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]
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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:
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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 https://
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 https://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
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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
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:
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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.
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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: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Email: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Ann E. Misback, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551. All public comments are
available from the Board’s website at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons 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,
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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: https://
www.fdic.gov/regulations/laws/federal/
Follow instructions for submitting
comments on the Agency website.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
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 https://www.fdic.gov/
regulations/laws/federal/, including any
personal information provided. Paper
copies of public comments may be
ordered from the FDIC Public
Information Center, 3501 North Fairfax
Drive, Room E–1002, Arlington, VA
22226 by telephone at (877) 275–3342 or
(703) 562–2200.
FOR FURTHER INFORMATION CONTACT:
OCC: 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.
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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
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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
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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).
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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).
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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
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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).
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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
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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.
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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.
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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.
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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
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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’’
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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
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12 CFR 252.161.
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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).
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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.
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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
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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’’).
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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).
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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
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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).
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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).
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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
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Public Law 111–203, 124 Stat. 1376 (2010).
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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
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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
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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.
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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
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U.S.C. 4802.
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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
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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
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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).
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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.
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(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.
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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.
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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
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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
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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.
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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
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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
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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
■
■
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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-
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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.
*
*
*
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*
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(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
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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
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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
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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.
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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
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§ 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
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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.
*
*
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*
*
(f) Insufficient amounts of a specific
regulatory capital component to effect
deductions. Under the corresponding
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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
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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
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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:
■
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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
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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-
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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).
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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
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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)
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(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.
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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
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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.
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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
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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
https://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 https://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
https://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
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]]>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]
=======================================================================
-----------------------------------------------------------------------
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: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://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 https://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: https://www.fdic.gov/regulations/laws/federal/ Follow instructions for submitting comments on the Agency
website.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal 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 https://www.fdic.gov/regulations/laws/federal/, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.
FOR FURTHER INFORMATION CONTACT:
OCC: 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\
---------------------------------------------------------------------------
\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\
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\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.
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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.
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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.
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\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.
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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.
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\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.
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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\
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\19\ The comments received on the 2015 proposal have been
considered in developing this proposal.
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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.
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\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.
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\22\ See 12 CFR 252.61.
\23\ See 12 CFR 252.161.
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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.''
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\24\ See https://www.bis.org/bcbs/publ/d387.pdf (TLAC Holdings
standard).
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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.
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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\
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\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'').
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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\
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\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).
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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).
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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.
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\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.
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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.
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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\
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\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.
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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.
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\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.
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The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. A
final regulatory flexibility analysis will be conducted after comments
received during the public comment period have been considered. 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\
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\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).
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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.
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\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.
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The FDIC supervises 3,604 institutions, of which 2,804 are
considered small entities for the purposes of RFA.\50\
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\50\ Call Report data, March 2018.
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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.
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\51\ Call Report data, March 2018.
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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:
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\52\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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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.
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\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.
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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\
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\54\ 12 U.S.C. 4802(a).
\55\ 12 U.S.C. 4802.
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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:
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\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\
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\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.
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(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.
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\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.
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(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.
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\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.
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(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.
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\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.
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* * * * *
(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
