purposes of the agencies' 
capital rule, the systemic risks posed by banking organizations' 
investments in ``covered debt instruments,'' as defined below, and to 
create an incentive for advanced approaches banking organizations to 
limit their exposure to GSIBs. Absent the proposal, investments in 
covered debt instruments issued by covered BHCs, foreign GSIBs, and 
covered IHCs are generally subject to a risk weight of 100 percent and 
are not subject to deduction from regulatory capital.
    The deductions that would be required under the proposal would 
affect the capital ratios of advanced approaches banking 
organizations--that is, the risk-based capital ratios that include 
``standardized total risk-weighted assets'' and ``advanced approaches 
total risk-weighted assets'' in the denominator of the ratios, as well 
as the leverage ratio and the supplementary leverage ratio. The 
agencies believe such an approach appropriately reduces systemic risks.
    The agencies believe the proposed rule will have relatively small 
effects on advanced approaches banking organizations. It is difficult 
to calculate TLAC holdings of affected institutions using available 
data. As noted earlier, Board analysis suggests that debt instruments 
subject to the proposed rule represent a minimal portion of the total 
assets of advanced approaches banking organizations. The proposed rule 
could pose some additional regulatory costs for advanced approaches 
banking organizations associated with changes to internal systems or 
processes. The agencies expect that the proposal will have the benefit 
of improving the resiliency and enhancing resolvability of advanced 
approaches banking organizations in the event that an entity required 
to issue LTD or TLAC fails or encounters material financial distress.
    While the systemic risk associated with banking organizations' 
investments in covered debt instruments is greatest for large banking 
organizations, it is relevant for all banking organizations. Distress 
at a GSIB and the associated write-down or conversion into equity of 
its covered debt instruments could have a direct negative impact on the 
capital of investing banking organizations, potentially at a time when 
investing banking organizations are already experiencing financial 
stress. In order to strongly discourage smaller banking organizations 
from investing in covered debt instruments, the agencies intend to give 
further consideration on how to address these risks with respect to 
investments in covered debt instruments, as defined below, by non-
advanced approaches banking organizations. The agencies recognize that 
the proposed approach is relatively complex and, as a result, are only 
proposing to apply it to advanced approaches banking organizations at 
this time.
    In late 2018, the agencies issued the Interagency Tailoring NPR 
that would, among other changes, amend the scope of ``advanced 
approaches banking organizations.'' \20\ Under the Interagency 
Tailoring NPR, the scope of ``advanced approaches banking 
organizations'' would be amended to include only those banking 
organizations subject to Category I or Category II standards.\21\ For 
purposes of considering and commenting on this NPR, the requirements 
that would apply to ``advanced approaches banking organizations'' would 
be included as Category I and II standards under the Interagency 
Tailoring NPR. Commenters should consider both proposals together

[[Page 13819]]

for purposes of their comments to the agencies.
---------------------------------------------------------------------------

    \20\ See 83 FR 66024 (December 21, 2018).
    \21\ Under the Interagency Tailoring NPR, Category I standards 
would apply to U.S. GSIBs and their subsidiary depository 
institutions. Category II standards would apply to banking 
organizations with $700 billion or more in total consolidated assets 
or $75 billion or more in cross-jurisdictional activity that are not 
subject to Category I standards and to their subsidiary depository 
institutions.
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    Question 1: The agencies invite comment on all aspects of the 
proposed deduction approach for investments in covered debt instruments 
by advanced approaches banking organizations.
    Question 2: To what extent do non-advanced approaches banking 
organizations have material holdings of covered debt instruments issued 
by covered BHCs, covered IHCs, and foreign GSIBs? The agencies invite 
data demonstrating the relative significance of such holdings.

II. Proposed Regulatory Capital Treatment for Advanced Approaches 
Banking Organizations' Investments in Covered Debt Instruments

    Under the existing capital rule, a banking organization must deduct 
from regulatory capital any investment in its own capital instruments 
and investments in the capital of other financial institutions that it 
holds reciprocally. Other investments in the capital of unconsolidated 
financial institutions are subject to deduction to the extent they 
exceed certain thresholds.
    Under the proposal, an investment in a covered debt instrument by 
an advanced approaches banking organization generally would be treated 
as an investment in a tier 2 capital instrument, and therefore, would 
be subject to deduction from the advanced approaches banking 
organization's own tier 2 capital. The existing deduction approaches 
under the capital rule would therefore apply to a banking 
organization's investments in its own covered debt instruments and to 
reciprocal cross-holdings of covered debt instruments; that is, an 
advanced approaches banking organization would deduct from its own tier 
2 capital any investments in its own covered debt instruments and 
reciprocal crossholdings of covered debt instruments with another 
banking organization. In addition, the existing corresponding deduction 
approach in the capital rule would apply to any required deduction by 
advanced approaches banking organizations of an investment in a covered 
debt instrument that exceeds certain thresholds.
    The proposal would revise section ____.22(c), (f), and (h) of the 
capital rule to incorporate the proposed deduction approach for 
investments in covered debt instruments. Several new definitions would 
be added to section ___.2 in order to effectuate these deductions. 
Further, the definition of ``investment in the capital of an 
unconsolidated financial institution'' would be amended to correct a 
typographical error.

A. Amendments to Definitions

    Consistent with the Board's 2015 proposal, the proposal would add 
or amend certain definitions in section &___.2 of the capital rule to 
implement the proposed deduction approach. Under the proposal, a 
``covered debt instrument'' would be defined to include an unsecured 
debt instrument that is: (1) Issued by a covered BHC and that is an 
``eligible debt security'' for purposes of the TLAC Rule,\22\ or that 
is pari passu or subordinated to any ``eligible debt security'' issued 
by the covered BHC; or (2) issued by a covered IHC and that is an 
``eligible Covered IHC debt security'' for purposes of the TLAC 
Rule,\23\ or that is pari passu or subordinated to any ``eligible 
Covered IHC debt security'' issued by the covered IHC. A covered debt 
instrument would not include a debt instrument that qualifies as tier 2 
capital under the capital rule.
---------------------------------------------------------------------------

    \22\ See 12 CFR 252.61.
    \23\ See 12 CFR 252.161.
---------------------------------------------------------------------------

    A ``covered debt instrument'' also would include any unsecured debt 
instrument issued by a foreign GSIB or any of its subsidiaries, other 
than its covered IHC, for the purpose of absorbing losses or 
recapitalizing the issuer or any of its subsidiaries in connection with 
a resolution, receivership, insolvency or similar proceeding of the 
issuer or any of its subsidiaries. Further, covered debt instruments 
would also include any debt instrument that is pari passu or 
subordinated to any unsecured debt instrument described above issued by 
the foreign GSIB or any of its subsidiaries, other than an unsecured 
debt instrument that is included in the regulatory capital of the 
issuer.
    Question 3: Under the proposed definition of ``covered debt 
instrument,'' unsecured debt instruments issued by a covered BHC or a 
covered IHC would be covered debt instruments--and thus potentially 
subject to deduction--if they were eligible debt securities or eligible 
Covered IHC debt securities, as applicable, under the TLAC Rule, or if 
they were pari passu or subordinated to any eligible debt security or 
eligible Covered IHC debt security. What would be a less burdensome way 
to include approximately the same debt instruments within the 
definition of ``covered debt instrument?'' For example, should 
``covered debt instrument'' include any unsecured debt instrument 
issued by a covered BHC or a covered IHC, including, for example, debt 
instruments that are senior to all eligible debt securities or eligible 
Covered IHC debt securities?
    In late 2016, the BCBS published its TLAC Holdings standard, which 
described the regulatory capital treatment under the BCBS Basel III 
framework applicable to investments in non-capital TLAC 
instruments.\24\ These investments are defined in the BCBS standards as 
``other TLAC liabilities.'' Similar to the definition of ``covered debt 
instrument'' described in this proposal, ``other TLAC liabilities'' are 
defined by the BCBS to include all direct, indirect, and synthetic 
investments in the instruments of a GSIB resolution entity that are 
eligible to be recognized as external TLAC but that do not otherwise 
qualify as regulatory capital. Instruments pari passu to TLAC, aside 
from certain exemptions described below, are also included in the 
BCBS's definition of ``other TLAC liabilities.'' In addition, similar 
to the proposal's definition of ``covered debt instruments,'' ``other 
TLAC liabilities'' are subject to deduction from the investing bank's 
regulatory capital, depending on the nature of the investment. However, 
there are several differences between the proposed definition of 
``covered debt instrument'' and the BCBS's definition of ``other TLAC 
liabilities.''
---------------------------------------------------------------------------

    \24\ See https://www.bis.org/bcbs/publ/d387.pdf (TLAC Holdings 
standard).
---------------------------------------------------------------------------

    Under the FSB's TLAC Term Sheet, certain ``Excluded Liabilities'' 
do not qualify as TLAC and therefore are not subject to deduction under 
the TLAC Holdings standard, even if they rank pari passu or 
subordinated to a TLAC instrument. Excluded Liabilities include 
deposits, liabilities arising from derivatives, and structured notes, 
among other items. The TLAC Rule prohibits or limits covered banking 
organizations from entering into financial arrangements that may 
compromise an orderly resolution process, including the issuance of 
Excluded Liabilities that rank pari passu or subordinated to LTD 
(referred to as ``clean holding company'' requirements in the TLAC 
Rule). Therefore, the definition of ``covered debt instrument'' in the 
proposal would not provide an exemption for Excluded Liabilities that 
rank pari passu or subordinated to LTD. An investment in a covered debt 
investment that constitutes an Excluded Liability may therefore be 
subject to deduction if it ranks pari passu or subordinated to LTD. To 
provide symmetrical treatment between liabilities issued by covered 
banking organizations and foreign GSIBs, the proposal also would not

[[Page 13820]]

exempt Excluded Liabilities issued by foreign GSIBs from the proposed 
definition of ``covered debt instrument.''
    In addition, the TLAC Holdings standard excludes from the 
definition of ``other TLAC liabilities'' instruments that are pari 
passu to (1) Excluded Liabilities and (2) other instruments that are 
eligible for recognition as external TLAC by virtue of the exemptions 
to the subordination requirements in the FSB's TLAC Term Sheet.\25\ 
However, the TLAC Holdings standard also provide national discretion to 
recognize such pari passu debt instruments as external TLAC. In 
jurisdictions that have exercised this discretion, such instruments are 
subject to the proportional deduction approach set forth in the TLAC 
Holdings standard.\26\
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    \25\ To ensure that TLAC absorbs losses prior to liabilities 
that are excluded from TLAC, eligible TLAC instruments must satisfy 
certain subordination requirements set forth in the FSB TLAC Term 
Sheet. However, an instrument may qualify as TLAC and not meet the 
subordination requirements if: (i) The amount of Excluded 
Liabilities on the balance sheet of the resolution entity that rank 
pari passu or junior to the TLAC-eligible liabilities does not 
exceed 5 percent of the GSIB's eligible TLAC; (ii) the resolution 
authority of the GSIB has authority to differentiate among pari 
passu creditors in resolution; (iii) differentiation in resolution 
in favor of such excluded liabilities would not give rise to 
material risk of successful legal challenge or valid compensation 
claims; and (iv) this does not have a material adverse impact on 
resolvability. See section 11 of the FSB TLAC Term Sheet.
    \26\ See ] 66.c of the TLAC Holdings standard. Only a proportion 
of instruments that are eligible to be recognized as external TLAC 
by virtue of the subordination exemptions may be considered TLAC 
under the TLAC Holdings standard. The proportion equals the ratio of 
(1) the debt instruments issued by a GSIB that rank pari passu to 
Excluded Liabilities and that are recognized as external TLAC by the 
GSIB, to (2) the debt instruments issued by the GSIB that rank pari 
passu to Excluded Liabilities and that would be recognized as 
external TLAC if the subordination requirement was not applied.
---------------------------------------------------------------------------

    The proposed definition of ``covered debt instruments'' would 
include all unsecured debt instruments that are pari passu or 
subordinated to instruments issued by a foreign GSIB for the purpose of 
satisfying the foreign GSIB's home-country TLAC requirements. This 
would include instruments that are pari passu to Excluded Liabilities 
if such instruments are recognized as external TLAC under home-country 
requirements as a matter of national discretion. In contrast to the 
BCBS standard, the proposal would not require proportional deduction 
for these instruments. Instead, the proposal would require deduction 
using the existing deduction approaches for tier 2 capital instruments 
under the capital rule. The agencies believe that implementation of the 
proportional deduction approach would introduce a high degree of 
complexity and operational burden because it would require a banking 
organization to track the full or partial recognition of TLAC 
instruments that may be pari passu to other liabilities in foreign 
jurisdictions. In addition, given that advanced approaches banking 
organizations are not expected to hold material investments in 
``covered debt instruments,'' use of the existing deduction approaches 
for tier 2 capital instruments is unlikely to have a meaningful impact 
on banking organizations' regulatory capital ratios relative to the 
proportional deduction approach.
    The proposal would also add a definition of ``excluded covered debt 
instrument'' to the capital rule in order to identify covered debt 
instruments held for short-term trading purposes that would not be 
subject to deduction, if below a certain threshold. The definition and 
prudential treatment of excluded covered debt instruments and their 
deduction are discussed in more detail in section II.C below.
    Question 4: How well does the proposed definition of covered debt 
instrument capture non-capital debt instruments issued by covered BHCs 
and covered IHCs for the purposes of meeting their TLAC requirements? 
The agencies invite comment on all aspects of the definition of covered 
debt instruments as it relates to instruments issued by covered BHCs 
and covered IHCs, particularly the scope of instruments that may be 
subject to deduction under the proposed definition.
    Question 5: To what degree does the proposed definition of covered 
debt instrument capture debt instruments issued by foreign GSIBs or 
their subsidiaries under foreign implementations of the international 
TLAC standard? The agencies invite comment on the definition of covered 
debt instrument, and whether it appropriately captures unsecured debt 
instruments that do not qualify as regulatory capital and that are 
issued by a foreign GSIB or any of its subsidiaries. Which method for 
identifying covered debt instruments would be simpler to apply in 
practice: (1.) Referring to the purpose of the debt instrument as to 
absorbing losses or recapitalizing the issuer, as proposed by the 
agencies, or (2.) referring to home country rules implementing the 
FSB's TLAC Term Sheet?
    Question 6: What are possible alternatives to the definition of 
``excluded covered debt instrument?'' For example, should the agencies 
consider as an alternative to ``held for the purpose of short-term or 
with the intent of benefiting from actual or expected short-term price 
movements'' a different standard, such as held available-for-sale or 
classified as a trading asset for accounting purposes?
    Similar to the measurement of investments in financial institutions 
capital instruments, an ``investment in a covered debt instrument'' 
would be defined as a net long position in a covered debt instrument, 
including direct, indirect, and synthetic exposures to such covered 
debt instrument. Investments in covered debt instruments would exclude 
underwriting positions held for five business days or less. In 
addition, the proposal would amend the definitions of ``indirect 
exposure'' and ``synthetic exposure'' in the capital rule to add 
exposures to covered debt instruments.\27\
---------------------------------------------------------------------------

    \27\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 
324.2 (FDIC) (``investment in the capital of an unconsolidated 
financial institution'', ``investment in the banking organization's 
own capital instrument'', and ``synthetic exposure'').
---------------------------------------------------------------------------

B. Investments in Covered Banking Organization's Own Covered Debt 
Instruments and Reciprocal Cross Holdings

    Under the agencies' capital rule, a banking organization must 
deduct from regulatory capital an investment in its own capital 
instruments and investments in the capital of other financial 
institutions that it holds reciprocally under sections____.22(c)(1) and 
(3). The proposal would amend sections____.22(c)(1) and (3) to require 
an advanced approaches banking organization to also deduct from its 
tier 2 capital investments in its own covered debt instruments and any 
investment in a covered debt instrument that is held reciprocally with 
another banking organization.

C. Significant and Non-Significant Investments in Covered Debt 
Instruments

    Under sections___.22(c)(4) and (5) of the capital rule, a banking 
organization must deduct from regulatory capital certain investments in 
the capital of unconsolidated financial institutions. The calculation 
of the deduction depends on whether the banking organization has a 
``significant'' or a ``non-significant'' investment, with 
``significant'' defined as ownership of more than 10 percent of the 
common stock of the unconsolidated financial institution.\28\ When a 
banking

[[Page 13821]]

organization has a ``significant investment'' in an unconsolidated 
financial institution, the banking organization must deduct from 
regulatory capital any investment in the capital of the unconsolidated 
financial institution that is not in the form of common stock.\29\ If 
the banking organization has one or more ``non-significant 
investments'' in unconsolidated financial institutions, it must 
aggregate such investments and deduct from regulatory capital any 
amount that exceeds 10 percent of the banking organization's common 
equity tier 1 capital.\30\
---------------------------------------------------------------------------

    \28\ 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) 
(``significant investment in the capital of an unconsolidated 
financial institution'').
    \29\See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); 
and 12 CFR 324.22(c)(5) (FDIC).
    \30\ See 12 CFR 3.22(c)(4) (OCC); 12 CFR 217.22(c)(4) (Board); 
and 12 CFR 324.2(c)(4) (FDIC).
---------------------------------------------------------------------------

    The proposal would amend section ___.22(c)(4) of the capital rule 
to require an advanced approaches banking organization with a non-
significant investment in a covered debt instrument to include such 
investment in the aggregate amount of non-significant investments in 
the capital of other unconsolidated financial institutions. As under 
the existing capital rule, the proposal would require a banking 
organization to deduct from regulatory capital the amount by which the 
aggregate amount of non-significant investments in the capital of 
unconsolidated financial institutions exceeds 10 percent of the 
advanced approaches banking organization's common equity tier 1 
capital. Any investment in a covered debt instrument subject to 
deduction would be deducted according to the corresponding deduction 
approach described below in section II.D.
    The proposal includes limited exclusions from this approach. The 
specifics of the applicable exclusion would depend on whether a firm is 
a covered BHC or is a subsidiary of a GSIB, consistent with the TLAC 
Holdings standard. To help support a deep and liquid market for covered 
debt instruments, the proposal would allow advanced approaches banking 
organizations to hold limited amounts of, and conduct limited market 
making in, such instruments. The proposal would provide that, under 
certain circumstances, an advanced approaches banking organization that 
is a covered BHC or is a subsidiary of a GSIB (advanced approaches GSIB 
banking organization) could designate an investment in a covered debt 
instrument as an ``excluded covered debt instrument'' if it holds the 
covered debt instrument for 30 business days or less for the purpose of 
short-term resale or with the intent of benefiting from actual or 
expected short-term price movements, or to lock in arbitrage profits. 
In this case, the advanced approaches GSIB banking organization could 
exclude each excluded covered debt instrument from the threshold 
calculation and potential deduction under section ___.22(c)(4) if the 
aggregate amount of excluded covered debt instruments, measured by 
their gross long position, is 5 percent or less of its common equity 
tier 1 capital. If the aggregate amount of excluded covered debt 
instruments is more than 5 percent of the common equity tier 1 capital 
of the advanced approaches GSIB banking organization, the excess over 5 
percent would be subject to deduction from tier 2 capital. In addition, 
if an excluded covered debt instrument were held for more than 30 
business days or ceased to be held for the purpose of short-term resale 
or with the intent of benefiting from actual or expected short-term 
price movements, or to lock in arbitrage profits, the excluded covered 
debt instrument would be subject to deduction from tier 2 capital.
    Consistent with the TLAC Holdings standard, the proposal includes a 
more simple materiality threshold for advanced approaches banking 
organizations that are not covered BHCs or subsidiaries of GSIBs 
(advanced approaches non-GSIB banking organizations) given that these 
banking organizations pose less systemic risk than GSIBs. Such banking 
organizations could exclude covered debt instruments from the threshold 
calculation and potential deduction under section ___.22(c)(4) if the 
aggregate amount of covered debt instruments, measured by their gross 
long position, is 5 percent or less of its common equity tier 1 
capital. If the aggregate amount of covered debt instruments is more 
than 5 percent of an advanced approaches non-GSIB banking 
organization's common equity tier 1 capital, the excess over 5 percent 
would be included, on a net long position basis in accordance with 
section___.22(h), with other non-significant investments in the capital 
instruments of unconsolidated financial institutions as described 
above.
    The proposal would amend section ___.22(c)(5) of the capital rule 
to require an advanced approaches banking organization with an 
investment in a covered debt instrument issued by an unconsolidated 
financial institution to deduct the investment from tier 2 capital, in 
accordance with the corresponding deduction approach, if the advanced 
approaches banking organization has a significant investment in the 
capital of the unconsolidated financial institution.
    Question 7: Do the proposed exclusions from deduction for certain 
investments in covered debt instruments of an unconsolidated financial 
institution appropriately align with the treatment set forth in the 
TLAC Holdings standard? Should all banking organizations subject to the 
rule be subject to uniform exclusion requirements, and if so, why? 
Would the exclusion applicable only to GSIBs and the 5 percent 
threshold below which deduction is not required allow for sufficient 
market making activity to support a deep and liquid market for covered 
debt instruments?

D. Corresponding Deduction Approach

    Under the corresponding deduction approach, a banking organization 
must apply any required deduction to the component of capital for which 
the underlying instrument would qualify if it were issued by the 
banking organization.\31\ If the banking organization does not have 
enough of the component of capital to give full effect to the 
deduction, the corresponding deduction approach provides that any 
amount of the investment that has not already been deducted would be 
deducted from the next, more subordinated component of capital.\32\ If, 
for example, a banking organization has insufficient amounts of tier 2 
capital and additional tier 1 capital to effect a required deduction, 
the banking organization would need to deduct from common equity tier 1 
capital the amount of the investment that exceeds the tier 2 and 
additional tier 1 capital of the banking organization.\33\ The proposal 
would amend the corresponding deduction approach in section 
___.22(c)(2) of the capital rule to specify that an investment in a 
covered debt instrument by an advanced approaches banking organization 
would be subject to the corresponding deduction approach.
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    \31\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 
and 12 CFR 324.22(c)(2) (FDIC).
    \32\ See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2) 
and (f) (Board); and 12 CFR 324.(c)(2) and (f) (FDIC).
    \33\ See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12 
CFR 324.22(f) (FDIC).
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    Question 8: Are there simpler alternatives to the proposed 
deduction approach for investments in covered debt instruments that 
would achieve the same objectives of reducing both interconnectedness 
within the financial system and systemic risk?

[[Page 13822]]

E. Net Long Position

    The proposal would follow the same general approach as currently 
provided under the agencies' capital rule regarding the calculation of 
the amount of any deduction and the treatment of guarantees and 
indirect investments for purposes of the deductions. Under the capital 
rule, the amount of a banking organization's investment in its own 
capital instrument or in the capital instrument of an unconsolidated 
financial institution is the banking organization's net long position 
in the capital instrument as calculated under section____.22(h) of the 
capital rule. Under section___.22(h), a banking organization may net 
certain gross short positions in a capital instrument against a gross 
long position in the instrument to determine the net long position. The 
amount of an investment potentially subject to deduction under section 
___.22(c) is the net long position.
    The proposal would modify section ___.22(h) of the capital rule 
such that an advanced approaches banking organization would determine 
its net long position in an exposure to its own covered debt instrument 
or in a covered debt instrument issued by an unconsolidated financial 
institution in the same manner as currently provided for investments in 
the capital of an unconsolidated financial institution or investments 
in an institution's own capital instruments. Consistent with the 
current capital rule, the calculation of a net long position would take 
into account direct investments in covered debt instruments as well as 
indirect exposures to covered debt instruments held through investment 
funds.
    A banking organization has three options under the capital rule to 
measure its gross long position in a capital instrument held indirectly 
through an investment fund.\34\ The proposal would amend 
section___22(h)(2)(ii) of the capital rule to provide the same three 
options to determine the gross long position in a covered debt 
instrument held through an investment fund. The first option would be 
to use the entire carrying value of the investment in the fund. The 
second option would be, with prior supervisory approval, for the 
advanced approaches banking organization to use a conservative estimate 
of the amount of the investment in the covered debt instrument held 
through the fund. The third option would be to multiply the carrying 
value of the advanced approaches banking organization's investment in 
the fund by the exact percentage of the covered debt instrument held by 
the investment fund or by the highest stated prospectus limit for such 
an investment. In each case, the amount of the gross long position may 
be reduced by the advanced approaches banking organization's qualifying 
short positions to reach the net long position.\35\
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    \34\ See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.12(h)(2) (Board); 
and 12 CFR 324.22(h)(2) (FDIC).
    \35\ See 12 CFR 3.22(h)(1) (OCC); 12 CFR 217.22(h)(1) (Board); 
and 12 CFR 324.22(h)(1) (FDIC).
---------------------------------------------------------------------------

    For purposes of any deduction required for an advanced approaches 
banking organization's investment in the capital of an unconsolidated 
financial institution, the amount of a covered debt instrument would 
include any contractual obligations the advanced approaches banking 
organization has to purchase such covered debt instruments.

III. Technical Amendment and Additional Requests for Comment

    The agencies are amending the definition of investment in the 
capital of an unconsolidated financial institution in section___.2 of 
the capital rule in order to correct a drafting error. The agencies' 
capital rule currently defines investment in the capital of an 
unconsolidated financial institution as `` . . . an instrument that is 
recognized as capital for regulatory purposes by the primary supervisor 
of an unconsolidated regulated financial institution and is an 
instrument that is part of the GAAP equity of an unconsolidated 
unregulated financial institution . . . . '' The proposal would change 
``and is'' to ``or'' to reflect the agencies' original intent.
    The agencies invite comment on all aspects of the proposed 
deduction approaches for investments in covered debt instruments by 
advanced approaches banking organizations, and the technical amendment 
to the agencies' capital rule. Comments are requested about the 
potential advantages of the proposal in ensuring the safety and 
soundness of advanced approaches banking organizations as well as the 
stability of the financial system. Comments are also requested about 
the capital impact of the proposal and the nature and extent of costs 
and benefits to the affected institutions or the broader economy.

IV. Proposed Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital Related to Investments in Covered 
Debt Instruments and Excluded Covered Debt Instruments

    The Board is proposing to modify the instructions to the 
Consolidated Financial Statements for Holding Companies (FR Y-9C), 
Schedule HC-R, Part I and Part II, to effectuate the deductions from 
regulatory capital for Board-regulated advanced approaches banking 
organizations related to investments in covered debt instruments and 
excluded covered debt instruments as described above.
    Specifically, the Board would modify the instructions of the FR Y-
9C for Schedule HC-R, Part I, item 33, ``Tier 2 capital deductions.'' 
On the FR Y-9C, a Board-regulated advanced approaches GSIB banking 
organization would be required to deduct from tier 2 capital the 
aggregate amount of its investments in covered debt instruments that, 
when combined with the banking organization's other non-significant 
investments in unconsolidated financial institutions, exceed 10 percent 
of the common equity tier 1 capital of the banking organization. Also, 
if an excluded covered debt instrument is held by a Board-regulated 
advanced approaches GSIB banking organization for more than 30 business 
days, or is no longer held for the purpose of short-term resale or with 
the intent of benefiting from actual or expected short-term price 
movements, or to lock in arbitrage profits, the excluded covered debt 
instrument would be deducted from tier 2 capital.
    In addition, for purposes of the deduction requirements related to 
non-significant investments in unconsolidated financial institutions, 
Board-regulated advanced approaches non-GSIB banking organizations 
would be required to deduct from tier 2 capital those investments in 
covered debt instruments that exceed 5 percent of common equity tier 1 
capital, and that also, when combined with the banking organization's 
other non-significant investments in unconsolidated financial 
institutions, exceed 10 percent of the common equity tier 1 capital of 
the banking organization. The Board would also modify the instructions 
for calculating other deduction-related and risk-weighted asset line 
items to incorporate investments in covered debt instruments and 
excluded debt instruments, as applicable, by Board-regulated advanced 
approaches banking organizations.

[[Page 13823]]

    The agencies would propose to modify in a future interagency 
reporting proposal the Consolidated Reports of Condition and Income for 
a Bank with Domestic and Foreign Offices (FFIEC 031), Consolidated 
Reports of Condition and Income for a Bank with Domestic Offices Only 
(FFEIC 041) (collectively with the FFIEC 031, the Call Report \36\), 
and Regulatory Capital Reporting for Institutions Subject to the 
Advanced Capital Adequacy Framework (FFIEC 101) in a manner consistent 
with the changes described above to the FR Y-9C.
---------------------------------------------------------------------------

    \36\ The proposed modifications would not affect the 
Consolidated Reports of Condition and Income for a Bank with 
Domestic Offices Only and Total Assets Less than $1 Billion (FFIEC 
051) because banks and savings associations that are advanced 
approaches banking organizations are not eligible to file the FFIEC 
051 report.
---------------------------------------------------------------------------

B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered IHCs

    The Board is proposing to modify Schedule HC-R, Part I of the FR Y-
9C by adding new data items that would publicly disclose: (1) The LTD 
and TLAC for covered BHCs and covered IHCs; (2) these firms' LTD and 
TLAC ratios to ensure compliance with the TLAC Rule; (3) TLAC buffers; 
and (4) amendments to the instructions for the calculation of eligible 
retained income (item 47), institution-specific capital buffer (items 
46.a and 46.b), and distributions and discretionary bonus payments 
(item 48) for covered BHCs and covered IHCs.

V. Regulatory Analyses

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' 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 proposal would revise sections __.22(c), (f), and (h) of the 
capital rule to incorporate the proposed deduction approach for 
investments in covered debt instruments. Several new definitions would 
be added to section __.2 in order to effectuate these deductions. 
Further, the definition of ``investment in the capital of an 
unconsolidated financial institution'' would be amended to correct a 
typographical error.
    The proposal will require changes to the Consolidated Financial 
Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128). 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 
[email protected], Attention, Federal Banking Agency Desk 
Officer.
Proposed Collection (Board Only)
    Title of information collection: Consolidated Financial Statements 
for Holding Companies.
    Agency form number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR 
Y-9CS.
    OMB control number: 7100-0128.
    Frequency: Quarterly, semiannually, and annually.
    Affected public: Businesses or other for-profit.
    Respondents: Bank holding companies (BHCs), savings and loan 
holding companies (SLHCs), securities holding companies (SHCs), and 
U.S. Intermediate Holding Companies (IHCs) (collectively, holding 
companies (HCs)).
    Estimated number of respondents: FR Y-9C (non-advanced approaches 
holding companies): 292; FR Y-9C (advanced approached holding 
companies): 18; FR Y-9LP: 338; FR Y-9SP: 4,238; FR Y-9ES: 82; FR Y-9CS: 
236.
    General description of report: The FR Y-9 family of reporting forms 
continues to be the primary source of financial data on HCs on which 
examiners rely between on-site inspections. Financial data from these 
reporting forms is used to detect emerging financial problems, review 
performance, conduct pre-inspection analysis, monitor and evaluate 
capital adequacy, evaluate HC mergers and acquisitions, and analyze an 
HC's overall financial condition to ensure the safety and soundness of 
its operations. The FR Y-9C serves as the standardized financial 
statements for certain consolidated holding companies. The Board 
requires HCs to provide standardized financial statements to fulfill 
the Board's statutory obligation to supervise these organizations. HCs 
file the FR Y-9C on a quarterly basis.
    Legal authorization and confidentiality: The FR Y-9 family of 
reports is authorized by section 5(c) of the Bank Holding Company 
Act,\37\ section 10(b) of the Home Owners' Loan Act,\38\ section 618 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\39\ and section 165 of the Dodd-Frank Act.\40\ The 
obligation of covered institutions to report this information is 
mandatory.
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    \37\ See 12 U.S.C. 1844(c).
    \38\ See 12 U.S.C. 1467a(b).
    \39\ See 12 U.S.C. 1850a(c)(1).
    \40\ See 12 U.S.C. 5365.
---------------------------------------------------------------------------

    With respect to FR Y-9C, Schedule HI's item 7(g) ``FDIC deposit 
insurance assessments,'' Schedule HC-P's item 7(a) ``Representation and 
warranty reserves for 1-4 family residential mortgage loans sold to 
U.S. government agencies and government sponsored agencies,'' and 
Schedule HC-P's item 7(b) ``Representation and warranty reserves for 1-
4 family residential mortgage loans sold to other parties'' are 
considered confidential. Such treatment is appropriate because the data 
is not publicly available and the public release of this data is likely 
to impair the Board's ability to collect necessary information in the 
future and could cause substantial harm to the competitive position of 
the respondent. Thus, this information may be kept confidential under 
exemptions (b)(4) of the Freedom of Information Act, which exempts from 
disclosure ``trade secrets and commercial or financial information 
obtained from a person and privileged or confidential'' (5 U.S.C. 
552(b)(4)), and (b)(8) of the Freedom of Information Act, which exempts 
from disclosure information related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions (5 U.S.C. 552(b)(8)).

[[Page 13824]]

    Current actions: To implement the reporting requirements of the 
proposed rule, the Board proposes to revise the FR Y-9C, Schedule HC-R, 
Part I, Regulatory Capital Components and Ratios, to amend instructions 
for line items 11, 17, 24, and 33 to effectuate the deductions from 
regulatory capital for advanced approaches holding companies related to 
investments in covered debt instruments and excluded covered debt 
instruments as described above. Further, the Board proposes to revise 
the FR Y-9C, Schedule HC-R, Part II, Risk-Weighted Assets, to amend 
instructions for line items 2(a), 2(b), 7, and 8 to incorporate 
investments in covered debt instruments and excluded debt instruments, 
as applicable, by advanced approaches holding companies in their 
calculation of risk-weighted assets.
    In addition, the Board proposes to revise the FR Y-9C, Schedule HC-
R, Part I, Regulatory Capital Components and Ratios, to create new line 
items and instructions to allow the BHCs of U.S. GSIBs and the IHCs of 
foreign GSIBs to publicly report their long-term debt (LTD) and total 
loss absorbing capacity (TLAC) in accordance, respectively, with 12 CFR 
252, Subpart G and 12 CFR 252, Subpart P. Specifically, new line items 
would be created to report, as applicable, BHCs of U.S GSIBs' and IHCs 
of foreign GSIBs' (1.) outstanding eligible LTD (item 46); (2.) TLAC 
(item 47); (3.) LTD standardized risk-weighted asset ratio (item 48, 
column A); (4.) TLAC standardized risk-weighted asset ratio (item 48, 
column B); (5.) LTD advanced approaches risk-weighted asset ratio (item 
49, column A); (6.) TLAC advanced approaches risk-weighted asset ratio 
(item 49, column B); (7.) LTD leverage ratio (item 50, column A); (8.) 
TLAC leverage ratio (item 50, column B); (9.) LTD supplementary 
leverage ratio (item 51, column A); (10.) TLAC supplementary leverage 
ratio (item 51, column B); (11.) institution-specific TLAC risk-
weighted asset buffer necessary to avoid limitations on distributions 
and discretionary bonus payments (item 53(a)); and (12.) TLAC leverage 
buffer necessary to avoid limitations on distributions and 
discretionary bonus payments (item 53(b)). Existing line items 46, 
46(a), 46(b), 47, and 48 would be re-numbered, and respective 
instructions' references updated, to account for the proposed inclusion 
of the new data collection items described above. Finally, the 
instructions for re-numbered line item 55, ``Distributions and 
discretionary bonus payments during the quarter,'' would be amended for 
the BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to reflect maximum 
payout amounts that take into account a firm's TLAC risk-weighted and 
leverage buffers reported in proposed line items 53(a) and 53(b), 
respectively. The draft reporting forms and instructions are available 
on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
    Estimated average hours per response: FR Y-9C (non-advanced 
approaches holding companies): 46.43; FR Y-9C (advanced approached 
holding companies): 48.31; FR Y-9LP: 5.27; FR Y-9SP: 5.40; FR Y-9ES: 
0.50; FR Y-9CS: 0.50.
    Estimated annual burden hours: FR Y-9C (non advanced approaches 
holding companies): 54,230; FR Y-9C (advanced approached holding 
companies): 3,478; FR Y-9LP: 7,125; FR Y-9SP: 45,770; FR Y-9ES: 41; FR 
Y-9CS: 472.
    In addition to the collection of information discussed above, the 
agencies would propose to modify in a future interagency reporting 
proposal the Consolidated Reports of Condition and Income (Call 
Reports) (FFIEC 031 and FFIEC 041; OMB No. 1557-0081 (OCC), 7100-0036 
(Board), and 3064-0052) (FDIC)) and Risk-Based Capital Reporting for 
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 
101; OMB No. 1557-0239 (OCC), 7100-0319 (Board), and 3064-0159 (FDIC)) 
in a manner consistent with the changes described above to the FR Y-9C. 
The Board would also propose to modify the Capital Assessments and 
Stress Testing (FR Y-14A and Q; OMB No. 7100-0341) in a manner 
consistent with the changes described above to the FR Y-9C. These 
modifications will be addressed in one or more separate Federal 
Register notice(s).

B. Regulatory Flexibility Act Analysis

    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 Small Business Administration 
(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 December 31, 2017, the OCC supervises 886 small entities.\41\
---------------------------------------------------------------------------

    \41\ 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.
---------------------------------------------------------------------------

    As part of our analysis, we consider whether the proposal will have 
a significant economic impact on a substantial number of small 
entities, pursuant to the RFA Because the proposal only applies to 
advanced approaches banking organizations it will not impact any OCC-
supervised small entities. Therefore, the proposal will not have a 
significant economic impact on a substantial number of small entities.
    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.\42\ 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

[[Page 13825]]

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.
---------------------------------------------------------------------------

    \42\ 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 3,304 small bank holding companies, 216 small savings 
and loan holding companies, and 566 small state member banks.
---------------------------------------------------------------------------

    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. The 
proposal would also make corresponding changes to the Board's reporting 
forms.
    As discussed in detail above, the proposed rule would amend the 
capital rule. Under the proposed rule, the Board would require advanced 
approaches banking organizations to deduct investments in and exposures 
to covered debt instruments issued by covered BHCs, covered IHCs, and 
foreign GSIBs and their subsidiaries. These deductions may be subject 
to regulatory thresholds, as described in the Supplemental Information 
above. Deductions related to investments in and exposures to covered 
debt instruments would be effectuated by deduction from tier 2 capital 
according to the corresponding deduction approach, subject to 
applicable deduction thresholds.
    The Board has broad authority under the International Lending 
Supervision Act (ILSA) \43\ and the PCA provisions of the Federal 
Deposit Insurance Act \44\ 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.\45\ 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.\46\ In addition, 
the Board has broad authority to establish regulatory capital standards 
for bank holding companies under the Bank Holding Company Act and the 
Dodd-Frank Reform and Consumer Protection Act (Dodd-Frank Act).\47\
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 3901-3911.
    \44\ 12 U.S.C. 1831o.
    \45\ 12 U.S.C. 3907(a)(1).
    \46\ 12 U.S.C. 1831o(c)(2).
    \47\ See, e.g., sections 165 and 171 of the Dodd-Frank Act (12 
U.S.C. 5365 and 12 U.S.C. 5371). Public Law 111-203, 124 Stat. 1376 
(2010).
---------------------------------------------------------------------------

    The proposed rule would apply only to an advanced approaches Board-
regulated institution. This is a depository institution, bank holding 
company, savings and loan holding company, or intermediate holding 
company with at least $250 billion in total consolidated assets or has 
consolidated on-balance sheet foreign exposures of at least $10 
billion, or 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. The 
proposed rule would not apply to any small entities. 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 proposing to collect 
information from firms identified as advanced approaches banking 
organizations. These changes would include limited revisions to the 
Consolidated Financial Statements for Holding Companies (FR Y-9C) to 
provide for reporting of investments in covered debt securities and, as 
necessary, to reflect deduction of such investments. In addition, the 
FR Y-9C would be revised to provide for reporting of TLAC and LTD 
ratios and TLAC buffers under the TLAC Rule by covered BHCs and covered 
IHCs. These changes would not impact small entities. 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), 5 U.S.C. 601 et seq., 
generally requires an agency, in connection with a proposed rule, to 
prepare and make available for public comment an initial regulatory 
flexibility analysis that describes the impact of a proposed rule on 
small entities.\48\ However, a regulatory flexibility analysis is not 
required 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 of less than or 
equal to $550 million who are independently owned and operated or owned 
by a holding company with less than $550 million in total assets.\49\ 
For the reasons described below and under section 605(b) of the RFA, 
the FDIC certifies that the proposed rule will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \48\ 5 U.S.C. 601 et seq.
    \49\ 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.'' See 13 CFR 
121.201 (as amended, effective December 2, 2014). ``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.'' 
See 13 CFR 121.103. 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.
---------------------------------------------------------------------------

    The FDIC supervises 3,604 institutions, of which 2,804 are 
considered small entities for the purposes of RFA.\50\
---------------------------------------------------------------------------

    \50\ Call Report data, March 2018.
---------------------------------------------------------------------------

    This proposed rule will affect all institutions subject to the 
advanced approaches regulations and their subsidiaries. The FDIC 
supervises two institutions that are subsidiaries of advanced 
approaches institutions and have $550 million or less in total 
assets.\51\ However, neither institution is considered a small entity 
for the purposes of RFA since they are owned by holding companies with 
over $550 million in total assets. Since this proposal does not affect 
any institutions that are defined as small entities for the purposes of 
the RFA, the FDIC certifies that the proposed rule will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \51\ Call Report data, March 2018.
---------------------------------------------------------------------------

    The FDIC invites comments on all aspects of the supporting 
information provided in this RFA section. In particular, would this 
rule have any significant effects on small entities that the FDIC has 
not identified?

[[Page 13826]]

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \52\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies have sought to present 
the proposed rule in a simple and straightforward manner, and invite 
comment on the use of plain language. For example:
---------------------------------------------------------------------------

    \52\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

     Have the agencies organized the material to suit your 
needs? If not, how could they present the proposed rule more clearly?
     Are the requirements in the proposed rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
     Do the regulations contain technical language or jargon 
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 regulation easier to 
understand? If so, what changes would achieve that?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?''
     What other changes can the agencies incorporate to make 
the regulation easier to understand?

D. OCC Unfunded Mandates Reform Act of 1995 Determination

    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.\53\ Accordingly, the OCC has not 
prepared a written statement to accompany this proposal.
---------------------------------------------------------------------------

    \53\ Based on available supervisory information, the OCC 
determined that no OCC-supervised advanced approaches institutions 
currently hold TLAC instruments. Thus, there would no cost of 
capital associated with the implementation of this proposal. The OCC 
estimates that, if implemented, non-mandated, but anticipated 
compliance costs associated with activities such as modifying 
procedures and internal audit would be less than $1 million.
---------------------------------------------------------------------------

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),\54\ 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.\55\
---------------------------------------------------------------------------

    \54\ 12 U.S.C. 4802(a).
    \55\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    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 3

    Administrative practice and procedure, Capital, National banks, 
Risk.

12 CFR Part 217

    Administrative practice and procedure, Banks, Banking, Capital, 
Federal Reserve System, Holding companies.

12 CFR Part 324

    Administrative practice and procedure, Banks, Banking, Capital 
adequacy, Savings associations, State non-member banks.

Office of the Comptroller of the Currency

    For the reasons set out in the joint preamble, the OCC proposes to 
amend 12 CFR part 3 as follows.

PART 3--CAPITAL ADEQUACY STANDARDS

0
1. 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
2. Amend Sec.  3.2 by:
0
a. Adding in alphabetical order the definitions of ``Covered debt 
instrument'' and ``Excluded covered debt instrument;''
0
b. Revising the definition of ``Indirect exposure;''
0
c. Adding in alphabetical order the definition of ``Investment in a 
covered debt instrument;'' and
0
d. Revising the definitions of ``Investment in the capital of an 
unconsolidated financial institution'' and ``Synthetic exposure''.
    The additions and revisions read as follows:


Sec.  3.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC, as defined in 12 
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 
252.61, or that is pari passu or subordinated to any eligible debt 
security issued by the global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or,
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global 
systemically important banking organization that is not a global 
systemically important BHC, other than a Covered IHC, as defined in 12 
CFR 252.161; and where,
    (i) The instrument has the purpose of absorbing losses or 
recapitalizing the issuer or any of its subsidiaries in connection with 
a resolution, receivership, insolvency or similar proceeding of the 
issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument does not include a debt instrument that qualifies as tier 2 
capital pursuant to 12

[[Page 13827]]

CFR 217.20(d) or that is otherwise treated as regulatory capital by the 
primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means a covered debt instrument 
held by a national bank or Federal savings association that is a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, for 30 business days or less for the purpose 
of short-term resale or with the intent of benefiting from actual or 
expected short-term price movements, or to lock in arbitrage profits.
* * * * *
    Indirect exposure means an exposure that arises from the national 
bank's or Federal savings association's investment in an investment 
fund which holds an investment in the national bank's or Federal 
savings association's own capital instrument, or an investment in the 
capital of an unconsolidated financial institution. For an advanced 
approaches national bank or Federal savings association, indirect 
exposure also includes an investment in an investment fund that holds a 
covered debt instrument.
* * * * *
    Investment in a covered debt instrument means a national bank's or 
Federal savings association's net long position calculated in 
accordance with Sec.  3.22(h) in a covered debt instrument, including 
direct, indirect, and synthetic exposures to the debt instrument, 
excluding any underwriting positions held by the national bank or 
Federal savings association for five or fewer business days.
* * * * *
    Investment in the capital of an unconsolidated financial 
institution means a net long position calculated in accordance with 
Sec.  3.22(h) in an instrument that is recognized as capital for 
regulatory purposes by the primary supervisor of an unconsolidated 
regulated financial institution or an instrument that is part of the 
GAAP equity of an unconsolidated unregulated financial institution, 
including direct, indirect, and synthetic exposures to capital 
instruments, excluding underwriting positions held by the national bank 
or Federal savings association for five or fewer business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the national bank or Federal savings 
association's own capital instrument or to the value of an investment 
in the capital of an unconsolidated financial institution. For an 
advanced approaches national bank or Federal savings association, 
synthetic exposure includes an exposure whose value is linked to the 
value of an investment in a covered debt instrument.
* * * * *
0
3. In Sec.  3.22, revise paragraphs (c), (f), and (h) to read as 
follows:


Sec.  3.22   Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the national bank's or Federal savings association's own capital 
instruments. A national bank or Federal savings association must deduct 
an investment in the national bank's or Federal savings association's 
own capital instruments, as follows:
---------------------------------------------------------------------------

    \23\ The national bank or Federal savings association must 
calculate amounts deducted under paragraphs (c) through (f) of this 
section after it calculates the amount of ALLL or AACL, as 
applicable, includable in tier 2 capital under Sec.  3.20(d)(3).
---------------------------------------------------------------------------

    (i) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
common stock instruments from its common equity tier 1 capital elements 
to the extent such instruments are not excluded from regulatory capital 
under Sec.  3.20(b)(1);
    (ii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
additional tier 1 capital instruments from its additional tier 1 
capital elements; and
    (iii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
tier 2 capital instruments from its tier 2 capital elements.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial 
institutions (as described in paragraph (c)(4) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions (as described in paragraph (c)(5) 
of this section). Under the corresponding deduction approach, a 
national bank or Federal savings association must make deductions from 
the component of capital for which the underlying instrument would 
qualify if it were issued by the national bank or Federal savings 
association itself, as described in paragraphs (c)(2)(i) through (iii) 
of this section. If the national bank or Federal savings association 
does not have a sufficient amount of a specific component of capital to 
effect the required deduction, the shortfall must be deducted according 
to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the national bank or Federal savings association must treat the 
instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  3.20, the national bank or Federal savings 
association must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches national bank or Federal savings 
association, a tier 2 capital instrument if it is a covered debt 
instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  3.300(c)), the national bank or Federal 
savings association must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.

[[Page 13828]]

    (3) Reciprocal cross-holdings in the capital of financial 
institutions. (i) A national bank or Federal savings association must 
deduct an investment in the capital of another financial institution 
that the national bank or Federal savings association holds 
reciprocally with another financial institution, where such reciprocal 
cross holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital instruments, 
by applying the corresponding deduction approach in paragraph (c)(2) of 
this section.
    (ii) An advanced approaches national bank or Federal savings 
association must deduct an investment in any covered debt instrument 
that the institution holds reciprocally with another financial 
institution, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital or covered debt instruments, by applying the 
corresponding deduction approach in paragraph (c)(2) of this section.
    (4) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) A national bank or Federal savings 
association that is not an advanced approaches national bank or Federal 
savings association must deduct its non-significant investments in the 
capital of unconsolidated financial institutions (as defined in Sec.  
3.2) that, in the aggregate, exceed 10 percent of the sum of the 
national bank or Federal savings association's common equity tier 1 
capital elements minus all deductions from and adjustments to common 
equity tier 1 capital elements required under paragraphs (a) through 
(c)(3) of this section (the 10 percent threshold for non-significant 
investments) by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.\24\ The deductions described in this 
section are net of associated DTLs in accordance with paragraph (e) of 
this section. In addition, with the prior written approval of the OCC, 
a national bank or Federal savings association that underwrites a 
failed underwriting, for the period of time stipulated by the OCC, is 
not required to deduct a non-significant investment in the capital of 
an unconsolidated financial institution.\25\
---------------------------------------------------------------------------

    \24\ With the prior written approval of the OCC, for the period 
of time stipulated by the OCC, a national bank or Federal savings 
association is not required to deduct a non-significant investment 
in the capital instrument of an unconsolidated financial institution 
or an investment in a covered debt instrument pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the OCC.
    \25\ Any non-significant investments in the capital of an 
unconsolidated financial institution that is not required to be 
deducted under this paragraph (c)(4) or otherwise under this section 
must be assigned the appropriate risk weight under subparts D, E, or 
F of this part, as applicable.
---------------------------------------------------------------------------

    (ii) An advanced approaches national bank or Federal savings 
association must deduct its non-significant investments in the capital 
of unconsolidated financial institutions (as defined in Sec.  3.2) 
that, in the aggregate and together with any investment in a covered 
debt instrument (as defined in Sec.  3.2) issued by a financial 
institution in which the national bank or Federal savings association 
does not have a significant investment in the capital of the 
unconsolidated financial institution (as defined in Sec.  3.2), exceeds 
10 percent of the sum of the advanced approaches national bank's or 
Federal savings association's common equity tier 1 capital elements 
minus all deductions from and adjustments to common equity tier 1 
capital elements required under paragraphs (a) through (c)(3) of this 
section (the 10 percent threshold for non-significant investments) by 
applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\26\ The deductions described in this paragraph are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the OCC, an advanced 
approaches national bank or Federal savings association that 
underwrites a failed underwriting, for the period of time stipulated by 
the OCC, is not required to deduct from capital a non-significant 
investment in the capital of an unconsolidated financial institution or 
an investment in a covered debt instrument pursuant to this paragraph 
(c)(4) to the extent the investment is related to the failed 
underwriting.\27\ For any calculation under this paragraph (c)(4)(ii), 
an advanced approaches national bank or Federal savings association may 
exclude the amount of an investment in a covered debt instrument under 
paragraphs (c)(4)(iv) or (c)(4)(v) of this section, as applicable.
---------------------------------------------------------------------------

    \26\ With the prior written approval of the OCC, for the period 
of time stipulated by the OCC, an advanced approaches a national 
bank or Federal savings association is not required to deduct a non-
significant investment in the capital instrument of an 
unconsolidated financial institution or an investment in a covered 
debt instrument pursuant to this paragraph if the financial 
institution is in distress and if such investment is made for the 
purpose of providing financial support to the financial institution, 
as determined by the OCC.
    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(4) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.
---------------------------------------------------------------------------

    (iii)(A) The amount to be deducted under this section from a 
specific capital component by a national bank or Federal savings 
association that is not an advanced approaches national bank or Federal 
savings association is equal to:
    (1) The national bank's or Federal savings association's aggregate 
non-significant investments in the capital of an unconsolidated 
financial institution exceeding the 10 percent threshold for non-
significant investments, multiplied by
    (2) The ratio of the national bank's or Federal savings 
association's aggregate non-significant investments in the capital of 
unconsolidated financial institutions (in the form of such capital 
component) to the national bank's or Federal savings association's 
total non-significant investments in unconsolidated financial 
institutions.
    (B) For an advanced approaches national bank or Federal savings 
association, the amount to be deducted under this section from a 
specific capital component is equal to:
    (1) The national bank's or Federal savings association's aggregate 
non-significant investments in the capital of an unconsolidated 
financial institution and, if applicable, any investments in a covered 
debt instrument subject to deduction under this paragraph (c)(4), 
exceeding the 10 percent threshold for non-significant investments, 
multiplied by
    (2) The ratio of the national bank's or Federal savings 
association's aggregate non-significant investments in the capital of 
an unconsolidated financial institution (in the form of such capital 
component) to the national bank's or Federal savings association's 
total non-significant investments in unconsolidated financial 
institutions, with an investment in a covered debt instrument being 
treated as tier 2 capital for this purpose.
    (iv) For purposes of applying the deduction under paragraph 
(c)(4)(ii) of this section, an advanced approaches national bank or 
Federal savings association that is not a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, must only include the amount of investments in covered debt 
instruments issued by financial institutions in which the national bank 
or Federal savings association does not have a significant investment 
in the capital of the unconsolidated financial institutions to the 
extent that the

[[Page 13829]]

national bank's or Federal savings association's gross long position, 
in accordance with Sec.  3.22(h)(2), in such covered debt instruments 
exceeds 5 percent of the common equity tier 1 capital of the national 
bank or Federal savings association.
    (v) Prior to applying the deduction under paragraph (c)(4)(ii):
    (A) A national bank or Federal savings association that is a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, may designate any investment in a covered debt 
instrument as an excluded covered debt instrument, as defined in Sec.  
3.2.
    (B) A national bank or Federal savings association that is a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, must deduct according to the corresponding 
deduction approach the amount of any investment in a covered debt 
instrument that was originally designated as an excluded covered debt 
instrument, in accordance with paragraph (c)(4)(iv)(A) above, but is no 
longer held for the purpose of short-term resale or with the intent of 
benefiting from actual or expected short-term price movements, or to 
lock in arbitrage profits.
    (C) A national bank or Federal savings association that is a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, must deduct according to the corresponding 
deduction approach the amount of any investment in a covered debt 
instrument that was originally designated as an excluded covered debt 
instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, 
and has been held for more than thirty business days.
    (D) A national bank or Federal savings association that is a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, must deduct according to the corresponding 
deduction approach the amount, measured on a gross long basis in 
accordance with Sec.  3.22(h)(2), of its aggregate investment in 
excluded covered debt instruments that exceeds 5 percent of the 
national bank's or Federal savings association's common equity tier 1 
capital.
    (5) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. (i) If 
a national bank or Federal savings association has a significant 
investment in the capital of an unconsolidated financial institution, 
the national bank or Federal savings association must deduct from 
capital any such investment issued by the unconsolidated financial 
institution that is held by the institution other than an investment in 
the form of common stock by applying the corresponding deduction 
approach in paragraph (c)(2) of this section.\28\ The deductions 
described in this section are net of associated DTLs in accordance with 
paragraph (e) of this section. In addition, with the prior written 
approval of the OCC, for the period of time stipulated by the OCC, a 
national bank or Federal savings association that underwrites a failed 
underwriting is not required to deduct a significant investment in the 
capital of an unconsolidated financial institution or an investment in 
covered debt instruments pursuant to this paragraph (c) if such 
investment is related to such failed underwriting.
---------------------------------------------------------------------------

    \28\ With prior written approval of the OCC, for the period of 
time stipulated by the OCC, a national bank or Federal savings 
association is not required to deduct a significant investment in 
the capital instrument of an unconsolidated financial institution 
under this paragraph (c)(5) or otherwise under this section if such 
investment is made for the purpose of providing financial support to 
the financial institution as determined by the OCC.
---------------------------------------------------------------------------

    (ii) If an advanced approaches national bank or Federal savings 
association has a significant investment in the capital of an 
unconsolidated financial institution and has an investment in a covered 
debt instrument issued by the unconsolidated financial institution, the 
national bank or Federal savings association must also deduct its 
investment in the covered debt instrument by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.\29\ The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. In addition, with the 
prior written approval of the OCC, for the period of time stipulated by 
the OCC, an advanced approaches national bank or Federal savings 
association that underwrites a failed underwriting is not required to 
deduct the investment in the covered debt instrument pursuant to this 
paragraph (c)(5) if such investment is related to such failed 
underwriting.
---------------------------------------------------------------------------

    \29\ With prior written approval of the OCC, for the period of 
time stipulated by the OCC, an advanced approaches national bank or 
Federal savings association is not required to deduct an investment 
in a covered debt instrument under this paragraph (c)(5) or 
otherwise under this section if such investment is made for the 
purpose of providing financial support to the financial institution 
as determined by the OCC.
---------------------------------------------------------------------------

* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
national bank or Federal savings association does not have a sufficient 
amount of a specific component of capital to effect the full amount of 
any deduction from capital required under paragraph (d) of this 
section, the national bank or Federal savings association must deduct 
the shortfall amount from the next higher (that is, more subordinated) 
component of regulatory capital. Any investment by an advanced 
approaches national bank or Federal savings association in a covered 
debt instrument must be treated as an investment in the tier 2 capital 
for purposes of this paragraph when applied to the capital ratio 
calculations in section 3.10(c).
* * * * *
    (h) Net long position. (1) For purposes of calculating the amount 
of a national bank's or Federal savings association's investment in the 
national bank's or Federal savings association's own capital 
instrument, investment in the capital of an unconsolidated financial 
institution, and investment in a covered debt instrument, the 
institution's net long position is the gross long position in the 
underlying instrument determined in accordance with paragraph (h)(2) of 
this section, as adjusted to recognize any short position by the 
national bank or Federal savings association in the same instrument 
subject to paragraph (h)(3) of this section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the national 
bank or Federal savings association, the adjusted carrying value of the 
exposure as that term is defined in Sec.  3.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  3.2;
    (iii) For each indirect exposure, the national bank's or Federal 
savings association's carrying value of its investment in an investment 
fund or, alternatively:
    (A) A national bank or Federal savings association may, with the 
prior approval of the OCC, use a conservative estimate of the amount of 
its investment in the national bank's or Federal savings association's 
own capital instruments, its indirect investment in the capital of an 
unconsolidated financial institution, or its indirect investment in a 
covered debt instrument held through a position in an index, as 
applicable; or
    (B) A national bank or Federal savings association may calculate 
the gross long position for an indirect exposure by multiplying the 
national bank's or Federal savings association's carrying

[[Page 13830]]

value of its investment in the investment fund by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the national bank's or Federal savings association's own 
capital instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings of the investment in the 
national bank's or Federal savings association's own capital 
instruments, investment in the capital of an unconsolidated financial 
institution, or investment in an covered debt instrument, as 
applicable; and
    (iv) For a synthetic exposure, the amount of the national bank's or 
Federal savings association's loss on the exposure if the reference 
capital instrument were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the national bank's 
or Federal savings association's Call Report, if the national bank or 
Federal savings association has a contractual right or obligation to 
sell the long position at a specific point in time and the counterparty 
to the contract has an obligation to purchase the long position if the 
national bank or Federal savings association exercises its right to 
sell, this point in time may be treated as the maturity of the long 
position such that the maturity of the long position and short position 
are deemed to match for purposes of the maturity requirement, even if 
the maturity of the short position is less than one year; and
    (iii) For an investment in a national bank's or Federal savings 
association's own capital instrument under paragraph (c)(1) of this 
section, an investment in the capital of an unconsolidated financial 
institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this 
section, and an investment in a covered debt instrument under 
paragraphs (c)(4) and (c)(5) of this section:
    (A) The national bank or Federal savings association may only net a 
short position against a long position in an investment in the national 
bank's or Federal savings association's own capital instrument under 
paragraph (c)(1) of this section if the short position involves no 
counterparty credit risk;
    (B) A gross long position in an investment in the national bank's 
or Federal savings association's own capital instrument, an investment 
in the capital of an unconsolidated financial institution, or an 
investment in a covered debt instrument due to a position in an index 
may be netted against a short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the national bank's or Federal 
savings association's own capital instrument, an investment in the 
capital instrument of an unconsolidated financial institution, or an 
investment in a covered debt instrument can be decomposed to provide 
recognition of the hedge. More specifically, the portion of the index 
that is composed of the same underlying instrument that is being hedged 
may be used to offset the long position if both the long position being 
hedged and the short position in the index are reported as a trading 
asset or trading liability (whether on- or off-balance sheet) on the 
national bank's or Federal savings association's Call Report, and the 
hedge is deemed effective by the national bank's or Federal savings 
association's internal control processes, which have not been found to 
be inadequate by the OCC.
* * * * *

Board of Governors of the Federal Reserve System

    For the reasons set forth in the joint preamble, the Board proposes 
to amend part 217 of chapter II of title 12 of the Code of Federal 
Regulations as follows:

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

0
1. The authority citation for part 217 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.

0
2. Amend Sec.  217.2 by:
0
a. Adding in alphabetical order the definitions of ``Covered debt 
instrument'' and ``Excluded covered debt instrument;''
0
b. Revising the definition of ``Indirect exposure;''
0
c. Adding in alphabetical order the definition of ``Investment in a 
covered debt instrument;'' and
0
d. Revising the definitions of ``Investment in the capital of an 
unconsolidated financial institution'' and ``Synthetic exposure''.
    The additions and revisions to read as follows:


Sec.  217.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC and that is an 
eligible debt security, as defined in 12 CFR 252.61, or that is pari 
passu or subordinated to any eligible debt security issued by the 
global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC; or issued by a subsidiary of a global systemically important 
banking organization that is not a global systemically important BHC, 
other than a Covered IHC, as defined in 12 CFR 252.161; and where,
    (i) The instrument has the purpose of absorbing losses or 
recapitalizing the issuer or any of its subsidiaries in connection with 
a resolution, receivership, insolvency or similar proceeding of the 
issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument does not include a debt instrument that qualifies as tier 2 
capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as 
regulatory capital by the primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means a covered debt instrument 
held by a global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2 for 30 business days 
or less for the purpose of short-

[[Page 13831]]

term resale or with the intent of benefiting from actual or expected 
short-term price movements, or to lock in arbitrage profits.
* * * * *
    Indirect exposure means an exposure that arises from the Board-
regulated institution's investment in an investment fund which holds an 
investment in the Board-regulated institution's own capital instrument 
or an investment in the capital of an unconsolidated financial 
institution. For an advanced approaches Board-regulated institution, 
indirect exposure also includes an investment in an investment fund 
that holds a covered debt instrument.
* * * * *
    Investment in a covered debt instrument means a Board-regulated 
institution's net long position calculated in accordance with Sec.  
217.22(h) in a covered debt instrument, including direct, indirect, and 
synthetic exposures to the debt instrument, excluding any underwriting 
positions held by the Board-regulated institution for five or fewer 
business days.
* * * * *
    Investment in the capital of an unconsolidated financial 
institution means a net long position calculated in accordance with 
Sec.  217.22(h) in an instrument that is recognized as capital for 
regulatory purposes by the primary supervisor of an unconsolidated 
regulated financial institution or an instrument that is part of the 
GAAP equity of an unconsolidated unregulated financial institution, 
including direct, indirect, and synthetic exposures to capital 
instruments, excluding underwriting positions held by the Board-
regulated institution for five or fewer business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the Board-regulated institution's own capital 
instrument or to the value of an investment in the capital of an 
unconsolidated financial institution. For an advanced approaches Board-
regulated institution, synthetic exposure includes an exposure whose 
value is linked to the value of an investment in a covered debt 
instrument.
* * * * *
0
3. In Sec.  217.22, re-designate footnote 28 as footnote 30 in 
paragraph (d)(2) and revise paragraphs (c), (f), and (h) to read as 
follows:


Sec.  217.22   Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the Board-regulated institution's own capital or covered debt 
instruments. A Board-regulated institution must deduct an investment in 
the Board-regulated institution's own capital instruments, and an 
advanced approaches Board-regulated institution also must deduct an 
investment in the Board-regulated institution's own covered debt 
instruments, as follows:

    \23\ The Board-regulated institution must calculate amounts 
deducted under paragraphs (c) through (f) of this section after it 
calculates the amount of ALLL or AACL, as applicable, includable in 
tier 2 capital under Sec. 217.20(d)(3).

    (i) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own common stock instruments from its 
common equity tier 1 capital elements to the extent such instruments 
are not excluded from regulatory capital under Sec.  217.20(b)(1);
    (ii) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own additional tier 1 capital instruments 
from its additional tier 1 capital elements;
    (iii) A Board-regulated institution must deduct an investment in 
the Board-regulated institution's own tier 2 capital instruments from 
its tier 2 capital elements; and
    (iv) An advanced approaches Board-regulated institution must deduct 
an investment in the institution's own covered debt instruments from 
its tier 2 capital elements. If the advanced approaches Board-regulated 
institution does not have a sufficient amount of tier 2 capital to 
effect this deduction, the institution must deduct the shortfall amount 
from the next higher (that is, more subordinated) component of 
regulatory capital.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial 
institutions (as described in paragraph (c)(4) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions (as described in paragraph (c)(5) 
of this section). Under the corresponding deduction approach, a Board-
regulated institution must make deductions from the component of 
capital for which the underlying instrument would qualify if it were 
issued by the Board-regulated institution itself, as described in 
paragraphs (c)(2)(i) through (iii) of this section. If the Board-
regulated institution does not have a sufficient amount of a specific 
component of capital to effect the required deduction, the shortfall 
must be deducted according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the Board-regulated institution must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  217.20, the Board-regulated institution must 
treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches Board-regulated institution, a tier 
2 capital instrument if it is a covered debt instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  217.300(c)), the Board-regulated 
institution must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's

[[Page 13832]]

tier 2 capital (but not includable in tier 1 capital) prior to May 19, 
2010.
    (3) Reciprocal cross-holdings in the capital of financial 
institutions.
    (i) A Board-regulated institution must deduct an investment in the 
capital of another financial institution that the Board-regulated 
institution holds reciprocally with another financial institution, 
where such reciprocal cross holdings result from a formal or informal 
arrangement to swap, exchange, or otherwise intend to hold each other's 
capital instruments, by applying the corresponding deduction approach 
in paragraph (c)(2) of this section.
    (ii) An advanced approaches Board-regulated institution must deduct 
an investment in any covered debt instrument that the institution holds 
reciprocally with another financial institution, where such reciprocal 
cross holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital or covered 
debt instruments, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.
    (4) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) A Board-regulated institution that is not 
an advanced approaches Board-regulated institution must deduct its non-
significant investments in the capital of unconsolidated financial 
institutions (as defined in Sec.  217.2) that, in the aggregate, exceed 
10 percent of the sum of the Board-regulated institution's common 
equity tier 1 capital elements minus all deductions from and 
adjustments to common equity tier 1 capital elements required under 
paragraphs (a) through (c)(3) of this section (the 10 percent threshold 
for non-significant investments) by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.\24\ The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. In addition, with the 
prior written approval of the Board, a Board-regulated institution that 
underwrites a failed underwriting, for the period of time stipulated by 
the Board, is not required to deduct a non-significant investment in 
the capital of an unconsolidated financial institution.\25\

    \24\ With the prior written approval of the Board, for the 
period of time stipulated by the Board, a Board-regulated 
institution is not required to deduct a non-significant investment 
in the capital instrument of an unconsolidated financial institution 
or an investment in a covered debt instrument pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the Board.
    \25\ Any non-significant investments in the capital of an 
unconsolidated financial institution that is not required to be 
deducted under this paragraph (c)(4) or otherwise under this section 
must be assigned the appropriate risk weight under subparts D, E, or 
F of this part, as applicable.

    (ii) An advanced approaches Board-regulated institution must deduct 
its non-significant investments in the capital of unconsolidated 
financial institutions (as defined in Sec.  217.2) that, in the 
aggregate and together with any investment in a covered debt instrument 
(as defined in Sec.  217.2) issued by a financial institution in which 
the Board-regulated institution does not have a significant investment 
in the capital of the unconsolidated financial institution (as defined 
in Sec.  217.2), exceeds 10 percent of the sum of the advanced 
approaches Board-regulated institution's common equity tier 1 capital 
elements minus all deductions from and adjustments to common equity 
tier 1 capital elements required under paragraphs (a) through (c)(3) of 
this section (the 10 percent threshold for non-significant investments) 
by applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\26\ The deductions described in this paragraph are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the Board, an advanced 
approaches Board-regulated institution that underwrites a failed 
underwriting, for the period of time stipulated by the Board, is not 
required to deduct from capital a non-significant investment in the 
capital of an unconsolidated financial institution or an investment in 
a covered debt instrument pursuant to this paragraph (c)(4) to the 
extent the investment is related to the failed underwriting.\27\ For 
any calculation under paragraph (c)(4)(ii) of this section, an advanced 
approaches Board-regulated institution may exclude the amount of an 
investment in a covered debt instrument under paragraphs (c)(4)(iv) or 
(c)(4)(v) of this section, as applicable.

    \26\ With the prior written approval of the Board, for the 
period of time stipulated by the Board, an advanced approaches 
Board-regulated institution is not required to deduct a non-
significant investment in the capital instrument of an 
unconsolidated financial institution or an investment in a covered 
debt instrument pursuant to this paragraph if the financial 
institution is in distress and if such investment is made for the 
purpose of providing financial support to the financial institution, 
as determined by the Board.
    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(4) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.

    (iii)(A) The amount to be deducted under this section from a 
specific capital component by a Board-regulated institution that is not 
an advanced approaches Board-regulated institution is equal to:
    (1) The Board-regulated institution's aggregate non-significant 
investments in the capital of an unconsolidated financial institution 
exceeding the 10 percent threshold for non-significant investments, 
multiplied by
    (2) The ratio of the Board-regulated institution's aggregate non-
significant investments in the capital of unconsolidated financial 
institutions (in the form of such capital component) to the Board-
regulated institution's total non-significant investments in 
unconsolidated financial institutions.
    (B) For an advanced approaches Board-regulated institution, the 
amount to be deducted under this section from a specific capital 
component is equal to:
    (1) The Board-regulated institution's aggregate non-significant 
investments in the capital of an unconsolidated financial institution 
and, if applicable, any investments in a covered debt instrument 
subject to deduction under this paragraph (c)(4), exceeding the 10 
percent threshold for non-significant investments, multiplied by
    (2) The ratio of the Board-regulated institution's aggregate non-
significant investments in the capital of an unconsolidated financial 
institution (in the form of such capital component) to the Board-
regulated institution's total non-significant investments in 
unconsolidated financial institutions, with an investment in a covered 
debt instrument being treated as tier 2 capital for this purpose.
    (iv) For purposes of applying the deduction under paragraph 
(c)(4)(ii) of this section, an advanced approaches Board-regulated 
institution that is not a global systemically important BHC or a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2 must only include the amount of investments in 
covered debt instruments issued by financial institutions in which the 
Board-regulated institution does not have a significant investment in 
the capital of the unconsolidated financial institutions to the extent 
that the Board-regulated institution's gross long position, in 
accordance with

[[Page 13833]]

Sec.  217.22(h)(2), in such covered debt instruments exceeds 5 percent 
of the common equity tier 1 capital of the Board-regulated institution.
    (v) Prior to applying the deduction under paragraph (c)(4)(ii) of 
this section:
    (A) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2 may designate any 
investment in a covered debt instrument as an excluded covered debt 
instrument, as defined in Sec.  217.2.
    (B) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2 must deduct according 
to the corresponding deduction approach the amount of any investment in 
a covered debt instrument that was originally designated as an excluded 
covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of 
this section, but is no longer held for the purpose of short-term 
resale or with the intent of benefiting from actual or expected short-
term price movements, or to lock in arbitrage profits.
    (C) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2 must deduct according 
to the corresponding deduction approach the amount of any investment in 
a covered debt instrument that was originally designated as an excluded 
covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of 
this section, and has been held for more than thirty business days.
    (D) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2 must deduct according 
to the corresponding deduction approach the amount, measured on a gross 
long basis in accordance with Sec.  217.22(h)(2), of its aggregate 
investment in excluded covered debt instruments that exceeds 5 percent 
of the Board-regulated institution's common equity tier 1 capital.
    (5) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. (i) If 
a Board-regulated institution has a significant investment in the 
capital of an unconsolidated financial institution, the Board-regulated 
institution must deduct from capital any such investment issued by the 
unconsolidated financial institution that is held by the institution 
other than an investment in the form of common stock by applying the 
corresponding deduction approach in paragraph (c)(2) of this 
section.\28\ The deductions described in this section are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the Board, for the period 
of time stipulated by the Board, a Board-regulated institution that 
underwrites a failed underwriting is not required to deduct a 
significant investment in the capital of an unconsolidated financial 
institution or an investment in covered debt instruments pursuant to 
this paragraph (c) if such investment is related to such failed 
underwriting.

    \28\ With prior written approval of the Board, for the period of 
time stipulated by the Board, a Board-regulated institution is not 
required to deduct a significant investment in the capital 
instrument of an unconsolidated financial institution under this 
paragraph (c)(5) or otherwise under this section if such investment 
is made for the purpose of providing financial support to the 
financial institution as determined by the Board.

    (ii) If an advanced approaches Board-regulated institution has a 
significant investment in the capital of an unconsolidated financial 
institution and has an investment in a covered debt instrument issued 
by the unconsolidated financial institution, the Board-regulated 
institution must also deduct its investment in the covered debt 
instrument by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.\29\ The deductions described in this 
section are net of associated DTLs in accordance with paragraph (e) of 
this section. In addition, with the prior written approval of the 
Board, for the period of time stipulated by the Board, an advanced 
approaches Board-regulated institution that underwrites a failed 
underwriting is not required to deduct the investment in the covered 
debt instrument pursuant to this paragraph (c)(5) if such investment is 
related to such failed underwriting.

    \29\ With prior written approval of the Board, for the period of 
time stipulated by the Board, an advanced approaches Board-regulated 
institution is not required to deduct an investment in a covered 
debt instrument under this paragraph (c)(5) or otherwise under this 
section if such investment is made for the purpose of providing 
financial support to the financial institution as determined by the 
Board.

* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
Board-regulated institution does not have a sufficient amount of a 
specific component of capital to effect the full amount of any 
deduction from capital required under paragraph (d) of this section, 
the Board-regulated institution must deduct the shortfall amount from 
the next higher (that is, more subordinated) component of regulatory 
capital. Any investment by an advanced approaches Board-regulated 
institution in a covered debt instrument must be treated as an 
investment in the tier 2 capital for purposes of this paragraph when 
applied to the capital ratio calculations in section 217.10(c).
* * * * *
    (h) Net long position. (1) For purposes of calculating the amount 
of a Board-regulated institution's investment in the Board regulated 
institution's own capital instrument, investment in the capital of an 
unconsolidated financial institution, and investment in a covered debt 
instrument, the institution's net long position is the gross long 
position in the underlying instrument determined in accordance with 
paragraph (h)(2) of this section, as adjusted to recognize any short 
position by the Board-regulated institution in the same instrument 
subject to paragraph (h)(3) of this section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the Board-
regulated institution, the adjusted carrying value of the exposure as 
that term is defined in Sec.  217.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  217.2;
    (iii) For each indirect exposure, the Board-regulated institution's 
carrying value of its investment in an investment fund or, 
alternatively:
    (A) A Board-regulated institution may, with the prior approval of 
the Board, use a conservative estimate of the amount of its investment 
in the Board-regulated institution's own capital instruments, its 
indirect investment in the capital of an unconsolidated financial 
institution, or its indirect investment in a covered debt instrument 
held through a position in an index, as applicable; or
    (B) A Board-regulated institution may calculate the gross long 
position for an indirect exposure by multiplying the Board-regulated 
institution's carrying value of its investment in the investment fund 
by either:
    (1) The highest stated investment limit (in percent) for an 
investment in

[[Page 13834]]

the Board-regulated institution's own capital instruments, an 
investment in the capital of an unconsolidated financial institution, 
or an investment in a covered debt instrument, as applicable, as stated 
in the prospectus, partnership agreement, or similar contract defining 
permissible investments of the investment fund; or
    (2) The investment fund's actual holdings of the investment in the 
Board-regulated institution's own capital instruments, investment in 
the capital of an unconsolidated financial institution, or investment 
in an covered debt instrument, as applicable; and
    (iv) For a synthetic exposure, the amount of the Board-regulated 
institution's loss on the exposure if the reference capital instrument 
were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the Board-regulated 
institution's Call Report, for a state member bank, or FR Y-9C, for a 
bank holding company, savings and loan holding company, or intermediate 
holding company, as applicable, if the Board-regulated institution has 
a contractual right or obligation to sell the long position at a 
specific point in time and the counterparty to the contract has an 
obligation to purchase the long position if the Board-regulated 
institution exercises its right to sell, this point in time may be 
treated as the maturity of the long position such that the maturity of 
the long position and short position are deemed to match for purposes 
of the maturity requirement, even if the maturity of the short position 
is less than one year; and
    (iii) For an investment in a Board-regulated institution's own 
capital instrument under paragraph (c)(1) of this section, an 
investment in the capital of an unconsolidated financial institution 
under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and 
an investment in a covered debt instrument under paragraphs (c)(1), 
(c)(4), and (c)(5) of this section:
    (A) The Board-regulated institution may only net a short position 
against a long position in an investment in the Board-regulated 
institution's own capital instrument or own covered debt instrument 
under paragraph (c)(1) of this section if the short position involves 
no counterparty credit risk;
    (B) A gross long position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital of 
an unconsolidated financial institution, or an investment in a covered 
debt instrument due to a position in an index may be netted against a 
short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument can be decomposed to provide recognition 
of the hedge. More specifically, the portion of the index that is 
composed of the same underlying instrument that is being hedged may be 
used to offset the long position if both the long position being hedged 
and the short position in the index are reported as a trading asset or 
trading liability (whether on- or off-balance sheet) on the Board-
regulated institution's Call Report, for a state member bank, or FR Y-
9C, for a bank holding company, savings and loan holding company, or 
intermediate holding company, as applicable, and the hedge is deemed 
effective by the Board-regulated institution's internal control 
processes, which have not been found to be inadequate by the Board.
* * * * *

12 CFR Part 324

Federal Deposit Insurance Corporation

    For the reasons set out in the joint preamble, the FDIC proposes to 
amend 12 CFR part 324 as follows.

PART 324--CAPITAL ADEQUACY OF FDIC--SUPERVISED INSTITUTIONS

* * * * *

12 CFR Part 324 Authority and Issuance

    For the reasons set out in the joint preamble, the FDIC proposes to 
amend 12 CFR part 324 as follows:

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

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

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

0
2. In Sec.  324.2:
0
a. Add in alphabetical order the definitions of ``Covered debt 
instrument'' and ``Excluded covered debt instrument;''
0
b. Revise the definition of ``Indirect exposure'';
0
c. Add in alphabetical order the definition of ``Investment in a 
covered debt instrument'';
0
d. Revise the definitions of ``Investment in the capital of an 
unconsolidated financial institution'' and ``Synthetic exposure''.
    The additions and revisions read as follows:


Sec.  324.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC, as defined in 12 
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 
252.61, or that is pari passu or subordinated to any eligible debt 
security issued by the global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global 
systemically important banking organization that is not a global 
systemically important BHC, other than a Covered IHC, as defined in 12 
CFR 252.161; and where,
    (i) The instrument has the purpose of absorbing losses or 
recapitalizing the issuer or any of its subsidiaries in connection with 
a resolution, receivership, insolvency or similar proceeding of the 
issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument

[[Page 13835]]

does not include a debt instrument that qualifies as tier 2 capital 
pursuant to 12 CFR 217.20(d) or that is otherwise treated as regulatory 
capital by the primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means a covered debt instrument 
held by an FDIC-supervised institution that is a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, for 30 business days or less for the purpose of short-term 
resale or with the intent of benefiting from actual or expected short-
term price movements, or to lock in arbitrage profits.
* * * * *
    Indirect exposure means an exposure that arises from the FDIC-
supervised institution's investment in an investment fund which holds 
an investment in the FDIC-supervised institution's own capital 
instrument or an investment in the capital of an unconsolidated 
financial institution. For an advanced approaches FDIC-supervised 
institution, indirect exposure also includes an investment in an 
investment fund that holds a covered debt instrument.
* * * * *
    Investment in a covered debt instrument means an FDIC-supervised 
institution's net long position calculated in accordance with Sec.  
324.22(h) in a covered debt instrument, including direct, indirect, and 
synthetic exposures to the debt instrument, excluding any underwriting 
positions held by the FDIC-supervised institution for five or fewer 
business days.
* * * * *
    Investment in the capital of an unconsolidated financial 
institution means a net long position calculated in accordance with 
Sec.  324.22(h) in an instrument that is recognized as capital for 
regulatory purposes by the primary supervisor of an unconsolidated 
regulated financial institution or an instrument that is part of the 
GAAP equity of an unconsolidated unregulated financial institution, 
including direct, indirect, and synthetic exposures to capital 
instruments, excluding underwriting positions held by the FDIC-
supervised institution for five or fewer business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the FDIC-supervised institution's own capital 
instrument or to the value of an investment in the capital of an 
unconsolidated financial institution. For an advanced approaches FDIC-
supervised institution, synthetic exposure includes an exposure whose 
value is linked to the value of an investment in a covered debt 
instrument.
* * * * *
0
3. Amend Sec.  324.22 by re-designating footnotes 27 and 28 in 
paragraph (d) as footnotes 30 and 31, and revising paragraphs (c) (f), 
and (h) to read as follows.


Sec.  324.22  Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the FDIC-supervised institution's own capital instruments. An FDIC-
supervised institution must deduct an investment in the FDIC-supervised 
institution's own capital instruments, as follows:
---------------------------------------------------------------------------

    \23\ The FDIC-supervised institution must calculate amounts 
deducted under paragraphs (c) through (f) of this section after it 
calculates the amount of ALLL or AACL, as applicable, includable in 
tier 2 capital under Sec.  324.20(d)(3).
---------------------------------------------------------------------------

    (i) An FDIC-supervised institution must deduct an investment in the 
FDIC-supervised institution's own common stock instruments from its 
common equity tier 1 capital elements to the extent such instruments 
are not excluded from regulatory capital under Sec.  324.20(b)(1);
    (ii) An FDIC-supervised institution must deduct an investment in 
the FDIC-supervised institution's own additional tier 1 capital 
instruments from its additional tier 1 capital elements; and
    (iii) An FDIC-supervised institution must deduct an investment in 
the FDIC-supervised institution's own tier 2 capital instruments from 
its tier 2 capital elements.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial 
institutions (as described in paragraph (c)(4) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions (as described in paragraph (c)(5) 
of this section). Under the corresponding deduction approach, an FDIC-
supervised institution must make deductions from the component of 
capital for which the underlying instrument would qualify if it were 
issued by the FDIC-supervised institution itself, as described in 
paragraphs (c)(2)(i) through (iii) of this section. If the FDIC-
supervised institution does not have a sufficient amount of a specific 
component of capital to effect the required deduction, the shortfall 
must be deducted according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the FDIC-supervised institution must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  324.20, the FDIC-supervised institution must 
treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches FDIC-supervised institution, a tier 
2 capital instrument if it is a covered debt instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  324.300(c)), the FDIC-supervised 
institution must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.
    (3) Reciprocal cross-holdings in the capital of financial 
institutions. (i) An

[[Page 13836]]

FDIC-supervised institution must deduct an investment in the capital of 
another financial institution that the FDIC-supervised institution 
holds reciprocally with another financial institution, where such 
reciprocal cross holdings result from a formal or informal arrangement 
to swap, exchange, or otherwise intend to hold each other's capital 
instruments, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.
    (ii) An advanced approaches FDIC-supervised institution must deduct 
an investment in any covered debt instrument that the institution holds 
reciprocally with another financial institution, where such reciprocal 
cross holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital or covered 
debt instruments, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.
    (4) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) An FDIC-supervised institution that is not 
an advanced approaches FDIC-supervised institution must deduct its non-
significant investments in the capital of unconsolidated financial 
institutions (as defined in Sec.  324.2) that, in the aggregate, exceed 
10 percent of the sum of the FDIC-supervised institution's common 
equity tier 1 capital elements minus all deductions from and 
adjustments to common equity tier 1 capital elements required under 
paragraphs (a) through (c)(3) of this section (the 10 percent threshold 
for non-significant investments) by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.\24\ The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. In addition, with the 
prior written approval of the FDIC, an FDIC-supervised institution that 
underwrites a failed underwriting, for the period of time stipulated by 
the FDIC, is not required to deduct a non-significant investment in the 
capital of an unconsolidated financial institution.\25\
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    \24\ With the prior written approval of the FDIC, for the period 
of time stipulated by the FDIC, an FDIC-supervised institution is 
not required to deduct a non-significant investment in the captial 
instrument of an unconsolidated financial institution or an 
investment in a covered debt instrument pursuant to this paragraph 
if the financial institution is in distress and if such investment 
is made for the purpose of providing financial support to the 
financial institution, as determined by the FDIC.
    \25\ Any non-significant investments in the captial of an 
unconsolidated financial institution that is not required to be 
deducted under this paragraph (c)(4) or otherwise under this section 
must be assigned the appropriate risk weight under subparts D, E, or 
F of this part, as applicable.
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    (ii) An advanced approaches FDIC-supervised institution must deduct 
its non-significant investments in the capital of unconsolidated 
financial institutions (as defined in Sec.  324.2) that, in the 
aggregate and together with any investment in a covered debt instrument 
(as defined in Sec.  324.2) issued by a financial institution in which 
the FDIC-supervised institution does not have a significant investment 
in the capital of the unconsolidated financial institution (as defined 
in Sec.  324.2), exceeds 10 percent of the sum of the advanced 
approaches FDIC-supervised institution's common equity tier 1 capital 
elements minus all deductions from and adjustments to common equity 
tier 1 capital elements required under paragraphs (a) through (c)(3) of 
this section (the 10 percent threshold for non-significant investments) 
by applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\26\ The deductions described in this paragraph are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the FDIC, an advanced 
approaches FDIC-supervised institution that underwrites a failed 
underwriting, for the period of time stipulated by the FDIC, is not 
required to deduct from capital a non-significant investment in the 
capital of an unconsolidated financial institution or an investment in 
a covered debt instrument pursuant to this paragraph (c)(4) to the 
extent the investment is related to the failed underwriting.\27\ For 
any calculation under this paragraph (c)(4)(ii), an advanced approaches 
FDIC-supervised institution may exclude the amount of an investment in 
a covered debt instrument under paragraphs (c)(4)(iv) or (c)(4)(v) of 
this section, as applicable.
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    \26\ With the prior written approval of the FDIC, for the period 
of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution is not required to deduct a non-significant 
investment in the capital instrument of an unconsolidated financial 
institution or an investment in a covered debt instrument pursuant 
to this paragraph if the financial institution is in distress and if 
such investment is made for the purpose of providing financial 
support to the financial institution, as determined by the FDIC.
    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(4) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.
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    (iii)(A) The amount to be deducted under this section from a 
specific capital component by an FDIC-supervised institution that is 
not an advanced approaches FDIC-supervised institution is equal to:
    (1) The FDIC-supervised institution's aggregate non-significant 
investments in the capital of an unconsolidated financial institution 
exceeding the 10 percent threshold for non-significant investments, 
multiplied by
    (2) The ratio of the FDIC-supervised institution's aggregate non-
significant investments in the capital of unconsolidated financial 
institutions (in the form of such capital component) to the FDIC-
supervised institution's total non-significant investments in 
unconsolidated financial institutions.
    (B) For an advanced approaches FDIC-supervised institution, the 
amount to be deducted under this section from a specific capital 
component is equal to:
    (1) The FDIC-supervised institution's aggregate non-significant 
investments in the capital of an unconsolidated financial institution 
and, if applicable, any investments in a covered debt instrument 
subject to deduction under this paragraph (c)(4), exceeding the 10 
percent threshold for non-significant investments, multiplied by
    (2) The ratio of the FDIC-supervised institution's aggregate non-
significant investments in the capital of an unconsolidated financial 
institution (in the form of such capital component) to the FDIC-
supervised institution's total non-significant investments in 
unconsolidated financial institutions, with an investment in a covered 
debt instrument being treated as tier 2 capital for this purpose.
    (iv) For purposes of applying the deduction under paragraph 
(c)(4)(ii), an advanced approaches FDIC-supervised institution that is 
not a subsidiary of a global systemically important banking 
organization, as defined in 12 CFR 252.2, must only include the amount 
of investments in covered debt instruments issued by financial 
institutions in which the FDIC-supervised institution does not have a 
significant investment in the capital of the unconsolidated financial 
institutions to the extent that the FDIC-supervised institution's gross 
long position, in accordance with Sec.  324.22(h)(2), in such covered 
debt instruments exceeds 5 percent of the common equity tier 1 capital 
of the FDIC-supervised institution.
    (v) Prior to applying the deduction under paragraph (c)(4)(ii):
    (A) An FDIC-supervised institution that is a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, may designate any investment in a covered debt instrument as an

[[Page 13837]]

excluded covered debt instrument, as defined in Sec.  324.2.
    (B) An FDIC-supervised institution that is a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach 
the amount of any investment in a covered debt instrument that was 
originally designated as an excluded covered debt instrument, in 
accordance with paragraph (c)(4)(iv)(A) of this section, but is no 
longer held for the purpose of short-term resale or with the intent of 
benefiting from actual or expected short-term price movements, or to 
lock in arbitrage profits.
    (C) An FDIC-supervised institution that is a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach 
the amount of any investment in a covered debt instrument that was 
originally designated as an excluded covered debt instrument, in 
accordance with paragraph (c)(4)(iv)(A) above, and has been held for 
more than thirty business days.
    (D) An FDIC-supervised institution that is a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach 
the amount, measured on a gross long basis in accordance with Sec.  
324.22(h)(2), of its aggregate investment in excluded covered debt 
instruments that exceeds 5 percent of the FDIC-supervised institution's 
common equity tier 1 capital.
    (5) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. (i) If 
an FDIC-supervised institution has a significant investment in the 
capital of an unconsolidated financial institution, the FDIC-supervised 
institution must deduct from capital any such investment issued by the 
unconsolidated financial institution that is held by the institution 
other than an investment in the form of common stock by applying the 
corresponding deduction approach in paragraph (c)(2) of this 
section.\28\ The deductions described in this section are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the FDIC, for the period 
of time stipulated by the FDIC, an FDIC-supervised institution that 
underwrites a failed underwriting is not required to deduct a 
significant investment in the capital of an unconsolidated financial 
institution or an investment in covered debt instruments pursuant to 
this paragraph (c) if such investment is related to such failed 
underwriting.
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    \28\ With prior written approval of the FDIC, for the period of 
time stipulated by the FDIC, and FDIC-supervised institution is not 
required to deduct a significant investment in the capital 
instrument of an unconsolidated financial institution under this 
paragraph (c)(5) or otherwise under this ssection if such investment 
is made for the purpose of providing financial support to the 
financial institution as determined by the FDIC.
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    (ii) If an advanced approaches FDIC-supervised institution has a 
significant investment in the capital of an unconsolidated financial 
institution and has an investment in a covered debt instrument issued 
by the unconsolidated financial institution, the FDIC-supervised 
institution must also deduct its investment in the covered debt 
instrument by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.\29\ The deductions described in this 
section are net of associated DTLs in accordance with paragraph (e) of 
this section. In addition, with the prior written approval of the FDIC, 
for the period of time stipulated by the FDIC, an advanced approaches 
FDIC-supervised institution that underwrites a failed underwriting is 
not required to deduct the investment in the covered debt instrument 
pursuant to this paragraph (c)(5) if such investment is related to such 
failed underwriting.
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    \29\ With prior written approval of the FDIC, for the period of 
time stipulated by the FDIC, an advanced approaches FDIC-supervised 
institution is not required to deduct an investment in a covered 
debt instrument under this paragraph (c)(5) or otherwise under this 
section if such investment is made for the purpose of providing 
financial support to the financial institution as determined by the 
FDIC.
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* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if an 
FDIC-supervised institution does not have a sufficient amount of a 
specific component of capital to effect the full amount of any 
deduction from capital required under paragraph (d) of this section, 
the FDIC-supervised institution must deduct the shortfall amount from 
the next higher (that is, more subordinated) component of regulatory 
capital. Any investment by an advanced approaches FDIC-supervised 
institution in a covered debt instrument must be treated as an 
investment in the tier 2 capital for purposes of this paragraph when 
applied to the capital ratio calculations in section 324.10(c).
* * * * *
    (h) Net long position. (1) For purposes of calculating the amount 
of an FDIC-supervised institution's investment in the FDIC-supervised 
institution's own capital instrument, investment in the capital of an 
unconsolidated financial institution, and investment in a covered debt 
instrument, the institution's net long position is the gross long 
position in the underlying instrument determined in accordance with 
paragraph (h)(2) of this section, as adjusted to recognize any short 
position by the FDIC-supervised institution in the same instrument 
subject to paragraph (h)(3) of this section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the FDIC-
supervised institution, the adjusted carrying value of the exposure as 
that term is defined in Sec.  324.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  324.2;
    (iii) For each indirect exposure, the FDIC-supervised institution's 
carrying value of its investment in an investment fund or, 
alternatively:
    (A) An FDIC-supervised institution may, with the prior approval of 
the FDIC, use a conservative estimate of the amount of its investment 
in the FDIC-supervised institution's own capital instruments, its 
indirect investment in the capital of an unconsolidated financial 
institution, or its indirect investment in a covered debt instrument 
held through a position in an index, as applicable; or
    (B) An FDIC-supervised institution may calculate the gross long 
position for an indirect exposure by multiplying the FDIC-supervised 
institution's carrying value of its investment in the investment fund 
by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the FDIC-supervised institution's own capital 
instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings of the investment in the 
FDIC-supervised institution's own capital instruments, investment in 
the capital of an unconsolidated financial institution, or investment 
in an covered debt instrument, as applicable; and
    (iv) For a synthetic exposure, the amount of the FDIC-supervised

[[Page 13838]]

institution's loss on the exposure if the reference capital instrument 
were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the FDIC-supervised 
institution's Call Report, if the FDIC-supervised institution has a 
contractual right or obligation to sell the long position at a specific 
point in time and the counterparty to the contract has an obligation to 
purchase the long position if the FDIC-supervised institution exercises 
its right to sell, this point in time may be treated as the maturity of 
the long position such that the maturity of the long position and short 
position are deemed to match for purposes of the maturity requirement, 
even if the maturity of the short position is less than one year; and
    (iii) For an investment in an FDIC-supervised institution's own 
capital instrument under paragraph (c)(1) of this section, an 
investment in the capital of an unconsolidated financial institution 
under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and 
an investment in a covered debt instrument under paragraphs (c)(4) and 
(c)(5) of this section:
    (A) The FDIC-supervised institution may only net a short position 
against a long position in an investment in the FDIC-supervised 
institution's own capital instrument under paragraph (c)(1) of this 
section if the short position involves no counterparty credit risk;
    (B) A gross long position in an investment in the FDIC-supervised 
institution's own capital instrument, an investment in the capital of 
an unconsolidated financial institution, or an investment in a covered 
debt instrument due to a position in an index may be netted against a 
short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the FDIC-supervised 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument can be decomposed to provide recognition 
of the hedge. More specifically, the portion of the index that is 
composed of the same underlying instrument that is being hedged may be 
used to offset the long position if both the long position being hedged 
and the short position in the index are reported as a trading asset or 
trading liability (whether on- or off-balance sheet) on the FDIC-
supervised institution's Call Report, and the hedge is deemed effective 
by the FDIC-supervised institution's internal control processes, which 
have not been found to be inadequate by the FDIC.
* * * * *

    Dated: September 11, 2018.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, March 22, 2019.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC on September 19, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-06344 Filed 4-5-19; 8:45 am]
 BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P