Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations, 61776-61804 [2019-23472]

Download as PDF 61776 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations DEPARTMENT OF TREASURY Office of the Comptroller of the Currency 12 CFR Parts 1, 3, 5, 6, 23, 24, 32, 34, 160, and 192 [Docket ID OCC–2018–0040] RIN 1557–AE59 FEDERAL RESERVE SYSTEM 12 CFR Parts 206, 208, 211, 215, 217, 223, 225, 238, and 251 [Regulation Q; Docket No. R–1638] RIN 7100–AF 29 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 303, 324, 337, 347, 362, 365, and 390 RIN 3064–AE91 Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Final rule. AGENCY: The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are adopting a final rule that provides for a simple measure of capital adequacy for certain community banking organizations, consistent with section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (final rule). Under the final rule, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio framework (qualifying community banking organizations). Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9 percent will be considered to have satisfied the generally applicable riskbased and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will SUMMARY: VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 be considered to have met the wellcapitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. The final rule includes a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9 percent leverage ratio requirement, generally would still be deemed wellcapitalized so long as the banking organization maintains a leverage ratio greater than 8 percent. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. Similarly, a banking organization that fails to maintain a leverage ratio greater than 8 percent would not be permitted to use the grace period and must comply with the capital rule’s generally applicable requirements and file the appropriate regulatory reports. DATES: The final rule is effective on January 1, 2020. FOR FURTHER INFORMATION CONTACT: OCC: David Elkes, Risk Expert, Benjamin Pegg, Risk Expert, or Jung Sup Kim, Risk Specialist, Capital and Regulatory Policy (202) 649–6370; or Carl Kaminski, Special Counsel, or Daniel Perez, Senior Attorney, or Rima Kundnani, Senior Attorney, Chief Counsel’s Office, (202) 649–5490, for persons who are deaf or hearing impaired, TTY, (202) 649–5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. Board: Constance M. Horsley, Deputy Associate Director, (202) 452–5239; Juan Climent, Manager, (202) 872–7526; Andrew Willis, Lead Financial Institutions Policy Analyst, (202) 912– 4323, or Christopher Appel, Senior Financial Institutions Policy Analyst II, (202) 973–6862, Division of Supervision and Regulation; or Mark Buresh, Senior Counsel, (202) 452–270; or Andrew Hartlage, Counsel, (202) 452–6483, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: Benedetto Bosco, Chief, Capital Policy Section, bbosco@fdic.gov; Stephanie Lorek, Senior Capital Markets Policy Analyst, slorek@fdic.gov; Dushan Gorechan, Financial Analyst, dgorechan@fdic.gov; Kyle McCormick, Financial Analyst, kmccormick@ fdic.gov; Capital Markets Branch, Division of Risk Management PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 Supervision, regulatorycapital@fdic.gov, (202) 898–6888; or Michael Phillips, Counsel, mphillips@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Background B. Summary of the Final Rule II. Proposed Rule A. Proposed Community Bank Leverage Ratio Framework B. Summary of Comments III. Final Rule A. Qualifying Criteria for the Community Bank Leverage Ratio Framework 1. Leverage Ratio of Greater Than 9 Percent 2. Total Consolidated Assets 3. Total Off-Balance Sheet Exposures 4. Total Trading Assets and Trading Liabilities 5. Advanced Approaches Banking Organizations B. Definition of the Leverage Ratio’s Numerator and Denominator 1. Numerator 2. Denominator C. Calibration of the Leverage Ratio in Order To Qualify for the Community Bank Leverage Ratio D. Ability To Opt Into and Out of the Community Bank Leverage Ratio Framework E. Ongoing Compliance With the Community Bank Leverage Ratio Framework 1. Meeting the Definition of a Qualifying Community Banking Organization 2. Treatment of a Community Banking Organization That Falls Below Certain Leverage Ratio Levels F. FDIC Deposit Insurance Assessments Regulations G. Other Affected Regulations H. Effective Date of the Final Rule IV. Regulatory Analyses A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 E. Riegle Community Development and Regulatory Improvement Act of 1994 F. The Congressional Review Act I. Introduction A. Background On February 8, 2019, 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) published a notice of proposed rulemaking (the proposed rule or proposal) 1 to implement section 201 of the Economic Growth, Regulatory Relief, and 1 84 FR 3062 (February 8, 2019). E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations Consumer Protection Act (Act), and proposed to establish a community bank leverage ratio for qualifying community banking organizations as a simple alternative methodology to measure capital adequacy. The proposal was intended to simplify regulatory capital requirements and provide material regulatory compliance burden relief to qualifying community banking organizations that opt into the community bank leverage ratio framework. Section 201 of the Act directs the agencies to develop a community bank leverage ratio for qualifying community banking organizations of not less than 8 percent and not more than 10 percent. The Act provides that a qualifying community banking organization is a depository institution or depository institution holding company with total consolidated assets of less than $10 billion that satisfies such other factors, based on its risk profile, that the agencies determine are appropriate. Pursuant to section 201, a qualifying community banking organization that exceeds the community bank leverage ratio level established by the agencies shall be considered to have met: (i) The generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable rule); (ii) the capital ratio requirements in order to be considered well capitalized under the agencies’ prompt corrective action (PCA) framework (in the case of insured depository institutions); and (iii) any other applicable capital or leverage requirements. In addition, the Act directs the agencies to establish procedures for the treatment of qualifying community banking organizations that fall below the community bank leverage ratio level established by the agencies.2 Section 201 of the Act defines the community bank leverage ratio as the ratio of a qualifying community banking organization’s tangible equity capital to its average total consolidated assets, both as reported on the qualifying community banking organization’s applicable regulatory filing. In addition, the Act states that the agencies may determine that a banking organization is 2 The agencies note that, under existing PCA requirements applicable to insured depository institutions, to be considered ‘‘well capitalized’’ a banking organization must demonstrate that it is not subject to any written agreement, order, capital directive, or as applicable, prompt corrective action directive, to meet and maintain a specific capital level for any capital measure. See 12 CFR 6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(v) (Board); 12 CFR 324.403(b)(1)(v) (FDIC). The same legal requirements would continue to apply under the community bank leverage ratio framework. VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 not a qualifying community banking organization based on the banking organization’s risk profile. This determination shall be based on consideration of off-balance sheet exposures, trading assets and liabilities, total notional derivatives exposures, and such other factors as the agencies determine appropriate. The Act also specifies that the community bank leverage ratio framework does not limit the agencies’ authority in effect as of the date of enactment of the Act. The Act directs the agencies to consult with applicable state bank supervisors in carrying out section 201 of the Act and to notify the applicable state bank supervisor of any qualifying community banking organization that exceeds, or does not exceed after previously exceeding, the community bank leverage ratio. As part of this consultation process, the agencies had a series of discussions with state bank supervisors, before and after publication of the proposal, that helped shape key elements of the community bank leverage ratio framework in the final rule. In response to the proposal, the agencies received approximately 50 public comment letters and approximately 500 form letters from depository institutions, depository institution holding companies, trade associations, and other interested parties. Commenters generally supported the agencies’ efforts to simplify the regulatory capital requirements. However, as discussed in greater detail below, many commenters indicated that certain aspects of the proposal were burdensome or unnecessarily complex, and some commenters expressed concern that banking supervisors would make the proposed community bank leverage ratio the de facto minimum capital requirement for community banking organizations, irrespective of whether they have opted into the community bank leverage ratio framework. Commenters generally favored greater simplicity in the community bank leverage ratio framework, and recommended the removal of the proposal’s separate PCA proxy levels. After reviewing the comments, the agencies are making several modifications to address commenters’ concerns and further simplify the community bank leverage ratio framework while retaining the quality and quantity of regulatory capital in the banking system. B. Summary of the Final Rule In response to comments received on the proposal, the agencies are making a PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 61777 number of changes in this final rule. In addition, the final rule clarifies other important aspects of the community bank leverage ratio framework. The key changes being made to the final rule include the following: • Adoption of tier 1 capital, and therefore the existing leverage ratio, into the community bank leverage ratio framework; • Removal of the qualifying criteria for mortgage servicing assets and deferred tax assets arising from temporary differences; • Removal of the PCA proxy levels; and • Allowing a banking organization that elects to use the community bank leverage ratio framework to be considered well-capitalized during the two-quarter grace period if its leverage ratio is 9 percent or less and greater than 8 percent. Under the final rule, the numerator of the community bank leverage ratio is the existing measure of tier 1 capital used by non-advanced approaches banking organizations.3 4 Numerous commenters described complexities that would be created with the proposed introduction of a new measure of capital, tangible equity, in the community bank leverage ratio framework and, therefore, the agencies have adopted the commenters’ recommendation to use tier 1 capital. The use of tier 1 capital also has the benefit of including the existing threshold deduction approaches for mortgage servicing assets (MSAs) and deferred tax assets arising from temporary differences (temporary difference DTAs) which enabled the agencies to remove the qualifying criteria related to these exposures from the community bank leverage ratio framework. Due to the adoption of tier 1 capital, the community bank leverage ratio is generally calculated in the same 3 Under the final rule, a qualifying community banking organization that elects to use the community bank leverage ratio framework will calculate its leverage ratio taking into account the modifications made in relation to the capital simplifications rule and current expected credit losses methodology (CECL) transitions final rule. See 84 FR 35234 (July 22, 2019) and 84 FR 4222 (February 14, 2019), respectively. The agencies anticipate that the tier 1 capital amount used in the numerator of the calculation will reflect any future modifications made to the tier 1 capital definition applicable to non-advanced approaches banking organizations. See 84 FR 35234 (July 22, 2019). 4 For purposes of the community bank leverage ratio framework, an electing banking organization is not required to calculate tier 2 capital and therefore would not be required to make any deductions that would be taken from tier 2 capital or potentially tier 1 capital due to insufficient tier 2 capital. As part of the final rule the agencies are amending 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); 12 CFR 324.22(f) (FDIC). E:\FR\FM\13NOR2.SGM 13NOR2 61778 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations manner as the generally applicable rule’s leverage ratio: Tier 1 capital divided by average total consolidated assets minus amounts deducted from tier 1 capital. As a result, the final rule incorporates and refers to the generally applicable rule’s leverage ratio. Commenters also raised concerns that the PCA proxy levels included in the proposal caused unnecessary complexity in the community bank leverage ratio framework and requested that the framework include a grace period to transition back to the generally applicable rule if a banking organization’s community bank leverage ratio was less than the well-capitalized threshold. The agencies are incorporating this feedback into the final rule by modifying the definition of a ‘‘qualifying community banking organization’’ to include the level of the leverage ratio as a qualifying criterion. The final rule provides that to be a ‘‘qualifying community banking organization,’’ a banking organization must not be an advanced approaches banking organization 5 and must meet the following qualifying criteria: (i) A leverage ratio of greater than 9 percent; (ii) total consolidated assets of less than $10 billion; (iii) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets; and (iv) the sum of total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Consistent with section 201, the final rule provides that qualifying community banking organizations that opt into the community bank leverage ratio framework (electing banking organization) will be deemed to have met the ‘‘well capitalized’’ ratio requirements and be in compliance with the generally applicable rule. Such banking organizations will not be required to calculate and report riskbased capital ratios. Notably, the agencies have retained the proposal’s 9 percent calibration for the leverage ratio in the community bank leverage ratio framework. The agencies believe that a 9 percent calibration, in conjunction with the final rule’s qualifying criteria, will not 5 An advanced approaches banking organization is generally defined as a firm with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposure, and depository institution subsidiaries of those firms. Proposed rulemakings to tailor capital and liquidity requirements applicable to large banking organizations may result in changing the definition of advanced approaches banking organization. See 83 FR 66024 (December 21, 2018) and 84 FR 24296 (May 24, 2019). VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 result in a reduction in the aggregate level of regulatory capital currently held by electing banking organizations. Further, incorporating into the community bank leverage ratio framework the existing leverage ratio and the two-quarter grace period will facilitate the transition to and from the generally applicable rule. Banking organizations opt into and out of the framework through their Consolidated Reports of Condition and Income (Call Report) or Form FR–Y9C. If a qualifying community banking organization that has opted into the community bank leverage ratio framework subsequently fails to satisfy one or more of the qualifying criteria but continues to report a leverage ratio of greater than 8 percent, the banking organization could continue to use the community bank leverage ratio framework and be deemed to meet the ‘‘well capitalized’’ capital ratio requirements for a grace period of up to two quarters.6 As long as the banking organization is able to return to compliance with all the qualifying criteria within two quarters, it will continue to be deemed to meet the ‘‘well capitalized’’ ratio requirements and be in compliance with the generally applicable rule. A banking organization will be required to comply with the generally applicable rule and file the relevant regulatory reports if the banking organization (i) is unable to restore compliance with all qualifying criteria during the two-quarter grace period (including coming into compliance with the greater than 9 percent leverage ratio requirement), (ii) reports a leverage ratio of 8 percent or less, or (iii) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The agencies believe that the final rule provides a simple framework that simultaneously meets safety and soundness goals and responds to the concerns conveyed through comments received on the proposal. Additionally, the final rule meets the policy objectives described in the proposal. First, the community bank leverage ratio framework is available to a meaningful number of well-capitalized banking organizations with less than $10 billion in total consolidated assets. Second, the community bank leverage ratio requirement is calibrated to maintain the overall amount of capital currently 6 As a result of adopting the grace period construct, the final rule does not include the agencies’ proposed PCA proxy levels, which would have allowed certain banking organizations that fell to a leverage ratio of 9 percent or lower to remain in the community bank leverage ratio framework indefinitely. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 held by qualifying community banking organizations. Third, banking organizations with higher risk profiles remain subject to the generally applicable rule to ensure that such banking organizations hold capital commensurate with the risk of their exposures and activities.7 Fourth, the agencies maintain the authority to take supervisory action under the PCA framework and other statutes and regulations based on a banking organization’s capital ratios and risk profile. The final rule also provides regulatory compliance burden relief as the community bank leverage ratio is simple to apply and allows a qualifying community banking organization to avoid the burden of calculating and reporting risk-based capital ratios under the generally applicable rule. II. Proposed Rule A. Proposed Community Bank Leverage Ratio Framework The agencies proposed the community bank leverage ratio framework as a simple alternative methodology to measure capital adequacy for qualifying community banking organizations, based on the requirements of section 201 of the Act. Under the proposal, a qualifying community banking organization would have been defined as a depository institution or depository institution holding company that was not an advanced approaches banking organization and that met the following criteria (qualifying criteria), each as described further below: • Total consolidated assets of less than $10 billion; • Total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets; • Total trading assets plus trading liabilities of 5 percent or less of total consolidated assets; • MSAs of 25 percent or less of tangible equity (as defined in the proposal); and • Temporary difference DTAs of 25 percent or less of tangible equity. Under the proposal, the community bank leverage ratio would have been calculated as the ratio of tangible equity to average total consolidated assets. Tangible equity would have been defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income (AOCI), 7 12 CFR 3.10(a)–(b) (OCC); 12 CFR 217.10(a)–(b) (Board); 12 CFR 324.10(a)–(b) (FDIC). E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill, and other intangible assets (other than MSAs), each as of the most recent calendar quarter and calculated in accordance with a qualifying community banking organization’s regulatory reports. Average total consolidated assets would have been calculated in a manner similar to the generally applicable rule’s leverage ratio denominator in that amounts deducted from the numerator would also have been excluded from the denominator. Under the proposal, a qualifying community banking organization could have elected to use the community bank leverage ratio framework if its community bank leverage ratio was greater than 9 percent. The proposal would have permitted an electing banking organization to remain in the community bank leverage ratio framework even in cases where such an institution’s community bank leverage ratio subsequently fell to 9 percent or less. In this situation, the proposal would have continued to provide for the agencies’ supervisory actions under PCA and other applicable statutes and regulations. Specifically, for insured depository institutions, the proposal would have incorporated community bank leverage ratio levels as proxies for the following PCA categories: Adequately capitalized, undercapitalized and significantly undercapitalized. If an electing banking organization had met certain community bank leverage ratio levels, it would have been considered to have met the capital ratio requirements within the applicable corresponding PCA category and been subject to the same restrictions that currently apply to any other insured depository institution in the same PCA category. After issuing the proposal, the agencies proposed a regulatory capital schedule that would have been simpler than Schedules RC–R of the Call Report and HC–R of Form FR Y–9C for use by electing banking organizations. On this proposed reporting schedule, the community bank leverage ratio calculation would have required a banking organization to report significantly less information than under the generally applicable rule. B. Summary of Comments Collectively, the agencies received approximately 50 public comment letters and approximately 500 form letters on the proposal from depository institutions, depository institution holding companies, trade associations, and other interested parties. As further VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 detailed in the more comprehensive discussion of the final rule, commenters generally supported the agencies’ efforts to propose a simpler regulatory capital framework but expressed concerns with some aspects of the proposal. Several commenters expressed concern that calibrating the community bank leverage ratio at 9 percent is unnecessarily punitive and would disqualify too many banking organizations from being able to use the community bank leverage ratio framework. These commenters favored calibrating the community bank leverage ratio at 8 percent. One commenter suggested calibrating the community bank leverage ratio at 10 percent, the highest permitted by statute, because higher leverage ratios may lower the adverse effects of crises on U.S. GDP, which exceeds the costs that may arise from lower capital formation and lower GDP. Many commenters also expressed concern that the proposed PCA proxy levels would have added unnecessary complexity to the community bank leverage ratio framework, and therefore recommended their elimination in the final rule. Some commenters expressed concern that the agencies would not permit an insured depository institution with a community bank leverage ratio at or below 9 percent to demonstrate that it is well capitalized under the generally applicable rule before assigning it a PCA category other than well capitalized. Other commenters indicated that some of the qualifying criteria were unnecessary (such as that for MSAs), overly complex to calculate (such as the off-balance sheet exposures criterion), or did not appropriately reflect the risks of underlying assets. Multiple commenters suggested that the proposed numerator of the community bank leverage ratio should be based on tier 1 capital, as defined under the generally applicable rule, rather than on a new ‘‘tangible equity’’ measure. Commenters expressed concern that examiners may penalize banking organizations for opting into or out of the framework, and that the community bank leverage ratio could become the de facto minimum capital requirement for all community banking organizations. III. Final Rule A. Qualifying Criteria for the Community Bank Leverage Ratio Framework The agencies received comments requesting that they eliminate or modify certain of the qualifying criteria in the proposal, particularly the MSA and the PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 61779 temporary difference DTA criteria. Many of these commenters also suggested using tier 1 capital, as recently modified by the agencies in a final rule (simplifications rule),8 as the numerator of the leverage ratio. Several commenters noted that some of the qualifying criteria, such as the proposed limit for MSAs, could prevent many otherwise qualifying community banking organizations from opting into the community bank leverage ratio framework. Finally, some commenters suggested that the off-balance sheet criterion, as proposed, would be overly burdensome for community banking organizations to calculate and that certain elements included in this criterion should be eliminated as they do not represent material risk to banking organizations. After considering the comments, the agencies have decided to modify the definition of ‘‘qualifying community banking organization’’ by removing the MSA criterion and the temporary difference DTA criterion. Exposures to MSAs and temporary difference DTAs will be addressed through the use of tier 1 capital as the numerator, which requires deduction of such assets to the extent they exceed certain regulatory thresholds, rather than the proposed use of ‘‘tangible equity.’’ The use of tier 1 capital as the numerator is discussed in more detail below in this SUPPLEMENTARY INFORMATION. Under the final rule, a qualifying banking organization must not be an advanced approaches banking organization and must have: • A leverage ratio of greater than 9 percent; • Total consolidated assets of less than $10 billion; • Total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidated assets, and • Total trading assets plus trading liabilities of 5 percent or less of total consolidated assets.9 8 See 84 FR 35243 (July 22, 2019). The agencies also are adopting a final rule that permits banking organizations not subject to the advanced approaches capital rule to implement the simplifications rule in the quarter beginning January 1, 2020, or wait until the quarter beginning April 1, 2020. 9 Consistent with the proposal, the agencies have reserved the authority to disallow the use of the community bank leverage ratio framework by a depository institution or depository institution holding company, based on the risk profile of the banking organization. This authority is reserved under the general reservation of authority included in the capital rule, in which the community bank leverage ratio framework would be codified. See 12 CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR E:\FR\FM\13NOR2.SGM Continued 13NOR2 61780 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations 1. Leverage Ratio of Greater Than 9 Percent Under the proposal, a banking organization would have been required to have a community bank leverage ratio of greater than 9 percent in order to be eligible to opt into the community bank leverage ratio framework. The final rule adopts the 9 percent calibration of the community bank leverage ratio as proposed. The proposal also would have allowed an electing banking organization to remain in the community bank leverage ratio framework despite having a community bank leverage ratio which subsequently fell to 9 percent or less. As discussed above, the final rule eliminates the PCA proxy levels and, therefore, an electing banking organization will generally be required to maintain a leverage ratio of greater than 9 percent in order to be eligible to use the community bank leverage ratio framework. A two-quarter grace period, as discussed in further detail below, is available for a banking organization that ceases to meet any of the qualifying criteria, including a banking organization whose leverage ratio falls to 9 percent or less, but is greater than 8 percent. During the grace period, a banking organization may continue to be treated as a qualifying community banking organization and is presumed to satisfy the ‘‘well capitalized’’ ratio requirements and be in compliance with the generally applicable rule without having to calculate and report risk-based capital ratios. 2. Total Consolidated Assets Under the proposal, a qualifying community banking organization would be required to have less than $10 billion in total consolidated assets as of the end of the most recent calendar quarter, in accordance with the Act. Total consolidated assets would be calculated in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y– 9C, as applicable. A commenter indicated that the Act places no limit on the ability of the agencies to apply the community bank leverage ratio framework to institutions with $10 billion or more in total assets and suggested that the agencies should apply the community bank leverage ratio framework based on suitability for 324.1(d) (FDIC). In addition, for purposes of the capital rule and section 201 of the Act, the agencies have reserved the authority to take action under other provisions of law, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law or regulation. See 12 CFR 3.1(b) (OCC); 12 CFR 217.1(b) (Board); 12 CFR 324.1(b) (FDIC). VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 relief rather than on size thresholds. The same commenter urged the agencies to take into account acquisitions and to index applicability to incorporate inflation or other relevant market measures. The agencies have considered the concerns raised with regard to the asset size threshold. The agencies continue to believe that the community bank leverage ratio framework is appropriate for most banking organizations with total consolidated assets of less than $10 billion that meet the other qualifying criteria. The agencies believe that the generally applicable rule is appropriate for larger banking organizations and banking organizations with concentrations in off-balance sheet exposures and trading assets and liabilities because such banking organizations may present risks that are not appropriately captured by the community bank leverage ratio framework. The agencies recently finalized a rule to simplify the generally applicable rule, and have proposed to modify and tailor several of the prudential requirements applicable to banking organizations with $100 billion or more in total consolidated assets.10 11 The agencies believe these revisions reflect an appropriate tailoring of regulations based on asset size and other risk characteristics to ensure that the requirements remain appropriate for the risk profiles of different banking organizations while also maintaining the safety and soundness of the banking industry. As such, the agencies are finalizing without modification the $10 billion in total assets size threshold. 3. Total Off-Balance Sheet Exposures Under the proposal, a qualifying community banking organization would have been required to have total offbalance sheet exposures of 25 percent or less of its total consolidated assets, as of the end of the most recent calendar quarter. The agencies included this qualifying criterion in the community bank leverage ratio framework because the proposed community bank leverage ratio included only on-balance sheet assets in its denominator and thus would not have required a qualifying community banking organization to hold capital against its off-balance sheet exposures. This qualifying criterion was intended to reduce the likelihood that a qualifying community banking organization with significant off-balance sheet exposures would hold less capital under the community bank leverage 84 FR 35243 (July 22, 2019). 83 FR 66024 (December 21, 2018) and 84 FR 24296 (May 24, 2019). ratio framework than under the generally applicable rule. Under the proposal, total off-balance sheet exposures would have been calculated as the sum of the notional amounts of certain off-balance sheet items against which banking organizations would hold capital under the generally applicable rule 12 as of the end of the most recent calendar quarter. Total off-balance sheet exposures would have included: a. The unused portions of commitments (except for unconditionally cancellable commitments); b. Self-liquidating, trade-related contingent items that arise from the movement of goods; c. Transaction-related contingent items (i.e., performance bonds, bid bonds and warranties); d. Sold credit protection in the form of guarantees and credit derivatives; e. Credit-enhancing representations and warranties; f. Off-balance sheet securitization exposures; g. Letters of credit; h. Forward agreements that are not derivative contracts; and i. Securities lending and borrowing transactions. Total off-balance sheet exposures would have excluded the notional amount for all derivative contracts except credit derivatives for sold credit protection. As stated in the proposal, the agencies believe that the notional amount for derivatives (other than credit derivatives for sold credit protection) is not an appropriate indicator of credit risk and could inadvertently disqualify a banking organization from using the community bank leverage ratio framework if the banking organization is otherwise appropriately using derivatives to hedge its risks. The proposed components of total offbalance sheet exposures would have been generally consistent with offbalance sheet items that are included in risk-weighted assets in the generally applicable rule, except for securities lending and borrowing transactions. Securities lending and borrowing transactions would have been assigned amounts in accordance with the reporting instructions for these items in Schedules RC–L of the Call Report or HC–L of Form FR Y–9C, as applicable. The proposed calculation of total offbalance sheet exposures would have been simpler than under the generally applicable rule, which requires that offbalance sheet exposures be converted to 10 See 11 See PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 12 See 12 CFR 324.33 (FDIC); 12 CFR 217.33 (Federal Reserve); 12 CFR 3.33 (OCC). E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations on-balance sheet equivalents for purposes of determining capital requirements. The agencies received several comments and requests for clarification on the proposed limit for off-balance sheet exposures. One commenter expressed concern that the process for categorizing off-balance sheet exposures, such as off-balance sheet securitizations, was overly complex, and the commenter would prefer that the off-balance sheet filter instead identify specific transactions and products routinely used by community banks that meet the off-balance sheet exposure definition. Another commenter found the wording in the proposed rule unclear and noted that it would be beneficial for the agencies to reference the specific Schedule RC–L line items that would be included in the 25 percent limitation for off-balance sheet line items. Several commenters expressed concern about the inclusion of residential mortgage-related off-balance sheet items. One commenter wrote that the agencies should not exclude banking organizations from using the community bank leverage ratio framework due to any mortgage origination-related hedging activity. The commenter expressed concern that as proposed the criterion may capture certain exposures related to routine functioning of the mortgage market. Another commenter noted that mortgage sales to certain Federal Home Loan Banks (FHLBs) through the Mortgage Partnership Finance Program could be captured by the off-balance sheet qualifying criteria. A commenter suggested that FHLB advances should be eliminated from the calculation because such advances are typically secured at a significant discount relative to underlying loan collateral. The commenter was concerned that a banking organization may be disqualified from the community bank leverage ratio framework due to its level of unfunded commitments and FHLB lines of credit. Finally, one commenter requested clarification on whether sales of whenissued mortgage-backed security contracts are included in the 25 percent limitation, stating that these items should be excluded because, in the commenter’s view, they are of lower risk. The agencies considered the commenters’ concerns and have decided to finalize the off-balance sheet qualifying criterion as proposed with several clarifications. The agencies are clarifying that the off-balance sheet qualifying criterion incorporates offbalance sheet exposures currently VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 required to be captured and reported by banking organizations in Schedules RC– L and RC–R of the Call Report or HC– L and HC–R of Form FR Y–9C which thereby permits these firms to leverage their existing identification, measurement and reporting infrastructure for these exposures. The agencies also are clarifying that banking organizations are only required to identify off-balance sheet securitizations to the extent that they are not already captured as part of another off-balance sheet exposure category. For example, if a banking organization issues a credit enhancing representation and warranty that also meets the definition of a traditional securitization, the final rule does not require that such an exposure be separately identified as an offbalance sheet securitization exposure because the exposure would already be captured through the requirement to include credit enhancing representations and warranties in the off-balance sheet qualifying criterion. The agencies also are clarifying that hedging techniques related to mortgage banking activities are generally only captured in the off-balance sheet qualifying criterion to the extent such exposures are treated as off-balance sheet exposures and subject to credit conversion factors under the generally applicable rule. For this reason, typical mortgage banking activities such as forward loan delivery commitments between banking organizations and investors, which typically are derivative contracts, were excluded from the offbalance sheet exposure criterion in the proposal and are excluded under the final rule. Put and call options on mortgage-backed securities are also typically derivatives and excluded from this criterion under the final rule. A contractual obligation for the future purchase of a ‘‘to be announced’’ (i.e., when-issued) mortgage securities contract, that does not meet the definition of a derivative contract under the generally applicable rule, would be captured in the off-balance sheet qualifying criterion as it would be considered a forward agreement under the generally applicable rule. In contrast, a contractual obligation for the future sale (rather than purchase) of a ‘‘to be announced’’ mortgage securities contract, that does not meet the definition of a derivative contract under the generally applicable rule, would not be captured in the off-balance sheet qualifying criterion as it would not be considered a forward agreement under the generally applicable rule. Banking organizations that sell mortgages to certain FHLBs through the Mortgage Partnership Finance Program PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 61781 may provide a credit enhancement to the FHLB. If these credit enhancements meet the definition of a creditenhancing representation and warranty or would otherwise be considered an off-balance sheet securitization under the generally applicable rule, then the exposure amount would be included in the off-balance sheet qualifying criterion. Because these are credit risk exposures that would be assigned riskbased capital under the generally applicable rule, inclusion in the offbalance sheet qualifying criterion is appropriate. The agencies analyzed average offbalance sheet exposures for banking organizations with less than $10 billion in total consolidated assets and observed that the vast majority of such banking organizations report off-balance sheet exposures totaling less than 25 percent of total consolidated assets, as of March 31, 2019. Accordingly, the agencies have determined that both the definition and calibration of the total off-balance sheet exposures qualifying criterion should allow a meaningful number of banking organizations to use the community bank leverage ratio framework without unduly restricting lending practices. The criterion should help to prevent banking organizations from engaging in substantial off-balance sheet activity without a commensurate capital requirement. 4. Total Trading Assets and Trading Liabilities Under the proposal, a qualifying community banking organization would have been required to have total trading assets and trading liabilities of 5 percent or less of its total consolidated assets, each measured as of the end of the most recent calendar quarter. Total trading assets and trading liabilities would have been calculated as the sum of those exposures, in accordance with the reporting instructions for these items on Schedules RC of the Call Report or HC of Form FR–Y–9C, as applicable. A banking organization would divide the sum of its total trading assets and trading liabilities by its total consolidated assets to determine its percentage of total trading assets and trading liabilities. The agencies recognize the potential elevated levels of risk and complexity that can be associated with certain trading activities. For this reason, banking organizations with significant trading assets and trading liabilities are subject to a market risk capital requirement under the generally E:\FR\FM\13NOR2.SGM 13NOR2 61782 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations applicable rule.13 In contrast, electing banking organizations would not be required to calculate additional market risk capital requirements and, as a result, the community bank leverage ratio framework may not appropriately capitalize for material amounts of trading assets and trading liabilities. In addition, elevated levels of trading activity can produce a heightened level of earnings volatility, which has implications for capital adequacy. Therefore, the agencies do not believe it is appropriate to make the community bank leverage ratio framework available to banking organizations with material market risk exposure. However, the agencies do not believe that low levels of trading activity should preclude a banking organization from using the community bank leverage ratio framework. Based on the agencies’ analysis, the vast majority of banking organizations with less than $10 billion in total consolidated assets have total trading assets and trading liabilities well below 5 percent of their total consolidated assets, as of March 31, 2019. The agencies believe that the proposed 5 percent threshold will help ensure that banking organizations that engage in significant trading activity are not subject to the community bank leverage ratio framework. Further, this criterion is generally consistent with section 203 of the Act, which excludes a community banking organization from proprietary trading restrictions if its total trading assets and trading liabilities are 5 percent or less of its total consolidated assets. The agencies did not receive any comment with regard to the proposed qualifying criterion for total trading assets and trading liabilities and are finalizing this requirement as proposed. 5. Advanced Approaches Banking Organizations Under the proposal, advanced approaches banking organizations would not have been eligible to use the community bank leverage ratio framework. The agencies received no comment on this requirement and believe that, in general, section 201 of the Act is designed to provide regulatory burden relief for banking organizations with less than $10 billion in total consolidated assets and that have a limited risk profile. A banking organization with less than $10 billion in total consolidated assets may be subject to the advanced approaches rules if it is a subsidiary of 13 12 CFR part 3, subpart F (OCC); 12 CFR part 217, subpart F (Board); 12 CFR part 324, subpart F (FDIC). VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 a much larger banking organization. While these types of advanced approaches banking organizations may be relatively small banking organizations, the agencies do not believe they share the same type of risk characteristics as non-complex community banking organization for which the community bank leverage ratio framework is appropriate. Consequently, under the final rule, an advanced approaches banking organization will not be eligible to use the community bank leverage ratio framework, regardless of its size. B. Definitions of the Leverage Ratio’s Numerator and Denominator 1. Numerator Under the proposal, the numerator of the community bank leverage ratio would have been tangible equity, calculated as a banking organization’s total bank equity capital or total holding company equity capital, as applicable, determined in accordance with the reporting instructions to Schedule RC of the Call Report or Schedule HC of Form FR Y–9C, prior to including minority interests, less: (i) Accumulated other comprehensive income (AOCI), (ii) all intangible assets (other than MSAs), and (iii) DTAs, net of any related valuation allowances, that arise from net operating loss and tax credit carryforwards, each as of the end of the most recent calendar quarter. Tangible equity would not have included minority interests (equity of a consolidated subsidiary that is not owned by the qualifying community banking organization) because minority interests do not have the same loss absorption capacity as other components of tangible equity at the consolidated banking organization level. The agencies received numerous comments in response to the proposed use of tangible equity as the numerator of the community bank leverage ratio. Many commenters noted that banking organizations are already familiar with the current tier 1 capital calculation, and that tier 1 capital, therefore, should be used to calculate the community bank leverage ratio instead of tangible equity. A commenter also argued that the burden associated with implementing the community bank leverage ratio framework would exceed the reporting relief provided by reduced complexity. Several commenters expressed concerns that it would be too complex for a banking organization to switch between the calculation of tangible equity and tier 1 capital as it either opts into or out of the community bank leverage ratio framework or no longer meets the definition of a PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 qualifying community banking organization. Several commenters recommended the agencies instead use tier 1 capital for the numerator, suggesting that this would not only simplify the calculation when switching between frameworks but would also increase comparability across all banking organizations. Commenters also preferred to use tier 1 capital for the numerator in order to ensure that certain instruments, such as trust preferred securities (TruPS) and common stock issued by bank subsidiaries, would count as regulatory capital under the community bank leverage ratio framework, up to their current limits. Finally, several commenters noted that use of tier 1 capital as the numerator would avoid the need for revisions to state banking laws that reference tier 1 capital, including but not limited to state law lending limits. Multiple commenters, although not explicitly expressing a preference for using tier 1 capital as the numerator, did request that certain adjustments be made to the proposed definition of tangible equity. A commenter recommended that cumulative preferred stock with a stated final maturity date be included as an eligible component of tangible equity. Several commenters requested that the agencies allow TruPS to count as tangible equity. A commenter recommended that the agencies include common stock minority interest of up to 10 percent of the numerator of the community bank leverage ratio where the subsidiary holds risk-weighted assets of at least the amount of common stock minority interest being included. Finally, some commenters expressed concern that the CECL methodology under U.S. generally accepted accounting principles could impact eligibility for the community bank leverage ratio framework and recommended that the agencies provide for an ongoing adjustment to the community bank leverage ratio numerator that approximates the incremental regulatory capital impact of CECL credit loss allowance levels over levels currently recorded under U.S. generally accepted accounting principles. Taking into account the concerns of commenters and seeking to balance burden reduction with safety and soundness, the agencies have decided to replace the proposed tangible equity measure with the current calculation of tier 1 capital as the numerator of the community bank leverage ratio. This change would align the final rule’s calculation of the leverage ratio with the generally applicable rule’s leverage E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations ratio, a calculation methodology with which banking organizations are already familiar, and therefore would streamline adoption of the community bank leverage ratio framework. In addition, the use of tier 1 capital in the community bank leverage ratio framework will enhance comparability among banking organizations and remove the need for separate qualifying criteria for MSAs and temporary difference DTAs, as discussed previously. Based on the agencies’ analysis, for the majority of banking organizations with less than $10 billion in total consolidated assets, the proposed tangible equity and the current tier 1 capital figures result in nearly the same amount of regulatory capital. Finally, the use of tier 1 capital as the numerator of the leverage ratio allows for the incorporation of changes from the simplifications rule, which further simplifies the tier 1 capital calculation by amending the treatment of MSAs, temporary difference DTAs, investments in capital instruments, and minority interests.14 The agencies note that the generally applicable rule requires deductions from tier 2 capital related to investments in capital instruments of unconsolidated financial institutions when such investments exceed certain limits and that such deductions can affect the calculation of tier 1 capital.15 This corresponding deduction approach requires a banking organization to make deductions from the same component of capital for which the underlying instrument would qualify if it was issued by the banking organization itself. In addition, if a banking organization does not have a sufficient amount of a specific regulatory capital component against which to effect the deduction, the shortfall must be deducted from the next higher (that is, more subordinated) regulatory capital component. Without any revision to the corresponding deduction approach, an electing banking organization with investments in tier 2 capital instruments of other financial institutions could have been required to apply the corresponding deduction approach potentially resulting in deductions from tier 1 capital. Under the final rule, however, since the community bank leverage ratio framework does not have a total capital requirement, an electing banking organization is neither required to calculate tier 2 capital nor make any deductions that would have been taken from tier 2 capital under the generally 14 See 84 FR 35234 (July 22, 2019). 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 12 CFR 324.22(c)(2) (FDIC). 15 See VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 applicable rule. Therefore, if an electing banking organization has investments in the capital instruments of an unconsolidated financial institution that would qualify as tier 2 capital of the electing banking organization under the generally applicable rule (tier 2 qualifying investments), and the banking organization’s total investments in the capital of unconsolidated financial institutions exceed the threshold for deduction, the banking organization is not required to deduct the tier 2 qualifying investments. An electing banking organization is only required to make a deduction from its common equity tier 1 capital or tier 1 capital if the sum of its investments in the capital of an unconsolidated financial institution is in a form that would qualify as common equity tier 1 capital or tier 1 capital instruments of the electing banking organization and exceeds the threshold for deduction. The agencies do not believe this is a common occurrence and observed that as of March 31, 2019, very few community banking organizations made a deduction from tier 2 capital. Therefore, the agencies believe it is appropriate to clarify this aspect of the tier 1 calculation for qualifying community banking organizations to ensure that it can be made as simply as possible. Further, although the community bank leverage ratio framework will not require qualifying community banking organizations to make deductions from their regulatory capital calculations for investments in tier 2 capital instruments issued by other financial institutions, the agencies will continue to monitor such investments and will address, on a caseby-case basis, any instances where such activity potentially creates an unsafe or unsound practice or condition. With respect to a banking organization that has not elected the community bank leverage ratio framework but invests in an instrument (e.g., subordinated debt instrument) issued by an electing banking organization that would qualify as tier 2 capital under the generally applicable rule, the investing banking organization would continue to treat the instrument as tier 2 capital notwithstanding the electing banking organization’s capital treatment of the instrument. The agencies believe adoption of tier 1 capital, including the adjustments described above, also addresses commenters’ concerns about the inclusion of TruPS,16 certain other 16 Banking organizations that are currently grandfathered and eligible to include TruPS in tier 1 capital can continue to include TruPS in tier 1 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 61783 preferred stock instruments, and minority interests includable in the numerator of the leverage ratio calculation by maintaining the same treatment that currently applies under the generally applicable rule’s calculation for tier 1 capital for nonadvanced approaches banking organizations. 2. Denominator Under the proposal and consistent with the Act, the community bank leverage ratio denominator would have been based on a banking organization’s average total consolidated assets. Specifically, average total consolidated assets for purposes of the denominator would have been calculated in accordance with the reporting instructions to Schedules RC–K on the Call Report or HC–K on Form FR Y–9C, as applicable, less the items deducted from the numerator, other than AOCI. The proposed denominator therefore would have been similar, but not identical, to the denominator of the generally applicable rule’s leverage ratio. The agencies received a limited number of comments on the proposed denominator for the community bank leverage ratio. A commenter suggested the agencies consider seasonality in total assets and allow for the use of fourquarter average total consolidated assets for the denominator. The agencies note that the denominator as proposed would be average total consolidated assets as described above, which would have substantially maintained consistency with the current regulatory capital calculation for average total consolidated assets. Another commenter asked that the agencies consider allowing a deduction from the denominator for pass-through reserve balances held with the Federal Reserve System. The commenter argued that allowing this deduction would refine this calculation for correspondent banking organizations to align more closely their capital requirements to their risk and would, in the commenter’s view, not unduly discourage correspondent banking organizations from assisting community banking organization clients with holding proper reserve balances with the Federal Reserve System. The agencies note that the leverage ratio in the generally applicable rule is capital under the community bank leverage ratio framework, subject to existing limits. See 12 CFR 3.20(c)(3) (OCC); 12 CFR 217.20(c)(3) (Board); 12 CFR 324.20(c)(3) (FDIC). See 12 CFR 3.22(c)(2)(iii)(A) (OCC); 12 CFR 217.22(c)(2)(iii)(A) (Board); 12 CFR 324.22(c)(2)(iii)(A) (FDIC). See 12 CFR 217.300(c) (Board). E:\FR\FM\13NOR2.SGM 13NOR2 61784 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations designed to be a simple, non-risk-based on-balance sheet measure. Adjusting the leverage ratio denominator as commenters suggested would add unnecessary complexity to the measure. Therefore, the agencies are finalizing the leverage ratio denominator as proposed, except that items deducted from the denominator will align with the deductions from tier 1 capital as the numerator rather than from the proposed tangible equity measure as the numerator. C. Calibration of the Leverage Ratio in Order To Qualify for the Community Bank Leverage Ratio The agencies proposed to permit a qualifying community banking organization to elect to use the community bank leverage ratio framework if the organization’s community bank leverage ratio was greater than 9 percent at the time of election. A qualifying community banking organization with a community bank leverage ratio greater than 9 percent would have been considered to have met: (i) The requirements of the generally applicable rule; (ii) the wellcapitalized capital ratio thresholds under the agencies’ PCA framework for insured depository institutions or the well-capitalized standards under the Board’s regulations for holding companies, as applicable; and (iii) any other capital or leverage requirements to which the banking organization is subject. Such qualifying community banking organizations would not have been required to calculate capital ratios under the generally applicable rule. Additionally, to have been considered well capitalized under the proposed community bank leverage ratio framework, and consistent with the agencies’ PCA framework, a qualifying community banking organization must not have been subject to any written agreement, order, capital directive, or PCA directive to meet and maintain a specific capital level for any capital measure. In general, commenters stated that the community bank leverage ratio requirement should be lowered to 8 percent, citing the lower end of the range of the requirement under section 201 of the Act. Commenters indicated that such a calibration would more closely track the current well capitalized thresholds under PCA and would allow more banking organizations to be eligible to use the community bank leverage ratio framework. Several commenters wrote that the proposed community bank leverage ratio requirement and qualifying criteria were excessively VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 conservative, particularly combined with the assumption that the adoption of CECL would, in the commenters’ view, reduce firms’ regulatory capital levels. A commenter suggested a banking organization should have the option to phase in the impact of the dayone CECL adjustment recorded in retained earnings over a five year period when it elects to use the community bank leverage ratio framework to calculate regulatory capital. A few commenters indicated that the proposed community bank leverage ratio calibration would not factor in the adjusted allowance for credit loss for up to 1.25 percent of risk-weighted assets, which would be permitted under the generally applicable rule for purposes of the total capital ratio, but would not be relevant under the community bank leverage ratio. Finally, a commenter recommended a dynamic calibration that would vary depending on the business cycle to accommodate recovery and encourage lending in a stressed environment. After considering the comments received on calibration, the agencies have decided to adopt a 9 percent leverage ratio as a qualifying criterion for the community bank leverage ratio framework. The agencies believe that a 9 percent calibration, with complementary qualifying criteria for asset size, off-balance sheet assets, and trading assets and trading liabilities, generally maintains the current level of regulatory capital held by electing banking organizations and supports the agencies’ goals of reducing regulatory burden for as many community banking organizations as possible. For example, even though an 8 percent leverage ratio would have allowed more banking organizations to opt into the community bank leverage ratio framework, the reduced calibration could create an inappropriate incentive for some qualifying community banking organizations to hold less regulatory capital than they do today. Rather than lowering the minimum community bank leverage ratio from 9 percent to 8 percent, the agencies determined that it would be more appropriate to alleviate the potential burden associated with switching regulatory capital frameworks as capital levels fall by permitting an electing banking organization to have its ratio drop below 9 percent temporarily (i.e., the two-quarter grace period). This grace period will provide an electing banking organization time to either comply with the qualifying criteria or to prepare to comply with the generally applicable rule and file the appropriate regulatory reports. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 The agencies estimate that, as of the first quarter of 2019, the vast majority of banking organizations with under $10 billion in total consolidated assets would meet the definition of a qualifying community banking organization and have a leverage ratio above 9 percent. Based on reported data as of March 31, 2019, there are 5,221 insured depository institutions with less than $10 billion in total consolidated assets and 231 depository institution holding companies with less than $10 billion in total consolidated assets that file the form FR Y–9C.17 The agencies estimate that approximately 85 percent of such insured depository institutions and approximately 76 percent of such depository institution holding companies would qualify to use the community bank leverage ratio framework under the 9 percent calibration and other qualifying criteria. The agencies believe the community bank leverage ratio framework in this final rule, including a 9 percent calibration, meets the objectives described above. In February of 2019, the agencies issued a final rule to amend the generally applicable rule in response to CECL (CECL transitions final rule).18 The CECL transitions final rule provides for an optional three-year transition arrangement that will allow a banking organization to phase in any adverse day-one regulatory capital effects of CECL adoption on retained earnings, deferred tax assets, allowance for credit losses, and average total consolidated assets. These day-one regulatory capital effects will be phased in over the transition period on a straight line basis. Under this final rule, the leverage ratio under the community bank leverage ratio framework is generally calculated in the same manner as the generally applicable rule’s leverage ratio. Accordingly, an electing banking organization is also eligible to phase-in any adverse day-one regulatory capital effects of CECL adoption on retained earnings, DTAs, allowance for credit losses, and average total consolidated assets. Banking organizations will retain their three-year transition period without reset (i.e., the transition period cannot be extended) upon passage in or 17 As of March 31, 2019, there are 4,261 depository institution holding companies with less than $10 billion in total consolidated assets. More than 95 percent of such holding companies are not subject to the capital rule because they have less than $3 billion in total consolidated assets and meet certain additional criteria to qualify for the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement. See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR 238.9. 18 84 FR 4222 (February 14, 2019). E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations out of the community bank leverage ratio framework. D. Ability To Opt Into and Out of the Community Bank Leverage Ratio Framework Under the proposal, a qualifying community banking organization with a community bank leverage ratio greater than 9 percent could have elected to use the community bank leverage ratio framework at any time. Such a banking organization would have indicated its election by completing a community bank leverage ratio reporting schedule in its Call Report or Form FR Y–9C, as applicable. Also, under the proposal, an electing banking organization would have been able to opt out of the community bank leverage ratio framework and become subject to the generally applicable rule by completing the associated reporting requirements on Schedules RC–R of the Call Report or HC–R of Form FR Y–9C, as applicable. Additionally, the agencies noted in the proposal that an electing banking organization would have been able to opt out of the community bank leverage ratio framework between reporting periods by providing the capital ratios under the generally applicable rule to its appropriate regulators at the time of opting out. A banking organization that opted out of the community bank leverage ratio framework would have been required to meet the qualifying criteria included in the definition of a qualifying community banking organization and have a community bank leverage ratio of greater than 9 percent to be able to opt back into the community bank leverage ratio framework. Several commenters suggested that the optionality aspect should be further emphasized to both bankers and agency examiners. These commenters expressed concern that banking organizations that do not opt in could be seen as outliers and could be pressured to raise capital and opt into the community bank leverage ratio framework, or that procedural issues would make it too difficult in practice for banking organizations to opt out. The agencies have considered the comments and are finalizing the election to use the community bank leverage ratio framework as proposed. Due to the adoption of tier 1 capital and the leverage ratio into the community bank leverage ratio framework, the agencies will update accordingly the proposed reporting changes to the Call Report and Form FR Y–9C. The agencies are further clarifying that the community bank leverage ratio framework is an optional framework, VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 based on section 201 of the Act, which serves the purpose of removing the burden of calculating and reporting riskbased capital ratios for banking organizations that meet certain criteria. The agencies are also clarifying that a banking organization can opt out of the community bank leverage ratio framework at any time, without restriction, by reverting to the generally applicable rule and providing the capital ratios under the generally applicable rule to its appropriate regulators at the time of opting out. One commenter requested that the rule require that banking agencies notify state bank regulators when a statechartered electing banking organization opts out of the framework between reporting periods. Under the final rule, a qualifying community banking organization may opt into or out of the community bank leverage ratio framework at any time and for any reason. The agencies, therefore, are not including a mandatory notification requirement in the final rule, as this could discourage banking organizations from electing to apply and report under the generally applicable rule. The agencies note that the Call Report and Form FR Y–9C are available to the public and therefore additional notice is not necessary. As described above, a banking organization generally opts into and out of the community bank leverage ratio framework through its Call Report or Form FR Y–9C. As a result, a banking organization’s compliance with the community bank leverage ratio framework or the generally applicable rule will be determined based upon the capital framework it has elected in its last filed Call Report or Form FR Y– 9C.19 E. Ongoing Compliance With the Community Bank Leverage Ratio Framework 1. Meeting the Definition of a Qualifying Community Banking Organization Under the proposal, an electing banking organization that no longer met the proposed qualifying criteria would have been required, within two consecutive calendar quarters, either to meet the qualifying criteria again or to demonstrate compliance with the generally applicable rule. During the proposed grace period, the banking organization could have continued to be treated as a qualifying community 19 See section I in this SUPPLEMENTARY for a discussion on the interaction between the effective date of the final rule and when a banking organization elects to use the community bank leverage ratio framework. INFORMATION PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 61785 banking organization and could have, therefore, continued calculating and reporting a community bank leverage ratio to determine its compliance with other statutes and regulations. The agencies did not receive specific comments relating to the mechanics of the proposed grace period. One commenter argued that a six-month transition period would be too short for banking organizations to sell MSAs, if necessary, or prepare for the different treatment in the generally applicable rule. Other commenters noted that the use of tier 1 capital would ease any transition back to the risk-based capital requirements. The agencies continue to believe that this limited grace period is appropriate to mitigate potential volatility in capital and associated regulatory reporting requirements based on temporary changes in a banking organization’s risk profile from quarter to quarter, while capturing more permanent changes in risk profile, and are therefore finalizing the two-quarter grace period largely as proposed. Under the final rule, the grace period begins as of the end of the calendar quarter in which the electing banking organization ceases to satisfy any of the qualifying criteria and will end after two consecutive calendar quarters. For example, if the electing banking organization no longer meets one of the qualifying criteria as of February 15, and still does not meet the criteria as of the end of that quarter, the grace period for such a banking organization will begin as of the end of the quarter ending March 31. The banking organization may continue to use the community bank leverage ratio framework as of June 30, but will need to comply fully with the generally applicable rule (including the associated reporting requirements) as of September 30, unless the banking organization once again meets all qualifying criteria of the community bank leverage ratio framework, including a leverage ratio of greater than 9 percent, by that date. Under the proposal, an electing banking organization that ceased to meet the qualifying criteria as a result of a business combination would have received no grace period and immediately would have been required to revert to the generally applicable rule. The agencies continue to believe this approach is appropriate, as banking organizations would need to consider the regulatory capital implications of a planned business combination and be prepared to comply with the applicable requirements. An electing banking organization that expects that it would not meet the qualifying criteria as a result of a business combination would E:\FR\FM\13NOR2.SGM 13NOR2 61786 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations need to provide its pro forma capital ratios under the generally applicable rule to its appropriate regulator as part of its merger application, if applicable, and fully comply with the generally applicable rule for the regulatory reporting period during which the transaction is completed. 2. Treatment of a Community Banking Organization That Falls Below Certain Leverage Ratio Levels Under the proposal, an electing banking organization that had a community bank leverage ratio greater than 9 percent would have been considered well capitalized. In addition, an electing banking organization would have been considered to have met the minimum capital requirements under the generally applicable rule if its community bank leverage ratio was 7.5 percent or greater.20 Under the proposal, an electing banking organization could have chosen to stop using the community bank leverage ratio framework and instead become subject to the generally applicable rule. The proposal also provided an electing banking organization with a declining community bank leverage ratio (e.g., below 9 percent) with the option to remain in the community bank leverage ratio framework indefinitely, rather than requiring the firm to revert to the generally applicable rule. Under the proposal, an electing banking organization that was an insured depository institution and no longer exceeded the 9 percent community bank leverage ratio would have been subject to community bank leverage ratio levels that would serve as proxies for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA capital categories.21 The agencies received comments and requests for clarification regarding both the proposed PCA proxy levels and the grace period for a banking organization that has a community bank leverage ratio at or below 9 percent. One commenter requested that the agencies clarify when PCA consequences begin to apply. Another commenter indicated 20 Under the proposal, an electing banking organization that is a depository institution holding company would no longer be considered well capitalized if the holding company had a community bank leverage ratio of 9 percent or less. 21 See, e.g., 12 U.S.C. 5371 (establishing a capital floor for insured depository institutions and depository institution holding companies); section 201 of the Act (requiring development of a community bank leverage ratio for which a depository institution exceeding that ratio would be considered to meet the requirements to be treated as well capitalized under PCA); 12 U.S.C. 1831o (PCA). VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 that the framework should require a banking organization that falls below the well-capitalized level to immediately begin reporting capital ratios under the generally applicable rule. Another commenter proposed that, instead of instituting the PCA proxy levels, the agencies should give qualifying banking organizations with a community bank leverage ratio between 8 percent and 9 percent a two-quarter grace period after which they would either need to restore their community bank leverage ratio to greater than 9 percent or revert to the generally applicable rule. The agencies also received comments in response to the proposal’s incorporation of community bank leverage ratio levels as proxies for the adequately capitalized, undercapitalized, and significantly undercapitalized PCA categories. In general, commenters noted that the establishment of a new, separate PCA framework within the community bank leverage ratio framework is not necessary or required under section 201 of the Act, expressing concern that the community bank leverage ratio framework could, in the future, function as the new, de facto minimum capital requirement, particularly if it is difficult for a banking organization to switch back to the generally applicable rule. Commenters also noted community banking organizations’ sensitivity to several restrictions that could arise if the community banking organization is determined to be less than well capitalized, including restrictions on funding sources such as limits on brokered deposits, and the inability to open branches or make acquisitions. Some commenters suggested alternative calibration levels for the PCA proxy levels. In response to commenter concerns regarding the proposed PCA proxy levels for electing banking organizations that no longer exceed a 9 percent leverage ratio, the agencies decided not to incorporate the proposed PCA proxy levels in the final rule. Therefore, under the final rule, banking organizations that are insured depository institutions and that have a leverage ratio of greater than 9 percent are deemed to have met the well capitalized capital ratio requirements for PCA purposes. Further, the agencies included the requirement to have a leverage ratio greater than 9 percent as a qualifying criterion in the definition of a qualifying community banking organization. Consequently, the two-quarter grace period described above also applies depending on the level of an electing banking organization’s leverage ratio. Under the PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 final rule, an electing banking organization that has a leverage ratio that is greater than 8 percent and equal to or less than 9 percent is allowed a two-quarter grace period after which it must either (i) again meet all qualifying criteria or (ii) apply and report the generally applicable rule. During this two-quarter period, a banking organization that is an insured depository institution and that has a leverage ratio that is greater than 8 percent would be considered to have met the well-capitalized capital ratio requirements for PCA purposes. An electing banking organization with a leverage ratio of 8 percent or less is not eligible for the grace period and must comply with the generally applicable rule, i.e., for the quarter in which the banking organization reports a leverage ratio of 8 percent or less. An electing banking organization experiencing or anticipating such an event would be expected to notify its primary federal supervisory agency, which would respond as appropriate to the circumstances of the banking organization. A commenter asked that the proposed rule be revised to provide expressly that for an otherwise qualifying community bank that is state chartered to be disqualified from using the community bank leverage ratio framework based on criteria other than the enumerated qualifying criteria, such a determination must be made jointly by (1) the bank’s primary federal banking supervisory agency (either the FDIC or the Board) and (2) the appropriate state bank supervisor. The agencies expect to continue to work closely with the state bank supervisors, particularly with respect to institutions that are supervised jointly. However, the agencies are not revising the rule to require a joint determination of the federal supervisor and the state supervisor because such a requirement could prevent the federal supervisor from applying the capital standards it believes to be appropriate. Finally, a commenter requested clarification that a bank that is a qualifying community bank may elect to use the community banking organization leverage ratio framework even if its parent holding company is not a qualifying community banking organization, or vice versa. Consistent with the proposal, a non-advanced approaches subsidiary insured depository institution may opt into the community bank leverage ratio framework even if its parent holding company is not a qualifying banking organization, and vice versa. The agencies do not have safety and E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations soundness concerns with these scenarios and the agencies intended to allow such elections in the proposal. F. FDIC Deposit Insurance Assessments Regulations The FDIC’s deposit insurance assessments regulations also would be affected by the finalized community bank leverage ratio framework. The FDIC is considering, and is expected to adopt, a separate final rule to apply the community bank leverage ratio framework to the deposit insurance assessment system. The separate final rule amends the FDIC’s assessment regulations to price all qualifying community banks that elect to use the community bank leverage ratio framework as small banks, and continues to use the leverage ratio to determine assessment rates for established small banks. The separate final rule additionally clarifies that an electing bank that meets the definition of a custodial bank will have no change to its custodial bank deduction or reporting items required to calculate the deduction, and makes technical amendments to ensure that the assessment regulations continue to reference the PCA regulations for the definitions of capital categories used in the deposit insurance assessment system. Because the leverage ratio in this final rule is the same leverage ratio currently being used for assessment purposes, the separate final rule does not modify the FDIC’s assessment methodology. The FDIC does not expect that any changes to its deposit insurance assessment regulations pursuant to this separate final rule will have a material impact on aggregate assessment revenue or on rates paid by individual institutions. G. Other Affected Regulations Under the final rule, the community bank leverage ratio framework incorporates tier 1 capital. Therefore, Federal banking regulations outside of the regulatory capital rule (non-capital rules) can continue to reference tier 1 capital. The final rule amends standards referencing total capital so that an electing banking organization uses tier 1 capital instead of total capital. The final rule amends standards referencing riskweighted assets so that an electing banking organization uses average total consolidated assets (i.e., the denominator of the leverage ratio) instead of risk-weighted assets. In addition, certain of the agencies’ non-capital rules refer to ‘‘capital stock and surplus’’ (or similar items) which is generally defined as tier 1 capital and tier 2 capital plus the amount of VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 allowances for loan and lease losses not included in tier 2 capital. The final rule amends standards referencing ‘‘capital stock and surplus’’ (or similar items) so that an electing banking organization uses tier 1 capital plus allowances for loan and lease losses (or adjusted allowance for credit losses, as applicable). Thus, for example, for purposes of compliance with section 23A of the Federal Reserve Act, the Board’s Regulation W should provide that for an electing banking organization ‘‘capital stock and surplus’’ means tier 1 capital plus allowances for loan and lease losses (or adjusted allowance for credit losses, as applicable). H. Effective Date of the Final Rule The final rule will be effective as of January 1, 2020, and banking organizations can utilize the community bank leverage ratio framework for purposes of filing their Call Report or Form FR Y–9C, as applicable, for the first quarter for 2020 (i.e., as of March 31, 2020). A banking organization’s compliance with capital requirements for a quarter prior to the final rule’s effective date shall be determined according to the agencies’ generally applicable rule until the institution has filed their Call Report Form or FR Y–9C, as applicable, for the first quarter of 2020 and has indicated whether or not it has elected the community bank leverage ratio framework. IV. Regulatory Analyses A. Paperwork Reduction Act The agencies’ capital rule contains ‘‘collections 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 OMB control number for the OCC is 1557–0318, Board is 7100– 0313, and FDIC is 3064–0153. The information collections that are part of the agencies’ capital rule will not be affected by this final rule and therefore no final submissions will be made by the FDIC or OCC to OMB under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB’s implementing regulations (5 CFR 1320) in connection with this rulemaking.22 22 The OCC and FDIC submitted their information collections to OMB at the proposed rule stage. However, these submissions were done solely in an effort to apply a conforming methodology for calculating the burden estimates and not due to the PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 61787 The agencies note that firms that elect to be subject to the community bank leverage ratio framework will become exempt from certain collections of information that are part of the agencies’ regulatory capital rule. Because of uncertainty regarding the number of firms that will elect to use the community bank leverage ratio framework, the agencies have not revised their estimates regarding the annual burden hours associated with such collections of information to account for elections to use the community bank leverage ratio framework. The agencies will reassess the annual burden hours associated with these information collections once there is more certainty regarding community bank leverage ratio elections. The final rule will also require changes to the Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC 051) and the Consolidated Financial Statements for Holding Companies (FR Y–9C; OMB No. 7100–0128 (Board)), which will be addressed in one or more separate Federal Register notices. B. Regulatory Flexibility Act OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires an agency either to provide a final regulatory flexibility analysis with a final rule for which a general notice of proposed rulemaking is required or to certify that the final rule will not have a significant economic impact on a substantial number of small entities. The U.S. Small Business Administration (SBA) establishes size standards that define which entities are small businesses for purposes of the RFA.23 proposed rule. OMB filed comments requesting that the agencies examine public comment in response to the proposed rule and describe in the supporting statement of its next collection any public comments received regarding the collection as well as why (or why it did not) incorporate the commenter’s recommendation. In addition, OMB requested that the OCC and the FDIC note the convergence of the agencies on the single methodology. The agencies received no comments on the information collection requirements. Since the proposed rule stage, the agencies have conformed their respective methodologies in a separate final rulemaking titled, Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations, 84 FR 4222 (February 14, 2019), and the FDIC and OCC have had their submissions approved through OMB. As a result, the agencies’ information collections related to the regulatory capital rules are currently aligned and therefore no submission will be made to OMB. 23 U.S. SBA, Table of Small Business Size Standards Matched to North American Industry Classification System Codes, available at https:// E:\FR\FM\13NOR2.SGM Continued 13NOR2 61788 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations Under regulations issued by the SBA, the size standard to be considered a small business for banking entities subject to the proposed rule is $600 million or less in consolidated assets.24 Under 5 U.S.C. 605(b), this analysis is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities and publishes its certification and a brief explanatory statement in the Federal Register along with its rule. Pursuant to the RFA, the OCC specifically considers (a) whether the final rule is likely to impact a substantial number of small entities; and (b) whether the economic impact on a substantial number of small entities is significant. To measure whether a rule would have a ‘‘significant economic impact,’’ the OCC focuses on the potential costs of the rule on OCCsupervised small entities, consistent with guidance on the RFA published by the Office of Advocacy of the SBA.25 As of December 31, 2017, the OCC supervised approximately 898 small entities.26 Although the minimum required capital under the community bank leverage ratio framework will, in most cases, be greater than that required for the generally applicable risk-based and leverage capital requirements, banks are not required to opt into the community bank leverage ratio framework. In addition, banks that do elect to use the community bank leverage ratio framework may, at any time, stop using the community bank leverage ratio framework. Accordingly, the final rule does not represent a regulatory increase in minimum regulatory capital requirements, and the primary cost to institutions for implementing the final rule will be administrative costs associated with required updates to www.sba.gov/sites/default/files/files/Size_ Standards_Table.pdf. 24 See 13 CFR 121.201. 25 See ‘‘A Guide for Government Agencies; How to Comply with the Regulatory Flexibility Act,’’ pp. 18–20 (Aug. 2017), available at https:// www.sba.gov/sites/default/files/advocacy/How-toComply-with-the-RFA-WEB.pdf. 26 The OCC bases its estimate of the number of small entities on the SBA’s size thresholds for commercial banks and savings institutions, and trust companies, which are $600 million and $41.5 million, respectively. Consistent with the General Principles of Affiliation 13 CFR 121.103(a), the OCC counts the assets of affiliated financial institutions when determining if the OCC should classify an OCC-supervised institution a small entity. The OCC uses December 31, 2017, to determine size because a ‘‘financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See footnote 8 of the U.S. Small Business Administration’s Table of Size Standards. VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 their capital reporting procedures and reports.27 Banks that elect to use the community bank leverage ratio framework will have to make updates to their capital reporting procedures and reports. Banks will also have to make updates to existing policies and procedures to ensure compliance with regulations that will be affected by the final rule (e.g., lending limits). The total impact associated with the final rule is the estimated annual tax benefit minus the compliance costs of modifying policies and procedures. The OCC estimates that each institution will spend no more than 160 hours to modify their policies and procedures. To estimate costs, the OCC uses a compensation rate of $114 per hour.28 Therefore, the OCC estimates the cost per institution will not exceed $18,240 (160 hours × $114 per hour). In general, the OCC classifies the economic impact of expected cost (to comply with a rule) on an individual bank as significant if the total estimated monetized costs in one year are greater than (1) 5 percent of the bank’s total annual salaries and benefits or (2) 2.5 percent of the bank’s total annual noninterest expense. Based on the above criteria, the estimated cost of the rule could impose a significant economic impact at 19 of the 898 small entities if they all elected to opt into the community bank leverage ratio framework. The OCC uses 5 percent to determine a substantial number of small entities. Approximately 2 percent (19/ 898 = 2.1%) of small entities could be significantly impacted by the rule, which is not a substantial number of small entities. Therefore, the OCC certifies that the final rule will not have a significant economic impact on a substantial number of OCC-supervised small entities. Board: An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 3(a) 27 The agencies intend to separately seek comment on the proposed changes to regulatory filings for qualifying community banking organizations that elect to use the community bank leverage ratio framework. 28 To estimate wages, the OCC reviewed May 2018 data for wages (by industry and occupation) from the U.S. Bureau of Labor Statistics (BLS) for credit intermediation and related activities excluding non-depository credit intermediaries (NAICS 5220A1). To estimate compensation costs associated with the rule, the OCC uses $114 per hour, which is based on the average of the 90th percentile for nine occupations adjusted for inflation (2.8 percent as of Q1 2019, according to the BLS), plus an additional 33.2 percent for benefits (based on the percent of total compensation allocated to benefits as of Q4 2018 for NAICS 522: Credit intermediation and related activities). PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the IRFA, the Board requested comment on the effect of the proposed rule on small entities and on any significant alternatives that would reduce the regulatory burden on small entities. The Board did not receive any comments on the IRFA. The RFA requires an agency to prepare a final regulatory flexibility analysis (FRFA) unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. In accordance with section 3(a) of the RFA, the Board has reviewed the final regulation. Based on its analysis, and for the reasons stated below, the Board certifies that the rule will not have a significant economic impact on a substantial number of small entities. Under regulations issued by the Small Business Administration, a small entity includes a bank, bank holding company, or savings and loan holding company with assets of $600 million or less and trust companies with total assets of $41.5 million or less (small banking organization).29 On average since the second quarter of 2018, there were approximately 2,976 small bank holding companies, 133 small savings and loan holding companies, and 555 small state member banks. As discussed, the Board is issuing this final rule to provide a simple measure of capital adequacy for certain community banking organizations. Under the final rule, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio framework and, as a result, will not be required to calculate the risk-based capital ratios under the generally applicable capital rule.30 29 See 13 CFR 121.201. Effective August 19, 2019, the Small Business Administration revised the size standards for banking organizations to $600 million in assets from $550 million in assets. 84 FR 34261 (July 18, 2019). 30 In general, the Board’s capital rule only applies to bank holding companies and savings and loan holding companies that are not subject to the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, which applies to bank holding companies and savings and loan holding companies with less than $3 billion in total assets that also meet certain additional criteria. Very few bank holding companies and savings and loan holding companies that are small entities would be impacted by the final rule because very few such entities are subject to the Board’s capital rule. E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations Although the final rule would provide some direct reduction in compliance burden associated with the capital rule, much of that reduction of compliance burden would be achieved through a separate notice to amend the regulatory reports associated with the capital rule. The Board does not expect that the final rule will result in a material change in the level of capital maintained by small banking organizations because (i) the framework is optional and (ii) a substantial majority of small banking organizations maintain capital in excess of both the generally applicable capital rule and the threshold established under the final rule. A small number of firms may face reduced capital requirements due to electing to use the community bank leverage ratio framework rather than the existing risk-based and leverage capital ratio framework. For example, the Board estimates that 454 small state member banks would be eligible for the community bank leverage ratio framework and that 4 of these small state member may face less stringent capital requirements as a result. The Board does not expect the rule to have a significant economic impact on a substantial number of small entities. FDIC: The RFA generally requires that, in connection with a final rulemaking, an agency prepare and make available for public comment a final regulatory flexibility analysis describing the impact of the proposed rule on small entities.31 However, a regulatory flexibility analysis is not required if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The SBA has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $600 million that are independently owned and operated or owned by a holding company with less than or equal to $600 million in total assets.32 Generally, the FDIC considers a significant effect to be a quantified effect in excess of 5 percent of total annual salaries and benefits per institution, or 2.5 percent of total noninterest expenses. The FDIC believes 31 5 U.S.C. 601 et seq. SBA defines a small banking organization as having $600 million or less in assets, where an organization’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, by 84 FR 34261, effective August 19, 2019). In its determination, the ‘‘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. 32 The VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. For the reasons described below, the FDIC believes that the final rule will not have a significant economic impact on a substantial number of small entities. Nevertheless, the FDIC has conducted and is providing a final regulatory flexibility analysis. 1. The Need for, and Objectives of, the Rule The policy objective of the proposed rule is to conform the FDIC’s regulations to the statutory language established by the Act. On May 24, 2018, the Act amended provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act 33 as well as certain other statutes administered by the agencies.34 Section 201 of the Act, titled ‘‘Capital Simplification for Qualifying Community Banks,’’ directs the agencies to develop a community bank leverage ratio (community bank leverage ratio) of not less than 8 percent and not more than 10 percent for qualifying community banks. The Act defines a qualifying community banking organization as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion. 2. The Significant Issues Raised by the Public Comments in Response to the Initial Regulatory Flexibility Analysis No significant issues were raised by the public comments in response to the initial regulatory flexibility analysis. 3. Response of the Agency to Any Comments Filed by the Chief Counsel for Advocacy of the Small Business Administration in Response to the Proposed Rule No comments were filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule. 4. A Description of and an Estimate of the Number of Small Entities to Which the Rule Will Apply or an Explanation of Why No Such Estimate Is Available As of March 31, 2019, the FDIC supervised 3,465 institutions, of which 2,705 are considered small entities for the purposes of RFA. Of these FDICsupervised small entities, 2,297 (85 percent) meet or exceed the qualifications for adopting the community bank leverage ratio 33 Public 34 Public PO 00000 Law 111–203, 124 Stat. 1376. Law 115–174, 132 Stat. 1296. Frm 00015 Fmt 4701 Sfmt 4700 61789 framework, as delineated above in Section III.A.35 Adoption of the community bank leverage ratio framework is voluntary so it is uncertain how many small, FDICsupervised entities that qualify will choose to adopt. Each qualifying entity must weigh the benefits of not being subject to risk-based capital requirements against the costs of adhering to the higher leverage ratio requirements under the community bank leverage ratio framework. As of March 2019, 237 (9 percent of) small, FDIC-supervised institutions would experience a net decrease in required capital holdings as a result of qualifying for and adopting the community bank leverage ratio framework. For purposes of this analysis, the FDIC assumes that these 237 small, FDIC-supervised institutions would adopt the community bank leverage ratio framework and therefore be affected by the final rule. In order to assess the maximum potential effects of the proposed rule, this analysis also calculates the expected effects assuming that all 2,297 small, FDIC-supervised institutions that qualify would adopt the community bank leverage ratio framework. 5. A Description of the Projected Reporting, Recordkeeping and Other Compliance Requirements of the Rule This analysis considers benefits and costs relative to a pre-statutory baseline in which qualifying institutions must maintain a tier 1 leverage ratio of five percent, a tier 1 risk-based capital ratio of eight percent, a common equity tier 1 ratio of 6.5 percent and a total capital ratio of 10 percent in order to be deemed well capitalized for purposes of Prompt Corrective Action. Pursuant to the capital conservation buffer that is part of the Basel III rule, institutions must also maintain an additional 0.5 percentage points of risk-weighted assets above the risk-based wellcapitalized thresholds to avoid potential limitations on dividends and other capital distributions.36 Under the final rule, in contrast, qualifying institutions would have the option to operate under a 9 percent community bank leverage ratio framework and not be subject to risk-based capital requirements. As previously discussed, 241 (9 percent of) small, FDIC-supervised institutions would experience a net decrease in required capital holdings as 35 Consolidated Reports of Condition and Income for the quarter ending March 31, 2019. 36 With the additional capital conservation buffer requirements, the pre-statute baseline risk-based capital thresholds are 7 percent for common equity tier 1 capital, 8.5 percent for tier 1 capital, and 10.5 percent for total capital. E:\FR\FM\13NOR2.SGM 13NOR2 61790 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations a result of qualifying for and adopting the community bank leverage ratio framework. For purposes of this analysis, the FDIC assumes that these 241 small, FDIC-supervised institutions would adopt the community bank leverage ratio framework and therefore be affected by the final rule. In order to assess the maximum potential effects of the proposed rule, this analysis also calculates the expected effects assuming that all 2,277 small, FDIC-supervised institutions that qualify would adopt the community bank leverage ratio framework. No bank will be compelled to raise capital under the community bank leverage ratio framework since the framework is optional. Moreover, as of March 2019, the 2,277 qualifying small, FDIC-supervised institutions held aggregate tier 1 capital in excess of 12 percent of their average assets—well in excess of both the 5 percent required by the generally applicable leverage ratio rules and the 9 percent threshold in the community bank leverage ratio framework. Some of the 241 small, FDIC-supervised banks whose capital requirements would be reduced under the community bank leverage ratio framework might choose to reduce their capital. However, these 241 banks also held aggregate tier 1 capital in excess of 12 percent of their average assets, suggesting that most of them already have the ability to operate with less capital but have chosen not to. Given these facts, the FDIC does not believe that adopting banks will change their leverage capital ratios significantly in response to this rule. It is possible that the elimination of risk-based capital requirements by banks that choose to adopt the rule would increase their incentives to hold higher-weighted assets, such as loans. To provide a high-end estimate of the economic effect for RFA purposes, this analysis will assume that every adopting bank responds to the rule by permanently increasing its loan balances by 1 percent. The analysis estimates the annual economic effect of a 1 percent permanent increase in loan balances at adopting banks by multiplying the increase by the net interest margin currently being earned by each bank.37 For each of the 237 banks that would experience a reduction in capital requirements under the community bank leverage ratio framework, this 37 Defined as the annualized net interest income as a percent of average earning assets, as reported on schedule RI. For reference, the average net interest margin was 3.9 percent for small, FDICinsured institutions, for the quarter ending March 31, 2019. VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 analysis calculates the expected economic effect to each bank by multiplying 1 percent of the bank’s loan balances by its net interest margin. Under these assumptions, as of March 2019, only six banks would experience an annual increase in net interest income that is significant (i.e., greater than 2.5 percent of their total noninterest income over the previous four quarters or 5 percent of their total salaries and benefits paid over the previous four quarters). The estimated aggregate increase in net interest income totals approximately $600,000. The six banks would comprise only less than 0.3 percent of the 2,705 small entities covered by this rule. These effects are not significant for a substantial number of small entities. As an estimate of the maximum potential effects of the rule, the analysis alternately assumes that all of the 2,297 qualifying small FDIC-supervised banks that could adopt the framework choose to do so, and that all increase their loan balances by 1 percent and earn their current net interest margin on the new loans. This analysis results in twelve banks experiencing an annual increase in net interest income that is significant (i.e., greater than 2.5 percent of their total noninterest income over the previous four quarters or 5 percent of their total salaries and benefits paid over the previous four quarters). The twelve banks comprise less than 0.54 percent of the 2,705 small entities covered by this rule. Thus, the plausible high-end effects are still not significant for a substantial number of small entities. Although the preceding assumptions and analysis indicate that the rule is unlikely to have significant economic effects on a substantial number of small, FDIC-supervised institutions, the extent of the rule’s effects on capital and assets are uncertain. Therefore, the FDIC believes, but does not certify, that the final rule will not have a significant economic impact on a substantial number of small entities. There are other non-quantified economic effects resulting from the adoption of the community bank leverage ratio framework, such as simplicity benefits and compliance costsavings from not having to comply with risk-based capital requirements going forward. Utilizing the community bank leverage ratio framework is expected to reduce reporting costs for small entities. Opting into the community bank leverage ratio framework would enable institutions to eliminate the reporting of many line items in schedule RC–R of their Call Reports, resulting in a reduction in reporting costs for PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 institutions. Depository institutions also may benefit from reduced reporting costs because by being able to employ those resources in ways the institution believes is more beneficial. The FDIC does not have a reasonable basis for quantifying the compliance cost savings associated with the rule, but does not believe they will be significant for a substantial number of small entities. The quantified economic effects are expected to be significant for less than half of a percent of small, FDICsupervised institutions covered by this rule. Even assuming broad adoption rates and an increase in lending by all adopting institutions, the quantified economic effects are only significant for less than half of a percent of small, FDIC-supervised institutions. 6. A Description of the Steps the Agency Has Taken To Minimize the Significant Economic Impact on Small Entities As described above, the FDIC does not believe this rule will have a significant economic impact on a substantial number of small entities. Further, since the election of the community bank leverage ratio is voluntary, the impacts are expected to be beneficial for institutions that adopt it. The agencies considered alternative calibrations, such as 8 percent. As discussed in Section III.C however, the agencies believe that a 9 percent calibration, with complementary qualifying criteria for asset size, offbalance sheet assets, and trading assets and liabilities, should generally maintain the current level of regulatory capital held by electing banking organizations while maintaining the quality and quantity of regulatory capital in the banking system consistent with the agencies’ safety-and-soundness goals, while also supporting the agencies’ goals of reducing regulatory burden for as many community banking organizations as possible. For example, even though an 8 percent leverage ratio would allow more banking organizations to opt into the community bank leverage ratio framework it could incentivize a large number of qualifying community banking organizations to hold less regulatory capital than they do today. C. Plain Language Section 722 of the Gramm-LeachBliley Act 38 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 final 38 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations rule in a simple and straightforward manner, and did not receive any comments on the use of plain language. D. OCC Unfunded Mandates Reform Act of 1995 The OCC analyzed the final 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). Because the rule does not specifically require banks to modify their policies and procedures, the OCC has determined that there are no expenditures for the purposes of UMRA. Therefore, the OCC concludes that the final rule will not result in an expenditure of $100 million or more annually by state, local, and tribal governments, or by the private sector. 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),39 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions (IDIs), 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 IDIs 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.40 The Federal banking agencies considered the administrative burdens and benefits of the rule and its elective framework in determining its effective date and administrative compliance requirements. As such, the final rule will be effective on January 1, 2020. F. The Congressional Review Act 12 CFR Part 24 For purposes of Congressional Review Act, the OMB makes a determination as to whether a final rule constitutes a ‘‘major’’ rule.41 If a rule is deemed a ‘‘major rule’’ by the Office of Management and Budget (OMB), the Congressional Review Act generally provides that the rule may not take effect until at least 60 days following its publication.42 The Congressional Review Act defines a ‘‘major rule’’ as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreignbased enterprises in domestic and export markets.43 The OMB has determined that the final rule is not a ‘‘major rule’’ within the meaning of the Congressional Review Act. As required by the Congressional Review Act, the agencies will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review. Community development, Credit, Investments, Low and moderate income housing, National banks, Reporting and recordkeeping requirements, Rural areas, Small businesses. List of Subjects 12 CFR Part 1 Banks, Banking, National banks, Reporting and recordkeeping requirements, Securities. 12 CFR Part 3 Administrative practice and procedure, Federal Reserve System, National banks, Reporting and recordkeeping requirements. 12 CFR Part 5 Administrative practice and procedure, National banks, Reporting and recordkeeping requirements, Securities. 40 12 VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 National banks, Reporting and recordkeeping requirements. 12 CFR Part 34 Mortgages, National banks, Reporting and recordkeeping requirements. 12 CFR Part 160 Consumer protection, Investments, Manufactured homes, Mortgages, Reporting and recordkeeping requirements, Savings associations, Securities. 12 CFR Part 192 Reporting and recordkeeping requirements, Savings associations, Securities. 12 CFR Part 206 Banks, Banking, Interbank liability, Lending limits, Savings associations. 12 CFR Part 208 Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Securities. 12 CFR Part 211 Exports, Federal Reserve System, Foreign banking, Holding companies, Investments, Reporting and recordkeeping requirements. 12 CFR Part 215 Credit, Penalties, Reporting and recordkeeping requirements. 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 223 Banks, Banking, Federal Reserve System. 12 CFR Part 225 Federal Reserve System, National banks. Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 23 National banks. 12 CFR Part 238 U.S.C. 801 et seq. 42 5 U.S.C. 801(a)(3). 43 5 U.S.C. 804(2). U.S.C. 4802(a). U.S.C. 4802. 12 CFR Part 32 12 CFR Part 6 41 5 39 12 61791 PO 00000 Frm 00017 Fmt 4701 Savings and loan holding companies (Regulation LL). Sfmt 4700 E:\FR\FM\13NOR2.SGM 13NOR2 61792 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations 12 CFR Part 251 Administrative practice and procedure, Banks, Banking, Concentration limit, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR Part 303 Administrative practice and procedure, Bank deposit insurance, Banks, Banking, Reporting and recordkeeping requirements, State nonmember banks, Savings associations. 12 CFR Part 324 Administrative practice and procedure, Banks, Banking, Capital adequacy, Reporting and recordkeeping requirements, State non-member banks, Savings associations. 12 CFR Part 337 Banks, Banking, Reporting and recordkeeping requirements, Securities. 12 CFR Part 347 Authority delegations (Government agencies), Bank deposit insurance, Banks, Banking, Credit, Foreign banking, Investments, Reporting and recordkeeping requirements, U.S. Investments abroad. 12 CFR Part 362 Administrative practice and procedure, Authority delegations (Government agencies), Bank deposit insurance, Banks, Banking, Investments, Reporting and recordkeeping requirements. DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency Authority and Issuance For the reasons stated in the joint preamble, chapter I of title 12 of the Code of Federal Regulations is amended as follows: VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 Definitions. (a) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization’s allowances for loan and lease losses as reported in the bank’s Consolidated Report of Condition and Income (Call Report); or (2) For all other banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in part 3 of this chapter, as applicable (or comparable capital guidelines of the appropriate Federal banking agency), as reported in the bank’s Call Report; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (a)(2)(i) of this section, as reported in the bank’s Call Report. * * * * * PART 3—CAPITAL ADEQUACY STANDARDS 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). § 3.2 [Amended] 4. Section 3.2 is amended by removing the first definition of ‘‘Nonsignificant investment in the capital of an unconsolidated financial institution’’. ■ 5. Section 3.10 is amended by revising paragraph (a) to read as follows: ■ § 3.10 12 CFR Chapter I 1. The authority citation for part 1 continues to read as follows: § 1.2 3. The authority citation for part 3 continues to read as follows: 12 CFR Part 390 Administrative practice and procedure, Advertising, Aged, Civil rights, Conflict of interests, Credit, Crime, Equal employment opportunity, Fair housing, Government employees, Individuals with disabilities, Reporting and recordkeeping requirements, Savings associations. ■ 2. Section 1.2 is amended by revising paragraph (a) to read as follows: ■ ■ 12 CFR Part 365 Banks, Banking, Mortgages. PART 1—INVESTMENT SECURITIES Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a. Minimum capital requirements. (a) Minimum capital requirements. (1) A national bank or Federal savings association must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches national banks or Federal savings associations or, for Category III OCC-regulated PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 institutions, a supplementary leverage ratio of 3 percent. (vi) For Federal savings associations, a tangible capital ratio of 1.5 percent. (2) A qualifying community banking organization (as defined in § 3.12), that is subject to the community bank leverage ratio framework (as defined in § 3.12), is considered to have met the minimum capital requirements in this paragraph (a). * * * * * ■ 6. Add section 3.12 to read as follows: § 3.12 Community bank leverage ratio framework. (a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 3.10, the capital ratio requirements for the well capitalized capital category under § 6.4(b)(1) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 9 percent. (2) For purposes of this section, a qualifying community banking organization means a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association and that satisfies all of the following criteria: (i) Has a leverage ratio of greater than 9 percent; (ii) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to the Call Report as of the end of the most recent calendar quarter; (iii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(iii)(A) through (I) of this section, divided by total consolidated assets, each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations (1) Guarantees; and (2) Credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to the Call Report; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; and (iv) Has total trading assets plus trading liabilities, calculated in accordance with the reporting instructions to the Call Report of 5 percent or less of the national bank’s or Federal savings association’s total consolidated assets, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the applicable reporting requirements of its Call Report. (iii)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio framework may opt out of the community bank leverage ratio framework by completing the applicable risk-based and leverage ratio reporting requirements necessary to demonstrate compliance with § 3.10(a)(1) in its Call Report or by otherwise providing this information to the OCC. (B) A qualifying community banking organization that opts out of the community bank leverage ratio framework pursuant to paragraph (a)(3)(iii)(A) of this section must comply with § 3.10(a)(1) immediately. (b) Calculation of the leverage ratio. A qualifying community banking organization’s leverage ratio is calculated in accordance with § 3.10(b)(4), except that a qualifying community banking organization is not required to: (1) Make adjustments and deductions from tier 2 capital for purposes of § 3.22(c); or (2) Calculate and deduct from tier 1 capital an amount resulting from insufficient tier 2 capital under § 3.22(f). (c) Treatment when ceasing to meet the qualifying community banking organization requirements. (1) Except as provided in paragraphs (c)(5) and (6) of this section, if a national bank or Federal savings association ceases to meet the definition of a qualifying VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 community banking organization, the national bank or Federal savings association has two reporting periods under its Call Report (grace period) to either satisfy the requirements to be a qualifying community banking organization or to comply with § 3.10(a)(1) and report the required capital measures under § 3.10(a)(1) on its Call Report. (2) The grace period begins as of the end of the calendar quarter in which the national bank or Federal savings association ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the national bank or Federal savings association continues to be treated as a qualifying community banking organization for the purpose of this part and must continue calculating and reporting its leverage ratio under this section unless the national bank or Federal savings association has opted out of using the community bank leverage ratio framework under paragraph (a)(3) of this section. (4) During the grace period, the qualifying community banking organization continues to be considered to have met the minimum capital requirements under § 3.10(a)(1), the capital ratio requirements for the well capitalized capital category under § 6.4(b)(1)(i)(A) through (D) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, and must continue calculating and reporting its leverage ratio under this section. (5) Notwithstanding paragraphs (c)(1) through (4) of this section, a national bank or Federal savings association that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such a national bank or Federal savings association must comply with the minimum capital requirements under § 3.10(a)(1) and must report the required capital measures under § 3.10(a)(1) for the quarter in which it ceases to be a qualifying community banking organization. (6) Notwithstanding paragraphs (c)(1) through (4) of this section, a national bank or Federal savings association that has a leverage ratio of 8 percent or less does not have a grace period and must comply with the minimum capital PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 61793 requirements under § 3.10(a)(1) and must report the required capital measures under § 3.10(a)(1) for the quarter in which it reports a leverage ratio of 8 percent or less. ■ 7. Section 3.22 is amended by revising paragraph (f) to read as follows: § 3.22 Regulatory capital adjustments and deductions. * * * * * (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 required deduction after completing the deductions required under paragraph (d) of this section, the national bank or Federal savings association must deduct the shortfall from the next higher (that is, more subordinated) component of regulatory capital. Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 3.12) that has elected to use the community bank leverage ratio framework pursuant to § 3.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * PART 5—RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES 8. The authority citation for part 5 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a–2, 215a–3, 481, 1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B). 9. Section 5.3 is amended by revising paragraph (e) to read as follows: ■ § 5.3 Definitions. * * * * * (e) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Consolidated Report of Condition and Income (Call Report); or (2) For all other national banks and Federal savings associations: E:\FR\FM\13NOR2.SGM 13NOR2 61794 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations (i) A national bank’s or Federal savings association’s tier 1 and tier 2 capital calculated under the OCC’s riskbased capital standards set forth in part 3 of this chapter, as applicable, as reported in the bank’s or savings association’s Consolidated Reports of Condition and Income (Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus (ii) The balance of the national bank’s or Federal savings association’s allowances for loan and lease losses not included in the institution’s tier 2 capital, for purposes of the calculation of risk-based capital reported in the institution’s Call Reports, described in paragraph (e)(2)(i) of this section. * * * * * ■ 10. Section 5.37 is amended by revising paragraph (c)(3) to read as follows: § 5.37 Investment in national bank or Federal savings association premises. * * * * * (c) * * * (3) Capital and surplus means: (i) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (A) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (B) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Call Report; or (ii) For all other national banks and Federal savings associations: (A) A national bank’s or Federal savings association’s tier 1 and tier 2 capital calculated under part 3 of this chapter, as applicable, as reported in the national bank’s or Federal savings association’s Consolidated Reports of Condition and Income (Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus (B) The balance of a national bank’s or Federal savings association’s allowances for loan and lease losses not included in the bank’s or savings association’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(3)(ii)(A) of this section, as reported in the national bank’s or Federal savings association’s Call Reports filed under 12 U.S.C. 161 or 1464(v), respectively. * * * * * ■ 11. Section 5.58 is amended by revising paragraph (h)(2) to read as follows: VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 § 5.58 Pass-through investments by a Federal savings association. * * * * * (h) * * * (2) The Federal savings association is not investing more than 10 percent of its total capital (or, in the case of a Federal savings association that is a qualifying community banking organization that has elected to use the community bank leverage ratio framework, 10 percent of its tier 1 capital, as used under § 3.12 of this chapter) in one company; * * * * * PART 6—PROMPT CORRECTIVE ACTION 12. The authority citation for part 6 continues to read as follows: ■ Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B). 13. Section 6.4 is amended by: a. Revising the section heading; b. Removing paragraph (b); c. Redesignating paragraph (c) as paragraph (b); ■ d. Revising newly designated paragraph (b) introductory text and paragraph (b)(1); and ■ e. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d), respectively. The revisions read as set forth below. ■ ■ ■ ■ § 6.4 Capital measures and capital categories. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this part, the relevant capital measures shall be: (i) Total Risk-Based Capital Measure: the total risk-based capital ratio; (ii) Tier 1 Risk-Based Capital Measure: the tier 1 risk-based capital ratio; (iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 riskbased capital ratio; (iv) The Leverage Measure: (A) The leverage ratio; and (B) With respect to an advanced approaches national bank or advanced approaches Federal savings association, on January 1, 2018, and thereafter, the supplementary leverage ratio; and (2) For a qualifying community banking organization (as defined in § 3.12 of this chapter), that has elected to use the community bank leverage ratio framework (as defined in § 3.12 of this chapter), the leverage ratio calculated in accordance with § 3.12(b) of this chapter is used to determine the well capitalized capital category under paragraph (b)(1)(i) (A) through (D) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this part, a national bank or Federal savings association shall be deemed to be: PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 (1)(i) Well capitalized if: (A) Total Risk-Based Capital Measure: The national bank or Federal savings association has a total risk-based capital ratio of 10.0 percent or greater; (B) Tier 1 Risk-Based Capital Measure: The national bank or Federal savings association has a tier 1 risk-based capital ratio of 8.0 percent or greater; (C) Common Equity Tier 1 Capital Measure: The national bank or Federal savings association has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; (D) Leverage Measure: (1) The national bank or Federal savings association has a leverage ratio of 5.0 percent or greater; and (2) With respect to a national bank or Federal savings association that is a subsidiary of a U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on the company’s most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y– 9C) or more than $10 trillion in assets under custody as reported on the company’s most recent Banking Organization Systemic Risk Report (Form FR Y–15), on January 1, 2018, and thereafter, the national bank or Federal savings association has a supplementary leverage ratio of 6.0 percent or greater; and (E) The national bank or Federal savings association is not subject to any written agreement, order or capital directive, or prompt corrective action directive issued by the OCC pursuant to section 8 of the FDI Act, the International Lending Supervision Act of 1983 (12 U.S.C. 3907), the Home Owners’ Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)), or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure. (ii) Qualifying community banking organization: A qualifying community banking organization, as defined under § 3.12 of this chapter, that has elected to use the community bank leverage ratio framework under § 3.12 of this chapter, shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraph (b)(1)(i) (A) through (D) of this section. * * * * * PART 23—LEASING 14. The authority citation for part 23 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a. 15. Section 23.2 is amended by revising paragraph (b) to read as follows: ■ E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations § 23.2 Definitions. * * * * * (b) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus. (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in part 3 of this chapter, as applicable, as reported in the bank’s Consolidated Reports of Condition and Income (Call Report) filed under 12 U.S.C. 161; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (b)(2)(i) of this section, as reported in the bank’s Consolidated Report of Condition and Income filed under 12 U.S.C. 161. * * * * * PART 24—COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS 16. The authority citation for part 24 continues to read as follows: ■ Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818. 17. Section 24.2 is amended by revising paragraph (b) to read as follows: ■ § 24.2 Definitions. * * * * * (b) Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 capital standards set forth in part 3 of this chapter, as applicable, as reported in the bank’s Consolidated Reports of Condition and Income (Call Report) as filed under 12 U.S.C. 161; plus (ii) The balance of a bank’s allowances for loan and lease losses not included in the bank’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (b)(2)(i) of this section, as reported in the bank’s Call Report as filed under 12 U.S.C. 161. * * * * * PART 32—LENDING LIMITS 18. The authority citation for part 32 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h. 19. Section 32.2 is amended by revising paragraph (c) to read as follows: ■ § 32.2 Definitions. * * * * * (c) Capital and surplus means— (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization’s allowances for loan and lease losses or allowance for credit losses, as applicable, as reported in the national bank’s or Federal savings association’s Call Report; or (2) For all other national banks and Federal savings associations: (i) A national bank’s or savings association’s tier 1 and tier 2 capital calculated under the risk-based capital standards applicable to the institution as reported in the bank’s or savings association’s Consolidated Reports of Condition and Income (Call Report); plus (ii) The balance of a national bank’s or Federal savings association’s allowances for loan and lease losses not included in the bank’s or savings association’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(2)(i) of this section, as reported in the national bank’s or savings association’s Call Report. * * * * * PART 34—REAL ESTATE LENDING AND APPRAISALS 20. The authority citation for part 34 continues to read as follows: ■ PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 61795 Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463, 1464, 1465, 1701j–3, 1828(o), 3331 et seq., 5101 et seq., and 5412(b)(2)(B) and 15 U.S.C. 1639h. 21. Section 34.81 is amended by adding a definition for ‘‘Capital and surplus’’ in alphabetical order to read as follows: ■ § 34.81 Definitions. Capital and surplus means: (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization’s allowances for loan and lease losses, or allowance for credit losses, as applicable, as reported in the national bank’s Call Report; or (2) For all other national banks: (i) A bank’s tier 1 and tier 2 capital calculated under the OCC’s risk-based capital standards set forth in part 3 of this chapter, as applicable, as reported in the bank’s Call Report; plus (ii) The balance of a bank’s allowances for loan and lease losses, or allowance for credit losses, as applicable, not included in the bank’s tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (a)(2)(i) of this section, as reported in the bank’s Call Report. * * * * * PART 160—LENDING AND INVESTMENT 22. The authority citation for part 160 continues to read as follows: ■ Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j–3, 1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106. 23. Section 160.3 is amended by adding a definition for ‘‘total capital’’ in alphabetical order to read as follows: ■ § 160.3 Definitions. * * * * * Total capital means: (1) For a qualifying community banking organization that has elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter, total capital refers to the qualifying community banking organization’s tier 1 capital, as used under § 3.12(b)(2) of this chapter; (2) For all other Federal savings associations, total capital means the sum of tier 1 capital and tier 2 capital, E:\FR\FM\13NOR2.SGM 13NOR2 61796 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations as calculated under part 3 of this chapter. PART 192—CONVERSIONS FROM MUTUAL TO STOCK FORM 24. The authority citation for part 192 continues to read as follows: ■ Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 2901, 5412(b)(2)(B); 15 U.S.C. 78c, 78l, 78m, 78n, 78w. 25. Section 192.500 is amended by adding (a)(3)(iii)to read as follows: ■ § 192.500 What management stock benefit plans may I implement? (a) * * * (3) * * * (iii) For a qualifying community banking organization that has elected to use the community bank leverage ratio framework, as set forth under the OCC’s Capital Adequacy Standards at part 3 of this chapter, the term tangible capital, as it is used in this paragraph (a)(3), refers to the qualifying community banking organization’s tier 1 capital, as used under § 3.12 of this chapter. * * * * * FEDERAL RESERVE SYSTEM 12 CFR Chapter II Authority and Issuance For the reasons set forth in the preamble, chapter II of title 12 of the Code of Federal Regulations is amended as set forth below: PART 206—LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F) 26. The authority citation for part 206 continues to read as follows: ■ Authority: 12 U.S.C. 371b–2. Tier 2 capital as calculated under the standards of that country. For an insured branch of a foreign bank organized under the laws of a country that does not subscribe to the principles of the Basel Capital Accord (Accord), ‘‘total capital’’ means total Tier 1 and Tier 2 capital as calculated under the provisions of the Accord. * * * * * ■ 28. Section 206.5 is amended by adding paragraph (a)(4) to read as follows: § 206.5 Capital levels of correspondents. (a) * * * (4) Notwithstanding paragraphs (a)(1) through (3) of this section, a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio (as defined in § 217.12 of this chapter) is considered to have met the minimum capital requirements in this paragraph (a). * * * * * PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 29. The authority citation for part 208 is revised to read as follows: ■ Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321–338a, 371d, 461, 481–486, 601, 611, 1814, 1816, 1817(a)(3), 1817(a)(12), 1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p–1, 1831r–1, 1831w, 1831x, 1835a, 1882, 2901–2907, 3105, 3310, 3331– 3351, 3905–3909, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780–4(c)(5), 78q, 78q–1, 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128. 27. Section 206.2 is amended by revising paragraph (g) to read as follows: 30. Section 208.2 is amended by adding paragraph (d)(3) to read as follows: § 206.2 § 208.2 ■ ■ Definitions. * * * * * (g) Total capital means the total of a bank’s Tier 1 and Tier 2 capital under the risk-based capital guidelines provided by the bank’s primary federal supervisor. For a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), total capital means the bank’s Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter). For an insured branch of a foreign bank organized under the laws of a country that subscribes to the principles of the Basel Capital Accord, ‘‘total capital’’ means total Tier 1 and VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 Definitions. * * * * * (d) * * * (3) For a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), capital stock and surplus means the bank’s Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowance for loan and lease losses or adjusted allowance for credit losses, as applicable. * * * * * ■ 31. Section 208.43 is amended by revising paragraphs (a) and (b) to read as follows: PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 § 208.43 Capital measures and capital category definitions. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this subpart, the relevant capital measures are: (i) Total Risk-Based Capital Measure: The total risk-based capital ratio; (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based capital ratio; (iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 riskbased capital ratio; and (iv) Leverage Measure: (A) The leverage ratio; and (B) With respect to an advanced approaches bank, on January 1, 2018, and thereafter, the supplementary leverage ratio. (C) With respect to any bank that is a subsidiary (as defined in § 217.2 of this chapter) of a global systemically important BHC, on Jan. 1, 2018, and thereafter, the supplementary leverage ratio. (2) For a qualifying community banking organization (as defined in § 217.12 of this chapter), that has elected to use the community bank leverage ratio framework (as defined in § 217.12 of this chapter), the leverage ratio calculated in accordance with § 217.12(b) of this chapter is used to determine the well capitalized capital category under paragraph (b)(1)(i)(A) through (D) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, a member bank is deemed to be: (1)(i) ‘‘Well capitalized’’ if: (A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of 10.0 percent or greater; and (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of 8.0 percent or greater; and (C) Common Equity Tier 1 Capital Measure: The bank has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; and (D) Leverage Measure: (1) The bank has a leverage ratio of 5.0 percent or greater; and (2) Beginning on January 1, 2018, with respect to any bank that is a subsidiary of a global systemically important BHC under the definition of ‘‘subsidiary’’ in § 217.2 of this chapter, the bank has a supplementary leverage ratio of 6.0 percent or greater; and (E) The bank is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board pursuant to section 8 of the FDI Act, the International Lending Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, or any regulation E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations thereunder, to meet and maintain a specific capital level for any capital measure. (ii) A qualifying community banking organization, as defined in § 217.12 of this chapter, that has elected to use the community bank leverage ratio framework under § 217.12 of this chapter, shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraph (b)(1)(i)(A) through (D) of this section. * * * * * PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K) 32. The authority citation for part 211 continues to read as follows: ■ Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s, 1681w, 6801 and 6805. 33. In part 211, remove the words ‘‘Capital Adequacy Guidelines’’ wherever they appear and add in their place the words ‘‘capital rule’’. ■ 34. Section 211.2 is amended by revising paragraphs (b), (c), and (x) to read as follows: ■ § 211.2 * * * * * (b) Capital and surplus means, unless otherwise provided in this part: (1) For organizations subject to the capital rule: (i) Tier 1 and tier 2 capital included in an organization’s risk-based capital (under the capital rule); and (ii) The balance of allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in an organization’s tier 2 capital for calculation of risk-based capital, based on the organization’s most recent consolidated Report of Condition and Income. (iii) For qualifying community banking organizations (as defined in § 217.12 of this chapter) that are subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable. (2) For all other organizations, paid-in and unimpaired capital and surplus, and includes undivided profits but does not include the proceeds of capital notes or debentures. (c) Capital rule means part 217 of this chapter. * * * * * 19:15 Nov 12, 2019 § 211.9 Jkt 250001 [Amended] 35. Section 211.9 is amended by redesignating footnote 5 to paragraph (a) as footnote 1 to paragraph (a). ■ PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O) 36. The authority citation for part 215 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 1817(k), 5412; and Pub. L. 102–242, 105 Stat. 2236 (1991). 37. Section 215.2 is amended by adding paragraph (i)(3) to read as follows: ■ § 215.2 Definitions. VerDate Sep<11>2014 (x) Tier 1 capital has the same meaning as provided in § 217.2 of this chapter. A qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), calculates its tier 1 capital in accordance with § 217.12(b) of this chapter. * * * * * Definitions. * * * * * (i) * * * (3) Notwithstanding paragraphs (i)(1) and (2) of this section, for a member bank that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), unimpaired capital and unimpaired surplus equals Tier 1 capital (as defined in § 217.12 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable. * * * * * PART 217—CAPITAL ADEQUACY OF BANKING HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q) 38. The authority citation for part 217 is revised to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371, and 5371 note. 39. Section 217.10 is amended by revising paragraph (a) to read as follows: ■ PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 § 217.10 61797 Minimum capital requirements. (a) Minimum capital requirements. (1) A Board-regulated institution must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches Boardregulated institutions or, for Category III Board-regulated institutions, a supplementary leverage ratio of 3 percent. (2) A qualifying community banking organization (as defined in § 217.12), that is subject to the community bank leverage ratio framework (as defined § 217.12), is considered to have met the minimum capital requirements in this paragraph (a) of this section. * * * * * ■ 40. Section 217.12 is added as to read as follows: § 217.12 Community bank leverage ratio framework. (a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 9 percent. (2) For purposes of this section, a qualifying community banking organization means a Board-regulated institution that is not an advanced approaches Board-regulated institution and that satisfies all of the following criteria: (i) Has a leverage ratio of greater than 9 percent; (ii) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y–9C, as applicable, as of the end of the most recent calendar quarter; (iii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(iii)(A) through (I) of this section, divided by total consolidated assets, E:\FR\FM\13NOR2.SGM 13NOR2 61798 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through guarantees and credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y–9C, as applicable; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; and (iv) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y–9C, as applicable, of 5 percent or less of the Board-regulated institution’s total consolidated assets, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the applicable reporting requirements of its Call Report or of its Form FR Y–9C, as applicable. (iii)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio framework may opt out of the community bank leverage ratio framework by completing the applicable risk-based and leverage ratio reporting requirements necessary to demonstrate compliance with § 217.10(a)(1) in its Call Report or its Form FR Y–9C, as applicable, or by otherwise providing the information to the Board. (B) A qualifying community banking organization that opts out of the community bank leverage ratio framework pursuant to paragraph (a)(3)(iii)(A) of this section must comply with § 217.10(a)(1) immediately. (b) Calculation of the leverage ratio. A qualifying community banking organization’s leverage ratio is calculated in accordance with VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 § 217.10(b)(4), except that a qualifying community banking organization is not required to: (1) Make adjustments and deductions from tier 2 capital for purposes of § 217.22(c); or (2) Calculate and deduct from tier 1 capital an amount resulting from insufficient tier 2 capital under § 217.22(f). (c) Treatment when ceasing to meet the qualifying community banking organization requirements. (1) Except as provided in paragraphs (c)(5) and (6) of this section, if an Board-regulated institution ceases to meet the definition of a qualifying community banking organization, the Board-regulated institution has two reporting periods under its Call Report or Form FR Y–9C, as applicable (grace period) either to satisfy the requirements to be a qualifying community banking organization or to comply with § 217.10(a)(1) and report the required capital measures under § 217.10(a)(1) on its Call Report or its Form FR Y–9C, as applicable. (2) The grace period begins as of the end of the calendar quarter in which the Board-regulated institution ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the Boardregulated institution continues to be treated as a qualifying community banking organization for the purpose of this part and must continue calculating and reporting its leverage ratio under this section unless the Board-regulated institution has opted out of using the community bank leverage ratio framework under paragraph (a)(3) of this section. (4) During the grace period, the qualifying community banking organization continues to be considered to have met the minimum capital requirements under § 217.10(a)(1), the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1)(i)(A) through (D) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, and must continue calculating and reporting its leverage ratio under this section. (5) Notwithstanding paragraphs (c)(1) through (4) of this section, a Boardregulated institution that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 grace period and immediately ceases to be a qualifying community banking organization. Such a Board-regulated institution must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it ceases to be a qualifying community banking organization. (6) Notwithstanding paragraphs (c)(1) through (4) of this section, a Boardregulated institution that has a leverage ratio of 8 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 8 percent or less. ■ 41. Section 217.22 is amended by revising paragraph (f) to read as follows: § 217.22 Regulatory capital adjustments and deductions. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a Boardregulated institution does not have a sufficient amount of a specific component of capital to effect the required deduction after completing the deductions required under paragraph (d) of this section, the Board-regulated institution must deduct the shortfall from the next higher (that is, more subordinated) component of regulatory capital. Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 217.12) that has elected to use the community bank leverage ratio framework pursuant to § 217.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * PART 223—TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W) 42. The authority citation for part 223 continues to read as follows: ■ Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c–1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412). 43. Section 223.3 is amended by adding paragraph (d)(4) to read as follows: ■ E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations § 223.3 What are the meanings of the other terms used in sections 23A and 23B and this part? * * * * * (d) * * * (4) Notwithstanding paragraphs (d)(1) through (3) of this section, for a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), capital stock and surplus equals tier 1 capital (as defined in § 217.12 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable. * * * * * PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 44. The authority citation for part 225 continues to read as follows: ■ Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331–3351, 3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805. 45. Section 225.2 is amended by revising paragraph (h), redesignating footnote 2 to paragraph (r)(1) as footnote 1 to paragraph (r)(1), and adding paragraph (r)(4). The revision and addition read as follows: ■ § 225.2 Definitions. * * * * * (h) Lead insured depository institution means the largest insured depository institution controlled by the bank holding company as of the quarter ending immediately prior to the proposed filing, based on a comparison of the average total risk-weighted assets controlled during the previous 12month period be each insured depository institution subsidiary of the holding company. For purposes of this paragraph (h), for a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), average total risk-weighted assets equal the qualifying community banking organization’s average total consolidated assets (as used in § 217.12 of this chapter). * * * * * (r) * * * (4) Notwithstanding paragraphs (r)(1) through (3) of this section: (i) A bank holding company that is a qualifying community banking VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) is well capitalized if it satisfies the requirements of paragraph (r)(1)(iii) of this section. (ii) A depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) is well capitalized. * * * * * ■ 46. Section 225.14 is amended by: ■ a. Redesignating footnote 3 to paragraph (a)(1)(ii) as footnote 1 to paragraph (a)(1)(ii); ■ b. Revising paragraphs (a)(1)(v)(A), (a)(1)(vii), and (c)(6)(i)(A) and (B); and ■ c. Adding paragraphs (c)(6)(iii) and (f). The revisions and additions read as follows: § 225.14 Expedited action for certain bank acquisitions by well-run bank holding companies. (a) * * * (1) * * * (v)(A) If the bank holding company is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), and: (1) If the bank holding company has consolidated assets of $3 billion or more, an abbreviated consolidated pro forma balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma risk-based capital ratios for the acquiring bank holding company as of the most recent quarter, and a description of the purchase price and the terms and sources of funding for the transaction; or (2) If the bank holding company has consolidated assets of less than $3 billion, a pro forma parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, and a description of the purchase price, the terms and sources of funding for the transaction, and the sources and schedule for retiring any debt incurred in the transaction; (B) If the bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), an abbreviated consolidated pro forma balance sheet as PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 61799 of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma leverage ratio (as calculated under § 217.12 of this chapter) for the acquiring bank holding company as of the most recent quarter, and a description of the purchase price and the terms and sources of funding for the transaction; * * * * * (vii)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or riskweighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma basis; and * * * * * (c) * * * (6) * * * (i) * * * (A) Limited growth. Except as provided in paragraphs (c)(6)(ii) and (iii) of this section, the sum of the aggregate risk-weighted assets to be acquired in the proposal and the aggregate riskweighted assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes paragraph (c)(6) of this section, other qualifying transactions means any transaction approved under this section or § 225.23 during the 12 months prior to filing the notice under this section; and (B) Individual size limitation. Except as provided in paragraph (c)(6)(iii) of this section, the total risk-weighted assets to be acquired do not exceed $7.5 billion; * * * * * (iii) Qualifying community banking organizations. Paragraphs (c)(6)(i)(A) E:\FR\FM\13NOR2.SGM 13NOR2 61800 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations and (B) of this section shall not apply if: (A) The acquiring bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter); (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as used in § 217.12 of this chapter) of the acquiring bank holding company as last reported to the Board; and (C) The total assets to be acquired do not exceed $7.5 billion; * * * * * (f) Qualifying community banking organizations. For purposes of this section, a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) controls total risk-weighted assets equal to the qualifying community banking organization’s average total consolidated assets (as used in § 217.12 of this chapter) as last reported to its primary banking supervisor. ■ 47. Section 225.22 is amended by adding paragraph (d)(8)(vi) to read as follows: § 225.22 Exempt nonbanking activities and acquisitions. * * * * * (d) * * * (8) * * * (vi) Qualifying community banking organizations. For purposes of paragraph (d)(8)(ii) of this section, a lending company or industrial bank that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), or is a subsidiary of such a qualifying community banking organization, has risk-weighted assets equal to: (A) Its average total consolidated assets (as used in § 217.12 of this chapter) as most recently reported to its primary banking supervisor (as defined in § 225.14(d)(5)); or (B) Its total assets, if the company or industrial bank does not report such average total consolidated assets. * * * * * ■ 48. Section 225.23 is amended by: VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 a. Redesignating footnote 2 to paragraph (a)(1) as footnote 1 to paragraph (a)(1); ■ b. Revising paragraphs (a)(1)(iii) and (c)(5)(i); and ■ c. Adding paragraphs (c)(5)(iii) and (e). The revisions and additions read as follows: ■ § 225.23 Expedited action for certain nonbanking proposals by well-run bank holding companies. (a) * * * (1) * * * (iii) If the proposal involves an acquisition of a going concern: (A) If the acquiring bank holding company is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter): (1) If the bank holding company has consolidated assets of $3 billion or more, an abbreviated consolidated pro forma balance sheet for the acquiring bank holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma risk-based capital ratios for the acquiring bank holding company as of the most recent quarter, a description of the purchase price and the terms and sources of funding for the transaction, and the total revenue and net income of the company to be acquired; or (2) If the bank holding company has consolidated assets of less than $3 billion, a pro forma parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, a description of the purchase price and the terms and sources of funding for the transaction and the sources and schedule for retiring any debt incurred in the transaction, and the total assets, off-balance sheet items, revenue and net income of the company to be acquired; (B) If the acquiring bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), an abbreviated consolidated pro forma balance sheet for the acquiring bank holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro forma leverage ratio for the acquiring bank holding company as of the most recent quarter, a description of the purchase price and the terms and sources of funding for the transaction, PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 and the total revenue and net income of the company to be acquired; (C) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or riskweighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (D) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma basis; * * * * * (c) * * * (5) * * * (i) In general—(A) Limited growth. Except as provided in paragraphs (c)(5)(ii) and (iii) of this section, the sum of aggregate risk-weighted assets to be acquired in the proposal and the aggregate risk-weighted assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes of paragraph (c)(5) of this section, ‘‘other qualifying transactions’’ means any transaction approved under this section or § 225.14 during the 12 months prior to filing the notice under this section; (B) Consideration paid. Except as provided in paragraph (c)(5)(iii) of this section, the gross consideration to be paid by the acquiring bank holding company in the proposal does not exceed 15 percent of the consolidated Tier 1 capital of the acquiring bank holding company; and (C) Individual size limitation. Except as provided in paragraph (c)(5)(iii) of this section, the total risk-weighted assets to be acquired do not exceed $7.5 billion; * * * * * (iii) Qualifying community banking organizations. Paragraphs (c)(5)(i)(A) through (C) of this section shall not apply if: (A) The acquiring bank holding company is a qualifying community E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter); and (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as used in § 217.12 of this chapter) of the acquiring bank holding company as last reported to the Board; (C) The gross consideration to be paid by the acquiring bank holding company in the proposal does not exceed 15 percent of the Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) of the acquiring bank holding company; and (D) The total assets to be acquired do not exceed $7.5 billion; * * * * * (e) Qualifying community banking organizations. For purposes of this section, a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) controls total risk-weighted assets equal to the qualifying community banking organization’s average total consolidated assets (as used in § 217.12 of this chapter) as last reported to its primary banking supervisor. ■ 49. Section 225.24 is amended by revising paragraphs (a)(2)(iv)(B) and (a)(2)(vi) to read as follows: § 225.24 Procedures for other nonbanking proposals. (a) * * * (2) * * * (iv) * * * (B) Consolidated pro forma risk-based capital and leverage ratio calculations for the acquiring bank holding company as of the most recent quarter (or, in the case of a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), consolidated pro forma leverage ratio calculations under § 217.12 of this chapter for the acquiring bank holding company as of the most recent quarter); and * * * * * (vi)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or riskweighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma basis; * * * * * ■ 50. Section 225.87 is amended by adding paragraph (b)(4)(iv) to read as follows: § 225.87 Is notice to the Board required after engaging in a financial activity? * * * * * (b) * * * (4) * * * (iv) For purposes of this paragraph (b)(4), a financial holding company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) calculates its Tier 1 capital (as defined in § 217.2 of this chapter) in accordance with § 217.12(b) of this chapter. ■ 51. Section 225.174 is amended by adding paragraph (d) to read as follows: § 225.174 What aggregate thresholds apply to merchant banking investments? * * * * * (d) Qualifying community banking organizations. For purposes of this section, a financial holding company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) calculates its Tier 1 capital (as defined in § 217.2 of this chapter) in accordance with § 217.12(b) of this chapter. ■ 52. Section 225.175 is amended by adding paragraph (c)(3) to read as follows: § 225.175 What risk management, record keeping and reporting policies are required to make merchant banking investments? * PO 00000 * * Frm 00027 * Fmt 4701 * Sfmt 4700 61801 (c) * * * (3) Qualifying community banking organizations. For purposes of this paragraph (c), a financial holding company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) calculates its Tier 1 capital (as defined in § 217.2 of this chapter) in accordance with § 217.12(b) of this chapter. PART 238—SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL) 53. The authority citation for part 238 continues to read as follows: ■ Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464, 1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C. 78l. 54. Section 238.53 is amended by revising paragraphs (c)(2)(iii)(B) and (c)(2)(v) to read as follows: ■ § 238.53 Prescribed services and activities of savings and loan holding companies. * * * * * (c) * * * (2) * * * (iii) * * * (B) Consolidated pro forma risk-based capital and leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter (or, in the case of a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), consolidated pro forma leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter); and * * * * * (v)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or riskweighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital, and total capital of the institution on a pro forma basis; and (B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), whose Tier 1 capital (as defined in § 217.2 of this E:\FR\FM\13NOR2.SGM 13NOR2 61802 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma basis; * * * * * PART 251—CONCENTRATION LIMIT (REGULATION XX) 55. The authority citation for part 251 continues to read as follows: ■ Authority: 12 U.S.C. 1818, 1844(b), 1852, 3101 et seq. 56. Section 251.3 is amended by revising paragraph (c)(2) and adding paragraph (c)(3) to read as follows: ■ § 251.3 Concentration limit. FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Chapter III Authority and Issuance For the reasons stated in the preamble, the Federal Deposit Insurance Corporation proposes to amend chapter III of Title 12, Code of Federal Regulations as follows: Jkt 250001 Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note); Pub. L. 115–174 § 201. 58. Section 324.10 is amended by revising paragraph (a) to read as follows: * * * * (c) * * * (2) U.S. company not subject to applicable risk-based capital rules. For a U.S. company that is not subject to applicable risk-based capital rules (other than a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)), consolidated liabilities are equal to the total liabilities of such company on a consolidated basis, as determined under applicable accounting standards. (3) Qualifying community banking organizations. For a U.S. company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), consolidated liabilities are equal to: (i) Average total consolidated assets (as used in § 217.12 of this chapter) of the company as last reported on the qualifying community banking organization’s applicable regulatory filing with the qualifying community banking organization’s appropriate Federal banking agency; minus (ii) The company’s tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter). * * * * * 19:15 Nov 12, 2019 57. The authority citation for part 324 continues to read as follows: ■ ■ * VerDate Sep<11>2014 PART 324—CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS § 324.10 Minimum capital requirements. (a) Minimum capital requirements. (1) An FDIC-supervised institution must maintain the following minimum capital ratios: (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches FDICsupervised institutions or for Category III FDIC-regulated institutions, a supplementary leverage ratio of 3 percent. (vi) For state savings associations, a tangible capital ratio of 1.5 percent. (2) A qualifying community banking organization (as defined in § 324.12), that is subject to the community bank leverage ratio framework (as defined in § 324.12), is considered to have met the minimum capital requirements in this paragraph (a). * * * * * ■ 59. Section 324.12 is added to read as follows: § 324.12 Community bank leverage ratio framework. (a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 324.10, the capital ratio requirements for the well capitalized capital category under § 324.403(b)(1) of this part, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 9 percent. (2) For purposes of this section, a qualifying community banking PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 organization means an FDIC-supervised institution that is not an advanced approaches FDIC-supervised institution and that satisfies all of the following criteria: (i) Has a leverage ratio of greater than 9 percent; (ii) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to the Call Report as of the end of the most recent calendar quarter; (iii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(iii)(A) through (I) of this section, divided by total consolidated assets, each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through guarantees and credit derivatives; (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to the Call Report; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; and (iv) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to the Call Report of 5 percent or less of the FDIC-supervised institution’s total consolidated assets, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the applicable reporting requirements of its Call Report. (iii)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio framework may opt out of the E:\FR\FM\13NOR2.SGM 13NOR2 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations community bank leverage ratio framework by completing the applicable risk-based and leverage ratio reporting requirements necessary to demonstrate compliance with § 324.10(a)(1) in its Call Report or by otherwise providing the information to the FDIC. (B) A qualifying community banking organization that opts out of the community bank leverage ratio framework pursuant to paragraph (a)(3)(iii)(A) of this section must comply with § 324.10(a)(1) immediately. (b) Calculation of the leverage ratio. A qualifying community banking organization’s leverage ratio is calculated in accordance to § 324.10(b)(4), except that a qualifying community banking organization is not required to: (1) Make adjustments and deductions from tier 2 capital for purposes of § 324.22(c); or (2) Calculate and deduct from tier 1 capital an amount resulting from insufficient tier 2 capital under § 324.22(f). (c) Treatment when ceasing to meet the qualifying community banking organization requirements. (1) Except as provided in paragraphs (c)(5) and (6) of this section, if an FDIC-supervised institution ceases to meet the definition of a qualifying community banking organization, the FDIC-supervised institution has two reporting periods under its Call Report (grace period) either to satisfy the requirements to be a qualifying community banking organization or to comply with § 324.10(a)(1) and report the required capital measures under § 324.10(a)(1) on its Call Report. (2) The grace period begins as of the end of the calendar quarter in which the FDIC-supervised institution ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the FDICsupervised institution continues to be treated as a qualifying community banking organization for the purpose of this part and must continue calculating and reporting its leverage ratio under this section unless the FDIC-supervised institution has opted out of using the community bank leverage ratio framework under paragraph (a)(3) of this section. (4) During the grace period, the qualifying community banking organization continues to be considered to have met the minimum capital requirements under § 324.10(a)(1), the VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 capital ratio requirements for the well capitalized capital category under § 324.403(b)(1)(i)(A) through (D) of this part, and any other capital or leverage requirements to which the qualifying community banking organization is subject and must continue calculating and reporting its leverage ratio under this section. (5) Notwithstanding paragraphs (c)(1) through (4) of this section, an FDICsupervised institution that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such an FDIC-supervised institution must comply with the minimum capital requirements under § 324.10(a)(1) and must report the required capital measures under § 324.10(a)(1) for the quarter in which it ceases to be a qualifying community banking organization. (6) Notwithstanding paragraphs (c)(1) through (4) of this section, an FDICsupervised institution that has a leverage ratio of 8 percent or less does not have a grace period and must comply with the minimum capital requirements under § 324.10(a)(1) and must report the required capital measures under § 324.10(a)(1) for the quarter in which it reports a leverage ratio of 8 percent or less. ■ 60. Section 324.22 is amended by revising paragraph (f) to read as follows: § 324.22 Regulatory capital adjustments and deductions. * * * * * (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 required deduction after completing the deductions required under paragraph (d) of this section, the FDIC-supervised institution must deduct the shortfall from the next higher (that is, more subordinated) component of regulatory capital. Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 324.12) that has elected to use the community bank leverage ratio framework pursuant to § 324.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * ■ 61. Section 324.403 is amended by revising paragraphs (a) and (b) to read as follows: PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 61803 § 324.403 Capital measures and capital categories. (a) Capital measures. (1) For purposes of section 38 of the FDI Act and this subpart H, the relevant capital measures are: (i) Total Risk-Based Capital Measure: The total risk-based capital ratio; (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based capital ratio; (iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 riskbased capital ratio; and (iv) Leverage Measure: (A) The leverage ratio; and (B) With respect to an advanced approaches FDIC-supervised institutions, on January 1, 2018, and thereafter, the supplementary leverage ratio. (2) For a qualifying community banking organization (as defined under § 324.12), that has elected to use the community bank leverage ratio framework (as defined under § 324.12), the leverage ratio calculated in accordance with § 324.12(b) is used to determine the well capitalized capital category under paragraph (b)(1)(i) (A) through (D) of this section. (b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, an FDIC-supervised institution shall be deemed to be: (1)(i) ‘‘Well capitalized’’ if: (A) Total Risk-Based Capital Measure: The FDIC-supervised institution has a total risk-based capital ratio of 10.0 percent or greater; and (B) Tier 1 Risk-Based Capital Measure: The FDIC-supervised institution has a tier 1 risk-based capital ratio of 8.0 percent or greater; and (C) Common Equity Tier 1 Capital Measure: The FDIC-supervised institution has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; and (D) The FDIC-supervised institution has a leverage ratio of 5.0 percent or greater; and (E) The FDIC-supervised institution is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC pursuant to section 8 of the FDI Act (12 U.S.C. 1818), the International Lending Supervision Act of 1983 (12 U.S.C. 3907), or the Home Owners’ Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)), or section 38 of the FDI Act (12 U.S.C. 1831o), or any regulation thereunder, to meet and maintain a specific capital level for any capital measure. (ii) Beginning on January 1, 2018 and thereafter, an FDIC-supervised institution that is a subsidiary of a covered BHC will be deemed to be well capitalized if the FDIC-supervised E:\FR\FM\13NOR2.SGM 13NOR2 61804 Federal Register / Vol. 84, No. 219 / Wednesday, November 13, 2019 / Rules and Regulations institution satisfies paragraphs (b)(1)(i) (A) through (E) of this section and has a supplementary leverage ratio of 6.0 percent or greater. For purposes of this paragraph, a covered BHC means a U.S. top-tier bank holding company with more than $700 billion in total assets as reported on the company’s most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y– 9C) or more than $10 trillion in assets under custody as reported on the company’s most recent Banking Organization Systemic Risk Report (Form FR Y–15). (iii) A qualifying community banking organization, as defined under § 324.12, that has elected to use the community bank leverage ratio framework under § 324.12 shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraph (b)(1)(i)(A) through (D) of this section. * * * * * PART 337—UNSAFE AND UNSOUND BANKING PRACTICES 62. The authority citation for part 337 continues to read as follows: ■ Authority: 12 U.S.C. 375a(4), 375b, 1463(a)(1), 1816, 1818(a), 1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412. 63. Section 337.3 is amended by redesignating footnote 3 to paragraph (b) as footnote 1 and revising it to read as follows: ■ § 337.3 Limits on extensions of credit to executive officers, directors, and principal shareholders of insured nonmember banks. * * * * * (b) * * * 1 For the purposes of § 337.3, an insured nonmember bank’s capital and unimpaired surplus shall have the same meaning as found in § 215.2(f) of Federal Reserve Board Regulation O (§ 215.2(f) of this chapter). For a qualifying community banking organization (as defined in § 324.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 324.12 of this chapter), capital and unimpaired surplus shall mean the FDIC-supervised institution’s tier 1 capital (as defined in § 324.2 of this chapter) plus adjusted allowances for credit losses or allowances for loan and lease losses, as applicable (as defined in § 324.2 of this chapter). * * * * * VerDate Sep<11>2014 19:15 Nov 12, 2019 Jkt 250001 PART 365—REAL ESTATE LENDING STANDARDS 64. The authority citation for part 365 continues to read as follows: ■ Authority: 12 U.S.C. 1828(o) and 5101 et seq. 65. Appendix A to subpart A of part 365 is amended: ■ a. In the first paragraph of the appendix, redesignating footnote 5 as footnote 1; ■ b. Following the heading ‘‘Supervisory Loan-to-Value-Limits’’ in the table, by redesignating footnotes 1 and 2 as footnotes 2 and 3; and ■ c. Following the heading ‘‘Loans in Excess of the Supervisory Loan-toValue-Limits,’’ redesignating the footnote 2 as footnote 4 and revising it. The revision reads as follows: ■ Appendix A to Subpart A of Part 365— Interagency Guidelines for Real Estate Lending Policies * * * * * chapter and calculated in accordance with § 324.12(b) of this chapter. * * * * * Dated: September 17, 2019. Joseph M. Otting, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, October 7, 2019. E. Misback, Deputy Secretary of the Board. Federal Deposit Insurance Corporation. By order of the Board of Directors. Dated at Washington, DC, on September 17, 2019. Robert E. Feldman, Executive Secretary. [FR Doc. 2019–23472 Filed 11–12–19; 8:45 am] BILLING CODE P DEPARTMENT OF TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 Loans in Excess of the Supervisory Loan-to-Value-Limits 4 For state non-member banks and state savings associations, ‘‘total capital’’ refers to that term described in § 324.2 of this chapter. For a qualifying community banking organization (as defined in § 324.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 324.12 of this chapter), ‘‘total capital’’ refers to the FDIC-supervised institution’s tier 1 capital, as defined in § 324.2 of this chapter. * * * * * [Docket ID OCC–2017–0018] RIN 1557–AE70 FEDERAL RESERVE SYSTEM 12 CFR Part 217 [Regulation Q; Docket No. R–1576] RIN 7100–AE74 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 324 RIN 3064–AF18 PART 390—REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT SUPERVISION 66. The authority citation for part 390 continues to read as follows: ■ Authority: 12 U.S.C. 1819. § 390.344 Definitions applicable to capital distributions. * * * * Capital means total capital, as computed under part 324 of this chapter. For a qualifying community banking organization (as defined in § 324.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 324.12 of this chapter), total capital means the FDIC-supervised institution’s tier 1 capital, as defined under § 324.2 of this PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation. ACTION: Final rule, announcement of effective date, early adoption. AGENCY: 67. Section 390.344 is amended by revising the definition of ‘‘Capital’’ to read as follows: ■ * Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996; Revised Effective Date The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are adopting a final rule that permits insured depository institutions and depository institution holding companies not subject to the advanced approaches capital rule to implement certain SUMMARY: E:\FR\FM\13NOR2.SGM 13NOR2

Agencies

[Federal Register Volume 84, Number 219 (Wednesday, November 13, 2019)]
[Rules and Regulations]
[Pages 61776-61804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23472]



[[Page 61775]]

Vol. 84

Wednesday,

No. 219

November 13, 2019

Part III





Department of Treasury





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Office of the Comptroller of the Currency





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12 CFR Parts 1, 3, 5, 6, et al.





Federal Reserve System





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12 CFR Parts 206, 208, 211, 215, et al.





Federal Deposit Insurance Corporation





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12 CFR Parts 303, 324, 337, 347, et al.





Regulatory Capital Rules; Final Rules

Federal Register / Vol. 84 , No. 219 / Wednesday, November 13, 2019 / 
Rules and Regulations

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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

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

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

FEDERAL RESERVE SYSTEM

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

[Regulation Q; Docket No. R-1638]
RIN 7100-AF 29

FEDERAL DEPOSIT INSURANCE CORPORATION

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

RIN 3064-AE91


Regulatory Capital Rule: Capital Simplification for Qualifying 
Community Banking Organizations

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

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, and the Federal Deposit 
Insurance Corporation (collectively, the agencies) are adopting a final 
rule that provides for a simple measure of capital adequacy for certain 
community banking organizations, consistent with section 201 of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act (final 
rule). Under the final rule, depository institutions and depository 
institution holding companies that have less than $10 billion in total 
consolidated assets and meet other qualifying criteria, including a 
leverage ratio (equal to tier 1 capital divided by average total 
consolidated assets) of greater than 9 percent, will be eligible to opt 
into the community bank leverage ratio framework (qualifying community 
banking organizations). Qualifying community banking organizations that 
elect to use the community bank leverage ratio framework and that 
maintain a leverage ratio of greater than 9 percent will be considered 
to have satisfied the generally applicable risk-based and leverage 
capital requirements in the agencies' capital rules (generally 
applicable rule) and, if applicable, will be considered to have met the 
well-capitalized ratio requirements for purposes of section 38 of the 
Federal Deposit Insurance Act. The final rule includes a two-quarter 
grace period during which a qualifying community banking organization 
that temporarily fails to meet any of the qualifying criteria, 
including the greater than 9 percent leverage ratio requirement, 
generally would still be deemed well-capitalized so long as the banking 
organization maintains a leverage ratio greater than 8 percent. At the 
end of the grace period, the banking organization must meet all 
qualifying criteria to remain in the community bank leverage ratio 
framework or otherwise must comply with and report under the generally 
applicable rule. Similarly, a banking organization that fails to 
maintain a leverage ratio greater than 8 percent would not be permitted 
to use the grace period and must comply with the capital rule's 
generally applicable requirements and file the appropriate regulatory 
reports.

DATES: The final rule is effective on January 1, 2020.

FOR FURTHER INFORMATION CONTACT: 
    OCC: David Elkes, Risk Expert, Benjamin Pegg, Risk Expert, or Jung 
Sup Kim, Risk Specialist, Capital and Regulatory Policy (202) 649-6370; 
or Carl Kaminski, Special Counsel, or Daniel Perez, Senior Attorney, or 
Rima Kundnani, Senior Attorney, Chief Counsel's Office, (202) 649-5490, 
for persons who are deaf or hearing impaired, TTY, (202) 649-5597, 
Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; Andrew Willis, Lead 
Financial Institutions Policy Analyst, (202) 912-4323, or Christopher 
Appel, Senior Financial Institutions Policy Analyst II, (202) 973-6862, 
Division of Supervision and Regulation; or Mark Buresh, Senior Counsel, 
(202) 452-270; or Andrew Hartlage, Counsel, (202) 452-6483, Legal 
Division, Board of Governors of the Federal Reserve System, 20th and C 
Streets NW, Washington, DC 20551. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section, 
[email protected]; Stephanie Lorek, Senior Capital Markets Policy 
Analyst, [email protected]; Dushan Gorechan, Financial Analyst, 
[email protected]; Kyle McCormick, Financial Analyst, 
[email protected]; Capital Markets Branch, Division of Risk 
Management Supervision, [email protected], (202) 898-6888; or 
Michael Phillips, Counsel, [email protected]; Supervision Branch, 
Legal Division, Federal Deposit Insurance Corporation, 550 17th Street 
NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Summary of the Final Rule
II. Proposed Rule
    A. Proposed Community Bank Leverage Ratio Framework
    B. Summary of Comments
III. Final Rule
    A. Qualifying Criteria for the Community Bank Leverage Ratio 
Framework
    1. Leverage Ratio of Greater Than 9 Percent
    2. Total Consolidated Assets
    3. Total Off-Balance Sheet Exposures
    4. Total Trading Assets and Trading Liabilities
    5. Advanced Approaches Banking Organizations
    B. Definition of the Leverage Ratio's Numerator and Denominator
    1. Numerator
    2. Denominator
    C. Calibration of the Leverage Ratio in Order To Qualify for the 
Community Bank Leverage Ratio
    D. Ability To Opt Into and Out of the Community Bank Leverage 
Ratio Framework
    E. Ongoing Compliance With the Community Bank Leverage Ratio 
Framework
    1. Meeting the Definition of a Qualifying Community Banking 
Organization
    2. Treatment of a Community Banking Organization That Falls 
Below Certain Leverage Ratio Levels
    F. FDIC Deposit Insurance Assessments Regulations
    G. Other Affected Regulations
    H. Effective Date of the Final Rule
IV. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995
    E. Riegle Community Development and Regulatory Improvement Act 
of 1994
    F. The Congressional Review Act

I. Introduction

A. Background

    On February 8, 2019, 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) published a notice of proposed rulemaking (the proposed rule 
or proposal) \1\ to implement section 201 of the Economic Growth, 
Regulatory Relief, and

[[Page 61777]]

Consumer Protection Act (Act), and proposed to establish a community 
bank leverage ratio for qualifying community banking organizations as a 
simple alternative methodology to measure capital adequacy. The 
proposal was intended to simplify regulatory capital requirements and 
provide material regulatory compliance burden relief to qualifying 
community banking organizations that opt into the community bank 
leverage ratio framework.
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    \1\ 84 FR 3062 (February 8, 2019).
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    Section 201 of the Act directs the agencies to develop a community 
bank leverage ratio for qualifying community banking organizations of 
not less than 8 percent and not more than 10 percent. The Act provides 
that a qualifying community banking organization is a depository 
institution or depository institution holding company with total 
consolidated assets of less than $10 billion that satisfies such other 
factors, based on its risk profile, that the agencies determine are 
appropriate. Pursuant to section 201, a qualifying community banking 
organization that exceeds the community bank leverage ratio level 
established by the agencies shall be considered to have met: (i) The 
generally applicable risk-based and leverage capital requirements in 
the agencies' capital rules (generally applicable rule); (ii) the 
capital ratio requirements in order to be considered well capitalized 
under the agencies' prompt corrective action (PCA) framework (in the 
case of insured depository institutions); and (iii) any other 
applicable capital or leverage requirements. In addition, the Act 
directs the agencies to establish procedures for the treatment of 
qualifying community banking organizations that fall below the 
community bank leverage ratio level established by the agencies.\2\
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    \2\ The agencies note that, under existing PCA requirements 
applicable to insured depository institutions, to be considered 
``well capitalized'' a banking organization must demonstrate that it 
is not subject to any written agreement, order, capital directive, 
or as applicable, prompt corrective action directive, to meet and 
maintain a specific capital level for any capital measure. See 12 
CFR 6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(v) (Board); 12 CFR 
324.403(b)(1)(v) (FDIC). The same legal requirements would continue 
to apply under the community bank leverage ratio framework.
---------------------------------------------------------------------------

    Section 201 of the Act defines the community bank leverage ratio as 
the ratio of a qualifying community banking organization's tangible 
equity capital to its average total consolidated assets, both as 
reported on the qualifying community banking organization's applicable 
regulatory filing. In addition, the Act states that the agencies may 
determine that a banking organization is not a qualifying community 
banking organization based on the banking organization's risk profile. 
This determination shall be based on consideration of off-balance sheet 
exposures, trading assets and liabilities, total notional derivatives 
exposures, and such other factors as the agencies determine 
appropriate. The Act also specifies that the community bank leverage 
ratio framework does not limit the agencies' authority in effect as of 
the date of enactment of the Act.
    The Act directs the agencies to consult with applicable state bank 
supervisors in carrying out section 201 of the Act and to notify the 
applicable state bank supervisor of any qualifying community banking 
organization that exceeds, or does not exceed after previously 
exceeding, the community bank leverage ratio. As part of this 
consultation process, the agencies had a series of discussions with 
state bank supervisors, before and after publication of the proposal, 
that helped shape key elements of the community bank leverage ratio 
framework in the final rule.
    In response to the proposal, the agencies received approximately 50 
public comment letters and approximately 500 form letters from 
depository institutions, depository institution holding companies, 
trade associations, and other interested parties. Commenters generally 
supported the agencies' efforts to simplify the regulatory capital 
requirements. However, as discussed in greater detail below, many 
commenters indicated that certain aspects of the proposal were 
burdensome or unnecessarily complex, and some commenters expressed 
concern that banking supervisors would make the proposed community bank 
leverage ratio the de facto minimum capital requirement for community 
banking organizations, irrespective of whether they have opted into the 
community bank leverage ratio framework. Commenters generally favored 
greater simplicity in the community bank leverage ratio framework, and 
recommended the removal of the proposal's separate PCA proxy levels. 
After reviewing the comments, the agencies are making several 
modifications to address commenters' concerns and further simplify the 
community bank leverage ratio framework while retaining the quality and 
quantity of regulatory capital in the banking system.

B. Summary of the Final Rule

    In response to comments received on the proposal, the agencies are 
making a number of changes in this final rule. In addition, the final 
rule clarifies other important aspects of the community bank leverage 
ratio framework. The key changes being made to the final rule include 
the following:
     Adoption of tier 1 capital, and therefore the existing 
leverage ratio, into the community bank leverage ratio framework;
     Removal of the qualifying criteria for mortgage servicing 
assets and deferred tax assets arising from temporary differences;
     Removal of the PCA proxy levels; and
     Allowing a banking organization that elects to use the 
community bank leverage ratio framework to be considered well-
capitalized during the two-quarter grace period if its leverage ratio 
is 9 percent or less and greater than 8 percent.
    Under the final rule, the numerator of the community bank leverage 
ratio is the existing measure of tier 1 capital used by non-advanced 
approaches banking organizations.^{3 4} Numerous commenters 
described complexities that would be created with the proposed 
introduction of a new measure of capital, tangible equity, in the 
community bank leverage ratio framework and, therefore, the agencies 
have adopted the commenters' recommendation to use tier 1 capital. The 
use of tier 1 capital also has the benefit of including the existing 
threshold deduction approaches for mortgage servicing assets (MSAs) and 
deferred tax assets arising from temporary differences (temporary 
difference DTAs) which enabled the agencies to remove the qualifying 
criteria related to these exposures from the community bank leverage 
ratio framework. Due to the adoption of tier 1 capital, the community 
bank leverage ratio is generally calculated in the same

[[Page 61778]]

manner as the generally applicable rule's leverage ratio: Tier 1 
capital divided by average total consolidated assets minus amounts 
deducted from tier 1 capital. As a result, the final rule incorporates 
and refers to the generally applicable rule's leverage ratio.
---------------------------------------------------------------------------

    \3\ Under the final rule, a qualifying community banking 
organization that elects to use the community bank leverage ratio 
framework will calculate its leverage ratio taking into account the 
modifications made in relation to the capital simplifications rule 
and current expected credit losses methodology (CECL) transitions 
final rule. See 84 FR 35234 (July 22, 2019) and 84 FR 4222 (February 
14, 2019), respectively. The agencies anticipate that the tier 1 
capital amount used in the numerator of the calculation will reflect 
any future modifications made to the tier 1 capital definition 
applicable to non-advanced approaches banking organizations. See 84 
FR 35234 (July 22, 2019).
    \4\ For purposes of the community bank leverage ratio framework, 
an electing banking organization is not required to calculate tier 2 
capital and therefore would not be required to make any deductions 
that would be taken from tier 2 capital or potentially tier 1 
capital due to insufficient tier 2 capital. As part of the final 
rule the agencies are amending 12 CFR 3.22(f) (OCC); 12 CFR 
217.22(f) (Board); 12 CFR 324.22(f) (FDIC).
---------------------------------------------------------------------------

    Commenters also raised concerns that the PCA proxy levels included 
in the proposal caused unnecessary complexity in the community bank 
leverage ratio framework and requested that the framework include a 
grace period to transition back to the generally applicable rule if a 
banking organization's community bank leverage ratio was less than the 
well-capitalized threshold. The agencies are incorporating this 
feedback into the final rule by modifying the definition of a 
``qualifying community banking organization'' to include the level of 
the leverage ratio as a qualifying criterion.
    The final rule provides that to be a ``qualifying community banking 
organization,'' a banking organization must not be an advanced 
approaches banking organization \5\ and must meet the following 
qualifying criteria: (i) A leverage ratio of greater than 9 percent; 
(ii) total consolidated assets of less than $10 billion; (iii) total 
off-balance sheet exposures (excluding derivatives other than sold 
credit derivatives and unconditionally cancelable commitments) of 25 
percent or less of total consolidated assets; and (iv) the sum of total 
trading assets and trading liabilities of 5 percent or less of total 
consolidated assets. Consistent with section 201, the final rule 
provides that qualifying community banking organizations that opt into 
the community bank leverage ratio framework (electing banking 
organization) will be deemed to have met the ``well capitalized'' ratio 
requirements and be in compliance with the generally applicable rule. 
Such banking organizations will not be required to calculate and report 
risk-based capital ratios.
---------------------------------------------------------------------------

    \5\ An advanced approaches banking organization is generally 
defined as a firm with at least $250 billion in total consolidated 
assets or at least $10 billion in total on-balance sheet foreign 
exposure, and depository institution subsidiaries of those firms. 
Proposed rulemakings to tailor capital and liquidity requirements 
applicable to large banking organizations may result in changing the 
definition of advanced approaches banking organization. See 83 FR 
66024 (December 21, 2018) and 84 FR 24296 (May 24, 2019).
---------------------------------------------------------------------------

    Notably, the agencies have retained the proposal's 9 percent 
calibration for the leverage ratio in the community bank leverage ratio 
framework. The agencies believe that a 9 percent calibration, in 
conjunction with the final rule's qualifying criteria, will not result 
in a reduction in the aggregate level of regulatory capital currently 
held by electing banking organizations. Further, incorporating into the 
community bank leverage ratio framework the existing leverage ratio and 
the two-quarter grace period will facilitate the transition to and from 
the generally applicable rule. Banking organizations opt into and out 
of the framework through their Consolidated Reports of Condition and 
Income (Call Report) or Form FR-Y9C.
    If a qualifying community banking organization that has opted into 
the community bank leverage ratio framework subsequently fails to 
satisfy one or more of the qualifying criteria but continues to report 
a leverage ratio of greater than 8 percent, the banking organization 
could continue to use the community bank leverage ratio framework and 
be deemed to meet the ``well capitalized'' capital ratio requirements 
for a grace period of up to two quarters.\6\ As long as the banking 
organization is able to return to compliance with all the qualifying 
criteria within two quarters, it will continue to be deemed to meet the 
``well capitalized'' ratio requirements and be in compliance with the 
generally applicable rule. A banking organization will be required to 
comply with the generally applicable rule and file the relevant 
regulatory reports if the banking organization (i) is unable to restore 
compliance with all qualifying criteria during the two-quarter grace 
period (including coming into compliance with the greater than 9 
percent leverage ratio requirement), (ii) reports a leverage ratio of 8 
percent or less, or (iii) ceases to satisfy the qualifying criteria due 
to consummation of a merger transaction.
---------------------------------------------------------------------------

    \6\ As a result of adopting the grace period construct, the 
final rule does not include the agencies' proposed PCA proxy levels, 
which would have allowed certain banking organizations that fell to 
a leverage ratio of 9 percent or lower to remain in the community 
bank leverage ratio framework indefinitely.
---------------------------------------------------------------------------

    The agencies believe that the final rule provides a simple 
framework that simultaneously meets safety and soundness goals and 
responds to the concerns conveyed through comments received on the 
proposal. Additionally, the final rule meets the policy objectives 
described in the proposal. First, the community bank leverage ratio 
framework is available to a meaningful number of well-capitalized 
banking organizations with less than $10 billion in total consolidated 
assets. Second, the community bank leverage ratio requirement is 
calibrated to maintain the overall amount of capital currently held by 
qualifying community banking organizations. Third, banking 
organizations with higher risk profiles remain subject to the generally 
applicable rule to ensure that such banking organizations hold capital 
commensurate with the risk of their exposures and activities.\7\ 
Fourth, the agencies maintain the authority to take supervisory action 
under the PCA framework and other statutes and regulations based on a 
banking organization's capital ratios and risk profile. The final rule 
also provides regulatory compliance burden relief as the community bank 
leverage ratio is simple to apply and allows a qualifying community 
banking organization to avoid the burden of calculating and reporting 
risk-based capital ratios under the generally applicable rule.
---------------------------------------------------------------------------

    \7\ 12 CFR 3.10(a)-(b) (OCC); 12 CFR 217.10(a)-(b) (Board); 12 
CFR 324.10(a)-(b) (FDIC).
---------------------------------------------------------------------------

II. Proposed Rule

A. Proposed Community Bank Leverage Ratio Framework

    The agencies proposed the community bank leverage ratio framework 
as a simple alternative methodology to measure capital adequacy for 
qualifying community banking organizations, based on the requirements 
of section 201 of the Act. Under the proposal, a qualifying community 
banking organization would have been defined as a depository 
institution or depository institution holding company that was not an 
advanced approaches banking organization and that met the following 
criteria (qualifying criteria), each as described further below:
     Total consolidated assets of less than $10 billion;
     Total off-balance sheet exposures (excluding derivatives 
other than sold credit derivatives and unconditionally cancelable 
commitments) of 25 percent or less of total consolidated assets;
     Total trading assets plus trading liabilities of 5 percent 
or less of total consolidated assets;
     MSAs of 25 percent or less of tangible equity (as defined 
in the proposal); and
     Temporary difference DTAs of 25 percent or less of 
tangible equity.
    Under the proposal, the community bank leverage ratio would have 
been calculated as the ratio of tangible equity to average total 
consolidated assets. Tangible equity would have been defined as total 
bank equity capital or total holding company equity capital, as 
applicable, prior to including minority interests, and excluding 
accumulated other comprehensive income (AOCI),

[[Page 61779]]

deferred tax assets arising from net operating loss and tax credit 
carry forwards, goodwill, and other intangible assets (other than 
MSAs), each as of the most recent calendar quarter and calculated in 
accordance with a qualifying community banking organization's 
regulatory reports. Average total consolidated assets would have been 
calculated in a manner similar to the generally applicable rule's 
leverage ratio denominator in that amounts deducted from the numerator 
would also have been excluded from the denominator. Under the proposal, 
a qualifying community banking organization could have elected to use 
the community bank leverage ratio framework if its community bank 
leverage ratio was greater than 9 percent.
    The proposal would have permitted an electing banking organization 
to remain in the community bank leverage ratio framework even in cases 
where such an institution's community bank leverage ratio subsequently 
fell to 9 percent or less. In this situation, the proposal would have 
continued to provide for the agencies' supervisory actions under PCA 
and other applicable statutes and regulations. Specifically, for 
insured depository institutions, the proposal would have incorporated 
community bank leverage ratio levels as proxies for the following PCA 
categories: Adequately capitalized, undercapitalized and significantly 
undercapitalized. If an electing banking organization had met certain 
community bank leverage ratio levels, it would have been considered to 
have met the capital ratio requirements within the applicable 
corresponding PCA category and been subject to the same restrictions 
that currently apply to any other insured depository institution in the 
same PCA category.
    After issuing the proposal, the agencies proposed a regulatory 
capital schedule that would have been simpler than Schedules RC-R of 
the Call Report and HC-R of Form FR Y-9C for use by electing banking 
organizations. On this proposed reporting schedule, the community bank 
leverage ratio calculation would have required a banking organization 
to report significantly less information than under the generally 
applicable rule.

B. Summary of Comments

    Collectively, the agencies received approximately 50 public comment 
letters and approximately 500 form letters on the proposal from 
depository institutions, depository institution holding companies, 
trade associations, and other interested parties. As further detailed 
in the more comprehensive discussion of the final rule, commenters 
generally supported the agencies' efforts to propose a simpler 
regulatory capital framework but expressed concerns with some aspects 
of the proposal.
    Several commenters expressed concern that calibrating the community 
bank leverage ratio at 9 percent is unnecessarily punitive and would 
disqualify too many banking organizations from being able to use the 
community bank leverage ratio framework. These commenters favored 
calibrating the community bank leverage ratio at 8 percent. One 
commenter suggested calibrating the community bank leverage ratio at 10 
percent, the highest permitted by statute, because higher leverage 
ratios may lower the adverse effects of crises on U.S. GDP, which 
exceeds the costs that may arise from lower capital formation and lower 
GDP.
    Many commenters also expressed concern that the proposed PCA proxy 
levels would have added unnecessary complexity to the community bank 
leverage ratio framework, and therefore recommended their elimination 
in the final rule. Some commenters expressed concern that the agencies 
would not permit an insured depository institution with a community 
bank leverage ratio at or below 9 percent to demonstrate that it is 
well capitalized under the generally applicable rule before assigning 
it a PCA category other than well capitalized. Other commenters 
indicated that some of the qualifying criteria were unnecessary (such 
as that for MSAs), overly complex to calculate (such as the off-balance 
sheet exposures criterion), or did not appropriately reflect the risks 
of underlying assets.
    Multiple commenters suggested that the proposed numerator of the 
community bank leverage ratio should be based on tier 1 capital, as 
defined under the generally applicable rule, rather than on a new 
``tangible equity'' measure. Commenters expressed concern that 
examiners may penalize banking organizations for opting into or out of 
the framework, and that the community bank leverage ratio could become 
the de facto minimum capital requirement for all community banking 
organizations.

III. Final Rule

A. Qualifying Criteria for the Community Bank Leverage Ratio Framework

    The agencies received comments requesting that they eliminate or 
modify certain of the qualifying criteria in the proposal, particularly 
the MSA and the temporary difference DTA criteria. Many of these 
commenters also suggested using tier 1 capital, as recently modified by 
the agencies in a final rule (simplifications rule),\8\ as the 
numerator of the leverage ratio. Several commenters noted that some of 
the qualifying criteria, such as the proposed limit for MSAs, could 
prevent many otherwise qualifying community banking organizations from 
opting into the community bank leverage ratio framework. Finally, some 
commenters suggested that the off-balance sheet criterion, as proposed, 
would be overly burdensome for community banking organizations to 
calculate and that certain elements included in this criterion should 
be eliminated as they do not represent material risk to banking 
organizations.
---------------------------------------------------------------------------

    \8\ See 84 FR 35243 (July 22, 2019). The agencies also are 
adopting a final rule that permits banking organizations not subject 
to the advanced approaches capital rule to implement the 
simplifications rule in the quarter beginning January 1, 2020, or 
wait until the quarter beginning April 1, 2020.
---------------------------------------------------------------------------

    After considering the comments, the agencies have decided to modify 
the definition of ``qualifying community banking organization'' by 
removing the MSA criterion and the temporary difference DTA criterion. 
Exposures to MSAs and temporary difference DTAs will be addressed 
through the use of tier 1 capital as the numerator, which requires 
deduction of such assets to the extent they exceed certain regulatory 
thresholds, rather than the proposed use of ``tangible equity.'' The 
use of tier 1 capital as the numerator is discussed in more detail 
below in this Supplementary Information. Under the final rule, a 
qualifying banking organization must not be an advanced approaches 
banking organization and must have:
     A leverage ratio of greater than 9 percent;
     Total consolidated assets of less than $10 billion;
     Total off-balance sheet exposures (excluding derivatives 
other than sold credit derivatives and unconditionally cancelable 
commitments) of 25 percent or less of total consolidated assets, and
     Total trading assets plus trading liabilities of 5 percent 
or less of total consolidated assets.\9\
---------------------------------------------------------------------------

    \9\ Consistent with the proposal, the agencies have reserved the 
authority to disallow the use of the community bank leverage ratio 
framework by a depository institution or depository institution 
holding company, based on the risk profile of the banking 
organization. This authority is reserved under the general 
reservation of authority included in the capital rule, in which the 
community bank leverage ratio framework would be codified. See 12 
CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR 324.1(d) (FDIC). 
In addition, for purposes of the capital rule and section 201 of the 
Act, the agencies have reserved the authority to take action under 
other provisions of law, including action to address unsafe or 
unsound practices or conditions, deficient capital levels, or 
violations of law or regulation. See 12 CFR 3.1(b) (OCC); 12 CFR 
217.1(b) (Board); 12 CFR 324.1(b) (FDIC).

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

[[Page 61780]]

1. Leverage Ratio of Greater Than 9 Percent
    Under the proposal, a banking organization would have been required 
to have a community bank leverage ratio of greater than 9 percent in 
order to be eligible to opt into the community bank leverage ratio 
framework. The final rule adopts the 9 percent calibration of the 
community bank leverage ratio as proposed. The proposal also would have 
allowed an electing banking organization to remain in the community 
bank leverage ratio framework despite having a community bank leverage 
ratio which subsequently fell to 9 percent or less. As discussed above, 
the final rule eliminates the PCA proxy levels and, therefore, an 
electing banking organization will generally be required to maintain a 
leverage ratio of greater than 9 percent in order to be eligible to use 
the community bank leverage ratio framework. A two-quarter grace 
period, as discussed in further detail below, is available for a 
banking organization that ceases to meet any of the qualifying 
criteria, including a banking organization whose leverage ratio falls 
to 9 percent or less, but is greater than 8 percent. During the grace 
period, a banking organization may continue to be treated as a 
qualifying community banking organization and is presumed to satisfy 
the ``well capitalized'' ratio requirements and be in compliance with 
the generally applicable rule without having to calculate and report 
risk-based capital ratios.
2. Total Consolidated Assets
    Under the proposal, a qualifying community banking organization 
would be required to have less than $10 billion in total consolidated 
assets as of the end of the most recent calendar quarter, in accordance 
with the Act. Total consolidated assets would be calculated in 
accordance with the reporting instructions to Schedule RC of the Call 
Report or Schedule HC of Form FR Y-9C, as applicable.
    A commenter indicated that the Act places no limit on the ability 
of the agencies to apply the community bank leverage ratio framework to 
institutions with $10 billion or more in total assets and suggested 
that the agencies should apply the community bank leverage ratio 
framework based on suitability for relief rather than on size 
thresholds. The same commenter urged the agencies to take into account 
acquisitions and to index applicability to incorporate inflation or 
other relevant market measures.
    The agencies have considered the concerns raised with regard to the 
asset size threshold. The agencies continue to believe that the 
community bank leverage ratio framework is appropriate for most banking 
organizations with total consolidated assets of less than $10 billion 
that meet the other qualifying criteria. The agencies believe that the 
generally applicable rule is appropriate for larger banking 
organizations and banking organizations with concentrations in off-
balance sheet exposures and trading assets and liabilities because such 
banking organizations may present risks that are not appropriately 
captured by the community bank leverage ratio framework. The agencies 
recently finalized a rule to simplify the generally applicable rule, 
and have proposed to modify and tailor several of the prudential 
requirements applicable to banking organizations with $100 billion or 
more in total consolidated assets.^{10 11} The agencies believe 
these revisions reflect an appropriate tailoring of regulations based 
on asset size and other risk characteristics to ensure that the 
requirements remain appropriate for the risk profiles of different 
banking organizations while also maintaining the safety and soundness 
of the banking industry. As such, the agencies are finalizing without 
modification the $10 billion in total assets size threshold.
---------------------------------------------------------------------------

    \10\ See 84 FR 35243 (July 22, 2019).
    \11\ See 83 FR 66024 (December 21, 2018) and 84 FR 24296 (May 
24, 2019).
---------------------------------------------------------------------------

3. Total Off-Balance Sheet Exposures
    Under the proposal, a qualifying community banking organization 
would have been required to have total off-balance sheet exposures of 
25 percent or less of its total consolidated assets, as of the end of 
the most recent calendar quarter. The agencies included this qualifying 
criterion in the community bank leverage ratio framework because the 
proposed community bank leverage ratio included only on-balance sheet 
assets in its denominator and thus would not have required a qualifying 
community banking organization to hold capital against its off-balance 
sheet exposures. This qualifying criterion was intended to reduce the 
likelihood that a qualifying community banking organization with 
significant off-balance sheet exposures would hold less capital under 
the community bank leverage ratio framework than under the generally 
applicable rule.
    Under the proposal, total off-balance sheet exposures would have 
been calculated as the sum of the notional amounts of certain off-
balance sheet items against which banking organizations would hold 
capital under the generally applicable rule \12\ as of the end of the 
most recent calendar quarter. Total off-balance sheet exposures would 
have included:
---------------------------------------------------------------------------

    \12\ See 12 CFR 324.33 (FDIC); 12 CFR 217.33 (Federal Reserve); 
12 CFR 3.33 (OCC).
---------------------------------------------------------------------------

    a. The unused portions of commitments (except for unconditionally 
cancellable commitments);
    b. Self-liquidating, trade-related contingent items that arise from 
the movement of goods;
    c. Transaction-related contingent items (i.e., performance bonds, 
bid bonds and warranties);
    d. Sold credit protection in the form of guarantees and credit 
derivatives;
    e. Credit-enhancing representations and warranties;
    f. Off-balance sheet securitization exposures;
    g. Letters of credit;
    h. Forward agreements that are not derivative contracts; and
    i. Securities lending and borrowing transactions.
    Total off-balance sheet exposures would have excluded the notional 
amount for all derivative contracts except credit derivatives for sold 
credit protection. As stated in the proposal, the agencies believe that 
the notional amount for derivatives (other than credit derivatives for 
sold credit protection) is not an appropriate indicator of credit risk 
and could inadvertently disqualify a banking organization from using 
the community bank leverage ratio framework if the banking organization 
is otherwise appropriately using derivatives to hedge its risks. The 
proposed components of total off-balance sheet exposures would have 
been generally consistent with off-balance sheet items that are 
included in risk-weighted assets in the generally applicable rule, 
except for securities lending and borrowing transactions. Securities 
lending and borrowing transactions would have been assigned amounts in 
accordance with the reporting instructions for these items in Schedules 
RC-L of the Call Report or HC-L of Form FR Y-9C, as applicable. The 
proposed calculation of total off-balance sheet exposures would have 
been simpler than under the generally applicable rule, which requires 
that off-balance sheet exposures be converted to

[[Page 61781]]

on-balance sheet equivalents for purposes of determining capital 
requirements.
    The agencies received several comments and requests for 
clarification on the proposed limit for off-balance sheet exposures. 
One commenter expressed concern that the process for categorizing off-
balance sheet exposures, such as off-balance sheet securitizations, was 
overly complex, and the commenter would prefer that the off-balance 
sheet filter instead identify specific transactions and products 
routinely used by community banks that meet the off-balance sheet 
exposure definition. Another commenter found the wording in the 
proposed rule unclear and noted that it would be beneficial for the 
agencies to reference the specific Schedule RC-L line items that would 
be included in the 25 percent limitation for off-balance sheet line 
items.
    Several commenters expressed concern about the inclusion of 
residential mortgage-related off-balance sheet items. One commenter 
wrote that the agencies should not exclude banking organizations from 
using the community bank leverage ratio framework due to any mortgage 
origination-related hedging activity. The commenter expressed concern 
that as proposed the criterion may capture certain exposures related to 
routine functioning of the mortgage market. Another commenter noted 
that mortgage sales to certain Federal Home Loan Banks (FHLBs) through 
the Mortgage Partnership Finance Program could be captured by the off-
balance sheet qualifying criteria. A commenter suggested that FHLB 
advances should be eliminated from the calculation because such 
advances are typically secured at a significant discount relative to 
underlying loan collateral. The commenter was concerned that a banking 
organization may be disqualified from the community bank leverage ratio 
framework due to its level of unfunded commitments and FHLB lines of 
credit.
    Finally, one commenter requested clarification on whether sales of 
when-issued mortgage-backed security contracts are included in the 25 
percent limitation, stating that these items should be excluded 
because, in the commenter's view, they are of lower risk.
    The agencies considered the commenters' concerns and have decided 
to finalize the off-balance sheet qualifying criterion as proposed with 
several clarifications. The agencies are clarifying that the off-
balance sheet qualifying criterion incorporates off-balance sheet 
exposures currently required to be captured and reported by banking 
organizations in Schedules RC-L and RC-R of the Call Report or HC-L and 
HC-R of Form FR Y-9C which thereby permits these firms to leverage 
their existing identification, measurement and reporting infrastructure 
for these exposures. The agencies also are clarifying that banking 
organizations are only required to identify off-balance sheet 
securitizations to the extent that they are not already captured as 
part of another off-balance sheet exposure category. For example, if a 
banking organization issues a credit enhancing representation and 
warranty that also meets the definition of a traditional 
securitization, the final rule does not require that such an exposure 
be separately identified as an off-balance sheet securitization 
exposure because the exposure would already be captured through the 
requirement to include credit enhancing representations and warranties 
in the off-balance sheet qualifying criterion.
    The agencies also are clarifying that hedging techniques related to 
mortgage banking activities are generally only captured in the off-
balance sheet qualifying criterion to the extent such exposures are 
treated as off-balance sheet exposures and subject to credit conversion 
factors under the generally applicable rule. For this reason, typical 
mortgage banking activities such as forward loan delivery commitments 
between banking organizations and investors, which typically are 
derivative contracts, were excluded from the off-balance sheet exposure 
criterion in the proposal and are excluded under the final rule. Put 
and call options on mortgage-backed securities are also typically 
derivatives and excluded from this criterion under the final rule. A 
contractual obligation for the future purchase of a ``to be announced'' 
(i.e., when-issued) mortgage securities contract, that does not meet 
the definition of a derivative contract under the generally applicable 
rule, would be captured in the off-balance sheet qualifying criterion 
as it would be considered a forward agreement under the generally 
applicable rule. In contrast, a contractual obligation for the future 
sale (rather than purchase) of a ``to be announced'' mortgage 
securities contract, that does not meet the definition of a derivative 
contract under the generally applicable rule, would not be captured in 
the off-balance sheet qualifying criterion as it would not be 
considered a forward agreement under the generally applicable rule.
    Banking organizations that sell mortgages to certain FHLBs through 
the Mortgage Partnership Finance Program may provide a credit 
enhancement to the FHLB. If these credit enhancements meet the 
definition of a credit-enhancing representation and warranty or would 
otherwise be considered an off-balance sheet securitization under the 
generally applicable rule, then the exposure amount would be included 
in the off-balance sheet qualifying criterion. Because these are credit 
risk exposures that would be assigned risk-based capital under the 
generally applicable rule, inclusion in the off-balance sheet 
qualifying criterion is appropriate.
    The agencies analyzed average off-balance sheet exposures for 
banking organizations with less than $10 billion in total consolidated 
assets and observed that the vast majority of such banking 
organizations report off-balance sheet exposures totaling less than 25 
percent of total consolidated assets, as of March 31, 2019. 
Accordingly, the agencies have determined that both the definition and 
calibration of the total off-balance sheet exposures qualifying 
criterion should allow a meaningful number of banking organizations to 
use the community bank leverage ratio framework without unduly 
restricting lending practices. The criterion should help to prevent 
banking organizations from engaging in substantial off-balance sheet 
activity without a commensurate capital requirement.
4. Total Trading Assets and Trading Liabilities
    Under the proposal, a qualifying community banking organization 
would have been required to have total trading assets and trading 
liabilities of 5 percent or less of its total consolidated assets, each 
measured as of the end of the most recent calendar quarter. Total 
trading assets and trading liabilities would have been calculated as 
the sum of those exposures, in accordance with the reporting 
instructions for these items on Schedules RC of the Call Report or HC 
of Form FR-Y-9C, as applicable. A banking organization would divide the 
sum of its total trading assets and trading liabilities by its total 
consolidated assets to determine its percentage of total trading assets 
and trading liabilities.
    The agencies recognize the potential elevated levels of risk and 
complexity that can be associated with certain trading activities. For 
this reason, banking organizations with significant trading assets and 
trading liabilities are subject to a market risk capital requirement 
under the generally

[[Page 61782]]

applicable rule.\13\ In contrast, electing banking organizations would 
not be required to calculate additional market risk capital 
requirements and, as a result, the community bank leverage ratio 
framework may not appropriately capitalize for material amounts of 
trading assets and trading liabilities. In addition, elevated levels of 
trading activity can produce a heightened level of earnings volatility, 
which has implications for capital adequacy. Therefore, the agencies do 
not believe it is appropriate to make the community bank leverage ratio 
framework available to banking organizations with material market risk 
exposure. However, the agencies do not believe that low levels of 
trading activity should preclude a banking organization from using the 
community bank leverage ratio framework.
---------------------------------------------------------------------------

    \13\ 12 CFR part 3, subpart F (OCC); 12 CFR part 217, subpart F 
(Board); 12 CFR part 324, subpart F (FDIC).
---------------------------------------------------------------------------

    Based on the agencies' analysis, the vast majority of banking 
organizations with less than $10 billion in total consolidated assets 
have total trading assets and trading liabilities well below 5 percent 
of their total consolidated assets, as of March 31, 2019. The agencies 
believe that the proposed 5 percent threshold will help ensure that 
banking organizations that engage in significant trading activity are 
not subject to the community bank leverage ratio framework. Further, 
this criterion is generally consistent with section 203 of the Act, 
which excludes a community banking organization from proprietary 
trading restrictions if its total trading assets and trading 
liabilities are 5 percent or less of its total consolidated assets. The 
agencies did not receive any comment with regard to the proposed 
qualifying criterion for total trading assets and trading liabilities 
and are finalizing this requirement as proposed.
5. Advanced Approaches Banking Organizations
    Under the proposal, advanced approaches banking organizations would 
not have been eligible to use the community bank leverage ratio 
framework. The agencies received no comment on this requirement and 
believe that, in general, section 201 of the Act is designed to provide 
regulatory burden relief for banking organizations with less than $10 
billion in total consolidated assets and that have a limited risk 
profile.
    A banking organization with less than $10 billion in total 
consolidated assets may be subject to the advanced approaches rules if 
it is a subsidiary of a much larger banking organization. While these 
types of advanced approaches banking organizations may be relatively 
small banking organizations, the agencies do not believe they share the 
same type of risk characteristics as non-complex community banking 
organization for which the community bank leverage ratio framework is 
appropriate. Consequently, under the final rule, an advanced approaches 
banking organization will not be eligible to use the community bank 
leverage ratio framework, regardless of its size.

B. Definitions of the Leverage Ratio's Numerator and Denominator

1. Numerator
    Under the proposal, the numerator of the community bank leverage 
ratio would have been tangible equity, calculated as a banking 
organization's total bank equity capital or total holding company 
equity capital, as applicable, determined in accordance with the 
reporting instructions to Schedule RC of the Call Report or Schedule HC 
of Form FR Y-9C, prior to including minority interests, less: (i) 
Accumulated other comprehensive income (AOCI), (ii) all intangible 
assets (other than MSAs), and (iii) DTAs, net of any related valuation 
allowances, that arise from net operating loss and tax credit 
carryforwards, each as of the end of the most recent calendar quarter. 
Tangible equity would not have included minority interests (equity of a 
consolidated subsidiary that is not owned by the qualifying community 
banking organization) because minority interests do not have the same 
loss absorption capacity as other components of tangible equity at the 
consolidated banking organization level.
    The agencies received numerous comments in response to the proposed 
use of tangible equity as the numerator of the community bank leverage 
ratio. Many commenters noted that banking organizations are already 
familiar with the current tier 1 capital calculation, and that tier 1 
capital, therefore, should be used to calculate the community bank 
leverage ratio instead of tangible equity. A commenter also argued that 
the burden associated with implementing the community bank leverage 
ratio framework would exceed the reporting relief provided by reduced 
complexity. Several commenters expressed concerns that it would be too 
complex for a banking organization to switch between the calculation of 
tangible equity and tier 1 capital as it either opts into or out of the 
community bank leverage ratio framework or no longer meets the 
definition of a qualifying community banking organization. Several 
commenters recommended the agencies instead use tier 1 capital for the 
numerator, suggesting that this would not only simplify the calculation 
when switching between frameworks but would also increase comparability 
across all banking organizations. Commenters also preferred to use tier 
1 capital for the numerator in order to ensure that certain 
instruments, such as trust preferred securities (TruPS) and common 
stock issued by bank subsidiaries, would count as regulatory capital 
under the community bank leverage ratio framework, up to their current 
limits. Finally, several commenters noted that use of tier 1 capital as 
the numerator would avoid the need for revisions to state banking laws 
that reference tier 1 capital, including but not limited to state law 
lending limits.
    Multiple commenters, although not explicitly expressing a 
preference for using tier 1 capital as the numerator, did request that 
certain adjustments be made to the proposed definition of tangible 
equity. A commenter recommended that cumulative preferred stock with a 
stated final maturity date be included as an eligible component of 
tangible equity. Several commenters requested that the agencies allow 
TruPS to count as tangible equity. A commenter recommended that the 
agencies include common stock minority interest of up to 10 percent of 
the numerator of the community bank leverage ratio where the subsidiary 
holds risk-weighted assets of at least the amount of common stock 
minority interest being included. Finally, some commenters expressed 
concern that the CECL methodology under U.S. generally accepted 
accounting principles could impact eligibility for the community bank 
leverage ratio framework and recommended that the agencies provide for 
an ongoing adjustment to the community bank leverage ratio numerator 
that approximates the incremental regulatory capital impact of CECL 
credit loss allowance levels over levels currently recorded under U.S. 
generally accepted accounting principles.
    Taking into account the concerns of commenters and seeking to 
balance burden reduction with safety and soundness, the agencies have 
decided to replace the proposed tangible equity measure with the 
current calculation of tier 1 capital as the numerator of the community 
bank leverage ratio. This change would align the final rule's 
calculation of the leverage ratio with the generally applicable rule's 
leverage

[[Page 61783]]

ratio, a calculation methodology with which banking organizations are 
already familiar, and therefore would streamline adoption of the 
community bank leverage ratio framework. In addition, the use of tier 1 
capital in the community bank leverage ratio framework will enhance 
comparability among banking organizations and remove the need for 
separate qualifying criteria for MSAs and temporary difference DTAs, as 
discussed previously. Based on the agencies' analysis, for the majority 
of banking organizations with less than $10 billion in total 
consolidated assets, the proposed tangible equity and the current tier 
1 capital figures result in nearly the same amount of regulatory 
capital. Finally, the use of tier 1 capital as the numerator of the 
leverage ratio allows for the incorporation of changes from the 
simplifications rule, which further simplifies the tier 1 capital 
calculation by amending the treatment of MSAs, temporary difference 
DTAs, investments in capital instruments, and minority interests.\14\
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    \14\ See 84 FR 35234 (July 22, 2019).
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    The agencies note that the generally applicable rule requires 
deductions from tier 2 capital related to investments in capital 
instruments of unconsolidated financial institutions when such 
investments exceed certain limits and that such deductions can affect 
the calculation of tier 1 capital.\15\ This corresponding deduction 
approach requires a banking organization to make deductions from the 
same component of capital for which the underlying instrument would 
qualify if it was issued by the banking organization itself. In 
addition, if a banking organization does not have a sufficient amount 
of a specific regulatory capital component against which to effect the 
deduction, the shortfall must be deducted from the next higher (that 
is, more subordinated) regulatory capital component. Without any 
revision to the corresponding deduction approach, an electing banking 
organization with investments in tier 2 capital instruments of other 
financial institutions could have been required to apply the 
corresponding deduction approach potentially resulting in deductions 
from tier 1 capital. Under the final rule, however, since the community 
bank leverage ratio framework does not have a total capital 
requirement, an electing banking organization is neither required to 
calculate tier 2 capital nor make any deductions that would have been 
taken from tier 2 capital under the generally applicable rule. 
Therefore, if an electing banking organization has investments in the 
capital instruments of an unconsolidated financial institution that 
would qualify as tier 2 capital of the electing banking organization 
under the generally applicable rule (tier 2 qualifying investments), 
and the banking organization's total investments in the capital of 
unconsolidated financial institutions exceed the threshold for 
deduction, the banking organization is not required to deduct the tier 
2 qualifying investments.
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    \15\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 
12 CFR 324.22(c)(2) (FDIC).
---------------------------------------------------------------------------

    An electing banking organization is only required to make a 
deduction from its common equity tier 1 capital or tier 1 capital if 
the sum of its investments in the capital of an unconsolidated 
financial institution is in a form that would qualify as common equity 
tier 1 capital or tier 1 capital instruments of the electing banking 
organization and exceeds the threshold for deduction. The agencies do 
not believe this is a common occurrence and observed that as of March 
31, 2019, very few community banking organizations made a deduction 
from tier 2 capital. Therefore, the agencies believe it is appropriate 
to clarify this aspect of the tier 1 calculation for qualifying 
community banking organizations to ensure that it can be made as simply 
as possible. Further, although the community bank leverage ratio 
framework will not require qualifying community banking organizations 
to make deductions from their regulatory capital calculations for 
investments in tier 2 capital instruments issued by other financial 
institutions, the agencies will continue to monitor such investments 
and will address, on a case-by-case basis, any instances where such 
activity potentially creates an unsafe or unsound practice or 
condition.
    With respect to a banking organization that has not elected the 
community bank leverage ratio framework but invests in an instrument 
(e.g., subordinated debt instrument) issued by an electing banking 
organization that would qualify as tier 2 capital under the generally 
applicable rule, the investing banking organization would continue to 
treat the instrument as tier 2 capital notwithstanding the electing 
banking organization's capital treatment of the instrument.
    The agencies believe adoption of tier 1 capital, including the 
adjustments described above, also addresses commenters' concerns about 
the inclusion of TruPS,\16\ certain other preferred stock instruments, 
and minority interests includable in the numerator of the leverage 
ratio calculation by maintaining the same treatment that currently 
applies under the generally applicable rule's calculation for tier 1 
capital for non-advanced approaches banking organizations.
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    \16\ Banking organizations that are currently grandfathered and 
eligible to include TruPS in tier 1 capital can continue to include 
TruPS in tier 1 capital under the community bank leverage ratio 
framework, subject to existing limits. See 12 CFR 3.20(c)(3) (OCC); 
12 CFR 217.20(c)(3) (Board); 12 CFR 324.20(c)(3) (FDIC). See 12 CFR 
3.22(c)(2)(iii)(A) (OCC); 12 CFR 217.22(c)(2)(iii)(A) (Board); 12 
CFR 324.22(c)(2)(iii)(A) (FDIC). See 12 CFR 217.300(c) (Board).
---------------------------------------------------------------------------

2. Denominator
    Under the proposal and consistent with the Act, the community bank 
leverage ratio denominator would have been based on a banking 
organization's average total consolidated assets. Specifically, average 
total consolidated assets for purposes of the denominator would have 
been calculated in accordance with the reporting instructions to 
Schedules RC-K on the Call Report or HC-K on Form FR Y-9C, as 
applicable, less the items deducted from the numerator, other than 
AOCI. The proposed denominator therefore would have been similar, but 
not identical, to the denominator of the generally applicable rule's 
leverage ratio.
    The agencies received a limited number of comments on the proposed 
denominator for the community bank leverage ratio. A commenter 
suggested the agencies consider seasonality in total assets and allow 
for the use of four-quarter average total consolidated assets for the 
denominator. The agencies note that the denominator as proposed would 
be average total consolidated assets as described above, which would 
have substantially maintained consistency with the current regulatory 
capital calculation for average total consolidated assets. Another 
commenter asked that the agencies consider allowing a deduction from 
the denominator for pass-through reserve balances held with the Federal 
Reserve System. The commenter argued that allowing this deduction would 
refine this calculation for correspondent banking organizations to 
align more closely their capital requirements to their risk and would, 
in the commenter's view, not unduly discourage correspondent banking 
organizations from assisting community banking organization clients 
with holding proper reserve balances with the Federal Reserve System.
    The agencies note that the leverage ratio in the generally 
applicable rule is

[[Page 61784]]

designed to be a simple, non-risk-based on-balance sheet measure. 
Adjusting the leverage ratio denominator as commenters suggested would 
add unnecessary complexity to the measure. Therefore, the agencies are 
finalizing the leverage ratio denominator as proposed, except that 
items deducted from the denominator will align with the deductions from 
tier 1 capital as the numerator rather than from the proposed tangible 
equity measure as the numerator.

C. Calibration of the Leverage Ratio in Order To Qualify for the 
Community Bank Leverage Ratio

    The agencies proposed to permit a qualifying community banking 
organization to elect to use the community bank leverage ratio 
framework if the organization's community bank leverage ratio was 
greater than 9 percent at the time of election. A qualifying community 
banking organization with a community bank leverage ratio greater than 
9 percent would have been considered to have met: (i) The requirements 
of the generally applicable rule; (ii) the well-capitalized capital 
ratio thresholds under the agencies' PCA framework for insured 
depository institutions or the well-capitalized standards under the 
Board's regulations for holding companies, as applicable; and (iii) any 
other capital or leverage requirements to which the banking 
organization is subject. Such qualifying community banking 
organizations would not have been required to calculate capital ratios 
under the generally applicable rule. Additionally, to have been 
considered well capitalized under the proposed community bank leverage 
ratio framework, and consistent with the agencies' PCA framework, a 
qualifying community banking organization must not have been subject to 
any written agreement, order, capital directive, or PCA directive to 
meet and maintain a specific capital level for any capital measure.
    In general, commenters stated that the community bank leverage 
ratio requirement should be lowered to 8 percent, citing the lower end 
of the range of the requirement under section 201 of the Act. 
Commenters indicated that such a calibration would more closely track 
the current well capitalized thresholds under PCA and would allow more 
banking organizations to be eligible to use the community bank leverage 
ratio framework. Several commenters wrote that the proposed community 
bank leverage ratio requirement and qualifying criteria were 
excessively conservative, particularly combined with the assumption 
that the adoption of CECL would, in the commenters' view, reduce firms' 
regulatory capital levels. A commenter suggested a banking organization 
should have the option to phase in the impact of the day-one CECL 
adjustment recorded in retained earnings over a five year period when 
it elects to use the community bank leverage ratio framework to 
calculate regulatory capital. A few commenters indicated that the 
proposed community bank leverage ratio calibration would not factor in 
the adjusted allowance for credit loss for up to 1.25 percent of risk-
weighted assets, which would be permitted under the generally 
applicable rule for purposes of the total capital ratio, but would not 
be relevant under the community bank leverage ratio. Finally, a 
commenter recommended a dynamic calibration that would vary depending 
on the business cycle to accommodate recovery and encourage lending in 
a stressed environment.
    After considering the comments received on calibration, the 
agencies have decided to adopt a 9 percent leverage ratio as a 
qualifying criterion for the community bank leverage ratio framework. 
The agencies believe that a 9 percent calibration, with complementary 
qualifying criteria for asset size, off-balance sheet assets, and 
trading assets and trading liabilities, generally maintains the current 
level of regulatory capital held by electing banking organizations and 
supports the agencies' goals of reducing regulatory burden for as many 
community banking organizations as possible. For example, even though 
an 8 percent leverage ratio would have allowed more banking 
organizations to opt into the community bank leverage ratio framework, 
the reduced calibration could create an inappropriate incentive for 
some qualifying community banking organizations to hold less regulatory 
capital than they do today. Rather than lowering the minimum community 
bank leverage ratio from 9 percent to 8 percent, the agencies 
determined that it would be more appropriate to alleviate the potential 
burden associated with switching regulatory capital frameworks as 
capital levels fall by permitting an electing banking organization to 
have its ratio drop below 9 percent temporarily (i.e., the two-quarter 
grace period). This grace period will provide an electing banking 
organization time to either comply with the qualifying criteria or to 
prepare to comply with the generally applicable rule and file the 
appropriate regulatory reports.
    The agencies estimate that, as of the first quarter of 2019, the 
vast majority of banking organizations with under $10 billion in total 
consolidated assets would meet the definition of a qualifying community 
banking organization and have a leverage ratio above 9 percent. Based 
on reported data as of March 31, 2019, there are 5,221 insured 
depository institutions with less than $10 billion in total 
consolidated assets and 231 depository institution holding companies 
with less than $10 billion in total consolidated assets that file the 
form FR Y-9C.\17\ The agencies estimate that approximately 85 percent 
of such insured depository institutions and approximately 76 percent of 
such depository institution holding companies would qualify to use the 
community bank leverage ratio framework under the 9 percent calibration 
and other qualifying criteria. The agencies believe the community bank 
leverage ratio framework in this final rule, including a 9 percent 
calibration, meets the objectives described above.
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    \17\ As of March 31, 2019, there are 4,261 depository 
institution holding companies with less than $10 billion in total 
consolidated assets. More than 95 percent of such holding companies 
are not subject to the capital rule because they have less than $3 
billion in total consolidated assets and meet certain additional 
criteria to qualify for the Board's Small Bank Holding Company and 
Savings and Loan Holding Company Policy Statement. See 12 CFR 
217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR 
238.9.
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    In February of 2019, the agencies issued a final rule to amend the 
generally applicable rule in response to CECL (CECL transitions final 
rule).\18\ The CECL transitions final rule provides for an optional 
three-year transition arrangement that will allow a banking 
organization to phase in any adverse day-one regulatory capital effects 
of CECL adoption on retained earnings, deferred tax assets, allowance 
for credit losses, and average total consolidated assets. These day-one 
regulatory capital effects will be phased in over the transition period 
on a straight line basis. Under this final rule, the leverage ratio 
under the community bank leverage ratio framework is generally 
calculated in the same manner as the generally applicable rule's 
leverage ratio. Accordingly, an electing banking organization is also 
eligible to phase-in any adverse day-one regulatory capital effects of 
CECL adoption on retained earnings, DTAs, allowance for credit losses, 
and average total consolidated assets. Banking organizations will 
retain their three-year transition period without reset (i.e., the 
transition period cannot be extended) upon passage in or

[[Page 61785]]

out of the community bank leverage ratio framework.
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    \18\ 84 FR 4222 (February 14, 2019).
---------------------------------------------------------------------------

D. Ability To Opt Into and Out of the Community Bank Leverage Ratio 
Framework

    Under the proposal, a qualifying community banking organization 
with a community bank leverage ratio greater than 9 percent could have 
elected to use the community bank leverage ratio framework at any time. 
Such a banking organization would have indicated its election by 
completing a community bank leverage ratio reporting schedule in its 
Call Report or Form FR Y-9C, as applicable. Also, under the proposal, 
an electing banking organization would have been able to opt out of the 
community bank leverage ratio framework and become subject to the 
generally applicable rule by completing the associated reporting 
requirements on Schedules RC-R of the Call Report or HC-R of Form FR Y-
9C, as applicable. Additionally, the agencies noted in the proposal 
that an electing banking organization would have been able to opt out 
of the community bank leverage ratio framework between reporting 
periods by providing the capital ratios under the generally applicable 
rule to its appropriate regulators at the time of opting out. A banking 
organization that opted out of the community bank leverage ratio 
framework would have been required to meet the qualifying criteria 
included in the definition of a qualifying community banking 
organization and have a community bank leverage ratio of greater than 9 
percent to be able to opt back into the community bank leverage ratio 
framework.
    Several commenters suggested that the optionality aspect should be 
further emphasized to both bankers and agency examiners. These 
commenters expressed concern that banking organizations that do not opt 
in could be seen as outliers and could be pressured to raise capital 
and opt into the community bank leverage ratio framework, or that 
procedural issues would make it too difficult in practice for banking 
organizations to opt out.
    The agencies have considered the comments and are finalizing the 
election to use the community bank leverage ratio framework as 
proposed. Due to the adoption of tier 1 capital and the leverage ratio 
into the community bank leverage ratio framework, the agencies will 
update accordingly the proposed reporting changes to the Call Report 
and Form FR Y-9C. The agencies are further clarifying that the 
community bank leverage ratio framework is an optional framework, based 
on section 201 of the Act, which serves the purpose of removing the 
burden of calculating and reporting risk-based capital ratios for 
banking organizations that meet certain criteria. The agencies are also 
clarifying that a banking organization can opt out of the community 
bank leverage ratio framework at any time, without restriction, by 
reverting to the generally applicable rule and providing the capital 
ratios under the generally applicable rule to its appropriate 
regulators at the time of opting out.
    One commenter requested that the rule require that banking agencies 
notify state bank regulators when a state-chartered electing banking 
organization opts out of the framework between reporting periods. Under 
the final rule, a qualifying community banking organization may opt 
into or out of the community bank leverage ratio framework at any time 
and for any reason. The agencies, therefore, are not including a 
mandatory notification requirement in the final rule, as this could 
discourage banking organizations from electing to apply and report 
under the generally applicable rule. The agencies note that the Call 
Report and Form FR Y-9C are available to the public and therefore 
additional notice is not necessary.
    As described above, a banking organization generally opts into and 
out of the community bank leverage ratio framework through its Call 
Report or Form FR Y-9C. As a result, a banking organization's 
compliance with the community bank leverage ratio framework or the 
generally applicable rule will be determined based upon the capital 
framework it has elected in its last filed Call Report or Form FR Y-
9C.\19\
---------------------------------------------------------------------------

    \19\ See section I in this Supplementary Information for a 
discussion on the interaction between the effective date of the 
final rule and when a banking organization elects to use the 
community bank leverage ratio framework.
---------------------------------------------------------------------------

E. Ongoing Compliance With the Community Bank Leverage Ratio Framework

1. Meeting the Definition of a Qualifying Community Banking 
Organization
    Under the proposal, an electing banking organization that no longer 
met the proposed qualifying criteria would have been required, within 
two consecutive calendar quarters, either to meet the qualifying 
criteria again or to demonstrate compliance with the generally 
applicable rule. During the proposed grace period, the banking 
organization could have continued to be treated as a qualifying 
community banking organization and could have, therefore, continued 
calculating and reporting a community bank leverage ratio to determine 
its compliance with other statutes and regulations.
    The agencies did not receive specific comments relating to the 
mechanics of the proposed grace period. One commenter argued that a 
six-month transition period would be too short for banking 
organizations to sell MSAs, if necessary, or prepare for the different 
treatment in the generally applicable rule. Other commenters noted that 
the use of tier 1 capital would ease any transition back to the risk-
based capital requirements. The agencies continue to believe that this 
limited grace period is appropriate to mitigate potential volatility in 
capital and associated regulatory reporting requirements based on 
temporary changes in a banking organization's risk profile from quarter 
to quarter, while capturing more permanent changes in risk profile, and 
are therefore finalizing the two-quarter grace period largely as 
proposed. Under the final rule, the grace period begins as of the end 
of the calendar quarter in which the electing banking organization 
ceases to satisfy any of the qualifying criteria and will end after two 
consecutive calendar quarters. For example, if the electing banking 
organization no longer meets one of the qualifying criteria as of 
February 15, and still does not meet the criteria as of the end of that 
quarter, the grace period for such a banking organization will begin as 
of the end of the quarter ending March 31. The banking organization may 
continue to use the community bank leverage ratio framework as of June 
30, but will need to comply fully with the generally applicable rule 
(including the associated reporting requirements) as of September 30, 
unless the banking organization once again meets all qualifying 
criteria of the community bank leverage ratio framework, including a 
leverage ratio of greater than 9 percent, by that date.
    Under the proposal, an electing banking organization that ceased to 
meet the qualifying criteria as a result of a business combination 
would have received no grace period and immediately would have been 
required to revert to the generally applicable rule. The agencies 
continue to believe this approach is appropriate, as banking 
organizations would need to consider the regulatory capital 
implications of a planned business combination and be prepared to 
comply with the applicable requirements. An electing banking 
organization that expects that it would not meet the qualifying 
criteria as a result of a business combination would

[[Page 61786]]

need to provide its pro forma capital ratios under the generally 
applicable rule to its appropriate regulator as part of its merger 
application, if applicable, and fully comply with the generally 
applicable rule for the regulatory reporting period during which the 
transaction is completed.
2. Treatment of a Community Banking Organization That Falls Below 
Certain Leverage Ratio Levels
    Under the proposal, an electing banking organization that had a 
community bank leverage ratio greater than 9 percent would have been 
considered well capitalized. In addition, an electing banking 
organization would have been considered to have met the minimum capital 
requirements under the generally applicable rule if its community bank 
leverage ratio was 7.5 percent or greater.\20\ Under the proposal, an 
electing banking organization could have chosen to stop using the 
community bank leverage ratio framework and instead become subject to 
the generally applicable rule. The proposal also provided an electing 
banking organization with a declining community bank leverage ratio 
(e.g., below 9 percent) with the option to remain in the community bank 
leverage ratio framework indefinitely, rather than requiring the firm 
to revert to the generally applicable rule. Under the proposal, an 
electing banking organization that was an insured depository 
institution and no longer exceeded the 9 percent community bank 
leverage ratio would have been subject to community bank leverage ratio 
levels that would serve as proxies for the adequately capitalized, 
undercapitalized, and significantly undercapitalized PCA capital 
categories.\21\
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    \20\ Under the proposal, an electing banking organization that 
is a depository institution holding company would no longer be 
considered well capitalized if the holding company had a community 
bank leverage ratio of 9 percent or less.
    \21\ See, e.g., 12 U.S.C. 5371 (establishing a capital floor for 
insured depository institutions and depository institution holding 
companies); section 201 of the Act (requiring development of a 
community bank leverage ratio for which a depository institution 
exceeding that ratio would be considered to meet the requirements to 
be treated as well capitalized under PCA); 12 U.S.C. 1831o (PCA).
---------------------------------------------------------------------------

    The agencies received comments and requests for clarification 
regarding both the proposed PCA proxy levels and the grace period for a 
banking organization that has a community bank leverage ratio at or 
below 9 percent. One commenter requested that the agencies clarify when 
PCA consequences begin to apply. Another commenter indicated that the 
framework should require a banking organization that falls below the 
well-capitalized level to immediately begin reporting capital ratios 
under the generally applicable rule. Another commenter proposed that, 
instead of instituting the PCA proxy levels, the agencies should give 
qualifying banking organizations with a community bank leverage ratio 
between 8 percent and 9 percent a two-quarter grace period after which 
they would either need to restore their community bank leverage ratio 
to greater than 9 percent or revert to the generally applicable rule.
    The agencies also received comments in response to the proposal's 
incorporation of community bank leverage ratio levels as proxies for 
the adequately capitalized, undercapitalized, and significantly 
undercapitalized PCA categories. In general, commenters noted that the 
establishment of a new, separate PCA framework within the community 
bank leverage ratio framework is not necessary or required under 
section 201 of the Act, expressing concern that the community bank 
leverage ratio framework could, in the future, function as the new, de 
facto minimum capital requirement, particularly if it is difficult for 
a banking organization to switch back to the generally applicable rule. 
Commenters also noted community banking organizations' sensitivity to 
several restrictions that could arise if the community banking 
organization is determined to be less than well capitalized, including 
restrictions on funding sources such as limits on brokered deposits, 
and the inability to open branches or make acquisitions. Some 
commenters suggested alternative calibration levels for the PCA proxy 
levels.
    In response to commenter concerns regarding the proposed PCA proxy 
levels for electing banking organizations that no longer exceed a 9 
percent leverage ratio, the agencies decided not to incorporate the 
proposed PCA proxy levels in the final rule. Therefore, under the final 
rule, banking organizations that are insured depository institutions 
and that have a leverage ratio of greater than 9 percent are deemed to 
have met the well capitalized capital ratio requirements for PCA 
purposes. Further, the agencies included the requirement to have a 
leverage ratio greater than 9 percent as a qualifying criterion in the 
definition of a qualifying community banking organization. 
Consequently, the two-quarter grace period described above also applies 
depending on the level of an electing banking organization's leverage 
ratio. Under the final rule, an electing banking organization that has 
a leverage ratio that is greater than 8 percent and equal to or less 
than 9 percent is allowed a two-quarter grace period after which it 
must either (i) again meet all qualifying criteria or (ii) apply and 
report the generally applicable rule. During this two-quarter period, a 
banking organization that is an insured depository institution and that 
has a leverage ratio that is greater than 8 percent would be considered 
to have met the well-capitalized capital ratio requirements for PCA 
purposes. An electing banking organization with a leverage ratio of 8 
percent or less is not eligible for the grace period and must comply 
with the generally applicable rule, i.e., for the quarter in which the 
banking organization reports a leverage ratio of 8 percent or less. An 
electing banking organization experiencing or anticipating such an 
event would be expected to notify its primary federal supervisory 
agency, which would respond as appropriate to the circumstances of the 
banking organization.
    A commenter asked that the proposed rule be revised to provide 
expressly that for an otherwise qualifying community bank that is state 
chartered to be disqualified from using the community bank leverage 
ratio framework based on criteria other than the enumerated qualifying 
criteria, such a determination must be made jointly by (1) the bank's 
primary federal banking supervisory agency (either the FDIC or the 
Board) and (2) the appropriate state bank supervisor. The agencies 
expect to continue to work closely with the state bank supervisors, 
particularly with respect to institutions that are supervised jointly. 
However, the agencies are not revising the rule to require a joint 
determination of the federal supervisor and the state supervisor 
because such a requirement could prevent the federal supervisor from 
applying the capital standards it believes to be appropriate.
    Finally, a commenter requested clarification that a bank that is a 
qualifying community bank may elect to use the community banking 
organization leverage ratio framework even if its parent holding 
company is not a qualifying community banking organization, or vice 
versa. Consistent with the proposal, a non-advanced approaches 
subsidiary insured depository institution may opt into the community 
bank leverage ratio framework even if its parent holding company is not 
a qualifying banking organization, and vice versa. The agencies do not 
have safety and

[[Page 61787]]

soundness concerns with these scenarios and the agencies intended to 
allow such elections in the proposal.

F. FDIC Deposit Insurance Assessments Regulations

    The FDIC's deposit insurance assessments regulations also would be 
affected by the finalized community bank leverage ratio framework. The 
FDIC is considering, and is expected to adopt, a separate final rule to 
apply the community bank leverage ratio framework to the deposit 
insurance assessment system. The separate final rule amends the FDIC's 
assessment regulations to price all qualifying community banks that 
elect to use the community bank leverage ratio framework as small 
banks, and continues to use the leverage ratio to determine assessment 
rates for established small banks. The separate final rule additionally 
clarifies that an electing bank that meets the definition of a 
custodial bank will have no change to its custodial bank deduction or 
reporting items required to calculate the deduction, and makes 
technical amendments to ensure that the assessment regulations continue 
to reference the PCA regulations for the definitions of capital 
categories used in the deposit insurance assessment system. Because the 
leverage ratio in this final rule is the same leverage ratio currently 
being used for assessment purposes, the separate final rule does not 
modify the FDIC's assessment methodology. The FDIC does not expect that 
any changes to its deposit insurance assessment regulations pursuant to 
this separate final rule will have a material impact on aggregate 
assessment revenue or on rates paid by individual institutions.

G. Other Affected Regulations

    Under the final rule, the community bank leverage ratio framework 
incorporates tier 1 capital. Therefore, Federal banking regulations 
outside of the regulatory capital rule (non-capital rules) can continue 
to reference tier 1 capital. The final rule amends standards 
referencing total capital so that an electing banking organization uses 
tier 1 capital instead of total capital. The final rule amends 
standards referencing risk-weighted assets so that an electing banking 
organization uses average total consolidated assets (i.e., the 
denominator of the leverage ratio) instead of risk-weighted assets.
    In addition, certain of the agencies' non-capital rules refer to 
``capital stock and surplus'' (or similar items) which is generally 
defined as tier 1 capital and tier 2 capital plus the amount of 
allowances for loan and lease losses not included in tier 2 capital. 
The final rule amends standards referencing ``capital stock and 
surplus'' (or similar items) so that an electing banking organization 
uses tier 1 capital plus allowances for loan and lease losses (or 
adjusted allowance for credit losses, as applicable). Thus, for 
example, for purposes of compliance with section 23A of the Federal 
Reserve Act, the Board's Regulation W should provide that for an 
electing banking organization ``capital stock and surplus'' means tier 
1 capital plus allowances for loan and lease losses (or adjusted 
allowance for credit losses, as applicable).

H. Effective Date of the Final Rule

    The final rule will be effective as of January 1, 2020, and banking 
organizations can utilize the community bank leverage ratio framework 
for purposes of filing their Call Report or Form FR Y-9C, as 
applicable, for the first quarter for 2020 (i.e., as of March 31, 
2020). A banking organization's compliance with capital requirements 
for a quarter prior to the final rule's effective date shall be 
determined according to the agencies' generally applicable rule until 
the institution has filed their Call Report Form or FR Y-9C, as 
applicable, for the first quarter of 2020 and has indicated whether or 
not it has elected the community bank leverage ratio framework.

IV. Regulatory Analyses

A. Paperwork Reduction Act

    The agencies' capital rule contains ``collections 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 OMB control number for the OCC is 1557-0318, Board is 7100-0313, 
and FDIC is 3064-0153. The information collections that are part of the 
agencies' capital rule will not be affected by this final rule and 
therefore no final submissions will be made by the FDIC or OCC to OMB 
under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 
1320.11 of the OMB's implementing regulations (5 CFR 1320) in 
connection with this rulemaking.\22\ The agencies note that firms that 
elect to be subject to the community bank leverage ratio framework will 
become exempt from certain collections of information that are part of 
the agencies' regulatory capital rule. Because of uncertainty regarding 
the number of firms that will elect to use the community bank leverage 
ratio framework, the agencies have not revised their estimates 
regarding the annual burden hours associated with such collections of 
information to account for elections to use the community bank leverage 
ratio framework. The agencies will reassess the annual burden hours 
associated with these information collections once there is more 
certainty regarding community bank leverage ratio elections.
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    \22\ The OCC and FDIC submitted their information collections to 
OMB at the proposed rule stage. However, these submissions were done 
solely in an effort to apply a conforming methodology for 
calculating the burden estimates and not due to the proposed rule. 
OMB filed comments requesting that the agencies examine public 
comment in response to the proposed rule and describe in the 
supporting statement of its next collection any public comments 
received regarding the collection as well as why (or why it did not) 
incorporate the commenter's recommendation. In addition, OMB 
requested that the OCC and the FDIC note the convergence of the 
agencies on the single methodology. The agencies received no 
comments on the information collection requirements. Since the 
proposed rule stage, the agencies have conformed their respective 
methodologies in a separate final rulemaking titled, Regulatory 
Capital Rule: Implementation and Transition of the Current Expected 
Credit Losses Methodology for Allowances and Related Adjustments to 
the Regulatory Capital Rule and Conforming Amendments to Other 
Regulations, 84 FR 4222 (February 14, 2019), and the FDIC and OCC 
have had their submissions approved through OMB. As a result, the 
agencies' information collections related to the regulatory capital 
rules are currently aligned and therefore no submission will be made 
to OMB.
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    The final rule will also require changes to the Consolidated 
Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, 
and FFIEC 051) and the Consolidated Financial Statements for Holding 
Companies (FR Y-9C; OMB No. 7100-0128 (Board)), which will be addressed 
in one or more separate Federal Register notices.

B. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires an agency either to provide a final regulatory flexibility 
analysis with a final rule for which a general notice of proposed 
rulemaking is required or to certify that the final rule will not have 
a significant economic impact on a substantial number of small 
entities. The U.S. Small Business Administration (SBA) establishes size 
standards that define which entities are small businesses for purposes 
of the RFA.\23\

[[Page 61788]]

Under regulations issued by the SBA, the size standard to be considered 
a small business for banking entities subject to the proposed rule is 
$600 million or less in consolidated assets.\24\ Under 5 U.S.C. 605(b), 
this analysis is not required if an agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities and publishes its certification and a brief explanatory 
statement in the Federal Register along with its rule.
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    \23\ U.S. SBA, Table of Small Business Size Standards Matched to 
North American Industry Classification System Codes, available at 
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
    \24\ See 13 CFR 121.201.
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    Pursuant to the RFA, the OCC specifically considers (a) whether the 
final rule is likely to impact a substantial number of small entities; 
and (b) whether the economic impact on a substantial number of small 
entities is significant. To measure whether a rule would have a 
``significant economic impact,'' the OCC focuses on the potential costs 
of the rule on OCC-supervised small entities, consistent with guidance 
on the RFA published by the Office of Advocacy of the SBA.\25\ As of 
December 31, 2017, the OCC supervised approximately 898 small 
entities.\26\
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    \25\ See ``A Guide for Government Agencies; How to Comply with 
the Regulatory Flexibility Act,'' pp. 18-20 (Aug. 2017), available 
at https://www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf.
    \26\ The OCC bases its estimate of the number of small entities 
on the SBA's size thresholds for commercial banks and savings 
institutions, and trust companies, which are $600 million and $41.5 
million, respectively. Consistent with the General Principles of 
Affiliation 13 CFR 121.103(a), the OCC counts the assets of 
affiliated financial institutions when determining if the OCC should 
classify an OCC-supervised institution a small entity. The OCC uses 
December 31, 2017, to determine size because a ``financial 
institution's assets are determined by averaging the assets reported 
on its four quarterly financial statements for the preceding year.'' 
See footnote 8 of the U.S. Small Business Administration's Table of 
Size Standards.
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    Although the minimum required capital under the community bank 
leverage ratio framework will, in most cases, be greater than that 
required for the generally applicable risk-based and leverage capital 
requirements, banks are not required to opt into the community bank 
leverage ratio framework. In addition, banks that do elect to use the 
community bank leverage ratio framework may, at any time, stop using 
the community bank leverage ratio framework. Accordingly, the final 
rule does not represent a regulatory increase in minimum regulatory 
capital requirements, and the primary cost to institutions for 
implementing the final rule will be administrative costs associated 
with required updates to their capital reporting procedures and 
reports.\27\
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    \27\ The agencies intend to separately seek comment on the 
proposed changes to regulatory filings for qualifying community 
banking organizations that elect to use the community bank leverage 
ratio framework.
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    Banks that elect to use the community bank leverage ratio framework 
will have to make updates to their capital reporting procedures and 
reports. Banks will also have to make updates to existing policies and 
procedures to ensure compliance with regulations that will be affected 
by the final rule (e.g., lending limits). The total impact associated 
with the final rule is the estimated annual tax benefit minus the 
compliance costs of modifying policies and procedures. The OCC 
estimates that each institution will spend no more than 160 hours to 
modify their policies and procedures. To estimate costs, the OCC uses a 
compensation rate of $114 per hour.\28\ Therefore, the OCC estimates 
the cost per institution will not exceed $18,240 (160 hours x $114 per 
hour).
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    \28\ To estimate wages, the OCC reviewed May 2018 data for wages 
(by industry and occupation) from the U.S. Bureau of Labor 
Statistics (BLS) for credit intermediation and related activities 
excluding non-depository credit intermediaries (NAICS 5220A1). To 
estimate compensation costs associated with the rule, the OCC uses 
$114 per hour, which is based on the average of the 90th percentile 
for nine occupations adjusted for inflation (2.8 percent as of Q1 
2019, according to the BLS), plus an additional 33.2 percent for 
benefits (based on the percent of total compensation allocated to 
benefits as of Q4 2018 for NAICS 522: Credit intermediation and 
related activities).
---------------------------------------------------------------------------

    In general, the OCC classifies the economic impact of expected cost 
(to comply with a rule) on an individual bank as significant if the 
total estimated monetized costs in one year are greater than (1) 5 
percent of the bank's total annual salaries and benefits or (2) 2.5 
percent of the bank's total annual non-interest expense. Based on the 
above criteria, the estimated cost of the rule could impose a 
significant economic impact at 19 of the 898 small entities if they all 
elected to opt into the community bank leverage ratio framework. The 
OCC uses 5 percent to determine a substantial number of small entities. 
Approximately 2 percent (19/898 = 2.1%) of small entities could be 
significantly impacted by the rule, which is not a substantial number 
of small entities.
    Therefore, the OCC certifies that the final rule will not have a 
significant economic impact on a substantial number of OCC-supervised 
small entities.
    Board: An initial regulatory flexibility analysis (IRFA) was 
included in the proposal in accordance with section 3(a) of the 
Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the 
IRFA, the Board requested comment on the effect of the proposed rule on 
small entities and on any significant alternatives that would reduce 
the regulatory burden on small entities. The Board did not receive any 
comments on the IRFA. The RFA requires an agency to prepare a final 
regulatory flexibility analysis (FRFA) unless the agency certifies that 
the rule will not, if promulgated, have a significant economic impact 
on a substantial number of small entities. In accordance with section 
3(a) of the RFA, the Board has reviewed the final regulation. Based on 
its analysis, and for the reasons stated below, the Board certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.
    Under regulations issued by the Small Business Administration, a 
small entity includes a bank, bank holding company, or savings and loan 
holding company with assets of $600 million or less and trust companies 
with total assets of $41.5 million or less (small banking 
organization).\29\ On average since the second quarter of 2018, there 
were approximately 2,976 small bank holding companies, 133 small 
savings and loan holding companies, and 555 small state member banks.
---------------------------------------------------------------------------

    \29\ See 13 CFR 121.201. Effective August 19, 2019, the Small 
Business Administration revised the size standards for banking 
organizations to $600 million in assets from $550 million in assets. 
84 FR 34261 (July 18, 2019).
---------------------------------------------------------------------------

    As discussed, the Board is issuing this final rule to provide a 
simple measure of capital adequacy for certain community banking 
organizations. Under the final rule, depository institutions and 
depository institution holding companies that have less than $10 
billion in total consolidated assets and meet other qualifying 
criteria, including a leverage ratio (equal to tier 1 capital divided 
by average total consolidated assets) of greater than 9 percent, will 
be eligible to opt into the community bank leverage ratio framework 
and, as a result, will not be required to calculate the risk-based 
capital ratios under the generally applicable capital rule.\30\
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    \30\ In general, the Board's capital rule only applies to bank 
holding companies and savings and loan holding companies that are 
not subject to the Board's Small Bank Holding Company and Savings 
and Loan Holding Company Policy Statement, which applies to bank 
holding companies and savings and loan holding companies with less 
than $3 billion in total assets that also meet certain additional 
criteria. Very few bank holding companies and savings and loan 
holding companies that are small entities would be impacted by the 
final rule because very few such entities are subject to the Board's 
capital rule.

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[[Page 61789]]

    Although the final rule would provide some direct reduction in 
compliance burden associated with the capital rule, much of that 
reduction of compliance burden would be achieved through a separate 
notice to amend the regulatory reports associated with the capital 
rule. The Board does not expect that the final rule will result in a 
material change in the level of capital maintained by small banking 
organizations because (i) the framework is optional and (ii) a 
substantial majority of small banking organizations maintain capital in 
excess of both the generally applicable capital rule and the threshold 
established under the final rule. A small number of firms may face 
reduced capital requirements due to electing to use the community bank 
leverage ratio framework rather than the existing risk-based and 
leverage capital ratio framework. For example, the Board estimates that 
454 small state member banks would be eligible for the community bank 
leverage ratio framework and that 4 of these small state member may 
face less stringent capital requirements as a result. The Board does 
not expect the rule to have a significant economic impact on a 
substantial number of small entities.
    FDIC: The RFA generally requires that, in connection with a final 
rulemaking, an agency prepare and make available for public comment a 
final regulatory flexibility analysis describing the impact of the 
proposed rule on small entities.\31\ However, a regulatory flexibility 
analysis is not required if the agency certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities. The SBA has defined ``small entities'' to include 
banking organizations with total assets of less than or equal to $600 
million that are independently owned and operated or owned by a holding 
company with less than or equal to $600 million in total assets.\32\ 
Generally, the FDIC considers a significant effect to be a quantified 
effect in excess of 5 percent of total annual salaries and benefits per 
institution, or 2.5 percent of total non-interest expenses. The FDIC 
believes that effects in excess of these thresholds typically represent 
significant effects for FDIC-supervised institutions.
---------------------------------------------------------------------------

    \31\ 5 U.S.C. 601 et seq.
    \32\ The SBA defines a small banking organization as having $600 
million or less in assets, where an organization'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, by 84 FR 34261, effective August 19, 2019). In its 
determination, the ``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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    For the reasons described below, the FDIC believes that the final 
rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the FDIC has conducted and is 
providing a final regulatory flexibility analysis.
1. The Need for, and Objectives of, the Rule
    The policy objective of the proposed rule is to conform the FDIC's 
regulations to the statutory language established by the Act. On May 
24, 2018, the Act amended provisions in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \33\ as well as certain other 
statutes administered by the agencies.\34\ Section 201 of the Act, 
titled ``Capital Simplification for Qualifying Community Banks,'' 
directs the agencies to develop a community bank leverage ratio 
(community bank leverage ratio) of not less than 8 percent and not more 
than 10 percent for qualifying community banks. The Act defines a 
qualifying community banking organization as a depository institution 
or depository institution holding company with total consolidated 
assets of less than $10 billion.
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    \33\ Public Law 111-203, 124 Stat. 1376.
    \34\ Public Law 115-174, 132 Stat. 1296.
---------------------------------------------------------------------------

2. The Significant Issues Raised by the Public Comments in Response to 
the Initial Regulatory Flexibility Analysis
    No significant issues were raised by the public comments in 
response to the initial regulatory flexibility analysis.
3. Response of the Agency to Any Comments Filed by the Chief Counsel 
for Advocacy of the Small Business Administration in Response to the 
Proposed Rule
    No comments were filed by the Chief Counsel for Advocacy of the 
Small Business Administration in response to the proposed rule.
4. A Description of and an Estimate of the Number of Small Entities to 
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is 
Available
    As of March 31, 2019, the FDIC supervised 3,465 institutions, of 
which 2,705 are considered small entities for the purposes of RFA. Of 
these FDIC-supervised small entities, 2,297 (85 percent) meet or exceed 
the qualifications for adopting the community bank leverage ratio 
framework, as delineated above in Section III.A.\35\
---------------------------------------------------------------------------

    \35\ Consolidated Reports of Condition and Income for the 
quarter ending March 31, 2019.
---------------------------------------------------------------------------

    Adoption of the community bank leverage ratio framework is 
voluntary so it is uncertain how many small, FDIC-supervised entities 
that qualify will choose to adopt. Each qualifying entity must weigh 
the benefits of not being subject to risk-based capital requirements 
against the costs of adhering to the higher leverage ratio requirements 
under the community bank leverage ratio framework. As of March 2019, 
237 (9 percent of) small, FDIC-supervised institutions would experience 
a net decrease in required capital holdings as a result of qualifying 
for and adopting the community bank leverage ratio framework. For 
purposes of this analysis, the FDIC assumes that these 237 small, FDIC-
supervised institutions would adopt the community bank leverage ratio 
framework and therefore be affected by the final rule. In order to 
assess the maximum potential effects of the proposed rule, this 
analysis also calculates the expected effects assuming that all 2,297 
small, FDIC-supervised institutions that qualify would adopt the 
community bank leverage ratio framework.
5. A Description of the Projected Reporting, Recordkeeping and Other 
Compliance Requirements of the Rule
    This analysis considers benefits and costs relative to a pre-
statutory baseline in which qualifying institutions must maintain a 
tier 1 leverage ratio of five percent, a tier 1 risk-based capital 
ratio of eight percent, a common equity tier 1 ratio of 6.5 percent and 
a total capital ratio of 10 percent in order to be deemed well 
capitalized for purposes of Prompt Corrective Action. Pursuant to the 
capital conservation buffer that is part of the Basel III rule, 
institutions must also maintain an additional 0.5 percentage points of 
risk-weighted assets above the risk-based well-capitalized thresholds 
to avoid potential limitations on dividends and other capital 
distributions.\36\ Under the final rule, in contrast, qualifying 
institutions would have the option to operate under a 9 percent 
community bank leverage ratio framework and not be subject to risk-
based capital requirements.
---------------------------------------------------------------------------

    \36\ With the additional capital conservation buffer 
requirements, the pre-statute baseline risk-based capital thresholds 
are 7 percent for common equity tier 1 capital, 8.5 percent for tier 
1 capital, and 10.5 percent for total capital.
---------------------------------------------------------------------------

    As previously discussed, 241 (9 percent of) small, FDIC-supervised 
institutions would experience a net decrease in required capital 
holdings as

[[Page 61790]]

a result of qualifying for and adopting the community bank leverage 
ratio framework. For purposes of this analysis, the FDIC assumes that 
these 241 small, FDIC-supervised institutions would adopt the community 
bank leverage ratio framework and therefore be affected by the final 
rule. In order to assess the maximum potential effects of the proposed 
rule, this analysis also calculates the expected effects assuming that 
all 2,277 small, FDIC-supervised institutions that qualify would adopt 
the community bank leverage ratio framework.
    No bank will be compelled to raise capital under the community bank 
leverage ratio framework since the framework is optional. Moreover, as 
of March 2019, the 2,277 qualifying small, FDIC-supervised institutions 
held aggregate tier 1 capital in excess of 12 percent of their average 
assets--well in excess of both the 5 percent required by the generally 
applicable leverage ratio rules and the 9 percent threshold in the 
community bank leverage ratio framework. Some of the 241 small, FDIC-
supervised banks whose capital requirements would be reduced under the 
community bank leverage ratio framework might choose to reduce their 
capital. However, these 241 banks also held aggregate tier 1 capital in 
excess of 12 percent of their average assets, suggesting that most of 
them already have the ability to operate with less capital but have 
chosen not to. Given these facts, the FDIC does not believe that 
adopting banks will change their leverage capital ratios significantly 
in response to this rule.
    It is possible that the elimination of risk-based capital 
requirements by banks that choose to adopt the rule would increase 
their incentives to hold higher-weighted assets, such as loans. To 
provide a high-end estimate of the economic effect for RFA purposes, 
this analysis will assume that every adopting bank responds to the rule 
by permanently increasing its loan balances by 1 percent.
    The analysis estimates the annual economic effect of a 1 percent 
permanent increase in loan balances at adopting banks by multiplying 
the increase by the net interest margin currently being earned by each 
bank.\37\
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    \37\ Defined as the annualized net interest income as a percent 
of average earning assets, as reported on schedule RI. For 
reference, the average net interest margin was 3.9 percent for 
small, FDIC-insured institutions, for the quarter ending March 31, 
2019.
---------------------------------------------------------------------------

    For each of the 237 banks that would experience a reduction in 
capital requirements under the community bank leverage ratio framework, 
this analysis calculates the expected economic effect to each bank by 
multiplying 1 percent of the bank's loan balances by its net interest 
margin. Under these assumptions, as of March 2019, only six banks would 
experience an annual increase in net interest income that is 
significant (i.e., greater than 2.5 percent of their total noninterest 
income over the previous four quarters or 5 percent of their total 
salaries and benefits paid over the previous four quarters). The 
estimated aggregate increase in net interest income totals 
approximately $600,000. The six banks would comprise only less than 0.3 
percent of the 2,705 small entities covered by this rule. These effects 
are not significant for a substantial number of small entities.
    As an estimate of the maximum potential effects of the rule, the 
analysis alternately assumes that all of the 2,297 qualifying small 
FDIC-supervised banks that could adopt the framework choose to do so, 
and that all increase their loan balances by 1 percent and earn their 
current net interest margin on the new loans. This analysis results in 
twelve banks experiencing an annual increase in net interest income 
that is significant (i.e., greater than 2.5 percent of their total 
noninterest income over the previous four quarters or 5 percent of 
their total salaries and benefits paid over the previous four 
quarters). The twelve banks comprise less than 0.54 percent of the 
2,705 small entities covered by this rule. Thus, the plausible high-end 
effects are still not significant for a substantial number of small 
entities.
    Although the preceding assumptions and analysis indicate that the 
rule is unlikely to have significant economic effects on a substantial 
number of small, FDIC-supervised institutions, the extent of the rule's 
effects on capital and assets are uncertain. Therefore, the FDIC 
believes, but does not certify, that the final rule will not have a 
significant economic impact on a substantial number of small entities.
    There are other non-quantified economic effects resulting from the 
adoption of the community bank leverage ratio framework, such as 
simplicity benefits and compliance cost-savings from not having to 
comply with risk-based capital requirements going forward. Utilizing 
the community bank leverage ratio framework is expected to reduce 
reporting costs for small entities. Opting into the community bank 
leverage ratio framework would enable institutions to eliminate the 
reporting of many line items in schedule RC-R of their Call Reports, 
resulting in a reduction in reporting costs for institutions. 
Depository institutions also may benefit from reduced reporting costs 
because by being able to employ those resources in ways the institution 
believes is more beneficial. The FDIC does not have a reasonable basis 
for quantifying the compliance cost savings associated with the rule, 
but does not believe they will be significant for a substantial number 
of small entities.
    The quantified economic effects are expected to be significant for 
less than half of a percent of small, FDIC-supervised institutions 
covered by this rule. Even assuming broad adoption rates and an 
increase in lending by all adopting institutions, the quantified 
economic effects are only significant for less than half of a percent 
of small, FDIC-supervised institutions.
6. A Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities
    As described above, the FDIC does not believe this rule will have a 
significant economic impact on a substantial number of small entities. 
Further, since the election of the community bank leverage ratio is 
voluntary, the impacts are expected to be beneficial for institutions 
that adopt it.
    The agencies considered alternative calibrations, such as 8 
percent. As discussed in Section III.C however, the agencies believe 
that a 9 percent calibration, with complementary qualifying criteria 
for asset size, off-balance sheet assets, and trading assets and 
liabilities, should generally maintain the current level of regulatory 
capital held by electing banking organizations while maintaining the 
quality and quantity of regulatory capital in the banking system 
consistent with the agencies' safety-and-soundness goals, while also 
supporting the agencies' goals of reducing regulatory burden for as 
many community banking organizations as possible. For example, even 
though an 8 percent leverage ratio would allow more banking 
organizations to opt into the community bank leverage ratio framework 
it could incentivize a large number of qualifying community banking 
organizations to hold less regulatory capital than they do today.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \38\ 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 final

[[Page 61791]]

rule in a simple and straightforward manner, and did not receive any 
comments on the use of plain language.
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    \38\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

D. OCC Unfunded Mandates Reform Act of 1995

    The OCC analyzed the final 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). Because the 
rule does not specifically require banks to modify their policies and 
procedures, the OCC has determined that there are no expenditures for 
the purposes of UMRA. Therefore, the OCC concludes that the final rule 
will not result in an expenditure of $100 million or more annually by 
state, local, and tribal governments, or by the private sector.

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),\39\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), 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 IDIs 
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.\40\
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 4802(a).
    \40\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The Federal banking agencies considered the administrative burdens 
and benefits of the rule and its elective framework in determining its 
effective date and administrative compliance requirements. As such, the 
final rule will be effective on January 1, 2020.

F. The Congressional Review Act

    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\41\ If a rule is deemed a ``major rule'' by the Office of 
Management and Budget (OMB), the Congressional Review Act generally 
provides that the rule may not take effect until at least 60 days 
following its publication.\42\
---------------------------------------------------------------------------

    \41\ 5 U.S.C. 801 et seq.
    \42\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in (A) 
an annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\43\ The OMB has determined that the final rule is not a 
``major rule'' within the meaning of the Congressional Review Act. As 
required by the Congressional Review Act, the agencies will submit the 
final rule and other appropriate reports to Congress and the Government 
Accountability Office for review.
---------------------------------------------------------------------------

    \43\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 1

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

12 CFR Part 3

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

12 CFR Part 5

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

12 CFR Part 6

    Federal Reserve System, National banks.

12 CFR Part 23

    National banks.

12 CFR Part 24

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

12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

12 CFR Part 34

    Mortgages, National banks, Reporting and recordkeeping 
requirements.

12 CFR Part 160

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

12 CFR Part 192

    Reporting and recordkeeping requirements, Savings associations, 
Securities.

12 CFR Part 206

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

12 CFR Part 208

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

12 CFR Part 211

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

12 CFR Part 215

    Credit, Penalties, Reporting and recordkeeping requirements.

12 CFR Part 217

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

12 CFR Part 223

    Banks, Banking, Federal Reserve System.

12 CFR Part 225

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

12 CFR Part 238

    Savings and loan holding companies (Regulation LL).

[[Page 61792]]

12 CFR Part 251

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

12 CFR Part 303

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

12 CFR Part 324

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

12 CFR Part 337

    Banks, Banking, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 347

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

12 CFR Part 362

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

12 CFR Part 365

    Banks, Banking, Mortgages.

12 CFR Part 390

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

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the joint preamble, chapter I of title 12 
of the Code of Federal Regulations is amended as follows:

PART 1--INVESTMENT SECURITIES

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

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


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


Sec.  1.2  Definitions.

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

PART 3--CAPITAL ADEQUACY STANDARDS

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

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


Sec.  3.2  [Amended]

0
4. Section 3.2 is amended by removing the first definition of ``Non-
significant investment in the capital of an unconsolidated financial 
institution''.

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


Sec.  3.10  Minimum capital requirements.

    (a) Minimum capital requirements. (1) A national bank or Federal 
savings association must maintain the following minimum capital ratios:
    (i) A common equity tier 1 capital ratio of 4.5 percent.
    (ii) A tier 1 capital ratio of 6 percent.
    (iii) A total capital ratio of 8 percent.
    (iv) A leverage ratio of 4 percent.
    (v) For advanced approaches national banks or Federal savings 
associations or, for Category III OCC-regulated institutions, a 
supplementary leverage ratio of 3 percent.
    (vi) For Federal savings associations, a tangible capital ratio of 
1.5 percent.
    (2) A qualifying community banking organization (as defined in 
Sec.  3.12), that is subject to the community bank leverage ratio 
framework (as defined in Sec.  3.12), is considered to have met the 
minimum capital requirements in this paragraph (a).
* * * * *

0
6. Add section 3.12 to read as follows:


Sec.  3.12  Community bank leverage ratio framework.

    (a) Community bank leverage ratio framework. (1) Notwithstanding 
any other provision in this part, a qualifying community banking 
organization that has made an election to use the community bank 
leverage ratio framework under paragraph (a)(3) of this section shall 
be considered to have met the minimum capital requirements under Sec.  
3.10, the capital ratio requirements for the well capitalized capital 
category under Sec.  6.4(b)(1) of this chapter, and any other capital 
or leverage requirements to which the qualifying community banking 
organization is subject, if it has a leverage ratio greater than 9 
percent.
    (2) For purposes of this section, a qualifying community banking 
organization means a national bank or Federal savings association that 
is not an advanced approaches national bank or Federal savings 
association and that satisfies all of the following criteria:
    (i) Has a leverage ratio of greater than 9 percent;
    (ii) Has total consolidated assets of less than $10 billion, 
calculated in accordance with the reporting instructions to the Call 
Report as of the end of the most recent calendar quarter;
    (iii) Has off-balance sheet exposures of 25 percent or less of its 
total consolidated assets as of the end of the most recent calendar 
quarter, calculated as the sum of the notional amounts of the exposures 
listed in paragraphs (a)(2)(iii)(A) through (I) of this section, 
divided by total consolidated assets, each as of the end of the most 
recent calendar quarter:
    (A) The unused portion of commitments (except for unconditionally 
cancellable commitments);
    (B) Self-liquidating, trade-related contingent items that arise 
from the movement of goods;
    (C) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit;
    (D) Sold credit protection through

[[Page 61793]]

    (1) Guarantees; and
    (2) Credit derivatives;
    (E) Credit-enhancing representations and warranties;
    (F) Securities lent and borrowed, calculated in accordance with the 
reporting instructions to the Call Report;
    (G) Financial standby letters of credit;
    (H) Forward agreements that are not derivative contracts; and
    (I) Off-balance sheet securitization exposures; and
    (iv) Has total trading assets plus trading liabilities, calculated 
in accordance with the reporting instructions to the Call Report of 5 
percent or less of the national bank's or Federal savings association's 
total consolidated assets, each as of the end of the most recent 
calendar quarter.
    (3)(i) A qualifying community banking organization may elect to use 
the community bank leverage ratio framework if it makes an opt-in 
election under this paragraph (a)(3).
    (ii) For purposes of this paragraph (a)(3), a qualifying community 
banking organization makes an election to use the community bank 
leverage ratio framework by completing the applicable reporting 
requirements of its Call Report.
    (iii)(A) A qualifying community banking organization that has 
elected to use the community bank leverage ratio framework may opt out 
of the community bank leverage ratio framework by completing the 
applicable risk-based and leverage ratio reporting requirements 
necessary to demonstrate compliance with Sec.  3.10(a)(1) in its Call 
Report or by otherwise providing this information to the OCC.
    (B) A qualifying community banking organization that opts out of 
the community bank leverage ratio framework pursuant to paragraph 
(a)(3)(iii)(A) of this section must comply with Sec.  3.10(a)(1) 
immediately.
    (b) Calculation of the leverage ratio. A qualifying community 
banking organization's leverage ratio is calculated in accordance with 
Sec.  3.10(b)(4), except that a qualifying community banking 
organization is not required to:
    (1) Make adjustments and deductions from tier 2 capital for 
purposes of Sec.  3.22(c); or
    (2) Calculate and deduct from tier 1 capital an amount resulting 
from insufficient tier 2 capital under Sec.  3.22(f).
    (c) Treatment when ceasing to meet the qualifying community banking 
organization requirements. (1) Except as provided in paragraphs (c)(5) 
and (6) of this section, if a national bank or Federal savings 
association ceases to meet the definition of a qualifying community 
banking organization, the national bank or Federal savings association 
has two reporting periods under its Call Report (grace period) to 
either satisfy the requirements to be a qualifying community banking 
organization or to comply with Sec.  3.10(a)(1) and report the required 
capital measures under Sec.  3.10(a)(1) on its Call Report.
    (2) The grace period begins as of the end of the calendar quarter 
in which the national bank or Federal savings association ceases to 
satisfy the criteria to be a qualifying community banking organization 
provided in paragraph (a)(2) of this section. The grace period ends on 
the last day of the second consecutive calendar quarter following the 
beginning of the grace period.
    (3) During the grace period, the national bank or Federal savings 
association continues to be treated as a qualifying community banking 
organization for the purpose of this part and must continue calculating 
and reporting its leverage ratio under this section unless the national 
bank or Federal savings association has opted out of using the 
community bank leverage ratio framework under paragraph (a)(3) of this 
section.
    (4) During the grace period, the qualifying community banking 
organization continues to be considered to have met the minimum capital 
requirements under Sec.  3.10(a)(1), the capital ratio requirements for 
the well capitalized capital category under Sec.  6.4(b)(1)(i)(A) 
through (D) of this chapter, and any other capital or leverage 
requirements to which the qualifying community banking organization is 
subject, and must continue calculating and reporting its leverage ratio 
under this section.
    (5) Notwithstanding paragraphs (c)(1) through (4) of this section, 
a national bank or Federal savings association that no longer meets the 
definition of a qualifying community banking organization as a result 
of a merger or acquisition has no grace period and immediately ceases 
to be a qualifying community banking organization. Such a national bank 
or Federal savings association must comply with the minimum capital 
requirements under Sec.  3.10(a)(1) and must report the required 
capital measures under Sec.  3.10(a)(1) for the quarter in which it 
ceases to be a qualifying community banking organization.
    (6) Notwithstanding paragraphs (c)(1) through (4) of this section, 
a national bank or Federal savings association that has a leverage 
ratio of 8 percent or less does not have a grace period and must comply 
with the minimum capital requirements under Sec.  3.10(a)(1) and must 
report the required capital measures under Sec.  3.10(a)(1) for the 
quarter in which it reports a leverage ratio of 8 percent or less.

0
 7. Section 3.22 is amended by revising paragraph (f) to read as 
follows:


Sec.  3.22  Regulatory capital adjustments and deductions.

* * * * *
    (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 required 
deduction after completing the deductions required under paragraph (d) 
of this section, the national bank or Federal savings association must 
deduct the shortfall from the next higher (that is, more subordinated) 
component of regulatory capital. Notwithstanding any other provision of 
this section, a qualifying community banking organization (as defined 
in Sec.  3.12) that has elected to use the community bank leverage 
ratio framework pursuant to Sec.  3.12 is not required to deduct any 
shortfall of tier 2 capital from its additional tier 1 capital or 
common equity tier 1 capital.
* * * * *

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

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

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


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


Sec.  5.3  Definitions.

* * * * *
    (e) Capital and surplus means:
    (1) For qualifying community banking organizations that have 
elected to use the community bank leverage ratio framework, as set 
forth under the OCC's Capital Adequacy Standards at part 3 of this 
chapter:
    (i) A qualifying community banking organization's tier 1 capital, 
as used under Sec.  3.12 of this chapter; plus
    (ii) A qualifying community banking organization's allowances for 
loan and lease losses or allowance for credit losses, as applicable, as 
reported in the national bank's or Federal savings association's 
Consolidated Report of Condition and Income (Call Report); or
    (2) For all other national banks and Federal savings associations:

[[Page 61794]]

    (i) A national bank's or Federal savings association's tier 1 and 
tier 2 capital calculated under the OCC's risk-based capital standards 
set forth in part 3 of this chapter, as applicable, as reported in the 
bank's or savings association's Consolidated Reports of Condition and 
Income (Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v), 
respectively; plus
    (ii) The balance of the national bank's or Federal savings 
association's allowances for loan and lease losses not included in the 
institution's tier 2 capital, for purposes of the calculation of risk-
based capital reported in the institution's Call Reports, described in 
paragraph (e)(2)(i) of this section.
* * * * *

0
10. Section 5.37 is amended by revising paragraph (c)(3) to read as 
follows:


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

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

0
11. Section 5.58 is amended by revising paragraph (h)(2) to read as 
follows:


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

* * * * *
    (h) * * *
    (2) The Federal savings association is not investing more than 10 
percent of its total capital (or, in the case of a Federal savings 
association that is a qualifying community banking organization that 
has elected to use the community bank leverage ratio framework, 10 
percent of its tier 1 capital, as used under Sec.  3.12 of this 
chapter) in one company;
* * * * *

PART 6--PROMPT CORRECTIVE ACTION

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

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


0
13. Section 6.4 is amended by:
0
a. Revising the section heading;
0
b. Removing paragraph (b);
0
c. Redesignating paragraph (c) as paragraph (b);
0
d. Revising newly designated paragraph (b) introductory text and 
paragraph (b)(1); and
0
e. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d), 
respectively.
    The revisions read as set forth below.


Sec.  6.4  Capital measures and capital categories.

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

PART 23--LEASING

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

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


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

[[Page 61795]]

Sec.  23.2  Definitions.

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

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

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

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


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


Sec.  24.2  Definitions.

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

PART 32--LENDING LIMITS

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

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


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


Sec.  32.2  Definitions.

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

PART 34--REAL ESTATE LENDING AND APPRAISALS

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

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


0
21. Section 34.81 is amended by adding a definition for ``Capital and 
surplus'' in alphabetical order to read as follows:


Sec.  34.81  Definitions.

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

PART 160--LENDING AND INVESTMENT

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

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


0
23. Section 160.3 is amended by adding a definition for ``total 
capital'' in alphabetical order to read as follows:


Sec.  160.3  Definitions.

* * * * *
    Total capital means:
    (1) For a qualifying community banking organization that has 
elected to use the community bank leverage ratio framework, as set 
forth under the OCC's Capital Adequacy Standards at part 3 of this 
chapter, total capital refers to the qualifying community banking 
organization's tier 1 capital, as used under Sec.  3.12(b)(2) of this 
chapter;
    (2) For all other Federal savings associations, total capital means 
the sum of tier 1 capital and tier 2 capital,

[[Page 61796]]

as calculated under part 3 of this chapter.

PART 192--CONVERSIONS FROM MUTUAL TO STOCK FORM

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

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


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


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

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

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

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

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

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

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


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


Sec.  206.2  Definitions.

* * * * *
    (g) Total capital means the total of a bank's Tier 1 and Tier 2 
capital under the risk-based capital guidelines provided by the bank's 
primary federal supervisor. For a qualifying community banking 
organization (as defined in Sec.  217.12 of this chapter) that is 
subject to the community bank leverage ratio framework (as defined in 
Sec.  217.12 of this chapter), total capital means the bank's Tier 1 
capital (as defined in Sec.  217.2 of this chapter and calculated in 
accordance with Sec.  217.12(b) of this chapter). For an insured branch 
of a foreign bank organized under the laws of a country that subscribes 
to the principles of the Basel Capital Accord, ``total capital'' means 
total Tier 1 and Tier 2 capital as calculated under the standards of 
that country. For an insured branch of a foreign bank organized under 
the laws of a country that does not subscribe to the principles of the 
Basel Capital Accord (Accord), ``total capital'' means total Tier 1 and 
Tier 2 capital as calculated under the provisions of the Accord.
* * * * *

0
28. Section 206.5 is amended by adding paragraph (a)(4) to read as 
follows:


Sec.  206.5  Capital levels of correspondents.

    (a) * * *
    (4) Notwithstanding paragraphs (a)(1) through (3) of this section, 
a qualifying community banking organization (as defined in Sec.  217.12 
of this chapter) that is subject to the community bank leverage ratio 
(as defined in Sec.  217.12 of this chapter) is considered to have met 
the minimum capital requirements in this paragraph (a).
* * * * *

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

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

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1817(a)(3), 1817(a)(12), 
1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 
1831w, 1831x, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-
3909, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780-
4(c)(5), 78q, 78q-1, 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


0
30. Section 208.2 is amended by adding paragraph (d)(3) to read as 
follows:


Sec.  208.2   Definitions.

* * * * *
    (d) * * *
    (3) For a qualifying community banking organization (as defined in 
Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter), 
capital stock and surplus means the bank's Tier 1 capital (as defined 
in Sec.  217.2 of this chapter and calculated in accordance with Sec.  
217.12(b) of this chapter) plus allowance for loan and lease losses or 
adjusted allowance for credit losses, as applicable.
* * * * *

0
31. Section 208.43 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  208.43   Capital measures and capital category definitions.

    (a) Capital measures. (1) For purposes of section 38 of the FDI Act 
and this subpart, the relevant capital measures are:
    (i) Total Risk-Based Capital Measure: The total risk-based capital 
ratio;
    (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based 
capital ratio;
    (iii) Common Equity Tier 1 Capital Measure: The common equity tier 
1 risk-based capital ratio; and
    (iv) Leverage Measure:
    (A) The leverage ratio; and
    (B) With respect to an advanced approaches bank, on January 1, 
2018, and thereafter, the supplementary leverage ratio.
    (C) With respect to any bank that is a subsidiary (as defined in 
Sec.  217.2 of this chapter) of a global systemically important BHC, on 
Jan. 1, 2018, and thereafter, the supplementary leverage ratio.
    (2) For a qualifying community banking organization (as defined in 
Sec.  217.12 of this chapter), that has elected to use the community 
bank leverage ratio framework (as defined in Sec.  217.12 of this 
chapter), the leverage ratio calculated in accordance with Sec.  
217.12(b) of this chapter is used to determine the well capitalized 
capital category under paragraph (b)(1)(i)(A) through (D) of this 
section.
    (b) Capital categories. For purposes of section 38 of the FDI Act 
and this subpart, a member bank is deemed to be:
    (1)(i) ``Well capitalized'' if:
    (A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of 10.0 percent or greater; and
    (B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of 8.0 percent or greater; and
    (C) Common Equity Tier 1 Capital Measure: The bank has a common 
equity tier 1 risk-based capital ratio of 6.5 percent or greater; and
    (D) Leverage Measure:
    (1) The bank has a leverage ratio of 5.0 percent or greater; and
    (2) Beginning on January 1, 2018, with respect to any bank that is 
a subsidiary of a global systemically important BHC under the 
definition of ``subsidiary'' in Sec.  217.2 of this chapter, the bank 
has a supplementary leverage ratio of 6.0 percent or greater; and
    (E) The bank is not subject to any written agreement, order, 
capital directive, or prompt corrective action directive issued by the 
Board pursuant to section 8 of the FDI Act, the International Lending 
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, 
or any regulation

[[Page 61797]]

thereunder, to meet and maintain a specific capital level for any 
capital measure.
    (ii) A qualifying community banking organization, as defined in 
Sec.  217.12 of this chapter, that has elected to use the community 
bank leverage ratio framework under Sec.  217.12 of this chapter, shall 
be considered to have met the capital ratio requirements for the well 
capitalized capital category in paragraph (b)(1)(i)(A) through (D) of 
this section.
* * * * *

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

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

    Authority:  12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 
3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s, 
1681w, 6801 and 6805.


0
33. In part 211, remove the words ``Capital Adequacy Guidelines'' 
wherever they appear and add in their place the words ``capital rule''.

0
34. Section 211.2 is amended by revising paragraphs (b), (c), and (x) 
to read as follows:


Sec.  211.2   Definitions.

* * * * *
    (b) Capital and surplus means, unless otherwise provided in this 
part:
    (1) For organizations subject to the capital rule:
    (i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under the capital rule); and
    (ii) The balance of allowance for loan and lease losses or adjusted 
allowance for credit losses, as applicable, not included in an 
organization's tier 2 capital for calculation of risk-based capital, 
based on the organization's most recent consolidated Report of 
Condition and Income.
    (iii) For qualifying community banking organizations (as defined in 
Sec.  217.12 of this chapter) that are subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter), 
tier 1 capital (as defined in Sec.  217.2 of this chapter and 
calculated in accordance with Sec.  217.12(b) of this chapter) plus 
allowances for loan and lease losses or adjusted allowance for credit 
losses, as applicable.
    (2) For all other organizations, paid-in and unimpaired capital and 
surplus, and includes undivided profits but does not include the 
proceeds of capital notes or debentures.
    (c) Capital rule means part 217 of this chapter.
* * * * *
    (x) Tier 1 capital has the same meaning as provided in Sec.  217.2 
of this chapter. A qualifying community banking organization (as 
defined in Sec.  217.12 of this chapter) that is subject to the 
community bank leverage ratio framework (as defined in Sec.  217.12 of 
this chapter), calculates its tier 1 capital in accordance with Sec.  
217.12(b) of this chapter.
* * * * *


Sec.  211.9  [Amended]

0
35. Section 211.9 is amended by redesignating footnote 5 to paragraph 
(a) as footnote 1 to paragraph (a).

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

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

    Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991).


0
37. Section 215.2 is amended by adding paragraph (i)(3) to read as 
follows:


Sec.  215.2   Definitions.

* * * * *
    (i) * * *
    (3) Notwithstanding paragraphs (i)(1) and (2) of this section, for 
a member bank that is a qualifying community banking organization (as 
defined in Sec.  217.12 of this chapter) that is subject to the 
community bank leverage ratio framework (as defined in Sec.  217.12 of 
this chapter), unimpaired capital and unimpaired surplus equals Tier 1 
capital (as defined in Sec.  217.12 of this chapter and calculated in 
accordance with Sec.  217.12(b) of this chapter) plus allowances for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable.
* * * * *

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

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

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


0
39. Section 217.10 is amended by revising paragraph (a) to read as 
follows:


Sec.  217.10  Minimum capital requirements.

    (a) Minimum capital requirements. (1) A Board-regulated institution 
must maintain the following minimum capital ratios:
    (i) A common equity tier 1 capital ratio of 4.5 percent.
    (ii) A tier 1 capital ratio of 6 percent.
    (iii) A total capital ratio of 8 percent.
    (iv) A leverage ratio of 4 percent.
    (v) For advanced approaches Board-regulated institutions or, for 
Category III Board-regulated institutions, a supplementary leverage 
ratio of 3 percent.
    (2) A qualifying community banking organization (as defined in 
Sec.  217.12), that is subject to the community bank leverage ratio 
framework (as defined Sec.  217.12), is considered to have met the 
minimum capital requirements in this paragraph (a) of this section.
* * * * *

0
40. Section 217.12 is added as to read as follows:


Sec.  217.12  Community bank leverage ratio framework.

    (a) Community bank leverage ratio framework. (1) Notwithstanding 
any other provision in this part, a qualifying community banking 
organization that has made an election to use the community bank 
leverage ratio framework under paragraph (a)(3) of this section shall 
be considered to have met the minimum capital requirements under Sec.  
217.10, the capital ratio requirements for the well capitalized capital 
category under Sec.  208.43(b)(1) of this chapter, and any other 
capital or leverage requirements to which the qualifying community 
banking organization is subject, if it has a leverage ratio greater 
than 9 percent.
    (2) For purposes of this section, a qualifying community banking 
organization means a Board-regulated institution that is not an 
advanced approaches Board-regulated institution and that satisfies all 
of the following criteria:
    (i) Has a leverage ratio of greater than 9 percent;
    (ii) Has total consolidated assets of less than $10 billion, 
calculated in accordance with the reporting instructions to the Call 
Report or to Form FR Y-9C, as applicable, as of the end of the most 
recent calendar quarter;
    (iii) Has off-balance sheet exposures of 25 percent or less of its 
total consolidated assets as of the end of the most recent calendar 
quarter, calculated as the sum of the notional amounts of the exposures 
listed in paragraphs (a)(2)(iii)(A) through (I) of this section, 
divided by total consolidated assets,

[[Page 61798]]

each as of the end of the most recent calendar quarter:
    (A) The unused portion of commitments (except for unconditionally 
cancellable commitments);
    (B) Self-liquidating, trade-related contingent items that arise 
from the movement of goods;
    (C) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit;
    (D) Sold credit protection through guarantees and credit 
derivatives;
    (E) Credit-enhancing representations and warranties;
    (F) Securities lent and borrowed, calculated in accordance with the 
reporting instructions to the Call Report or to Form FR Y-9C, as 
applicable;
    (G) Financial standby letters of credit;
    (H) Forward agreements that are not derivative contracts; and
    (I) Off-balance sheet securitization exposures; and
    (iv) Has total trading assets and trading liabilities, calculated 
in accordance with the reporting instructions to the Call Report or to 
Form FR Y-9C, as applicable, of 5 percent or less of the Board-
regulated institution's total consolidated assets, each as of the end 
of the most recent calendar quarter.
    (3)(i) A qualifying community banking organization may elect to use 
the community bank leverage ratio framework if it makes an opt-in 
election under this paragraph (a)(3).
    (ii) For purposes of this paragraph (a)(3), a qualifying community 
banking organization makes an election to use the community bank 
leverage ratio framework by completing the applicable reporting 
requirements of its Call Report or of its Form FR Y-9C, as applicable.
    (iii)(A) A qualifying community banking organization that has 
elected to use the community bank leverage ratio framework may opt out 
of the community bank leverage ratio framework by completing the 
applicable risk-based and leverage ratio reporting requirements 
necessary to demonstrate compliance with Sec.  217.10(a)(1) in its Call 
Report or its Form FR Y-9C, as applicable, or by otherwise providing 
the information to the Board.
    (B) A qualifying community banking organization that opts out of 
the community bank leverage ratio framework pursuant to paragraph 
(a)(3)(iii)(A) of this section must comply with Sec.  217.10(a)(1) 
immediately.
    (b) Calculation of the leverage ratio. A qualifying community 
banking organization's leverage ratio is calculated in accordance with 
Sec.  217.10(b)(4), except that a qualifying community banking 
organization is not required to:
    (1) Make adjustments and deductions from tier 2 capital for 
purposes of Sec.  217.22(c); or
    (2) Calculate and deduct from tier 1 capital an amount resulting 
from insufficient tier 2 capital under Sec.  217.22(f).
    (c) Treatment when ceasing to meet the qualifying community banking 
organization requirements. (1) Except as provided in paragraphs (c)(5) 
and (6) of this section, if an Board-regulated institution ceases to 
meet the definition of a qualifying community banking organization, the 
Board-regulated institution has two reporting periods under its Call 
Report or Form FR Y-9C, as applicable (grace period) either to satisfy 
the requirements to be a qualifying community banking organization or 
to comply with Sec.  217.10(a)(1) and report the required capital 
measures under Sec.  217.10(a)(1) on its Call Report or its Form FR Y-
9C, as applicable.
    (2) The grace period begins as of the end of the calendar quarter 
in which the Board-regulated institution ceases to satisfy the criteria 
to be a qualifying community banking organization provided in paragraph 
(a)(2) of this section. The grace period ends on the last day of the 
second consecutive calendar quarter following the beginning of the 
grace period.
    (3) During the grace period, the Board-regulated institution 
continues to be treated as a qualifying community banking organization 
for the purpose of this part and must continue calculating and 
reporting its leverage ratio under this section unless the Board-
regulated institution has opted out of using the community bank 
leverage ratio framework under paragraph (a)(3) of this section.
    (4) During the grace period, the qualifying community banking 
organization continues to be considered to have met the minimum capital 
requirements under Sec.  217.10(a)(1), the capital ratio requirements 
for the well capitalized capital category under Sec.  
208.43(b)(1)(i)(A) through (D) of this chapter, and any other capital 
or leverage requirements to which the qualifying community banking 
organization is subject, and must continue calculating and reporting 
its leverage ratio under this section.
    (5) Notwithstanding paragraphs (c)(1) through (4) of this section, 
a Board-regulated institution that no longer meets the definition of a 
qualifying community banking organization as a result of a merger or 
acquisition has no grace period and immediately ceases to be a 
qualifying community banking organization. Such a Board-regulated 
institution must comply with the minimum capital requirements under 
Sec.  217.10(a)(1) and must report the required capital measures under 
Sec.  217.10(a)(1) for the quarter in which it ceases to be a 
qualifying community banking organization.
    (6) Notwithstanding paragraphs (c)(1) through (4) of this section, 
a Board-regulated institution that has a leverage ratio of 8 percent or 
less does not have a grace period and must comply with the minimum 
capital requirements under Sec.  217.10(a)(1) and must report the 
required capital measures under Sec.  217.10(a)(1) for the quarter in 
which it reports a leverage ratio of 8 percent or less.
0
41. Section 217.22 is amended by revising paragraph (f) to read as 
follows:


Sec.  217.22   Regulatory capital adjustments and deductions.

* * * * *
    (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 required deduction after 
completing the deductions required under paragraph (d) of this section, 
the Board-regulated institution must deduct the shortfall from the next 
higher (that is, more subordinated) component of regulatory capital. 
Notwithstanding any other provision of this section, a qualifying 
community banking organization (as defined in Sec.  217.12) that has 
elected to use the community bank leverage ratio framework pursuant to 
Sec.  217.12 is not required to deduct any shortfall of tier 2 capital 
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *

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

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

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).


0
43. Section 223.3 is amended by adding paragraph (d)(4) to read as 
follows:

[[Page 61799]]

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

* * * * *
    (d) * * *
    (4) Notwithstanding paragraphs (d)(1) through (3) of this section, 
for a qualifying community banking organization (as defined in Sec.  
217.12 of this chapter) that is subject to the community bank leverage 
ratio framework (as defined in Sec.  217.12 of this chapter), capital 
stock and surplus equals tier 1 capital (as defined in Sec.  217.12 of 
this chapter and calculated in accordance with Sec.  217.12(b) of this 
chapter) plus allowances for loan and lease losses or adjusted 
allowance for credit losses, as applicable.
* * * * *

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

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

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
45. Section 225.2 is amended by revising paragraph (h), redesignating 
footnote 2 to paragraph (r)(1) as footnote 1 to paragraph (r)(1), and 
adding paragraph (r)(4).
    The revision and addition read as follows:


Sec.  225.2   Definitions.

* * * * *
    (h) Lead insured depository institution means the largest insured 
depository institution controlled by the bank holding company as of the 
quarter ending immediately prior to the proposed filing, based on a 
comparison of the average total risk-weighted assets controlled during 
the previous 12-month period be each insured depository institution 
subsidiary of the holding company. For purposes of this paragraph (h), 
for a qualifying community banking organization (as defined in Sec.  
217.12 of this chapter) that is subject to the community bank leverage 
ratio framework (as defined in Sec.  217.12 of this chapter), average 
total risk-weighted assets equal the qualifying community banking 
organization's average total consolidated assets (as used in Sec.  
217.12 of this chapter).
* * * * *
    (r) * * *
    (4) Notwithstanding paragraphs (r)(1) through (3) of this section:
    (i) A bank holding company that is a qualifying community banking 
organization (as defined in Sec.  217.12 of this chapter) that is 
subject to the community bank leverage ratio framework (as defined in 
Sec.  217.12 of this chapter) is well capitalized if it satisfies the 
requirements of paragraph (r)(1)(iii) of this section.
    (ii) A depository institution that is a qualifying community 
banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter) is well capitalized.
* * * * *

0
46. Section 225.14 is amended by:
0
a. Redesignating footnote 3 to paragraph (a)(1)(ii) as footnote 1 to 
paragraph (a)(1)(ii);
0
b. Revising paragraphs (a)(1)(v)(A), (a)(1)(vii), and (c)(6)(i)(A) and 
(B); and
0
c. Adding paragraphs (c)(6)(iii) and (f).
    The revisions and additions read as follows:


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

    (a) * * *
    (1) * * *
    (v)(A) If the bank holding company is not a qualifying community 
banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter), and:
    (1) If the bank holding company has consolidated assets of $3 
billion or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed transaction, consolidated pro forma risk-based 
capital ratios for the acquiring bank holding company as of the most 
recent quarter, and a description of the purchase price and the terms 
and sources of funding for the transaction; or
    (2) If the bank holding company has consolidated assets of less 
than $3 billion, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, and a description of the purchase price, the 
terms and sources of funding for the transaction, and the sources and 
schedule for retiring any debt incurred in the transaction;
    (B) If the bank holding company is a qualifying community banking 
organization (as defined in Sec.  217.12 of this chapter) that is 
subject to the community bank leverage ratio framework (as defined in 
Sec.  217.12 of this chapter), an abbreviated consolidated pro forma 
balance sheet as of the most recent quarter showing credit and debit 
adjustments that reflect the proposed transaction, consolidated pro 
forma leverage ratio (as calculated under Sec.  217.12 of this chapter) 
for the acquiring bank holding company as of the most recent quarter, 
and a description of the purchase price and the terms and sources of 
funding for the transaction;
* * * * *
    (vii)(A) For each insured depository institution (that is not a 
qualifying community banking organization (as defined in Sec.  217.12 
of this chapter) that is subject to the community bank leverage ratio 
framework (as defined in Sec.  217.12 of this chapter)) whose Tier 1 
capital, total capital, total assets or risk-weighted assets change as 
a result of the transaction, the total risk-weighted assets, total 
assets, Tier 1 capital and total capital of the institution on a pro 
forma basis; and
    (B) For each insured depository institution that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter), whose Tier 1 capital (as 
defined in Sec.  217.2 of this chapter and calculated in accordance 
with Sec.  217.12(b) of this chapter) or total assets change as a 
result of the transaction, the total assets and Tier 1 capital of the 
institution on a pro forma basis; and
* * * * *
    (c) * * *
    (6) * * *
    (i) * * *
    (A) Limited growth. Except as provided in paragraphs (c)(6)(ii) and 
(iii) of this section, the sum of the aggregate risk-weighted assets to 
be acquired in the proposal and the aggregate risk-weighted assets 
acquired by the acquiring bank holding company in all other qualifying 
transactions does not exceed 35 percent of the consolidated risk-
weighted assets of the acquiring bank holding company. For purposes 
paragraph (c)(6) of this section, other qualifying transactions means 
any transaction approved under this section or Sec.  225.23 during the 
12 months prior to filing the notice under this section; and
    (B) Individual size limitation. Except as provided in paragraph 
(c)(6)(iii) of this section, the total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
* * * * *
    (iii) Qualifying community banking organizations. Paragraphs 
(c)(6)(i)(A)

[[Page 61800]]

and (B) of this section shall not apply if:
    (A) The acquiring bank holding company is a qualifying community 
banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter);
    (B) The sum of the total assets to be acquired in the proposal and 
the total assets acquired by the acquiring bank holding company in all 
other qualifying transactions does not exceed 35 percent of the average 
total consolidated assets (as used in Sec.  217.12 of this chapter) of 
the acquiring bank holding company as last reported to the Board; and
    (C) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
    (f) Qualifying community banking organizations. For purposes of 
this section, a qualifying community banking organization (as defined 
in Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter) 
controls total risk-weighted assets equal to the qualifying community 
banking organization's average total consolidated assets (as used in 
Sec.  217.12 of this chapter) as last reported to its primary banking 
supervisor.

0
 47. Section 225.22 is amended by adding paragraph (d)(8)(vi) to read 
as follows:


Sec.  225.22   Exempt nonbanking activities and acquisitions.

* * * * *
    (d) * * *
    (8) * * *
    (vi) Qualifying community banking organizations. For purposes of 
paragraph (d)(8)(ii) of this section, a lending company or industrial 
bank that is a qualifying community banking organization (as defined in 
Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter), 
or is a subsidiary of such a qualifying community banking organization, 
has risk-weighted assets equal to:
    (A) Its average total consolidated assets (as used in Sec.  217.12 
of this chapter) as most recently reported to its primary banking 
supervisor (as defined in Sec.  225.14(d)(5)); or
    (B) Its total assets, if the company or industrial bank does not 
report such average total consolidated assets.
* * * * *

0
48. Section 225.23 is amended by:
0
a. Redesignating footnote 2 to paragraph (a)(1) as footnote 1 to 
paragraph (a)(1);
0
b. Revising paragraphs (a)(1)(iii) and (c)(5)(i); and
0
c. Adding paragraphs (c)(5)(iii) and (e).
    The revisions and additions read as follows:


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

    (a) * * *
    (1) * * *
    (iii) If the proposal involves an acquisition of a going concern:
    (A) If the acquiring bank holding company is not a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter):
    (1) If the bank holding company has consolidated assets of $3 
billion or more, an abbreviated consolidated pro forma balance sheet 
for the acquiring bank holding company as of the most recent quarter 
showing credit and debit adjustments that reflect the proposed 
transaction, consolidated pro forma risk-based capital ratios for the 
acquiring bank holding company as of the most recent quarter, a 
description of the purchase price and the terms and sources of funding 
for the transaction, and the total revenue and net income of the 
company to be acquired; or
    (2) If the bank holding company has consolidated assets of less 
than $3 billion, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, a description of the purchase price and the terms 
and sources of funding for the transaction and the sources and schedule 
for retiring any debt incurred in the transaction, and the total 
assets, off-balance sheet items, revenue and net income of the company 
to be acquired;
    (B) If the acquiring bank holding company is a qualifying community 
banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter), an abbreviated consolidated pro forma 
balance sheet for the acquiring bank holding company as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, consolidated pro forma leverage ratio for the 
acquiring bank holding company as of the most recent quarter, a 
description of the purchase price and the terms and sources of funding 
for the transaction, and the total revenue and net income of the 
company to be acquired;
    (C) For each insured depository institution (that is not a 
qualifying community banking organization (as defined in Sec.  217.12 
of this chapter) that is subject to the community bank leverage ratio 
framework (as defined in Sec.  217.12 of this chapter)) whose Tier 1 
capital, total capital, total assets or risk-weighted assets change as 
a result of the transaction, the total risk-weighted assets, total 
assets, Tier 1 capital and total capital of the institution on a pro 
forma basis; and
    (D) For each insured depository institution that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter) whose Tier 1 capital (as 
defined in Sec.  217.2 of this chapter and calculated in accordance 
with Sec.  217.12(b) of this chapter) or total assets change as a 
result of the transaction, the total assets and Tier 1 capital of the 
institution on a pro forma basis;
* * * * *
    (c) * * *
    (5) * * *
    (i) In general--(A) Limited growth. Except as provided in 
paragraphs (c)(5)(ii) and (iii) of this section, the sum of aggregate 
risk-weighted assets to be acquired in the proposal and the aggregate 
risk-weighted assets acquired by the acquiring bank holding company in 
all other qualifying transactions does not exceed 35 percent of the 
consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of paragraph (c)(5) of this section, ``other 
qualifying transactions'' means any transaction approved under this 
section or Sec.  225.14 during the 12 months prior to filing the notice 
under this section;
    (B) Consideration paid. Except as provided in paragraph (c)(5)(iii) 
of this section, the gross consideration to be paid by the acquiring 
bank holding company in the proposal does not exceed 15 percent of the 
consolidated Tier 1 capital of the acquiring bank holding company; and
    (C) Individual size limitation. Except as provided in paragraph 
(c)(5)(iii) of this section, the total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
* * * * *
    (iii) Qualifying community banking organizations. Paragraphs 
(c)(5)(i)(A) through (C) of this section shall not apply if:
    (A) The acquiring bank holding company is a qualifying community

[[Page 61801]]

banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter); and
    (B) The sum of the total assets to be acquired in the proposal and 
the total assets acquired by the acquiring bank holding company in all 
other qualifying transactions does not exceed 35 percent of the average 
total consolidated assets (as used in Sec.  217.12 of this chapter) of 
the acquiring bank holding company as last reported to the Board;
    (C) The gross consideration to be paid by the acquiring bank 
holding company in the proposal does not exceed 15 percent of the Tier 
1 capital (as defined in Sec.  217.2 of this chapter and calculated in 
accordance with Sec.  217.12(b) of this chapter) of the acquiring bank 
holding company; and
    (D) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
    (e) Qualifying community banking organizations. For purposes of 
this section, a qualifying community banking organization (as defined 
in Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter) 
controls total risk-weighted assets equal to the qualifying community 
banking organization's average total consolidated assets (as used in 
Sec.  217.12 of this chapter) as last reported to its primary banking 
supervisor.

0
49. Section 225.24 is amended by revising paragraphs (a)(2)(iv)(B) and 
(a)(2)(vi) to read as follows:


Sec.  225.24   Procedures for other nonbanking proposals.

    (a) * * *
    (2) * * *
    (iv) * * *
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring bank holding company as of the most 
recent quarter (or, in the case of a qualifying community banking 
organization (as defined in Sec.  217.12 of this chapter) that is 
subject to the community bank leverage ratio framework (as defined in 
Sec.  217.12 of this chapter), consolidated pro forma leverage ratio 
calculations under Sec.  217.12 of this chapter for the acquiring bank 
holding company as of the most recent quarter); and
* * * * *
    (vi)(A) For each insured depository institution (that is not a 
qualifying community banking organization (as defined in Sec.  217.12 
of this chapter) that is subject to the community bank leverage ratio 
framework (as defined in Sec.  217.12 of this chapter)) whose Tier 1 
capital, total capital, total assets or risk-weighted assets change as 
a result of the transaction, the total risk-weighted assets, total 
assets, Tier 1 capital and total capital of the institution on a pro 
forma basis; and
    (B) For each insured depository institution that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter) whose Tier 1 capital (as 
defined in Sec.  217.2 of this chapter and calculated in accordance 
with Sec.  217.12(b) of this chapter) or total assets change as a 
result of the transaction, the total assets and Tier 1 capital of the 
institution on a pro forma basis;
* * * * *

0
50. Section 225.87 is amended by adding paragraph (b)(4)(iv) to read as 
follows:


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

* * * * *
    (b) * * *
    (4) * * *
    (iv) For purposes of this paragraph (b)(4), a financial holding 
company that is a qualifying community banking organization (as defined 
in Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter) 
calculates its Tier 1 capital (as defined in Sec.  217.2 of this 
chapter) in accordance with Sec.  217.12(b) of this chapter.

0
51. Section 225.174 is amended by adding paragraph (d) to read as 
follows:


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

* * * * *
    (d) Qualifying community banking organizations. For purposes of 
this section, a financial holding company that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter) calculates its Tier 1 
capital (as defined in Sec.  217.2 of this chapter) in accordance with 
Sec.  217.12(b) of this chapter.

0
52. Section 225.175 is amended by adding paragraph (c)(3) to read as 
follows:


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

* * * * *
    (c) * * *
    (3) Qualifying community banking organizations. For purposes of 
this paragraph (c), a financial holding company that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter) calculates its Tier 1 
capital (as defined in Sec.  217.2 of this chapter) in accordance with 
Sec.  217.12(b) of this chapter.

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

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

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


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


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

* * * * *
    (c) * * *
    (2) * * *
    (iii) * * *
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring savings and loan holding company as of 
the most recent quarter (or, in the case of a qualifying community 
banking organization (as defined in Sec.  217.12 of this chapter) that 
is subject to the community bank leverage ratio framework (as defined 
in Sec.  217.12 of this chapter), consolidated pro forma leverage ratio 
calculations for the acquiring savings and loan holding company as of 
the most recent quarter); and
* * * * *
    (v)(A) For each insured depository institution (that is not a 
qualifying community banking organization (as defined in Sec.  217.12 
of this chapter) that is subject to the community bank leverage ratio 
framework (as defined in Sec.  217.12 of this chapter)) whose Tier 1 
capital, total capital, total assets or risk-weighted assets change as 
a result of the transaction, the total risk-weighted assets, total 
assets, Tier 1 capital, and total capital of the institution on a pro 
forma basis; and
    (B) For each insured depository institution that is a qualifying 
community banking organization (as defined in Sec.  217.12 of this 
chapter) that is subject to the community bank leverage ratio framework 
(as defined in Sec.  217.12 of this chapter), whose Tier 1 capital (as 
defined in Sec.  217.2 of this

[[Page 61802]]

chapter and calculated in accordance with Sec.  217.12(b) of this 
chapter) or total assets change as a result of the transaction, the 
total assets and Tier 1 capital of the institution on a pro forma 
basis;
* * * * *

PART 251--CONCENTRATION LIMIT (REGULATION XX)

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

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


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


Sec.  251.3   Concentration limit.

* * * * *
    (c) * * *
    (2) U.S. company not subject to applicable risk-based capital 
rules. For a U.S. company that is not subject to applicable risk-based 
capital rules (other than a qualifying community banking organization 
(as defined in Sec.  217.12 of this chapter) that is subject to the 
community bank leverage ratio framework (as defined in Sec.  217.12 of 
this chapter)), consolidated liabilities are equal to the total 
liabilities of such company on a consolidated basis, as determined 
under applicable accounting standards.
    (3) Qualifying community banking organizations. For a U.S. company 
that is a qualifying community banking organization (as defined in 
Sec.  217.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  217.12 of this chapter), 
consolidated liabilities are equal to:
    (i) Average total consolidated assets (as used in Sec.  217.12 of 
this chapter) of the company as last reported on the qualifying 
community banking organization's applicable regulatory filing with the 
qualifying community banking organization's appropriate Federal banking 
agency; minus
    (ii) The company's tier 1 capital (as defined in Sec.  217.2 of 
this chapter and calculated in accordance with Sec.  217.12(b) of this 
chapter).
* * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

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

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

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

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


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


Sec.  324.10  Minimum capital requirements.

    (a) Minimum capital requirements. (1) An FDIC-supervised 
institution must maintain the following minimum capital ratios:
    (i) A common equity tier 1 capital ratio of 4.5 percent.
    (ii) A tier 1 capital ratio of 6 percent.
    (iii) A total capital ratio of 8 percent.
    (iv) A leverage ratio of 4 percent.
    (v) For advanced approaches FDIC-supervised institutions or for 
Category III FDIC-regulated institutions, a supplementary leverage 
ratio of 3 percent.
    (vi) For state savings associations, a tangible capital ratio of 
1.5 percent.
    (2) A qualifying community banking organization (as defined in 
Sec.  324.12), that is subject to the community bank leverage ratio 
framework (as defined in Sec.  324.12), is considered to have met the 
minimum capital requirements in this paragraph (a).
* * * * *

0
59. Section 324.12 is added to read as follows:


Sec.  324.12  Community bank leverage ratio framework.

    (a) Community bank leverage ratio framework. (1) Notwithstanding 
any other provision in this part, a qualifying community banking 
organization that has made an election to use the community bank 
leverage ratio framework under paragraph (a)(3) of this section shall 
be considered to have met the minimum capital requirements under Sec.  
324.10, the capital ratio requirements for the well capitalized capital 
category under Sec.  324.403(b)(1) of this part, and any other capital 
or leverage requirements to which the qualifying community banking 
organization is subject, if it has a leverage ratio greater than 9 
percent.
    (2) For purposes of this section, a qualifying community banking 
organization means an FDIC-supervised institution that is not an 
advanced approaches FDIC-supervised institution and that satisfies all 
of the following criteria:
    (i) Has a leverage ratio of greater than 9 percent;
    (ii) Has total consolidated assets of less than $10 billion, 
calculated in accordance with the reporting instructions to the Call 
Report as of the end of the most recent calendar quarter;
    (iii) Has off-balance sheet exposures of 25 percent or less of its 
total consolidated assets as of the end of the most recent calendar 
quarter, calculated as the sum of the notional amounts of the exposures 
listed in paragraphs (a)(2)(iii)(A) through (I) of this section, 
divided by total consolidated assets, each as of the end of the most 
recent calendar quarter:
    (A) The unused portion of commitments (except for unconditionally 
cancellable commitments);
    (B) Self-liquidating, trade-related contingent items that arise 
from the movement of goods;
    (C) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit;
    (D) Sold credit protection through guarantees and credit 
derivatives;
    (E) Credit-enhancing representations and warranties;
    (F) Securities lent and borrowed, calculated in accordance with the 
reporting instructions to the Call Report;
    (G) Financial standby letters of credit;
    (H) Forward agreements that are not derivative contracts; and
    (I) Off-balance sheet securitization exposures; and
    (iv) Has total trading assets and trading liabilities, calculated 
in accordance with the reporting instructions to the Call Report of 5 
percent or less of the FDIC-supervised institution's total consolidated 
assets, each as of the end of the most recent calendar quarter.
    (3)(i) A qualifying community banking organization may elect to use 
the community bank leverage ratio framework if it makes an opt-in 
election under this paragraph (a)(3).
    (ii) For purposes of this paragraph (a)(3), a qualifying community 
banking organization makes an election to use the community bank 
leverage ratio framework by completing the applicable reporting 
requirements of its Call Report.
    (iii)(A) A qualifying community banking organization that has 
elected to use the community bank leverage ratio framework may opt out 
of the

[[Page 61803]]

community bank leverage ratio framework by completing the applicable 
risk-based and leverage ratio reporting requirements necessary to 
demonstrate compliance with Sec.  324.10(a)(1) in its Call Report or by 
otherwise providing the information to the FDIC.
    (B) A qualifying community banking organization that opts out of 
the community bank leverage ratio framework pursuant to paragraph 
(a)(3)(iii)(A) of this section must comply with Sec.  324.10(a)(1) 
immediately.
    (b) Calculation of the leverage ratio. A qualifying community 
banking organization's leverage ratio is calculated in accordance to 
Sec.  324.10(b)(4), except that a qualifying community banking 
organization is not required to:
    (1) Make adjustments and deductions from tier 2 capital for 
purposes of Sec.  324.22(c); or
    (2) Calculate and deduct from tier 1 capital an amount resulting 
from insufficient tier 2 capital under Sec.  324.22(f).
    (c) Treatment when ceasing to meet the qualifying community banking 
organization requirements. (1) Except as provided in paragraphs (c)(5) 
and (6) of this section, if an FDIC-supervised institution ceases to 
meet the definition of a qualifying community banking organization, the 
FDIC-supervised institution has two reporting periods under its Call 
Report (grace period) either to satisfy the requirements to be a 
qualifying community banking organization or to comply with Sec.  
324.10(a)(1) and report the required capital measures under Sec.  
324.10(a)(1) on its Call Report.
    (2) The grace period begins as of the end of the calendar quarter 
in which the FDIC-supervised institution ceases to satisfy the criteria 
to be a qualifying community banking organization provided in paragraph 
(a)(2) of this section. The grace period ends on the last day of the 
second consecutive calendar quarter following the beginning of the 
grace period.
    (3) During the grace period, the FDIC-supervised institution 
continues to be treated as a qualifying community banking organization 
for the purpose of this part and must continue calculating and 
reporting its leverage ratio under this section unless the FDIC-
supervised institution has opted out of using the community bank 
leverage ratio framework under paragraph (a)(3) of this section.
    (4) During the grace period, the qualifying community banking 
organization continues to be considered to have met the minimum capital 
requirements under Sec.  324.10(a)(1), the capital ratio requirements 
for the well capitalized capital category under Sec.  
324.403(b)(1)(i)(A) through (D) of this part, and any other capital or 
leverage requirements to which the qualifying community banking 
organization is subject and must continue calculating and reporting its 
leverage ratio under this section.
    (5) Notwithstanding paragraphs (c)(1) through (4) of this section, 
an FDIC-supervised institution that no longer meets the definition of a 
qualifying community banking organization as a result of a merger or 
acquisition has no grace period and immediately ceases to be a 
qualifying community banking organization. Such an FDIC-supervised 
institution must comply with the minimum capital requirements under 
Sec.  324.10(a)(1) and must report the required capital measures under 
Sec.  324.10(a)(1) for the quarter in which it ceases to be a 
qualifying community banking organization.
    (6) Notwithstanding paragraphs (c)(1) through (4) of this section, 
an FDIC-supervised institution that has a leverage ratio of 8 percent 
or less does not have a grace period and must comply with the minimum 
capital requirements under Sec.  324.10(a)(1) and must report the 
required capital measures under Sec.  324.10(a)(1) for the quarter in 
which it reports a leverage ratio of 8 percent or less.

0
60. Section 324.22 is amended by revising paragraph (f) to read as 
follows:


Sec.  324.22  Regulatory capital adjustments and deductions.

* * * * *
    (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 required deduction after 
completing the deductions required under paragraph (d) of this section, 
the FDIC-supervised institution must deduct the shortfall from the next 
higher (that is, more subordinated) component of regulatory capital. 
Notwithstanding any other provision of this section, a qualifying 
community banking organization (as defined in Sec.  324.12) that has 
elected to use the community bank leverage ratio framework pursuant to 
Sec.  324.12 is not required to deduct any shortfall of tier 2 capital 
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *

0
61. Section 324.403 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  324.403   Capital measures and capital categories.

    (a) Capital measures. (1) For purposes of section 38 of the FDI Act 
and this subpart H, the relevant capital measures are:
    (i) Total Risk-Based Capital Measure: The total risk-based capital 
ratio;
    (ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based 
capital ratio;
    (iii) Common Equity Tier 1 Capital Measure: The common equity tier 
1 risk-based capital ratio; and
    (iv) Leverage Measure:
    (A) The leverage ratio; and
    (B) With respect to an advanced approaches FDIC-supervised 
institutions, on January 1, 2018, and thereafter, the supplementary 
leverage ratio.
    (2) For a qualifying community banking organization (as defined 
under Sec.  324.12), that has elected to use the community bank 
leverage ratio framework (as defined under Sec.  324.12), the leverage 
ratio calculated in accordance with Sec.  324.12(b) is used to 
determine the well capitalized capital category under paragraph 
(b)(1)(i) (A) through (D) of this section.
    (b) Capital categories. For purposes of section 38 of the FDI Act 
and this subpart, an FDIC-supervised institution shall be deemed to be:
    (1)(i) ``Well capitalized'' if:
    (A) Total Risk-Based Capital Measure: The FDIC-supervised 
institution has a total risk-based capital ratio of 10.0 percent or 
greater; and
    (B) Tier 1 Risk-Based Capital Measure: The FDIC-supervised 
institution has a tier 1 risk-based capital ratio of 8.0 percent or 
greater; and
    (C) Common Equity Tier 1 Capital Measure: The FDIC-supervised 
institution has a common equity tier 1 risk-based capital ratio of 6.5 
percent or greater; and
    (D) The FDIC-supervised institution has a leverage ratio of 5.0 
percent or greater; and
    (E) The FDIC-supervised institution is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the FDIC pursuant to section 8 of the FDI Act (12 
U.S.C. 1818), the International Lending Supervision Act of 1983 (12 
U.S.C. 3907), or the Home Owners' Loan Act (12 U.S.C. 
1464(t)(6)(A)(ii)), or section 38 of the FDI Act (12 U.S.C. 1831o), or 
any regulation thereunder, to meet and maintain a specific capital 
level for any capital measure.
    (ii) Beginning on January 1, 2018 and thereafter, an FDIC-
supervised institution that is a subsidiary of a covered BHC will be 
deemed to be well capitalized if the FDIC-supervised

[[Page 61804]]

institution satisfies paragraphs (b)(1)(i) (A) through (E) of this 
section and has a supplementary leverage ratio of 6.0 percent or 
greater. For purposes of this paragraph, a covered BHC means a U.S. 
top-tier bank holding company with more than $700 billion in total 
assets as reported on the company's most recent Consolidated Financial 
Statement for Bank Holding Companies (Form FR Y-9C) or more than $10 
trillion in assets under custody as reported on the company's most 
recent Banking Organization Systemic Risk Report (Form FR Y-15).
    (iii) A qualifying community banking organization, as defined under 
Sec.  324.12, that has elected to use the community bank leverage ratio 
framework under Sec.  324.12 shall be considered to have met the 
capital ratio requirements for the well capitalized capital category in 
paragraph (b)(1)(i)(A) through (D) of this section.
* * * * *

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

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

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


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


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

* * * * *
    (b) * * *
    \1\ For the purposes of Sec.  337.3, an insured nonmember bank's 
capital and unimpaired surplus shall have the same meaning as found in 
Sec.  215.2(f) of Federal Reserve Board Regulation O (Sec.  215.2(f) of 
this chapter). For a qualifying community banking organization (as 
defined in Sec.  324.12 of this chapter) that is subject to the 
community bank leverage ratio framework (as defined in Sec.  324.12 of 
this chapter), capital and unimpaired surplus shall mean the FDIC-
supervised institution's tier 1 capital (as defined in Sec.  324.2 of 
this chapter) plus adjusted allowances for credit losses or allowances 
for loan and lease losses, as applicable (as defined in Sec.  324.2 of 
this chapter).
* * * * *

PART 365--REAL ESTATE LENDING STANDARDS

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

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


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

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

* * * * *
Loans in Excess of the Supervisory Loan-to-Value-Limits
    \4\ For state non-member banks and state savings associations, 
``total capital'' refers to that term described in Sec.  324.2 of this 
chapter. For a qualifying community banking organization (as defined in 
Sec.  324.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  324.12 of this chapter), 
``total capital'' refers to the FDIC-supervised institution's tier 1 
capital, as defined in Sec.  324.2 of this chapter.
* * * * *

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

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

    Authority:  12 U.S.C. 1819.


0
67. Section 390.344 is amended by revising the definition of 
``Capital'' to read as follows:


Sec.  390.344   Definitions applicable to capital distributions.

* * * * *
    Capital means total capital, as computed under part 324 of this 
chapter. For a qualifying community banking organization (as defined in 
Sec.  324.12 of this chapter) that is subject to the community bank 
leverage ratio framework (as defined in Sec.  324.12 of this chapter), 
total capital means the FDIC-supervised institution's tier 1 capital, 
as defined under Sec.  324.2 of this chapter and calculated in 
accordance with Sec.  324.12(b) of this chapter.
* * * * *

    Dated: September 17, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 7, 2019.
E. Misback,
Deputy Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on September 17, 2019.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2019-23472 Filed 11-12-19; 8:45 am]
 BILLING CODE P

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