Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and Stress Test Rules, 15576-15605 [2020-04838]

Download as PDF 15576 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations FEDERAL RESERVE SYSTEM 12 CFR Parts 217, 225, and 252 [Docket No. R–1603] RIN 7100–AF02 Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and Stress Test Rules SUPPLEMENTARY INFORMATION: Board of Governors of the Federal Reserve System (Board). ACTION: Final rule. AGENCY: jbell on DSKJLSW7X2PROD with RULES2 Table of Contents The Board is adopting a rule (final rule) that simplifies the Board’s capital framework while preserving strong capital requirements for large firms. The final rule would integrate the Board’s regulatory capital rule (capital rule) with the Comprehensive Capital Analysis and Review (CCAR), as implemented through the Board’s capital plan rule (capital plan rule). The final rule makes amendments to the capital rule, capital plan rule, stress test rules, and Stress Testing Policy Statement. Under the final rule, the Board will use the results of its supervisory stress test to establish the size of a firm’s stress capital buffer requirement, which replaces the static 2.5 percent of risk-weighted assets component of a firm’s capital conservation buffer requirement. Through the integration of the capital rule and CCAR, the final rule would remove redundant elements of the current capital and stress testing frameworks that currently operate in parallel rather than together, including the CCAR quantitative objection and the assumption that a firm makes all capital actions under stress. The final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations that have $100 billion or more in total consolidated assets. DATES: Effective May 18, 2020. FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Senior Associate Director, (202) 263–4833, Constance Horsley, Deputy Associate Director, (202) 452–5239, Juan Climent, Manager (202) 872–7526, Andrew Willis, Lead Financial Institution Policy Analyst, (202) 912– 4323, Christopher Appel, Senior Financial Institution Policy Analyst II, (202) 973–6862, Hillel Kipnis, Senior Financial Institution Policy Analyst II, (202) 452–2924, and Palmer Osteen, Financial Institution Policy Analyst, (202) 785–6025, Division of Supervision and Regulation; Benjamin McDonough, Assistant General Counsel, (202) 452– 2036, Julie Anthony, Senior Counsel, (202) 475–6682, Mark Buresh, Senior SUMMARY: VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 Counsel, (202) 452–5270, Asad Kudiya, Senior Counsel, (202) 475–6358, or Mary Watkins, Senior Attorney, (202) 452–3722, Legal Division, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD) only, call (202) 263–4869. I. Introduction II. Background and Overview of the Final Rule A. Background on the Stress Testing and Regulatory Capital Frameworks B. Overview of the Proposed Rule and Summary of Comments C. Overview of the Final Rule III. The Stress Capital Buffer Requirement A. Assumptions, Methodologies and Calculation Mechanics Used in Determining the Stress Capital Buffer Requirement i. Capital Distribution Assumptions ii. Balance Sheet Assumptions iii. Business Plan Changes iv. Calculation Mechanics B. Volatility of Capital Requirements and Severity of Scenarios i. Predictability of Capital Requirements and Stress Test Scenario Volatility ii. Abruptness of Buffer Restrictions C. Stress Leverage Buffer D. Effective Dates for Stress Capital Buffer Requirement IV. Changes to the Capital Plan Rule A. Quantitative Objection B. Requirements for a Firm’s Planned Capital Distributions C. Elimination of Prior Approval D. Timeline for Reviewing Capital Plans and Calculating the Stress Capital Buffer Requirement E. Request for Reconsideration F. Capital Plan Resubmission and Circumstances Warranting Recalculation of the Stress V. Changes to the Capital Rule and Mechanics of Distribution Limitations VI. Changes to the Stress Test Rules VII. Impact Analysis VIII. Changes to Regulatory Reports IX. Administrative Law Matters A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Use of Plain Language I. Introduction Over the past ten years, stress testing has become a fundamental element of the Federal Reserve’s supervision program for large banking organizations. In the same time period, the Board has strengthened the ongoing regulatory capital requirements applicable to these firms. On April 10, 2018, the Board issued a proposal to simplify its stress testing and regulatory capital frameworks with the introduction of the stress capital buffer requirement (the PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 proposal).1 This final rule adopts the stress capital buffer requirement set forth in the proposal with certain adjustments. As in the proposal, the Board will use the results of its supervisory stress test to determine a firm’s stress capital buffer requirement. A firm’s stress capital buffer requirement, which varies based on a firm’s risk, replaces the fixed 2.5 percent of risk-weighted assets portion of its capital conservation buffer requirement. A firm that does not maintain capital ratios above its minimums plus its buffer requirements faces restrictions on its capital distributions and discretionary bonus payments. This approach integrates CCAR with the capital rule, simplifies the Board’s overall approach to capital regulation, and preserves strong capital requirements. Separate from the final rule, the Board intends to propose at a future date modifications to further simplify and increase the transparency of the stress testing framework. II. Background and Overview of the Final Rule A. Background on the Stress Testing and Regulatory Capital Frameworks At the height of the 2008–2009 financial crisis, the Board created the Supervisory Capital Assessment Program (SCAP) as a way to help restore confidence in the largest U.S. banking organizations. SCAP estimated potential losses at those firms assuming that economic and financial conditions worsened. Building on the success of SCAP, the Board implemented the capital plan rule, which requires the largest firms to develop and maintain capital plans supported by robust processes for assessing their capital adequacy. The CCAR exercise established a quantitative assessment of firms’ capital adequacy for all subject firms and a qualitative assessment of the capital planning practices of the largest and most complex firms’ capital planning practices. The quantitative assessment includes an evaluation of firms’ capital adequacy and their ability to continue to lend and absorb potential losses under severely adverse conditions. Under the CCAR quantitative evaluation, a firm is required to demonstrate the ability to maintain capital ratios above the minimum requirements under stress, taking into account nine quarters of planned capital distributions. In the qualitative assessment, the Federal Reserve evaluated how the largest and most complex firms identify, measure, 1 See E:\FR\FM\18MRR2.SGM 80 FR 18160 (April 25, 2018). 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 and determine capital needs for their material risks. At the same time that the Board was building the stress testing program, it was also making changes to its capital rule to address weaknesses observed during the 2008–2009 financial crisis.2 These changes included the establishment of a minimum common equity tier 1 (CET1) capital requirement and a fixed capital conservation buffer equal to 2.5 percent of risk-weighted assets.3 Large banking organizations also became subject to a countercyclical capital buffer requirement, and the largest and most systemically important firms—global systemically important bank holding companies, or GSIBs— became subject to an additional capital buffer based on a measure of their systemic risk, the GSIB surcharge.4 The capital rule’s buffer requirements impose increasingly strict automatic limits on capital distributions as a firm’s capital ratios decline toward the minimum requirements. For example, a firm in the bottom quartile of its capital conservation buffer may not make any capital distributions without prior approval from the Board. Stress testing and stronger capital requirements have significantly improved the resilience of the U.S. banking system. The common equity capital ratios of firms subject to CCAR have more than doubled since 2009. Combined, these firms hold more than $1 trillion of CET1 capital. Notwithstanding these important improvements, the Board believes it is prudent to periodically review its regulations to ensure they are achieving their goals in an effective and efficient manner. Importantly, although the capital plan rule and the capital rule share similar goals, they were developed separately, and this has led to certain significant redundancies in the Board’s capital framework. In keeping with other recent efforts to improve the efficiency and risk-sensitivity of its regulations, the Board is adopting this final rule to integrate the overlapping requirements in the capital plan rule and the capital rule to increase the efficiency and simplicity of the Board’s capital framework while maintaining its risk sensitivity and improvements in capital adequacy. B. Overview of the Proposed Rule and Summary of Comments Under the proposed rule, for each firm subject to the capital plan rule, the Board would have calculated a stress 2 See 12 CFR part 217. 12 CFR 217.11. 4 See 80 FR 49082 (August 14, 2015). 3 See VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 capital buffer requirement based on the results of the supervisory stress test and four quarters of planned common stock dividends. The stress capital buffer requirement would have replaced the fixed 2.5 percent component of a firm’s capital conservation buffer requirement. The proposal also would have introduced a stress leverage buffer on top of the 4 percent minimum leverage ratio requirement for firms subject to the capital plan rule. A firm’s stress capital buffer requirement would have been ‘‘floored’’ at 2.5 percent of risk-weighted assets, whereas the stress leverage buffer requirement would not have included a floor. A firm would have been required to maintain risk-based and leveragebased capital ratios above its buffer requirements in order to avoid restrictions on its capital distributions and certain discretionary bonus payments. The proposal also would have made changes to the Board’s capital plan and stress test rules and related policy statements, and would have eliminated: (1) The assumption that a firm would make all planned capital distributions over the planning horizon, (2) the assumption that a firm’s balance sheet assets would increase over the planning horizon, (3) the quantitative objection in CCAR; and (4) the 30 percent dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan. The Board received twenty-six comments on the proposal from banking organizations, public interest groups, private individuals, and other interested parties. Many commenters were supportive of the proposal’s goal of integrating CCAR and the Board’s capital rule. Commenters had mixed views, however, on the calibration of the stress capital buffer requirement, the need for a stress leverage buffer, the proposed changes to the assumptions in the Board’s stress testing framework, and the flexibility provided to firms in their capital planning.5 Some commenters asserted that the proposed stress capital buffer requirement was too stringent, particularly when combined with the GSIB surcharge and the countercyclical capital buffer, and suggested alternatives. Other commenters asserted that it was important for the Federal Reserve to not take action that would lower capital requirements for any firm given improvements in capital since the 2008–2009 financial crisis and that the 5 The Board received a number of comments that were outside of the scope of the proposal. In particular, commenters recommended further revisions related to the U.S. GSIB capital surcharge rule, total loss absorbing capacity rule, and current expected credit losses standard. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 15577 Board should retain the assumption that firms make nine quarters of dividends and share repurchases in the stress test. Some commenters urged the Board to eliminate the proposed stress leverage buffer requirement, noting that its inclusion adds complexity to capital requirements and is inconsistent with the role of the leverage ratio as a backstop to risk-based capital requirements. These commenters were concerned that the proposed stress leverage buffer requirement would increase the probability that a banking organization’s binding post-stress capital constraint would be a leverage requirement rather than a risk-based requirement. Some of these commenters argued that there should be a clearer delineation between the capital framework’s risk-based and non-riskbased measures. Other commenters supported adopting the proposed stress leverage buffer requirement and urged the Board to retain a post-stress capital requirement for the supplementary leverage ratio to maintain the practice of evaluating off-balance sheet exposures in the supervisory stress test. Regarding the proposed changes to the assumptions in the stress test, some commenters argued that the Board should not include four quarters of common stock dividends in the stress capital buffer requirement because the capital rule already contains a distribution limitation mechanism to restrict a firm from making dividend payments if its capital ratios were at or below its minimums plus buffer requirements. Other commenters argued that not only should the Board include four quarters of dividends in the stress capital buffer requirement, but that the Board also should retain its assumption that a firm makes nine quarters of share repurchases and dividends as certain firms made dividend payments and executed share repurchases well into the beginning of the 2008–2009 financial crisis. Several commenters supported the proposed modifications to the balance sheet growth assumptions. Other commenters asserted that the Board should assume that trading assets would decline under stress, as such a reduction would align with reasonable expectations under stress. Still other commenters disagreed with the proposed modification to the balance sheet growth assumptions, as the current assumption that balance sheet assets would grow over the planning horizon helped to ensure that firms can lend and support the real economy during stress. These commenters were concerned that the proposed revisions would not ensure that banks would E:\FR\FM\18MRR2.SGM 18MRR2 15578 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations continue their credit intermediation function during a recession. Some commenters asserted that, in light of the proposal integrating CCAR with the capital rule, the Board should address the potential volatility of Board’s stress testing framework, including revising the Board’s scenario design process and revising the definition of eligible retained income in the capital rule to ensure that the distribution restrictions in the capital rule gradually restrict a firm’s ability to make capital distributions. Finally, regarding the ability of a firm to make distributions in excess of those in its capital plan, some commenters supported allowing the firm to exceed its planned capital distributions if its capital ratios were above those projected in the bank holding company baseline scenario projections.6 Others recommended allowing a firm to increase its planned capital distributions without prior approval from the Board as long as the firm did not exceed the distributions permitted under the capital rule’s capital conservation buffer requirement. Other commenters supported maintaining the requirement that a firm seek approval from the Board before making capital distributions in excess of those in its capital plan, arguing that removing this requirement would weaken capital standards by allowing banks additional leeway in making capital distributions. jbell on DSKJLSW7X2PROD with RULES2 C. Overview of the Final Rule The final rule integrates the capital plan rule and the capital rule by using the results of the supervisory stress test to establish a firm’s stress capital buffer requirement and establish a unified approach to capital distribution limitations. Specifically, a firm’s stress capital buffer requirement is calculated as: (1) The difference between the firm’s starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test (stress test losses) plus (2) the sum of the dollar amount of the firm’s planned common stock dividends for each of the fourth through seventh quarters of the planning horizon as a percentage of riskweighted assets (dividend add-on).7 A firm must maintain capital ratios above the sum of its minimum requirements and buffer requirements in order to 6 The capital plan rule requires firms to submit a request to the Board for approval of a capital distribution that exceeds the amount of capital distributions described in a firm’s annual capital plan submission. 7 The planning horizon is the period of at least nine consecutive quarters over which the relevant projections extend, beginning with the quarter preceding the quarter in which the firm submits its capital plan. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 avoid restrictions on capital distributions and discretionary bonus payments. In a change from the proposal, the final rule does not include a stress leverage buffer requirement in order to maintain a clear distinction between the capital framework’s risk-based and nonrisk-based capital requirements. In addition, to address the potential volatility of the stress capital buffer requirement and to ensure that the distribution limitations in the capital rule work as intended, the final rule revises the definition of eligible retained income to a quarterly average net income measure under certain conditions. The final rule adjusts the distribution assumptions used in CCAR by no longer presuming that a firm will make all planned capital distributions, including common stock dividends and repurchases, over the nine-quarter planning horizon. Instead, a firm’s stress capital buffer requirement includes four quarters of planned common stock dividends (in the fourth through seventh quarters of the nine-quarter planning horizon). In a change from the proposal, to simplify the calculation of the dividend add-on and to create consistency between the calculation of the dividend add-on and the portion of the stress capital buffer requirement attributable to the decline in CET1 ratios, the Board will no longer calculate the dividend add-on as the sum of the ratios of the dollar amount of the firm’s planned common stock dividends divided by the projected risk-weighted assets for each of the fourth through seventh quarters of the planning horizon. Instead the divided-add-on will be calculated by dividing the sum of the four quarters of planned common stock dividends by the projected riskweighted assets from the quarter in which the firm’s projected CET1 capital ratio reaches its minimum in the supervisory stress test. In addition, the final rule adjusts the methodology used in the supervisory stress test to assume that a firm takes actions to maintain a constant level of assets, including loans, trading assets, and securities over the planning horizon. In a change from the proposal, to simplify the stress test and to avoid potentially double-counting the impact of a merger or acquisition, the stress capital buffer requirement in the final rule does not include the projected impact of material business plan changes. Instead, any impact of these business changes will be reflected in a firm’s ongoing capital ratios once the business plan change is consummated. As in current CCAR, the Board may PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 require a firm to resubmit its capital plan and recalculate the firm’s stress capital buffer requirement in the event of material business changes. The final rule also modifies certain elements in CCAR to further the goal of establishing a unified approach to capital distribution limitations. Specifically, the final rule eliminates the once-a-year quantitative objection process, given the integration of stresstest results into the stress capital buffer requirement’s automatic distribution limitations.8 Relatedly, the final rule eliminates the 30 percent dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan. Finally, while the final rule continues to require a firm to describe its planned capital distributions in a capital plan, a firm is no longer required to seek prior approval if it makes capital distributions in excess of those included in its capital plan (so long as the firm is otherwise in compliance with the capital rule’s automatic restrictions on distributions). This approach harmonizes the approach to capital distributions in the capital plan rule and the capital rule. A similar change was made to provide additional flexibility in the ‘‘adjustment process’’ to permit a firm to increase its planned capital distributions upon receipt of its initial stress capital buffer requirement.9 III. The Stress Capital Buffer Requirement This section describes the calculation of the stress capital buffer requirement, including its calibration, and the changes to the assumptions in the Board’s stress testing framework. The final rule adopts the calculation of the stress capital buffer requirement as proposed. It also includes a revised definition of eligible retained income, which affects how the stress capital buffer requirement limits capital distributions. As discussed below, and in response to comments, the final rule does not include a stress leverage buffer requirement. 8 In March 2019, the Board eliminated the CCAR qualitative objection for most firms. 84 FR 8953 (March 13, 2019). Specifically, a firm that participates in four assessments and successfully passes the qualitative evaluation in the fourth year is no longer subject to a potential qualitative objection. 9 Upon completion of the supervisory stress test, the Federal Reserve will provide each firm with the results of its post-stress capital analysis, and each firm will have an opportunity to make a one-time adjustment to its planned capital actions. E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations A. Assumptions, Methodologies and Calculation Mechanics Used in Determining the Stress Capital Buffer Requirement The calculation of the stress capital buffer requirement generally includes the changes described in the proposal related to capital distribution and balance sheet assumptions. This section discusses the comments received on the proposed calculation of the stress capital buffer requirement and changes made in response to comments. jbell on DSKJLSW7X2PROD with RULES2 i. Capital Distribution Assumptions In its assessment of capital plans through CCAR, the Board assumed that a firm would make all nine quarters of its planned capital distributions, including dividend payments and share repurchases, under stress. The proposal would have modified this assumption to no longer assume that a firm made these planned capital distributions but, instead, would have included four quarters of planned common stock dividends in the calculation of the stress capital buffer requirement. In addition, the proposal would have eliminated the 30 percent dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan. Commenters generally were supportive of the proposal to eliminate all nine quarters of planned capital distributions. Several commenters similarly were opposed to including four quarters of planned dividends in the calculation of the stress capital buffer requirement, viewing it as unnecessary, complicated, and unduly punitive given the capital rule’s existing automatic restrictions on capital distributions. These commenters asserted that if the Board maintains this requirement, it should allow a firm to continue to pay its planned dividends if the firm’s capital ratios were in the dividend add-on portion of its buffer requirements. In addition, several commenters asserted that the underlying rationale for including four quarters of planned dividends does not apply to U.S. intermediate holding companies of foreign banking organizations given their ownership structures. Other commenters were supportive of including distributions in the calculation of the stress capital buffer requirement to create strong incentives for disciplined, forward-looking capital planning. Some commenters also argued that requiring a four-quarter dividend add-on is arbitrary and inconsistent with historical experience, while other commenters recommended that repurchases and redemptions should VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 also factor into the stress capital buffer requirement. After considering these comments, the Board is adopting the proposed changes to the capital distribution assumptions, as proposed. Although including four quarters of planned common stock dividends in the calculation of a firm’s stress capital buffer requirement adds a level of complexity to the stress capital buffer requirement calculation process, this approach is one way of promoting forward-looking dividend planning given historical experience. During the last financial crisis, many firms continued to make significant distributions of capital, including through dividends, without due consideration of the effects that a prolonged economic downturn could have on their capital adequacy. In addition, the dividend add-on requirement is one way to mitigate the procyclicality of the Board’s stress testing framework, because dividends tend to be higher when the economy is strong and earnings are high.10 To further simplify the Board’s stress test framework, the final rule also removes the 30 percent dividend payout ratio applied as a criterion for heightened supervisory scrutiny of a firm’s capital plan. This criterion was adopted to encourage firms to increase payouts through additional share repurchases rather than dividends. A dividend payout ratio criterion is no longer necessary because the final rule’s automatic distribution limitations, combined with the perceived market signaling effect of dividend cuts, will sufficiently restrict dividend increases in the future. One commenter suggested that the Board include issuances related to employee compensation in the stress capital buffer requirement calculation as an offset to the impact on retained earnings that would be embedded in the stress test results. The final rule does not include most other capital actions in the stress test and excluding employee stock issuances, along with related share repurchases, is consistent with this approach. This approach also will make the stress test results more comparable across firms and more transparent to the public. Similar to other capital actions 10 As in the current supervisory post-stress capital assessment, the Board will continue to assume in the supervisory stress test that a firm will make payments on any instrument that qualifies as additional tier 1 capital or tier 2 capital equal to the stated dividend, or contractual interest or principal due on such instrument during the quarter. Based on supervisory experience, reductions in these payments are generally viewed by market participants as a sign of material weakness, and firms are therefore likely to make them even under stressful conditions (see 12 CFR 217.20(c) and (d)). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 15579 that are not included in the stress test results, in real-time, issuances related to employee compensation increase a firm’s capital ratio and, therefore, impact the firm’s ability to avoid the automatic distribution limitations. For these reasons, the final rule excludes such issuances in the calculation of the stress capital buffer requirement, consistent with the proposal. ii. Balance Sheet Assumption Under the proposal, the Board would have modified its methodology for projecting a firm’s balance sheet in the supervisory stress test. The proposal would have updated the Board’s Stress Testing Policy Statement to include the assumption that a firm takes actions to maintain its current level of assets, including securities, trading assets, and loans, over the planning horizon.11 This assumption would have simplified the current supervisory stress test and also dissuaded firms from planning to reduce credit supply in a stress scenario. In addition, the proposal would have revised the Stress Testing Policy Statement to reflect that, in its projections, the Board would assume that a firm’s risk-weighted assets and leverage ratio denominator remain unchanged over the planning horizon except for changes primarily related to deductions from regulatory capital or changes in the Board’s regulations. Many commenters supported the proposed change to assume that the size of a firm’s balance sheet remains constant over the planning horizon, arguing that this change would make the supervisory projections more realistic. Commenters opposing the proposed change argued that the Federal Reserve should continue to model balance sheet growth, noting that bank balance-sheets have grown during periods of stress and that CCAR should continue to evaluate whether a firm could continue to provide credit and support the real economy. Other commenters suggested that rather than assuming no growth, the Board’s projections should assume that market declines and losses would reduce trading assets and risk-weighted assets. Commenters also requested that the Board require firms to make consistent assumptions in stress tests conducted by the firm. Consistent with the proposal, the final rule revises the Board’s Stress Testing Policy Statement to include the assumption that a firm takes actions to 11 While the Board will assume in the supervisory post-stress capital assessment that a firm’s balance sheet does not grow, in a firm’s company-run stress tests, the Board expects each firm’s projected balance sheet to be consistent with each scenario and the firm’s business strategy. E:\FR\FM\18MRR2.SGM 18MRR2 15580 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations maintain its current level of assets over the planning horizon. Although a firm’s balance sheet may change in different ways in periods of stress, a constant balance sheet assumption simplifies the Board’s stress testing framework, while dissuading firms from planning to reduce credit supply in a stress scenario. jbell on DSKJLSW7X2PROD with RULES2 iii. Business Plan Changes Similar to the Board’s current methodology, the proposal would have reflected the impact of expected changes to a firm’s business plan that are likely to have a material impact on the firm’s capital adequacy and funding profile (material business plan changes) in balance sheet, risk-weighted asset, and leverage ratio denominator projections for purposes of calculating the stress capital buffer requirement.12 One commenter suggested that the Board not reflect the impact of a material business plan change, such as a merger or acquisition, in a firm’s stress capital buffer requirement because the impact would be reflected in the firm’s balance sheet and risk-weighted assets once the merger or acquisition is consummated. This commenter argued that this approach would result in doublecounting the impact of a merger or acquisition. The final rule does not incorporate material business plan changes in a firm’s stress capital buffer requirement. For example, planned issuances of common or preferred stock in connection with a planned merger or acquisition will not be included in the stress capital buffer requirement calculation. In addition, any planned common stock dividends attributable to issuances that would be made in connection with a planned merger or acquisition will also not be included in the stress capital buffer requirement calculation.13 Excluding material business plan changes from the stress capital buffer requirement would simplify the framework and reduce burden. Material changes to a firm’s business plan resulting from a merger or acquisition are incorporated into a firm’s capital and risk-weighted assets 12 A firm’s capital plan must include a discussion of any expected changes to its business plan that are likely to have a material impact on the firm’s capital adequacy or liquidity. See 12 CFR 225.8(e)(2)(iv). 13 Specifically, the dividend add-on portion of a firm’s stress capital buffer requirement will exclude dividends planned for the fourth through seventh quarters of the planning horizon to the extent that these dividends are associated with a material business plan change. To isolate and exclude dividends associated with a material business plan change from other dividends, the Board will rely on information submitted in the capital plans and may collect additional information from firms. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 upon consummation of the transaction. Including these changes in a firm’s stress capital buffer requirement may overstate the impact of the business plan change while also adding complexity associated with predicting the impact of the material change in a firm’s balance sheet. In addition, the final rule would continue to require a firm to include in its capital plan a discussion of any expected changes to the firm’s business plan that are likely to have a material impact on the capital adequacy or liquidity position of the firm. This requirement would help to ensure that a firm appropriately plans for changes to its business. If the material business plan change resulted in or would result in a material change in a firm’s risk profile, the firm would be required to resubmit its capital plan and the Board may determine to recalculate the stress capital buffer requirement based on the resubmitted capital plan. The final rule would make conforming changes to the Board’s stress testing rules to align with exclusion of material business plan changes in the calculation of the stress capital buffer requirement. The final rule also would make conforming changes to the Stress Test Policy Statement. iii. Calculation Mechanics The proposal would have established a firm’s stress capital buffer requirement based on the difference between the firm’s starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test. One commenter argued that the stress capital buffer requirement should be based on absolute dollar values of capital depletion rather than ratios, because a firm’s losses in the stress test do not necessarily correspond to risk-weighted assets or total balancesheet assets. In addition, one commenter argued for more frequent recalibration of a firm’s stress capital buffer requirement.14 To ensure the capital framework is sufficiently risk-sensitive, the stress capital buffer requirement under the final rule is based on projected changes in a firm’s capital ratio.15 Using the change in projected capital ratios, and not the projected dollars of losses, allows a firm’s capital requirements to be sensitive to changes in its riskweighted assets throughout the year. Under this approach, the Federal Reserve assumes that stress losses are 14 See Section IV.F for further discussion on the recalculation of the stress capital buffer requirement. 15 A firm’s stress capital buffer requirement will be calculated up to a single decimal place (e.g.–2.7). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 related to a firm’s risk-weighted assets. Under the commenter’s recommendation, any increase in riskweighted assets during the course of the year would be treated as having zero dollars of losses in the stress test, thereby reducing risk sensitivity of the capital requirements. With respect to frequency of the stress capital buffer requirement calculation, calculating the stress capital buffer requirement with the same frequency as the stress test promotes both stability in capital requirements and risk sensitivity. As discussed in Section IV.F, if a firm experiences or will experience a material change in its risk profile, the Board may determine to recalculate the firm’s stress capital buffer requirement. The Board is therefore adopting the calculation of the stress capital buffer requirement as proposed. B. Volatility of Capital Requirements and Severity of Scenarios i. Predictability of Capital Requirements and Stress Test Scenario Volatility Commenters raised concerns about potential volatility in capital requirements as a result of the Board’s stress testing framework under the proposal. Some commenters suggested calculation changes to limit the yearover-year changes in a firm’s stress capital buffer requirement. Another commenter suggested reducing volatility by basing the stress capital buffer requirement on firm-developed models, to be reviewed by the Federal Reserve. While the proposal would not have amended the Board’s scenario design framework, commenters recommended that the Board enhance the transparency of the scenario design process, including by providing more parameters and shock ranges, in order to reduce the uncertainty associated with capital requirements. Commenters had a number of recommendations for enhancing the transparency of scenarios used in the supervisory stress test. Many commenters supported publishing each year’s severely adverse scenario for notice and comment. Other commenters, however, thought that publishing the scenario for comment may lead to pressure to not include salient risks that reflect current market conditions. Some degree of volatility is inherent to risk-based capital requirements, including those determined by stress testing, as such requirements are sensitive to changes in a firm’s activities, exposures and changes to macroeconomic conditions. In addition, some volatility in stress test results is to be expected because the stress test is E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations designed to capture a firm’s vulnerability to plausible and salient risks to the U.S. financial system. The Federal Reserve continues to study potential ways to mitigate unnecessary volatility in requirements, while retaining plausible changes in the scenarios to reflect changing risks. To provide firms and the public with greater transparency regarding the Board’s process for designing supervisory scenarios for stress testing, in 2013 the Board finalized a Policy Statement on the Scenario Design Framework for Stress Testing (Scenario Policy Statement).16 On February 5, 2019, the Board released materials intended to increase the transparency of the stress testing program.17 First, the Board updated the Scenario Policy Statement to provide additional information regarding the path of home price variables, in particular, reducing uncertainty about the path of these variables in the severely adverse scenario. Second, the Board adopted a final Stress Testing Policy Statement to provide additional information about the Board’s principles and policies with regard to supervisory stress test model development and validation.18 As described in the Stress Testing Policy Statement, material changes to the supervisory stress test models are phased in over two years to reduce yearover-year volatility stemming from updates to the supervisory models.19 This approach contributes to the stability of the results of the supervisory stress test by ensuring changes in model projections primarily reflect changes in underlying risk factors and scenarios, year over year. Third, the Board provided additional information about the models used in the supervisory stress test.20 The Board is committed to continuing to provide additional information, including modeled loss rates by loan and borrower characteristics, of its stress test models as it has done most recently for its corporate loan and credit card models.21 Regarding the publication of scenarios for comment, the Board is considering 16 See 12 CFR part 252, Appendix A. jbell on DSKJLSW7X2PROD with RULES2 17 https://www.federalreserve.gov/newsevents/ pressreleases/bcreg20190205a.htm. 18 See 12 CFR part 252, Appendix B. 19 The Policy Statement defines a model change as highly material if its use results in a change in the CET1 ratio of 50 basis points or more for one or more firms, relative to the model used in prior years’ supervisory exercises. See 12 CFR 252, Appendix B 2.3. 20 See 84 FR 6784 (February 5, 2019). 21 See Board of Governors of the Federal Reserve System, Dodd Frank Act Stress Test 2019: Supervisory Stress Test Methodology (March 2019), https://www.federalreserve.gov/publications/files/ 2019-march-supervisory-stress-testmethodology.pdf. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 these comments and weighing the benefit of increased transparency against the costs, including, increased risk of window-dressing by firms and reduced flexibility by the Board to respond to salient risks. Finally, the Board received no comments on the use of the severely adverse scenario to size a firm’s stress capital buffer requirement, although some commenters expressed concern regarding the scope of application of additional components of the severely adverse scenario. Because these additional components capture risks that are not sufficiently captured by the macroeconomic scenario, the final rule maintains the supervisory stress test’s severely adverse scenario as the basis for the calculation of a firm’s stress capital buffer requirement and makes no changes to the scenario design process. ii. Abruptness of Buffer Restrictions In light of the proposed integration of the supervisory stress test results into the capital rule, several commenters suggested that the Board revisit the mechanics of the capital conservation buffer requirement’s payout restrictions, including the definition of eligible retained income. Specifically, commenters noted the case of a relatively healthy firm in normal economic conditions that distributes the full amount of its earnings in each of the preceding four quarters, such that its eligible retained income in the current quarter is zero. Under the proposal, if such a firm’s capital ratios were to immaterially fall below its buffer requirements due to an increase in its stress capital buffer requirement, that firm would have been prohibited from making any distributions. To address this issue, some commenters recommended the calculation provided under the definition of eligible retained income should be based on a firm’s prior four quarters of earnings gross of distributions. Other commenters suggested adopting a prospective payout restriction based on earnings recognized since the end of the last quarter in which a firm failed to meet its full stress capital buffer requirement. Some commenters noted that because firms are more likely to decrease share repurchases before decreasing dividends and executive compensation, the capital conservation buffer’s payout restrictions should initially restrict only repurchases, and subsequently restrict dividends and executive compensation if a firm’s capital levels declined further. The proposal would have used the current capital rule’s definition of eligible retained income, which was PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 15581 adopted in the wake of the financial crisis when firms tended to retain a substantial portion of their earnings. Under a more benign business environment, firms tend to distribute all or nearly all of their net income, resulting in very low or zero eligible retained income and potential sudden and severe distribution limitations if a firm’s capital ratio unexpectedly falls below its capital conservation buffer requirement. To reduce the potential for such a scenario, in connection with the stress capital buffer requirement, the final rule replaces the capital rule’s current concept of eligible retained income with quarterly average net income—the average of a firm’s previous four quarters of net income— in certain cases. Specifically, to the extent that a firm’s risk-based capital ratios determined under the standardized approach exceed the minimum requirements plus 2.5 percent plus any applicable GSIB surcharge and countercyclical capital buffer amount, the firm would use quarterly average net income to determine its eligible retained income. For example, under the final rule, if a firm has a stress capital buffer requirement of 5.5 percent, and its CET1 capital ratio falls to 3 percent above the minimum requirement, the firm would use the average of its past four quarters of net income to calculate its maximum distributable amount. However, to ensure that firms subject to the stress capital buffer requirement are not subject to a capital conservation buffer requirement that is less strict than that the requirements that apply more broadly under the current capital rule, if this firm’s CET1 capital ratio falls below 2.5 percent above the minimum requirements, the firm would be required to calculate its maximum distributable amount by using the previous four quarters of net income net of any distributions and associated tax effects not already reflected in net income. Even though income and capital ratios will not be reported on a firm’s filings until later in the quarter, firms that are subject to the stress capital buffer requirement are expected to know their capital positions and be able to calculate any distribution restrictions on a daily basis. If a firm has any uncertainty regarding its quarter-end capital ratios prior to filing its regulatory reports, it should be conservative with capital distributions (including repurchases) during the beginning of a calendar quarter in order to avoid a situation in which it distributes more than the amount permitted under the capital rule. Under the final rule, all other E:\FR\FM\18MRR2.SGM 18MRR2 15582 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations aspects of the stress capital buffer requirement are being finalized as proposed. Moving from the current definition of eligible retained income to a quarterly average net income measure in the capital rule makes the automatic limitations on a firm’s distributions more gradual as the firm’s capital ratios decline. jbell on DSKJLSW7X2PROD with RULES2 C. Stress Leverage Buffer The proposal would have included a stress leverage buffer requirement that would be determined based on the supervisory stress test. Some commenters urged the Board to remove the proposed stress leverage buffer requirement, noting that it could undermine the purpose of leveragebased measures to act as a simple, riskinsensitive backstop to risk-based capital requirements. These commenters were concerned that the proposed stress leverage buffer requirement would increase the probability that a banking organization’s binding post-stress capital constraint would be a leverage requirement rather than a risk-based one, and would add complexity to the capital rule. One commenter suggested that if the Board adopts the proposed stress leverage buffer requirement, it should revise the capital rule such that the stress leverage buffer requirement does not result in payout restrictions, but would only prompt heightened scrutiny through the Federal Reserve’s ongoing supervisory processes. Other commenters supported adopting the proposed stress leverage buffer requirement and some urged the Board to retain a post-stress capital requirement for the supplementary leverage ratio to maintain the practice of evaluating off-balance sheet exposures in the supervisory stress test. Because leverage requirements are not risk-sensitive, the Board has long held the view that leverage ratio requirements should serve as a robust backstop to the risk-based requirements. In light of the integration of CCAR and the Board’s non-stress capital requirements, which include leverage ratio requirements that serve as a backstop to the risk-based requirements, the final rule does not contain a stress leverage buffer requirement. Non-stress leverage ratio requirements continue to apply to all firms. The final rule results in unchanged CET1 capital requirements and not imposing a stress leverage buffer requirement increases the likelihood that that risk-based requirements will be the binding requirement for firms. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 D. Effective Dates for Stress Capital Buffer Requirement A firm’s stress capital buffer requirement becomes effective on October 1 of each year, and remains in effect until September 30 of the following year, unless the firm receives an updated stress capital buffer requirement from the Board.22 The final rule will be effective May 18, 2020, and a firm’s first stress capital buffer requirement will be effective on October 1, 2020.23 IV. Changes to the Capital Plan Rule This section describes changes to the capital plan rule. Specifically, the final rule adopts the proposal’s elimination of the quantitative objection and the process by which a firm determines the final planned capital distributions included in its capital plan. As discussed below and in response to comment, under certain conditions, the final rule no longer requires a firm to request prior approval to make distributions that exceed the amount included in its capital plan. The final rule also clarifies the timeline and procedures related to a firm’s stress capital buffer requirement, requests for reconsideration, and capital plan resubmissions. A. Quantitative Objection The proposal would have replaced the ability for the Board to object to a firm’s capital plan if the firm did not demonstrate the ability to maintain capital ratios above the minimum requirements on a post-stress basis with the automatic distribution limitations included in the capital rule, which would include the firm’s stress capital buffer requirement. Commenters generally were supportive of the elimination of the quantitative objection, and the final rule eliminates the quantitative objection as proposed. One commenter requested that the Board clarify that it would not qualitatively object to a firm’s capital plan based on quantitative weaknesses in the firm’s capital position. As noted above, the Board adopted a final rule in March 2019 to limit the use of the 22 A firm may receive an updated stress capital buffer requirement in connection with a resubmitted capital plan or in connection with a request for reconsideration (as described in section IV of this preamble). 23 To provide a transition between the 2019 CCAR cycle and the first stress capital buffer requirement, for the period from July 1 through September 30, 2020, a firm will be authorized to make capital distributions that do not exceed the four-quarter average of capital distributions for which the Board or Reserve Bank indicated its non-objection in the previous capital plan cycle, unless otherwise determined by the Board. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 qualitative objection. For those firms that remain subject to the qualitative objection in CCAR 2020, the Board will not evaluate the firm’s ability to maintain capital ratios above minimum requirements on a post-stress basis as a factor in its decision to object or not object to the firm’s capital plan on a qualitative basis. As proposed, in determining whether to object to a firm’s capital plan, the Board will consider whether the firm has material unresolved supervisory issues, the assumptions and analysis underlying its capital plan, and the capital planning process and methodologies of the firm. B. Requirements for a Firm’s Planned Capital Distributions To help ensure that a firm’s planned capital distributions are consistent with statutory and regulatory requirements, the proposal would have required a firm to limit the planned capital distributions included in its capital plan for the fourth through seventh quarters of the planning horizon to those that would be consistent with any effective capital distribution limitations that would apply under the firm’s own baseline projections (BHC baseline scenario).24 The proposal specified that a firm would be required to plan for all limitations on capital distributions in the Board’s rules, except those specifically related to the advanced approaches capital conservation buffer requirement and total loss-absorbing capacity buffer requirement calculated using the advanced approaches.25 As discussed further in Section IV.D, the proposal would have required a firm to adjust its planned distributions to be consistent with these distribution limitations under the BHC baseline scenario, assuming the new stress capital buffer requirement applied. The Board did not receive any comments on the requirement that firms must plan to be in compliance with the capital rules in their BHC baseline scenario projection, and the Board is adopting this aspect of the proposed rule without modification. C. Elimination of Prior Approval The proposal would have retained the requirement that a firm generally seek 24 Under the proposal, a firm would have been required to ensure its planned capital distributions were consistent with any limitations on capital distributions in effect, including those related to any applicable capital buffer requirement, that it anticipates would apply under baseline conditions under the capital rule’s standardized approach in the upcoming year. However, the proposal would not have required a firm to consider planned discretionary bonus payments. 25 See e.g., 12 CFR 217.11, 12 CFR 252.63, 12 CFR 252.165, and 12 CFR part 263. E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations prior approval from the Board to make a capital distribution in which the dollar amount of the firm’s capital distributions exceeded the amount described in its capital plan. The Board sought comment on alternative approaches to this requirement, including the advantages or disadvantages of providing additional flexibility for a firm to make capital distributions in excess of the capital distributions included in its capital plan. Some commenters asserted that the prior approval requirement is unnecessary and duplicative in light of automatic distribution restrictions already in place in the capital rule. These commenters argued that retaining this requirement would result in undue burden on firms and would be inconsistent with the proposal’s goal of simplifying the Board’s capital requirements. These commenters also argued that eliminating prior approval would support flexible capital planning by allowing firms to adapt to actual capital and earnings. Other commenters were supportive of retaining the requirement. These commenters argued that providing additional flexibility to make capital distributions would further weaken capital standards by allowing firms additional leeway in making capital distributions and would be unnecessary in light of firm profitability and recent distributions. Commenters provided a number of suggestions for allowing firms to increase their planned capital distributions without seeking approval from the Board, including eliminating the prior approval requirement altogether. For, example, some commenters supported allowing a firm to exceed the capital distributions included in its capital plan on the condition that the firm’s capital ratios exceeded its BHC baseline scenario projections. Others recommended that all increases in planned capital distributions become subject to an expedited prior approval requirement, such as the process applied to de minimis capital distribution increases, or that the Board remove the ‘‘blackout period’’ during which a firm is not permitted to request prior approval. These commenters also argued that the stress capital buffer requirement should be used to satisfy prior approval requirements in the capital rule, which requires a firm to seek prior approval for redemptions and repurchases of regulatory capital instruments.26 26 As part of a separate final rule to simplify elements of the capital rule, the Board amended section 20 of the capital rule to remove the VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 After reviewing the comments, the Board has modified the proposed rule so that, as a general matter, a firm will no longer be required to request prior approval to make distributions in excess of those included in its capital plan, provided that the distribution is consistent with distribution limitations included in the capital rule. Removing the requirements to request prior approval for incremental capital distributions reduces burden, further integrates the capital plan rule and the capital rule, and provides firms with additional flexibility in capital planning. Under the final rule, firms will remain subject to the automatic distribution limitations in the capital rule, which will include a firm’s stress capital buffer requirement. While the final rule provides firms additional flexibility, the capital plan rule requires that a firm engage in capital planning. A firm’s processes for managing and allocating its capital resources are critical to its financial strength and resiliency and also to the stability and effective functioning of the U.S. financial system. The capital plan rule requires a firm to develop and maintain a capital plan that includes an assessment of the sources and uses of capital and reflects forward-looking projections of revenue and losses to monitor and maintain their internal capital adequacy. A capital plan must be reviewed and approved at least annually by the firm’s board of directors or a designated subcommittee thereof. The firm’s planned capital actions should be consistent with the firm’s capital policy, including the amounts of planned dividends and repurchases. Taken together, these requirements help ensure disciplined capital planning. In addition, a firm’s capital plan and capital planning processes will continue to be reviewed through the supervisory process and, if applicable, through the qualitative objection. The final rule also requires a firm to provide the Board and appropriate Reserve Bank with notice within 15 days after making any capital distributions in excess of those included in its capital plan. A firm would provide notice of additional distributions through an update to a firm’s FR Y–14A requirement to obtain prior approval of the Board before redeeming or repurchasing CET1 capital instruments only to the extent otherwise required by law or regulation. That final rule largely removes prior approval requirements for redemptions and repurchases of CET1 capital under the capital rule. Firms must obtain prior approval to redeem or repurchase CET1 capital only to the extent otherwise required by law or regulation, such as the requirements under section 225.4 of Regulation Y or section 11 of the Federal Reserve Act. See 12 CFR 217.20(f) and 84 FR 35234 (July 22, 2019). PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 15583 Schedule C, Regulatory Capital Instruments. This reporting requirement will allow the Board to continue to monitor a firm’s capital distributions. Under the final rule, there remain certain circumstances under which a firm will be required to seek prior approval to distribute capital. Specifically, if a firm receives a qualitative objection to its capital plan, it would be required to seek prior approval before making any capital distributions. In addition, if a firm or the Board determines that a firm must resubmit its capital plan, the firm would be required to seek prior approval before making any capital distributions until the firm received prior approval to make distributions or receives notice regarding recalculation of its stress capital buffer requirement. Maintaining prior approval requirements in these instances is appropriate given the circumstances that would give rise to a qualitative objection or a resubmitted capital plan. In the case of a qualitative objection, the Federal Reserve has determined that the firm’s capital planning processes are inadequate or unreasonable, or would constitute an unsafe or unsound practice. In the case of a resubmitted capital plan, either the firm or the Board has determined that a material change to the firm’s risk profile or financial condition has occurred or will occur, which may indicate that a firm’s stress capital buffer requirement no longer adequately reflects its risk profile. Finally, the final rule provides a transition provision during the quarter before the first stress capital buffer requirement is effective to permit a firm to seek prior approval for any distribution that would exceed an amount equal to the average of the capital distributions for the four quarters to which the Board previously indicated its non-objection. With respect to the limited circumstances under which prior approval would still be required, the final rule makes certain targeted amendments to the prior approval process. Specifically, the final rule clarifies that a firm is required to submit either its current capital plan or a description of changes to its capital plan as part of its request for prior approval. This would permit the Board to consider a prior approval request in advance of receiving a resubmitted plan.27 The final rule would not change 27 A firm must resubmit its capital plan within 30 calendar days of determining that a resubmission is required or of receiving notice that a resubmission is required. In some cases, a resubmission may be triggered by an anticipated change to the corporate structure or risk profile of the firm. By allowing the E:\FR\FM\18MRR2.SGM Continued 18MRR2 15584 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations other aspects of the prior approval process, including other informational requirements and the Board’s process for considering these requests. In considering a request for prior approval in the past, the Board has generally permitted a firm to make capital distributions that are consistent with distributions included in its capital plan. In 2016, the Board amended the capital plan rule to include a ‘‘blackout period,’’ during which a firm was prohibited from submitting a request for prior approval to make an additional capital distribution. This requirement helped to ensure that the Board’s quantitative analysis in CCAR would represent a comprehensive and current evaluation of the firm’s capital adequacy. Under the final rule, the calculation of a firm’s stress capital buffer requirement no longer includes capital distributions (except for dividends in projection quarters four through seven), so a request by a firm for prior approval to make an additional capital distribution would not impact the calculation of a firm’s stress capital buffer requirement. In addition, given the circumstances during which prior approval will be required and the potential for a capital plan resubmission at any time of the year, a ‘‘blackout period’’ is unnecessary. Therefore and in response to comments received, the final rule removes the ‘‘blackout period’’ for additional capital distribution requests. jbell on DSKJLSW7X2PROD with RULES2 D. Timeline for Reviewing Capital Plans and Calculating the Stress Capital Buffer Requirement The proposal included an updated timeline for the capital plan cycle under the stress capital buffer framework. The proposal maintained the Board’s timeline for providing a firm with the results of the supervisory stress test and review of its capital plan. Under the proposal, a firm would have received notice of its stress capital buffer requirement by June 30 of each year. Some commenters expressed concerns regarding the effective date of a stress capital buffer requirement, which are discussed in Section III.D. The final rule generally adopts the timeline as proposed. Under the final rule, the as-of date for the capital plan Federal Reserve to consider a prior approval request in advance of receiving a resubmitted plan, the final rule would provide the Board additional flexibility to consider and act on a request based on a discussion of the changes to the capital plan rather than receipt of the capital plan. Consistent with past practice, a firm would be able to incorporate by reference portions of its previously filed capital plan to the extent that those portions are unaffected by the change requiring submission. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 cycle will be December 31 of the previous calendar year, and the planning horizon for capital planning will be a period of nine consecutive quarters from that date. Firms will generally submit their capital plans and related regulatory reports by April 5. The Board will generally determine each firm’s stress capital buffer requirement in the second quarter of the year (April through June).28 By June 30, the Board generally will disclose to the public each firm’s stress capital buffer requirement. Commenters requested further clarity regarding public disclosure of the stress test results and stress capital buffer requirements. Some commenters requested that the Board disclose only one set of results. Other commenters expressed concerns regarding public disclosure of planned dividends and requests for reconsideration. The final rule clarifies, but does not require, that the Board to disclose of certain types of information. Consistent with current practice, the Board anticipates disclosing summary information regarding a firm’s stress losses.29 The Board may consider additional changes to further streamline its stress testing disclosure practices. The final rule will not be effective before a firm is required to submit its capital plan and the results of its company-run stress test, if applicable, for the 2020 stress testing cycle. The final rule will be effective prior to the Board conducting the supervisory stress test. Accordingly, the results of a company-run stress test will reflect different assumptions, particularly regarding capital actions and material business plan changes, than would be used as part of the supervisory stress test. A firm will be required to disclose the results of its company-run stress test within 15 days of the Board disclosing the results of the supervisory stress test. The Board intends to clarify in its disclosures for 2020 that the assumptions used in the supervisory stress test are different from the assumptions used in the company-run stress tests for 2020 and, therefore, the results are not comparable. 28 For firms subject to a potential qualitative objection, the qualitative assessment will take place from April to June. By June 30, the Board generally will disclose the decision to object or not object to the capital plan of any firm subject to a qualitative objection. 29 As discussed further in Section IV.E. and IV.F., a firm may request reconsideration of its stress capital buffer requirement and the Board may recalculate a firm’s stress capital buffer requirement if a firm resubmits its capital plan. In the event that a firm receives a revised stress capital buffer requirement, a firm would be required to disclose its revised stress capital buffer requirement and its buffer on the FR Y–9C form. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 Under the proposal, within two business days of receipt of notice of its stress capital buffer requirement, a firm would have been required to assess whether its planned capital distributions are consistent with the effective capital distribution limitations under the BHC baseline scenario throughout the fourth through seventh quarters of the planning horizon, assuming that the firm’s new stress capital buffer requirement replaced any existing stress capital buffer requirement. In the event of an inconsistency, a firm would have been required to reduce the capital distributions in its capital plan to be consistent with such limitations for those quarters of the planning horizon.30 A firm would have been required to notify the Board of any reductions in capital distributions in its capital plan (adjustment process). Some commenters expressed concerns regarding the adjustment process. These commenters argued that modifications to the adjustment process were necessary to support flexible capital planning in light of variability in the supervisory stress test, particularly if the Board retained dividend add-on or prior approval requirements. For example, some commenters requested that firms be permitted to increase planned issuances in order to meet the requirements in the BHC baseline scenario projections and to allow planned increases in capital distributions. In response to comments, the Board has revised this process in the final rule to allow firms to make any adjustments to their planned capital distributions during the two-day adjustments process, provided that the revised planned capital distributions are consistent with the effective capital distribution limitations that would apply on a pro forma basis under the BHC baseline scenario throughout the fourth through seventh quarters of the planning horizon. Allowing a firm to increase its planned distributions would provide firms additional flexibility in capital planning, including by allowing firms to reflect the results of the supervisory stress test. Any increases in planned dividends in quarters four through seven of the planning horizon would be reflected in a firm’s stress capital buffer requirement. Each firm’s updated annual stress capital buffer requirement generally will become effective on October 1 and be in effect until September 30 of the 30 In addition, a firm that is not required to reduce its planned capital distributions will be permitted to do so after receiving its initial notice. E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations following calendar year. Table 1 below summarizes key actions and the dates that these actions generally will occur in 15585 the annual capital plan cycle under the final rule. TABLE 1—KEY DATES AND ACTIONS IN THE ANNUAL CAPITAL PLAN CYCLE Date December 31 of the preceding calendar year. By February 15 .................... By April 5 .............................. April through June ................ By June 30 ........................... Within two business days of notice. October 1 through September 30 of the following calendar year. Action As-of date of the capital plan cycle. Board publishes scenarios for the upcoming capital plan cycle. Each firm submits its capital plan (including results of the bank holding company’s stress tests) and relevant regulatory reports. Board conducts its supervisory stress test and calculates each firm’s stress capital buffer requirement. The Board provides to a firm notice of its stress capital buffer requirement. A firm will have 15 days to make a request for reconsideration. Each firm must analyze its planned capital distributions for the period of October 1 through September 30 of the following calendar year, adjust its planned distributions if necessary, and provide the Board its final planned capital distributions. Effective dates of a firm’s stress capital buffer requirement. jbell on DSKJLSW7X2PROD with RULES2 The Board’s previous review and approval of planned capital actions covers the four-quarter period between July 1 of each year and June 30 of the following calendar year. The stress capital buffer requirement becomes effective on October 1, 2020. As a result, a firm will not have any approved planned capital actions for the period July 1 to September 30, 2020. To provide a transition to the stress capital buffer requirement, the final rule authorizes a firm to make capital distributions for the period July 1 to September 30, 2020, that do not exceed a four quarter average of capital distributions to which the Board indicated its non-objection for the previous capital plan cycle, unless otherwise determined by the Board. A firm may seek prior approval to make additional capital distributions beyond this four-quarter average amount using the prior approval process discussed in Section IV.C. E. Requests for Reconsideration The proposed rule would have modified the process for requesting reconsideration of an objection to a capital plan and extended this process to include the ability to request reconsideration of the stress capital buffer requirement. Under the proposal, a firm that requested reconsideration of its stress capital buffer requirement would have been required to submit a request to the Board in writing within 15 days of receipt of the firm’s stress capital buffer requirement, and the Board would have responded in writing within 30 days. The firm’s request would have been required to include an explanation of why the firm believes that its stress capital buffer requirement should be reconsidered. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 The proposed procedures were intended to provide a firm with an opportunity to respond to its stress capital buffer requirement or a qualitative objection to its capital plan, and to help ensure that the stress capital buffer requirement is appropriately sized and that the Board has considered all relevant aspects of the firm’s capital planning and capital adequacy process. Some commenters argued that the proposed timeline for the reconsideration process should be extended, asserting that the proposed October 1 effective date of the stress capital buffer requirement would provide insufficient time to prepare for changes in capital requirements and, as a result, reduce the usefulness of the reconsideration process. These commenters argued that a firm would be required to prepare for a stress capital buffer requirement during the pendency of a request for reconsideration, reducing the value of the reconsideration process. The final rule maintains the proposed reconsideration process and timeline without modification. This process is based on the process that has been included in the capital plan rule since its adoption in 2011.31 The reconsideration process is intended to provide the firm with a meaningful opportunity to request reconsideration of the stress capital buffer requirement or objection to a capital plan, including through the presentation of additional information, while promoting an efficient process. In particular, the timeline is intended to provide an opportunity for response, while ensuring that the results of the supervisory stress test and a firm’s most 31 76 PO 00000 FR 74631 (December 1, 2011). Frm 00011 Fmt 4701 Sfmt 4700 recent capital plan are reflected in the firm’s ongoing capital requirements and planned distributions as quickly as possible. Prolonging the period for requesting reconsideration or responding to a request for reconsideration also would delay incorporation of more current information about a firm’s risk profile that are not contested, including its balance sheet, into the firm’s stress capital buffer requirement or capital plan. In addition, the final rule provides that the Board may extend the time for acting on a request for reconsideration, which would allow the Board to request and the firm to submit additional information or delay the effective date of a stress capital buffer requirement, if needed. Finally, as discussed in Section III.B the Board has adopted changes to its stress testing framework to increase transparency and certainty. By providing greater transparency and predictability, these changes also may reduce the likelihood that a request for reconsideration is made. The capital plan rule provides that a firm that requests reconsideration of an objection to its capital plan may request an informal hearing as part of its request for reconsideration. The Board, in its sole discretion, may order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve issues of fact raised in the request for recommendation. The proposal would have extended this option to requests for reconsideration of a stress capital buffer requirement. The Board did not receive comments on the informal hearing procedures provisions as applied to the stress capital buffer requirement. Thus, the final rule provides firms with an opportunity to request an informal hearing as part of E:\FR\FM\18MRR2.SGM 18MRR2 15586 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations their request for reconsideration of either an objection to a capital plan or a stress capital buffer requirement. jbell on DSKJLSW7X2PROD with RULES2 F. Capital Plan Resubmission and Circumstances Warranting Recalculation of the Stress Capital Buffer Requirement The proposal would have maintained the circumstances under which a firm was required to resubmit a capital plan and the process for reviewing a resubmitted capital plan. In particular, the Board could have required a firm to resubmit its capital plan if the Board determines that there has been a material change in the firm’s risk profile, financial condition, or corporate structure or if the bank holding company stress scenario(s) used in the firm’s most recent capital plan are no longer appropriate for the firm’s business model and portfolios, or if changes in financial markets or the macro-economic outlook that could have a material impact on a firm’s risk profile and financial condition require the use of updated scenarios (material change). Additionally, a firm would have been required to resubmit its capital plan if it determines there has been or will be a material change since the firm last submitted its capital plan to the Board. The proposal would have integrated the existing resubmission process with the stress capital buffer requirement by permitting the Board to recalculate a firm’s stress capital buffer requirement if the firm chose to or was required to resubmit its capital plan. Under the proposal, the Board would have reviewed a resubmitted capital plan within 75 calendar days after receipt and, at the Board’s discretion, provided the firm with an updated stress capital buffer requirement. Upon a determination that a firm has had a material change in its risk profile, the Board could have conducted an updated supervisory stress test and recalculated the firm’s stress capital buffer requirement based on the resubmitted capital plan.32 As with the process for submitting the annual capital plan, the planned capital distributions in the firm’s resubmitted capital plan would have been required to be consistent with any capital distribution limitations that would have applied on a pro forma basis over the planning horizon. Any updated stress capital buffer 32 For this purpose, the planning horizon would have been the nine quarter period beginning on the date after the as-of date of the projections. For instance, if the as-of date of the projections was June 30, 2020, the planning horizon would have extended from July 1, 2020, through September 30, 2022. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 requirement would have been in effect until the firm’s updated stress capital buffer requirement from the next annual assessment by the Board became effective (unless the firm experienced another material change prior to that date). Some commenters supported the inclusion of a process to recalculate a firm’s stress capital buffer requirement, but expressed concern about the circumstances under which a stress capital buffer requirement would be recalculated as well as the methodology for recalculation. In particular, some commenters expressed concern regarding the proposed approach of recalculating a firm’s stress capital buffer requirement based on a resubmitted capital plan. One commenter argued that recalculation of a stress capital buffer requirement based on a resubmitted plan would discourage a firm from resubmitting a capital plan. Some commenters urged the Board to separate the process for recalculating a stress capital buffer requirement from resubmission of a capital plan, suggesting instead that recalculation of the stress capital buffer requirement be made at the option of the firm or automatically based on information reported on the FR Y–14 reports. Other commenters expressed concern regarding the methodology for recalculation, asserting that recalculation based on a new or different stress scenario could produce a significantly different stress capital buffer requirement. Finally, some commenters expressed concerns about the resubmission process generally, including the distribution limitations on firms that resubmit a capital plan as well as the circumstances under which a resubmission would be required. The final rule adopts the proposed process for recalculating a firm’s stress capital buffer requirement based on a resubmitted capital plan.33 The circumstances that require a firm to resubmit its capital plan may also indicate that its stress capital buffer requirement no longer reflects its risk profile. Accordingly, the automatic distribution limitations that would apply if the firm held capital within its buffer also may not be sufficient. As commenters observed, a firm may resubmit a capital plan for a variety of reasons. Not every change to a firm’s capital plan or balance sheet would be significant enough to warrant recalculation of its stress capital buffer requirement. In some cases, a capital 33 The final rule also would maintain the process for reviewing a resubmitted capital plan for a firm subject to the qualitative objection. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 plan may be resubmitted based on anticipated changes in the corporate structure or business of the firm, and a stress capital buffer requirement may be more accurately evaluated after consummation of the anticipated change. Accordingly, the final rule provides the Board discretion in determining when and how to recalculate a stress capital buffer requirement based on a resubmitted capital plan. If a firm resubmits its capital plan, the Board will inform the firm of whether its stress capital buffer requirement will be recalculated within 75 days of the capital plan being resubmitted. In response to concerns regarding the restrictions on distributions triggered by a resubmission, as discussed in Section IV.C., the final rule would simplify and clarify the submission requirements for prior approval requests made as a result of a resubmitted capital plan. The final rule also would maintain the criteria for resubmission of a capital plan based on a material change. These criteria help support an effective capital planning process. V. Changes to the Capital Rule and Mechanics of Distribution Limitations Under the capital rule, a firm is subject to restrictions on distributions and discretionary bonus payments if the firm’s capital ratios are at or below its minimums plus its capital conservation buffer requirement.34 For all firms, the capital conservation buffer requirement is composed of CET1 capital and is equal to 2.5 percent of risk-weighted assets, plus any applicable countercyclical capital buffer amount and GSIB surcharge. To incorporate the stress capital buffer requirement into the capital rule, the proposal would have revised the capital rule to include the stress capital buffer requirement in the capital conservation buffer framework. A firm would have been subject to the most stringent distribution limitation, if any, as determined by the firm’s standardized approach capital conservation buffer requirement, the firm’s stress leverage buffer requirement and, if applicable, the firm’s advanced approaches capital conservation buffer requirement, and the enhanced supplementary leverage ratio standard.35 A firm’s standardized 34 See 12 CFR 217.11. with the proposal, the final rule does not alter the substance of the buffer applicable to GSIBs under the Board’s enhanced supplementary leverage ratio standards. The regulatory language implementing this buffer is revised by the final rule to integrate the enhanced 35 Consistent E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations approach capital conservation buffer requirement would have been equal to the sum of: (1) Its stress capital buffer requirement as calculated using the standardized approach, (2) as applicable, the firm’s GSIB surcharge; and, (3) as applicable, the firm’s countercyclical capital amount.36 A firm’s advanced approaches capital conservation buffer requirement would have been equal to the sum of: (1) 2.5 percent of risk-weighted assets calculated using the advanced approaches, (2) as applicable, the firm’s GSIB surcharge; and, (3) as applicable, the firm’s countercyclical capital buffer amount. Similarly, under the proposal, a firm would have compared its leverage buffer to its stress leverage buffer requirement. Under the proposal, a firm would have been subject to the most stringent distribution limitation as determined by the firm’s standardized approach capital conservation buffer requirement, the firm’s stress leverage buffer requirement and, if applicable, the firm’s advanced approaches capital conservation buffer requirement, and the enhanced supplementary leverage ratio standard. A firm would have determined the maximum amount it could pay in capital distributions and discretionary bonus payments during a given quarter by multiplying the firm’s eligible retained income by its applicable payout ratio, if any, as determined under Table 2 to 12 CFR 217.11 of the proposed rule. Several commenters supported the proposal to separate the standardized approach capital conservation buffer and the advanced approaches capital conservation buffer and to only incorporate the stress capital buffer requirement into the standardized approach capital conservation buffer. Arguments in favor of not incorporating the stress capital buffer requirement into the advanced approaches capital conservation buffer generally focused on the complexity such an approach would add to the rule by combining two different model-based approaches (i.e., the advanced approaches and the stress test). However, some commenters supported applying the stress capital buffer requirement over advanced approaches risk-weighted assets by scaling the stress capital buffer requirement by the ratio of a firm’s standardized risk-weighted assets to its supplementary leverage ratio buffer with the stress capital buffer requirement within the capital rule. 36 The existing buffer framework in the capital rule would have remained unchanged for firms not subject to the capital plan rule. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 advanced approaches risk-weighted assets. Some commenters argued that the stress capital buffer requirement would remove the need for firms to calculate risk-weighted assets using the advanced approaches because both effectively measured capital needs based on a firm’s internal risk-based methodologies. These commenters recommended removal of the advanced approaches from the capital rule altogether, or that the Board narrow the scope of the advanced approaches to only the largest, most systemic firms. Some commenters also supported removing the advanced approaches from the capital rule for reasons unrelated to this rulemaking. The final rule includes the buffer framework with certain revisions from the proposal. Most notably, the final rule includes a revised definition of eligible retained income and does not include the proposed stress leverage buffer.37 As discussed in the proposal, the interaction of the stress capital buffer requirement and a firm’s risk-based capital ratios calculated using the advanced approaches would add excessive complexity to the rule, whether through the use of a scaling factor or other calibration adjustment. Consistent with the rationale in the proposal, the final rule does not incorporate the stress capital buffer requirement into the advanced approaches capital conservation buffer. The Board is not removing the advanced approaches from the capital rule in this final rule. The concerns related to the interaction of the advanced approaches and the stress capital buffer requirement are addressed in the final rule by limiting the application of the stress capital buffer requirement to the standardized approach capital requirements. The Board continues to believe that large and more systemic firms should be subject to more risk-sensitive capital requirements commensurate with their risk profiles. Some commenters supported the Board’s proposal to include any applicable countercyclical capital amount in the capital conservation buffer requirement, noting that it is not redundant with the stress capital buffer requirement, as each addressed different risks independently. Other commenters argued that the stress capital buffer requirement could make the 37 The revisions to eligible retained income are discussed in greater detail in Section III.A and the stress leverage buffer requirement is discussed in greater detail in Section III.D. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 15587 countercyclical capital buffer redundant, and recommended that the Board make only sparing use of the countercyclical capital buffer. Some commenters urged the Board to remove the countercyclical capital buffer from the capital rule, arguing that it was fully redundant with the stress capital buffer requirement due to countercyclical features of the stress tests. Commenters also argued that countercyclical capital requirements could be set more effectively through the stress capital buffer requirement than the countercyclical capital buffer. Commenters also argued that, if the countercyclical capital buffer were retained, any activation of the countercyclical capital buffer should be reflected in the stress testing framework. Consistent with the proposal, the final rule retains the countercyclical capital buffer as a tool the Board could use to address situations when systemic vulnerabilities are meaningfully above normal. The stress capital buffer requirement is not redundant with the countercyclical capital buffer. The countercyclical capital buffer is a macroprudential tool intended to strengthen the resiliency of financial firms and the financial system, by allowing the Board to raise capital standards when credit growth in the economy becomes excessive. The Board’s stress testing scenario design framework is designed to mitigate the inherent procyclicality in the stress test, not to serve as an explicit countercyclical offset to the financial system. As a result, there may be circumstances where the countercyclical capital buffer is the appropriate tool to address systemic vulnerabilities, and it is important to retain this tool as a potential option going forward. One commenter urged the Board to recognize the ability of long-term debt issued under the Board’s Total LossAbsorbing Capacity (TLAC) rule to absorb losses in the same manner as common equity tier 1 capital. The commenter therefore recommended that firms be permitted to satisfy all or a portion of the stress capital buffer requirement with internal long-term debt or common equity tier 1 capital. Only a subset of firms subject to the capital plan rule are subject to the TLAC rule—U.S. GSIBs and the U.S. intermediate holding companies of nonU.S. GSIBs—and these firms are among the larger and more systemic firms subject to the capital plan rule. Providing these firms with greater flexibility to satisfy the buffers would be inconsistent with the general principle that larger and more systemic firms E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 15588 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations should be subject to more stringent and risk-sensitive requirements. In addition, the loss-absorbing capacity of long-term debt issued under the Board’s TLAC rule is not identical to the lossabsorbing capacity of CET1 capital as the way in which long-term debt could absorb losses varies by circumstance. As a result, the Board is maintaining the requirement that the standardized approach capital conservation buffer and the advanced approaches capital conservation buffer must be satisfied with common equity tier 1 capital. Several commenters raised concerns that the stress capital buffer requirement would be redundant with the GSIB surcharge. Some commenters noted that both the stress capital buffer requirement and GSIB surcharge account for risks arising from capital markets activities and for counterparty risks. One commenter suggested that the Board address the potential doublecounting of risks by making the stress capital buffer requirement an alternative to the current capital conservation buffer requirements. Specifically, the commenter suggested that a firm’s buffer requirement be the greater of (1) its stress capital buffer requirement, and (2) 2.5 percent, plus any applicable GSIB surcharge and countercyclical capital buffer amount. Other commenters suggested additional similar structures for a firm’s buffer requirement. Commenters asked that the Board exclude the GSIB surcharge from the standardized approach capital conservation buffer, pending revisions to the Board’s GSIB surcharge rule. The final rule, consistent with the proposal, establishes the buffer requirement for the standardized approach capital conservation buffer equal to a firm’s stress capital buffer requirement, plus any applicable GSIB surcharge and countercyclical capital buffer amount. The stress capital buffer requirement, which will incorporate losses from the global market shock and the large counterparty default component, is not duplicative of the GSIB surcharge. The stress capital buffer requirement is calculated based on each firm’s vulnerability to adverse economic or financial market conditions. The global market shock measures the trading mark-to-market losses associated with sudden changes in asset prices, and the large counterparty default scenario component measures the risk of losses due to an unexpected default of the counterparty whose default on all derivatives and securities financing transactions would generate the largest stressed losses for a firm. These components of the supervisory stress VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 test do not capture the potential adverse impact of the failure of a GSIB on the financial system as a whole, which is captured only by the GSIB surcharge. Several commenters also raised concerns regarding the methodologies used to determine the GSIB surcharge. Some commenters favored the elimination of the GSIB framework’s Method 1 score, while other commenters favored the elimination of the Method 2 score. In addition, commenters raised concerns with specific GSIB indicators’ ability to capture systemic risk and recommended changes to the indicators. Several commenters also made recommendations on ways to recalibrate the GSIB surcharge, such as revisiting the calibration of Method 2 in light of post-crisis reforms. Others suggested updates to the GSIB surcharge coefficients and denominators. A commenter also recommended that the Board introduce a more gradated surcharge scale to avoid potential cliff effects. Commenters urged the Board to make changes to the GSIB surcharge methodologies effective concurrently with the effective date of the stress capital buffer requirement. The Board is not revising the GSIB surcharge rule in connection with the final rule. As noted, the GSIB surcharge is designed to address risks that differ from those addressed by the stress capital buffer requirement. As discussed in the preamble to the final GSIB surcharge rule, the GSIB surcharge, including the amount of the surcharges and the calculation of Method 1 and Method 2 scores, is designed to address the risks to the financial system presented by systemically important firms. Taken together, the components of a firm’s buffer requirements each serve independent functions. Specifically, the stress capital buffer requirement ensures that a firm has sufficient capital to continue to serve as a financial intermediary during stress. The GSIB surcharge ensures that a GSIB internalizes the cost that its failure would have on the broader economy. The countercyclical capital buffer ensures capital when there is an elevated risk of above-normal losses. For these reasons, the stress capital buffer requirement, as adopted in the final rule, serves as an appropriate complement to the other capital buffers and the GSIB surcharges. The proposal would not have amended the current definitions of ‘‘distribution’’ and ‘‘capital distribution’’ found in the capital rule PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 and capital plan rule, respectively.38 Unlike the definition of distribution in the capital rule, the definition of capital distribution in the capital plan rule does not provide an exception for distributions accompanied by an offsetting issuance. The broader definition included in the capital plan rule ensures that all distributions, including those offset by issuances, are included in a firm’s capital plan. However, because distributions offset by equivalent issuances within a quarter do not affect a firm’s capital position, this type of distribution is not included in the definition in the capital rule. As discussed in Section IV.C, some commenters raised concerns regarding these differing definitions in the context of their recommendation to eliminate the prior approval requirement to make incremental capital actions. As the final rule eliminates the prior approval requirement, the Board is adopting this aspect of the proposal without modification and will continue to monitor this issue. VI. Changes to the Stress Test Rules The proposal would have revised the capital action assumptions in the Board’s supervisory stress test and the company-run stress tests conducted under Regulation YY, in order to harmonize the publicly disclosed supervisory and company-run stress test results with the stress capital buffer requirement.39 The proposal would not have included the four quarter dividend add-on in the required capital actions in the stress test rules. The Board received several comments on the capital distribution assumptions, which were addressed above in Section 38 Under the capital rule, the definition of distribution includes reductions in tier 1 capital through a repurchase or any other means, except when the institution, in the same quarter as the repurchase, fully replaces the tier 1 instrument by issuing a similar instrument. Under the capital plan rule, a capital distribution means a redemption or repurchase of any debt or equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that the Board determines to be in substance a distribution of capital. 39 In the proposal, a firm’s company-run stress test, would no longer include in their capital action assumptions: (1) Actual capital actions for the first quarter of the planning horizon; (2) any common stock dividends; or (3) issuance of common or preferred stock relating to expensed employee compensation. For the first quarter of the planning horizon, firms will include any payments on any other instrument that is eligible for inclusion in the numerator of a regulatory capital ratio equal to the stated dividend, interest, or principal due on such instrument during the quarter. The capital action assumptions used in the company-run and supervisory stress tests will not include the four quarters of planned dividends. E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations III.B.i; however, there were no comments on the proposal to ensure that the capital actions in the companyrun stress test rule matched the capital actions in the calculation of the stress capital buffer requirement. Therefore, the final rule adopts changes to the capital action assumptions in the Board’s supervisory stress test and company-run stress test to be consistent with one another. 40 As discussed above in Section III.B.i, the final rule does not include a planned material business plan change (e.g. merger, acquisition, or divestiture) in a firm’s stress capital buffer requirement. In order to harmonize the publicly disclosed supervisory and company-run stress test results with the stress capital buffer requirement, the final rule removes the requirement to include issuances in connection with a planned merger or acquisition to the extent that the merger or acquisition is reflected in the covered company’s pro forma balance sheet estimates. Consistent with current requirements, the final rule will continue to require a firm to include in its capital plan a discussion of any expected changes to the firm’s business plan that are likely to have a material impact on the capital adequacy or liquidity position of the firm. Firms will continue to be expected to include the impact of a material business plan change on the FR Y–14A reports, including the Schedule A— Summary, Schedule C—Regulatory Capital Instruments, and Schedule F— Business Plan Changes. The proposal would have incorporated the definition of ‘‘significant trading activity’’ into the Board’s company-run stress test requirements in order to increase transparency regarding the application of an additional trading and counterparty scenario component.41 Currently, significant trading activity is defined by reference to the Capital Assessments and Stress Testing report (FR Y–14Q). The FR Y–14Q defines a firm with significant trading activity as any domestic bank holding company or U.S. intermediate holding company that is subject to supervisory stress tests and that (1) has aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets, and (2) is not a ‘‘large and noncomplex firm’’ under the Board’s capital plan rule. The proposal would have adopted this FR Y–14 40 The supervisory and company-run stress tests conducted under Regulation YY will not include four quarters of planned dividends. 41 See 12 CFR part 252, subpart F. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 definition of significant trading activity in the stress test rules for the annual company-run stress test. Commenters did not comment on this aspect of the proposal and it is finalized as proposed. While the Board’s scenario design framework was not part of the proposal, commenters raised issues with the severity and plausibility of the supervisory scenarios. Some commenters argued that the Board’s scenario design process resulted in scenarios that were implausibly severe and required firms to hold more capital than would be necessary to withstand stressful conditions. Commenters suggested that the Board introduce limits on the overall severity of the severely adverse scenario, as they argue that supervisory scenarios were more severe than historical experience. Another suggestion was to introduce a rule for scenario plausibility, including modifying the global market shock to make it more realistic and to ensure that the macroeconomic scenario is consistent with the global market shock. As described in Appendix A to 12 CFR part 252, severely adverse scenarios are designed to be plausible, relevant, and guided in large part by historical experience in severe U.S. recessions.42 By design, the severity of the scenarios is meant to mimic past recessions and financial crises with the addition of certain salient risks in order to ensure that firms can withstand stress and continue to lend. In addition, the Board may factor in particular risks to the scenario to make appropriate adjustments to the paths of specific economic variables that are historically less typical in order to highlight systemic risks. A comparison of the severity of recent CCAR scenarios to benchmarks in past recessions or financial crises, both domestic and international, suggests that the scenarios used in the 2017 through 2019 CCAR assessments are plausibly severe. As in the current supervisory post-stress capital assessment in CCAR, under the proposal, the supervisory stress test will continue to use a common set of scenarios, models, and assumptions across firms. Commenters also suggested that the Board enhance the transparency of the models used in the supervisory stress test by publishing model specifications for comment, or publishing its methodology for comment each year. One commenter opposed providing more information about supervisory models or publishing the model specifications for comment. The commenter suggested such publication 42 See PO 00000 12 CFR part 252, Appendix A. Frm 00015 Fmt 4701 Sfmt 4700 15589 could lead to firms adopting stress test models that are similar to the supervisory models, potentially causing models to have common weaknesses that create risks to financial stability. While the Board’s methodology for conducting the supervisory stress test was not part of the proposal, the Board received several comments regarding the Board’s models and methodology for conducting the supervisory stress test. Many of the comments focused on the assumptions associated with the global market shock and large counterparty default scenario component. These commenters’ recommended reflecting the impact of the global market shock in capital deductions, reflecting variation margin in counterparty losses, capping trading losses and associated capital deductions at the total amount of a firm’s trading exposure, and eliminating the double-counting of losses between the global market shock and the macroeconomic scenario. Other comments focused on other supervisory models, such as suggesting that the supervisory net income projections should reflect firm-specific considerations, such as tax attributes and that the FR Y–14 should collect credit risk mitigation transactions so that the Federal Reserve could reflect these transactions in its projections. Finally, commenters suggested that the Federal Reserve consider the impact of incorporating the current expected credit loss (CECL) methodology into the supervisory stress test.43 Since the Board issued the proposal in 2018, the Board separately has taken steps to respond to these comments. For example, in February 2019, the Board adopted a final stress test policy statement, which reduced the materiality threshold for phasing-in material model changes.44 Additionally, in order to address the suggestion to reflect the impact of the global market shock on regulatory capital deductions, the Board will begin collecting information regarding this impact on the FR Y–14A starting in CCAR 2020. Similarly, the Board will also begin collecting more granular information related to tax attributes on the FR Y– 14A starting in CCAR 2020, to further understand the impact of tax related items under stress. Regarding CECL, the Board has met with various affected parties, including firms subject to the supervisory stress test, and has determined to maintain the current modeling framework for loan 43 See ASU 2016–13, ‘‘Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.’’ 44 See 12 CFR part 252, Appendix A. E:\FR\FM\18MRR2.SGM 18MRR2 15590 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations allowances in its supervisory stress test through 2021.45 The Board continues to consider how to implement CECL in its stress testing methodology and will continue to seek feedback on the best way to implement CECL in stress testing. jbell on DSKJLSW7X2PROD with RULES2 VII. Impact Analysis The Board analyzed the impact of the final rule on the capital requirements of affected firms. This analysis compared the capital required to avoid limitations on capital distributions under the current framework and under the final rule.46 In addition, the impact analysis considered the potential effects of the rule on economic activity. The Board used data from the 2013 to 2019 CCAR exercises to obtain a through-the-cycle view of the impact of the rule.47 While 2013 to 2019 represents a period of generally favorable economic and financial conditions, capital distributions—a key driver of the impact of the rule relative to current requirements—varied cyclically, rising from a relatively low level in 2013 to a high level in 2019. The impact of the rule will also vary through the economic and credit cycle based on the risk profile and planned capital distributions of individual firms, as well as on the specific severely adverse stress scenario used in the supervisory stress test. Based on data from CCAR 2013 to CCAR 2019, the rule is estimated to result in largely unchanged CET1 capital requirements: CET1 capital requirements are estimated to increase, on average, by $11 billion, a one percent increase from current requirements. As such, viewed through-the-cycle, the rule preserves the current requirements for the highest quality capital. Looking across CCAR years, the impact of the proposal on CET1 capital requirements ranges from a decline of $59 billion to an increase of $78 billion. 45 See Board of Governors of the Federal Reserve System, ‘‘Statement on the current expected credit loss methodology (CECL) and stress testing’’ December 21, 2018, available online at: www.federalreserve.gov/newsevents/pressreleases/ files/bcreg20181221b1.pdf. 46 The analysis made certain simplifying assumptions. For example, the Board assumed the impact of the flat balance sheet assumption on projected losses and revenue in the stress test offset each other but included the impact of the assumption on the denominator of the projected capital ratios. 47 Firms were subject to a CET1 capital requirement over the entire planning horizon of the supervisory stress test beginning with the 2015 CCAR exercise. For the 2013 and 2014 CCAR exercises, tier 1 common equity capital serves as a proxy for CET1 capital and is broadly similar to CET1 but includes fewer deductions, among other differences. The supervisory stress test began in 2013. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 The Board expects that the impact of the rule would vary for GSIBs relative to the smaller and less complex firms that are subject to the stress capital buffer requirement. On average, from 2013 to 2019, the rule is expected to lead to an increase in CET1 capital requirements for GSIBs of $46 billion, a seven percent increase in their current aggregate CET1 capital requirement. By contrast, the CET1 capital requirements for firms subject to Category II–IV standards are expected to decrease by $35 billion, a 10 percent decrease relative to their current aggregate requirement. While the less stringent balance sheet and distribution assumptions in the supervisory stress test lower capital requirements for all firms, the increased requirement for GSIBs results from the integration of a stress test-based capital requirement with each firm’s GSIB surcharge.48 In part due to an elimination of the stress leverage buffer requirement, the rule is estimated to lower aggregate tier 1 capital requirements by $49 billion, based on average CCAR results from 2013 to 2019, a four percent decrease relative to aggregate current tier 1 capital requirements.49 Modified balance sheet and distribution assumptions in the supervisory stress test also contribute to the decline. On average, the tier 1 capital requirement for GSIBs, the riskiest and most systemically important firms, remains unchanged by the final rule. The tier 1 capital requirements for firms subject to Category II–IV standards is expected to decrease by $49 billion, a 12 percent decrease relative to their current aggregate requirement. Looking across CCAR years, the impact of the rule would range from an aggregate reduction in tier 1 capital requirements of $102 billion to an aggregate increase in tier 1 capital requirements of $77 billion. As the final rule has differential effects depending on the required form of regulatory capital, the Board studied the effect on overall bank funding costs to provide another view of the impact of the rule. The Board expects that the rule would slightly reduce the yearly dollar 48 The fact that the required capital as measured by Board’s stress tests typically acts as the most binding capital requirement in the current framework for many GSIBs reduces the impact of incorporating the GSIB surcharge to the stress capital buffer requirement, which is currently not included in the minimum capital standards in the stress tests. 49 Common equity tier 1 capital was developed after the financial crisis and consists of the highest quality regulatory capital. Prior to the financial crisis, tier 1 capital, which consists of common equity and non-cumulative perpetual preferred stock, was the main measure of capital adequacy. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 funding costs of capital and long-term debt needed to meet requirements. The changes in CET1 and tier 1 capital requirements drive these funding cost impacts. Firms often maintain ‘‘management buffers’’ of tier 1 and CET1 capital that exceed regulatory requirements. As the final rule significantly changes how stress tests factor into capital requirements, firms may change their approach to management buffers in response to the rule. Such a change could lead to changes in levels of capital that differ from the changes in requirements reported above. The Board examined the impact of the rule on risk sensitivity, as stress losses will determine capital requirements only for firms above the stress capital buffer requirement floor. Combining firm-by-firm data across supervisory stress test exercises from 2013 to 2019, the Board estimated that about half of the observations would have a stress capital buffer requirement above 2.5 percent. In comparison, about 90 percent of the observations in past CCAR exercises, which included the prior capital distribution assumptions and growing balance sheets, experienced capital declines of greater than 2.5 percent. The Board also assessed the macroeconomic consequences of the final rule using models that consider the benefit of higher amounts of regulatory capital in reducing the frequency of financial crisis versus the cost of reduced lending.50 Based on the estimated change in average capital requirements through the cycle, the proposal is expected to have little to no impact on the long-run level of GDP. VIII. Changes to Regulatory Reports The proposal would have modified the Consolidated Financial Statements for Holding Companies Report (FR Y– 9C; OMB: 7100–0128) to collect information regarding the stress capital buffer requirement applicable to a firm and the Capital Assessments and Stress Testing Report (FR Y–14A; OMB No. 7100–0341). Specifically, the proposal would have added new line items to the quarterly FR Y–9C in order to collect information regarding a firm’s stress capital buffer requirement, stress leverage buffer requirement, and GSIB surcharge and countercyclical capital 50 See Firestone, S., A. Lorenc and B. Ranish, 2019, An empirical economic assessment of the costs and benefits of bank capital in the United States, Federal Reserve Bank of St. Louis Review, 101, pp. 203–230; and Basel Committee on Banking Supervision, 2010, An assessment of the long-term economic impact of stronger capital and liquidity requirements, white paper. E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations buffer amount, as applicable, and information necessary to calculate a firm’s distribution limitations, including its capital conservation buffer, advanced approaches capital conservation buffer, leverage buffer, eligible retained income, and distributions. The proposal would have also added similar items to the applicable FR Y–14A schedule. This information would enable the Board and the public to identify any distribution limitations and monitor a bank holding company’s performance on a quarterly basis and allow the Board to compare a firm’s projected capital ratios to expected buffer requirements and implement the proposed evaluation of planned capital actions under the BHC baseline scenario.51 One commenter suggested that it was unnecessary to report eligible retained income, maximum payout ratio, maximum payout amount, and distributions and discretionary bonus payments unless the firm is subject to a maximum payout ratio. The Board is adopting the proposed adjustments to the FR Y–9C, with some modifications to reflect changes made to the final rule. Firms will be required to report all items related to their buffer and potential limitations to provide critical information to the Board and public about the firm’s capital adequacy and ability to continue to operate under stress. As the final rule does not include a stress leverage buffer requirement, the corresponding new line items on the FR Y–9C have been removed from the final FR Y–9C forms and instructions. Responses to these items will enable the Board and public to monitor a firm’s capital adequacy relative to its requirements. The responses will also ensure that the Board and public can estimate the potential consequences for a firm if it were to undergo a period of stress. The proposed changes to the FR Y– 14A are also being adopted as proposed, with some modifications to reflect changes made to the final rule. Similar to the FR Y–9C, line items related to the stress leverage buffer requirement have not been added to the FR Y–14A in the final rule. In addition, the Board has not added items to the FR Y–14A related to buffer requirements that are reported on the FR Y–9C by firms not subject to the capital plan rule, as these items are not applicable to FR Y–14 reporters. The changes to the FR Y–14A reporting forms and instructions are essential to understand a firm’s projected capital positions under stress and will help 51 A firm generally will only be required to report this information annually in connection with its capital plan submission. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 shape the Federal Reserve’s evaluation of the firm’s capital planning processes. As described in Section IV above, the final rule provides that, within two business days of receipt of notice of its stress capital buffer requirement, a firm will be required to assess whether its planned capital distributions are consistent with the effective capital distribution limitations that will apply on a pro forma basis under the BHC baseline scenario throughout the fourth through seventh quarters of the planning horizon. In the event of an inconsistency, a firm will be required to reduce the capital distributions in its capital plan to be consistent with such limitations for those quarters of the planning horizon and provide the Board with its final planned capital actions following any such adjustments.52 To implement this requirement, a firm will be required to report its capital distributions on the FR Y–14A filed in connection with its initial capital plan on April 5, and in the event of any downward adjustments to its planned capital distributions, resubmit the FR Y–14A summary schedule within two business days of receiving its stress capital buffer requirement, that reflect the stress capital buffer requirement and its reduced planned capital distributions.53 At the time a firm submits its capital plan and FR Y–14A report as of December 31, the firm will not be aware of its stress capital buffer requirement for the upcoming cycle. For simplicity, the instructions contemplate that the firm will report the stress capital buffer requirement currently in effect, and assume that the stress capital buffer requirement remain constant through the planning horizon. However, the capital plan rule requires the firm’s planned capital distributions to be consistent with effective capital distribution limitations in the fourth through seventh quarters of the planning horizon and not the distribution limitations in effect in the prior cycle. Thus, it will be possible for a firm to include planned capital distributions in its FR Y–14A as of December 31 that will exceed those 52 The final rule also permits a firm to reduce its planned capital distributions if the firm’s planned capital distributions are consistent with effective capital distribution limitations. 53 In the event that a firm requests reconsideration of its stress capital buffer requirement, a firm must evaluate its planned capital distributions in light of any modifications to its stress capital buffer requirement. The firm may be required to reduce or permitted to increase its capital distributions depending on any modifications, and must provide the Board with its final planned capital actions reflecting those adjustments. In the event of any adjustment, the firm will be required to file the FR Y–14A to reflect its revised planned capital distributions. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 15591 permitted under the previous cycle’s capital plan, but be consistent with the capital plan rule because the firm’s stress capital buffer requirement declined. The Board is also making changes to its regulatory reports to reflect the changes to the circumstances in which a firm is required to seek prior approval from the Federal Reserve before making capital distributions in excess of these included in the firm’s capital plan. Currently, a firm is required to submit an updated FR Y–14A Schedule C, Regulatory Capital Instruments prior to making any additional capital distributions. As discussed in Section IV.C, the Board is eliminating the prior approval requirement. To reflect these changes in the regulatory reports, a firm will be required to submit an updated FR Y–14A Schedule C, Regulatory Capital Instruments, within 15 days after notice of distributions in excess of planned distributions as required under the capital plan rule. This reporting requirement will allow the Board to continue to monitor a firm’s capital distributions while reducing burden. IX. Administrative Law Matters A. Paperwork Reduction Act Certain provisions of the final rule contain ‘‘collections of information’’ within the meaning of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501–3521). The Board may not conduct or sponsor, and a 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 Board reviewed the final rule under the authority delegated to the Board by OMB. The Board did not receive any specific comments on the PRA for the FR Y–14 or FR Y–13. Regarding the proposed changes to the FR Y–9C, one commenter suggested that it was unnecessary for firms subject to the capital plan rule to report eligible retained income, maximum payout ratio, maximum payout amount, and distributions and discretionary bonus payments unless the firm is subject to a maximum payout ratio. As noted above, responses to these items will enable the Board and public to monitor a firm’s capital adequacy relative to its requirements. The responses will also ensure that the Board and public can estimate the potential consequences for a firm if it were to undergo a period of stress. The final rule contains reporting requirements subject to the PRA. As described further below, the Board is revising the reporting requirements E:\FR\FM\18MRR2.SGM 18MRR2 15592 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations found in section 12 CFR 225.8. Additionally, the Board is revising certain other collections of information to reflect the changes proposed in the proposed rule. Adopted Revision, With Extension for Three Years, of the Following Information Collections: (1) Report title: Financial Statements for Holding Companies. Agency form number: FR Y–9C; FR Y– 9LP; FR Y–9SP; FR Y–9ES; FR Y–9CS. OMB control number: 7100–0128. Effective date: December 31, 2020. Frequency: Quarterly, semiannually, and annually. Affected public: Businesses or other for-profit. Respondents: Bank holding companies (BHCs), savings and loan holding companies (SLHCs),54 securities holding companies (SHCs), and U.S. intermediate holding companies (IHCs) (collectively, holding companies (HCs)). Estimated number of respondents: FR Y–9C (non AA HCs) with less than $5 billion in total assets—155, FR Y–9C (non AA HCs) with $5 billion or more in total assets—189, FR Y–9C (AA HCs)—19, FR Y–9LP—434, FR Y–9SP—3,960, FR Y–9ES—83, FR Y–9CS—236. Estimated average hours per response: Reporting FR Y–9C (non AA HCs) with less than $5 billion in total assets—40.48, FR Y–9C (non AA HCs) with $5 billion or more in total assets—46.45, FR Y–9C (AA HCs)—48.59, FR Y–9LP—5.27, FR Y–9SP—5.40, FR Y–9ES—0.50, FR Y–9CS—0.50. Recordkeeping FR Y–9C (non AA HCs) with less than $5 billion in total assets—1, FR Y–9C (non AA HCs) with $5 billion or more in total assets—1, FR Y–9C (AA HCs)—1, FR Y–9LP—1, FR Y–9SP—0.50, FR Y–9ES—0.50, FR Y–9CS—0.50. Estimated annual burden hours: jbell on DSKJLSW7X2PROD with RULES2 Reporting FR Y–9C (non AA HCs) with less than $5 billion in total assets—25,098, 54 An SLHC must file one or more of the FR Y– 9 family of reports unless it is: (1) A grandfathered unitary SLHC with primarily commercial assets and thrifts that make up less than 5 percent of its consolidated assets; or (2) a SLHC that primarily holds insurance-related assets and does not otherwise submit financial reports with the SEC pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 FR Y–9C (non AA HCs) with $5 billion or more in total assets—35,116, FR Y–9C (AA HCs)—3,693, FR Y–9LP—9,149, FR Y–9SP—42,768, FR Y–9ES—42, FR Y–9CS—471. Recordkeeping FR Y–9C (non AA HCs) with less than $5 billion in total assets—620, FR Y–9C (non AA HCs) with $5 billion or more in total assets—756, FR Y–9C (AA HCs)—76, FR Y–9LP—1,736, FR Y–9SP—3,960, FR Y–9ES—42, FR Y–9CS—472. General description of report: The FR Y–9 family of reporting forms continues to be the primary source of financial data on holding companies that examiners rely on in the intervals between on-site inspections. Financial data from these reporting forms are used to detect emerging financial problems, to review performance and conduct preinspection analysis, to monitor and evaluate capital adequacy, to evaluate holding company mergers and acquisitions, and to analyze a holding company’s overall financial condition to ensure the safety and soundness of its operations. The FR Y–9C, FR Y–9LP, and FR Y–9SP serve as standardized financial statements for the consolidated holding company. The Board requires HCs to provide standardized financial statements to fulfill the Board’s statutory obligation to supervise these organizations. The FR Y–9ES is a financial statement for HCs that are Employee Stock Ownership Plans. The Board uses the FR Y–9CS (a free-form supplement) to collect additional information deemed to be critical and needed in an expedited manner. HCs file the FR Y–9C on a quarterly basis, the FR Y–9LP quarterly, the FR Y–9SP semiannually, the FR Y–9ES annually, and the FR Y–9CS on a schedule that is determined when this supplement is used. Legal authorization and confidentiality: The Board has the authority to impose the reporting and recordkeeping requirements associated with the FR Y–9 family of reports on BHCs pursuant to section 5 of the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1844); on SLHCs pursuant to section 10(b)(2) and (3) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)(2) and (3)), as amended by sections 369(8) and 604(h)(2) of the Dodd-Frank Wall Street and Consumer Protection Act (Dodd-Frank Act); on U.S. IHCs pursuant to section 5 of the BHC Act (12 U.S.C 1844), as well as PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 pursuant to sections 102(a)(1) and 165 of the Dodd-Frank Act (12 U.S.C. 511(a)(1) and 5365); and on securities holding companies pursuant to section 618 of the Dodd-Frank Act (12 U.S.C. 1850a(c)(1)(A)). The obligation to submit the FR Y–9 series of reports, and the recordkeeping requirements set forth in the respective instructions to each report, are mandatory. With respect to the FR Y–9C report, Schedule HI’s data item 7(g) ‘‘FDIC deposit insurance assessments,’’ Schedule HC–P’s data item 7(a) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to U.S. government agencies and government sponsored agencies,’’ and Schedule HC–P’s data item 7(b) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to other parties’’ are considered confidential commercial and financial information. Such treatment is appropriate under exemption 4 of the Freedom of Information Act (FOIA) (5 U.S.C. 552(b)(4)) because these data items reflect commercial and financial information that is both customarily and actually treated as private by the submitter, and which the Board has previously assured submitters will be treated as confidential. It also appears that disclosing these data items may reveal confidential examination and supervisory information, and in such instances, this information would also be withheld pursuant to exemption 8 of the FOIA (5 U.S.C. 552(b)(8)), which protects information related to the supervision or examination of a regulated financial institution. In addition, for both the FR Y–9C report and the FR Y–9SP report, Schedule HC’s memorandum item 2.b., the name and email address of the external auditing firm’s engagement partner, is considered confidential commercial information and protected by exemption 4 of the FOIA (5 U.S.C. 552(b)(4)) if the identity of the engagement partner is treated as private information by HCs. The Board has assured respondents that this information will be treated as confidential since the collection of this data item was proposed in 2004. Aside from the data items described above, the remaining data items on the FR Y–9C report and the FR Y–9SP report are generally not accorded confidential treatment. The data items collected on FR Y–9LP, FR Y–9ES, and FR Y–9CS reports, are also generally not accorded confidential treatment. As provided in the Board’s Rules Regarding Availability of Information (12 CFR part 261), however, a respondent may request confidential treatment for any E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations data items the respondent believes should be withheld pursuant to a FOIA exemption. The Board will review any such request to determine if confidential treatment is appropriate, and will inform the respondent if the request for confidential treatment has been denied. To the extent the instructions to the FR Y–9C, FR Y–9LP, FR Y–9SP, and FR Y–9ES reports each respectively direct the financial institution to retain the workpapers and related materials used in preparation of each report, such material would only be obtained by the Board as part of the examination or supervision of the financial institution. Accordingly, such information is considered confidential pursuant to exemption 8 of the FOIA (5 U.S.C. 552(b)(8)). In addition, the workpapers and related materials may also be protected by exemption 4 of the FOIA, to the extent such financial information is treated as confidential by the respondent (5 U.S.C. 552(b)(4)). Current actions: The final rule will modify the FR Y–9C for holding companies subject to the capital plan rule in order to collect information regarding a firm’s stress capital buffer requirement, GSIB surcharge, countercyclical capital buffer amount, as applicable, and any applicable distribution limitations under the regulatory capital rule. Specifically, the final rule will add new line items to the FR Y–9C Schedule HC–R Part I to collect the following information from holding companies subject to the capital plan rule: (1) The firm’s capital conservation buffer requirements (including its standardized approach capital conservation buffer requirement and the advanced approaches capital conservation buffer requirement) and leverage buffer requirement; (2) the firm’s capital conservation buffer, advanced approaches capital conservation buffer, and, as applicable, leverage buffer as of the preceding quarter-end, which is the difference between the firm’s relevant capital ratio and the relevant minimum requirement; and (3) information needed to calculate the firm’s maximum payout amount, including the firm’s planned total capital distributions, eligible retained income, and maximum payout ratio. The new line items will apply to top-tier holding companies subject to the Board’s capital plan rule (BHCs and IHCs with total consolidated assets of $100 billion or more), for a total of 39 of the existing FR Y–9C respondents. The Board estimates that revisions to the FR Y–9 would increase the estimated average hours per response for FR Y–9C (non AA HCs) with $5 billion or more in total assets filers by VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 0.11 hours and FR Y–9C (AA HCs) filers by 1 hour. The Board estimates that revisions to the FR Y–9 would increase the estimated annual burden by 159 hours. The draft reporting form and instructions for the FR Y–9C are available at https:// www.federalreserve.gov/apps/ reportforms/review.aspx. (2) Report title: Capital Assessments and Stress Testing. Agency form number: FR Y–14A/Q/ M. OMB control number: 7100–0341. Effective date: The revisions are effective with the December 31, 2020, as-of date, except for the revisions to FR Y–14A, Schedule C, which are effective when the final rule goes into effect. Frequency: Annually, quarterly, and monthly. Affected public: Businesses or other for-profit. Respondents: These collections of information are applicable to bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), and savings and loan holding companies (SLHCs) 55 with $100 billion or more in total consolidated assets, as based on: (i) The average of the firm’s total consolidated assets in the four most recent quarters as reported quarterly on the firm’s Consolidated Financial Statements for Holding Companies (FR Y–9C); or (ii) if the firm has not filed an FR Y–9C for each of the most recent four quarters, then the average of the firm’s total consolidated assets in the most recent consecutive quarters as reported quarterly on the firm’s FR Y–9Cs. Reporting is required as of the first day of the quarter immediately following the quarter in which the respondent meets this asset threshold, unless otherwise directed by the Board. Estimated number of respondents: FR Y–14A/Q—36; FR Y–14M—34.56 Estimated average hours per response: FR Y–14A—1,085, FR Y–14Q—1,920, FR Y–14M—1,072, FR Y–14 Ongoing Automation Revisions—480, FR Y–14 Attestation—2,560. Estimated annual burden hours: 55 SLHCs with $100 billion or more in total consolidated assets become members of the FR Y– 14Q and FR Y–14M panels effective June 30, 2020, and the FR Y–14A panel effective December 31, 2020. See 84 FR 59032 (November 1, 2019). 56 The estimated number of respondents for the FR Y–14M is lower than for the FR Y–14Q and FR Y–14A because, in recent years, certain respondents to the FR Y–14A and FR Y–14Q have not met the materiality thresholds to report the FR Y–14M due to their lack of mortgage and credit activities. The Board expects this situation to continue for the foreseeable future. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 15593 FR Y–14A—39,060, FR Y–14Q—276,480, FR Y–14M—437,376, FR Y–14 Ongoing Automation Revisions—17,280, FR Y–14 Attestation—33,280. General description of report: This family of information collections is composed of the following three reports: The FR Y–14A collects quantitative projections of balance sheet, income, losses, and capital across a range of macroeconomic scenarios and qualitative information on methodologies used to develop internal projections of capital across scenarios.57 The quarterly FR Y–14Q collects granular data on various asset classes, including loans, securities, trading assets, and PPNR for the reporting period. The monthly FR Y–14M is comprised of three retail portfolio- and loan-level schedules, and one detailed addressmatching schedule to supplement two of the portfolio and loan-level schedules. The data collected through the FR Y– 14A/Q/M reports provide the Board with the information needed to help ensure that large firms have strong, firm-wide risk measurement and management processes supporting their internal assessments of capital adequacy and that their capital resources are sufficient given their business focus, activities, and resulting risk exposures. The FR Y–14 reports are used to support the Board’s annual Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST) exercises, which complement other Board supervisory efforts aimed at enhancing the continued viability of large firms, including continuous monitoring of firms’ planning and management of liquidity and funding resources, as well as regular assessments of credit, market and operational risks, and associated risk management practices. Information gathered in this data collection is also used in the supervision and regulation of respondent financial institutions. 57 On October 10, 2019, the Board issued a final rule that eliminated the requirement for firms subject to Category IV standards to conduct and publicly disclose the results of a company-run stress test. See 84 FR 59032 (Nov. 1, 2019). That final rule maintained the existing FR Y–14 substantive reporting requirements for these firms in order to provide the Board with the data it needs to conduct supervisory stress testing and inform the Board’s ongoing monitoring and supervision of its supervised firms. However, as noted in the final rule, the Board intends to provide greater flexibility to banking organizations subject to Category IV standards in developing their annual capital plans and consider further change to the FR Y–14 forms as part of a separate proposal. See 84 FR 59032, 59063. E:\FR\FM\18MRR2.SGM 18MRR2 15594 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 Respondent firms are currently required to complete and submit up to 17 filings each year: One annual FR Y–14A filing, four quarterly FR Y–14Q filings, and 12 monthly FR Y–14M filings. Compliance with the information collection is mandatory. Legal authorization and confidentiality: The Board has the authority to require BHCs file the FR Y– 14 reports pursuant to section 5(c) of the BHC Act (12 U.S.C. 1844(c)), and pursuant to section 165(i) of the DoddFrank Act (12 U.S.C. 5365(i)), as amended by section 401(a) and (e) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).58 The Board has authority to require SLHCs file the FR Y–14 reports pursuant to section 10(b) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)), as amended by section 369(8) and 604(h)(2) of the Dodd-Frank Act. Lastly, the Board has authority to require IHCs file the FR Y–14 reports pursuant to section 5 of the BHC Act (12 U.S.C 1844), as well as pursuant to sections 102(a)(1) and 165 of the DoddFrank Act (12 U.S.C. 5311(a)(1) and 5365).59 In addition, section 401(g) of EGRRCPA (12 U.S.C. 5365) note, provides that the Board has the authority to establish enhanced prudential standards for foreign banking organizations with total consolidated assets of $100 billion or more, and clarifies that nothing in section 401 ‘‘shall be construed to affect the legal effect of the final rule of the Board . . . entitled ‘Enhanced Prudential Standard for [BHCs] and Foreign Banking Organizations’ (79 FR 17240 (March 27, 2014)), as applied to foreign banking organizations with total consolidated assets equal to or greater than $100 million.’’ 60 The information reported in 58 Public Law 115–174, Title IV § 401(a) and (e), 132 Stat. 1296, 1356–59 (2018). 59 Section 165(b)(2) of the Dodd-Frank Act, 12 U.S.C. 5365(b)(2), refers to ‘‘foreign-based bank holding company.’’ Section 102(a)(1) of the DoddFrank Act, 12 U.S.C. 5311(a)(1), defines ‘‘bank holding company’’ for purposes of Title I of the Dodd-Frank Act to include foreign banking organizations that are treated as bank holding companies under section 8(a) of the International Banking Act of 1978, 12 U.S.C. 3106(a). The Board has required, pursuant to section 165(b)(1)(B)(iv) of the Dodd-Frank Act, 12 U.S.C. 5365(b)(1)(B)(iv), certain foreign banking organizations subject to section 165 of the Dodd-Frank Act to form U.S. intermediate holding companies. Accordingly, the parent foreign-based organization of a U.S. IHC is treated as a BHC for purposes of the BHC Act and section 165 of the Dodd-Frank Act. Because Section 5(c) of the BHC Act authorizes the Board to require reports from subsidiaries of BHCs, section 5(c) provides additional authority to require U.S. IHCs to report the information contained in the FR Y– 14 reports. 60 The Board’s Final Rule referenced in section 401(g) of EGRRCPA specifically stated that the VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 the FR Y–14 reports is collected as part of the Board’s supervisory process, and therefore, such information is afforded confidential treatment pursuant to exemption 8 of the Freedom of Information Act (FOIA) (5 U.S.C. 552(b)(8)). In addition, confidential commercial or financial information, which a submitter actually and customarily treats as private, and which has been provided pursuant to an express assurance of confidentiality by the Board, is considered exempt from disclosure under exemption 4 of the FOIA (5 U.S.C. 552(b)(4). Current actions: To implement the reporting requirements of the final rule, the Board revised the FR Y–14A report to in order to collect information regarding a firm’s capital conservation buffer requirements (including the stress capital buffer requirement) and any applicable distribution limitations under the regulatory capital rule. Specifically, the Board revised the FR Y–14A, Schedule A.1.d (Capital) report to collect the following items under firm baseline conditions: (1) The firm’s capital conservation buffer requirement and, as applicable, leverage buffer requirement for each quarter of the planning horizon; (2) the firm’s capital conservation buffer and, as applicable, leverage buffer as of the preceding quarter-end for each quarter of the planning horizon, which is the difference between the firm’s relevant capital ratio and the relevant minimum requirement; and (3) information needed to calculate the firm’s maximum payout amount, including the firm’s planned total capital distributions, eligible retained income, and maximum payout ratio for each quarter of the planning horizon. Finally, to align with the final rule, the Board has revised the FR Y–14A instructions to require a firm to submit an updated FR Y–14A, Schedule C (Regulatory Capital Instruments), within 15 days after notice of distributions in excess of planned distributions as required under the capital plan rule. The Board estimates that revisions to the FR Y–14 would increase the estimated average hours per response for FR Y–14A filers by 20 hours. The Board estimates that revisions to the FR Y–14 would increase the estimated annual burden by 720 hours. The draft reporting form and instructions for the FR Y–14A are available at https:// www.federalreserve.gov/apps/ reportforms/review.aspx. (3) Title of information collection: Reporting and Recordkeeping Board would require IHCs to file the FR Y–14 reports. See 79 FR 17240, 17304 (March 27, 2014). PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 Requirements Associated with Regulation Y (Capital Plans). Agency form number: FR Y–13. OMB control number: 7100–0342. Effective date: Effective date of the final rule. Frequency: Annually. Affected public: Businesses or other for-profit. Respondents: BHCs and IHCs. Estimated number of respondents: Reporting Section 225.8(e)(1)(ii)—34. Section 225.8(e)(3)—25. Section 225.8(e)(4)—10. Section 225.8(h)(2)(ii)(B)—2. Section 225.8(j)—2. Sections 225.8(k)(1) and (2)—3. Section 225.8(k)(4)—2. Recordkeeping Section 225.8(e)(1)(i)—34. Section 225.8(e)(1)(iii)—34. Estimated average hours per response: Reporting 61 Section 225.8(e)(1)(ii)—80. Section 225.8(e)(3)—1,005. Section 225.8(e)(4)—100. Section 225.8(h)(2)(ii)(B)—2. Section 225.8(j)—16. Sections 225.8(k)(1) and (2)—100. Section 225.8(k)(4)—16. Recordkeeping Section 225.8(e)(1)(i)—8,920. Section 225.8(e)(1)(iii)—100. Estimated annual burden hours: Reporting Section 225.8(e)(1)(ii)—2,720. Section 225.8(e)(3)—25,125. Section 225.8(e)(4)—1,000. Section 225.8(h)(2)(ii)(B)—4. Section 225.8(j)—32. Sections 225.8(k)(1) and (2)—300. Section 225.8(k)(4)—32. Recordkeeping Section 225.8(e)(1)(i)—303,280. Section 225.8(e)(1)(iii)—3,400. General description of report: Regulation Y (12 CFR part 225) requires large bank holding companies (BHCs) and U.S. intermediate holding companies (IHCs) to submit capital plans to the Federal Reserve on an annual basis and to request prior approval from the Federal Reserve under certain circumstances before making a capital distribution. Legal authorization and confidentiality: Section 616(a) of the 61 The reporting requirement in section 225.8(l) is identical to a reporting requirement in the FR Y– 14A. The burden associated with this requirement is accounted for in the burden estimate for the FR Y–14 information collection. E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations Dodd-Frank Act amended section 5(b) of the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1844(b)) to specifically authorize the Board to issue regulations and orders relating to capital requirements for BHCs. The Board is also authorized to collect and require reports from BHCs pursuant to section 5(c) of the BHC Act (12 U.S.C. 1844(c)). Additionally, the Board’s rulemaking authority for the information collection and disclosure requirements associated with the FR Y–13 is found in sections 908 and 910 of the International Lending Supervision Act of 1983, as amended (12 U.S.C. 3907 and 3909). Additional support for FR Y–13 is found in sections 165 and 166 of the DoddFrank Act (12 U.S.C. 5365 and 5366).62 The obligation to respond to this information collection is mandatory. The capital plan information submitted by the covered BHC will consist of confidential and proprietary modeling information and highly sensitive business plans, such as acquisition plans submitted to the Board for approval. Therefore, it appears the information will be subject to withholding under exemption 4 of the Freedom of Information Act (5 U.S.C. 552(b)(4)). Current actions: The final rule modifies the process by which a firm determines the final planned capital distributions included in its capital plan. In addition, under certain conditions, the final rule removes the requirement for a firm to request prior approval to make distributions that exceed the amount included in its capital plan. The final rule also modifies the timeline and procedures related to a firm’s stress capital buffer requirement, requests for reconsideration, and capital plan resubmissions. The Board estimates that response to notice; adjustments to planned capital distributions (reporting) (225.8(h)(2)(ii)) would be 2 hours per response. The Board estimates that revisions to the FR Y–13 would decrease the estimated annual burden by 2,028 hours. B. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) generally requires that, in connection jbell on DSKJLSW7X2PROD with RULES2 62 Section 165 requires the Board to impose enhances prudential standards on large BHCs, including stress testing requirements; enhanced capital, liquidity, and risk management requirements; and a requirement to establish a risk committee. Section 166 requires the Board to impose early remediation requirements on large BHCs under which a large BHC experiencing financial distress must take specific remedial actions in order to minimize the probability that the company will become insolvent and to minimize the potential harm of such insolvency the United States. VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 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.63 However, a final 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 Small Business Administration (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.64 For the reasons described below and under section 605(b) of the RFA, the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities. As of December 31, 2019, there were 2,799 bank holding companies, 171 savings and loan holding companies, and 497 state member banks that would fit the SBA’s current definition of ‘‘small entity’’ for purposes of the RFA. In connection with the proposed rule, the Board stated that it did not believe the proposed rule would have a significant economic impact on a substantial number of small entities. Nevertheless, the Board published and invited comment on an initial regulatory flexibility analysis of the proposed rule. No comments were received on the initial regulatory flexibility analysis. The Board is finalizing amendments to Regulations Q,65 Y,66 and YY 67 that would affect the regulatory requirements that apply to bank holding companies with total consolidated assets of $50 billion or more, any nonbank financial company supervised by the Board that becomes subject to the capital planning requirements pursuant to a rule or order of the Board, and to U.S. intermediate holding companies established pursuant to Regulation YY. The reasons and justification for the final rule are described above in more detail in this SUPPLEMENTARY INFORMATION. 15595 The Board has considered whether to conduct a final regulatory flexibility analysis in connection with this final rule. However, the assets of institutions subject to this final rule substantially exceed the $600 million asset threshold under which a banking organization is considered a ‘‘small entity’’ under SBA regulations. Because the final rule is not likely to apply to any depository institution or company with assets of $600 million or less, it is not expected to apply to any small entity for purposes of the RFA. The Board does not believe that the final rule duplicates, overlaps, or conflicts with any other Federal rules. In light of the foregoing, the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities supervised. C. Use of Plain Language Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board has sought to present the proposed rule in a simple and straightforward manner, and invites comment on the use of plain language. For example: • Have we organized the material to suit your needs? If not, how could the rule be more clearly stated? • Are the requirements in the rule clearly stated? If not, how could the rule be more clearly stated? • Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification? • Will a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes will make the regulation easier to understand? • Will more, but shorter, sections be better? If so, which sections should be changed? • What else could we do to make the regulation easier to understand? List of Subjects 63 5 U.S.C. 601 et. seq. 64 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. See 84 FR 34261 (July 18, 2019). Consistent with the General Principles of Affiliation in 13 CFR 121.103, the Board counts the assets of all domestic and foreign affiliates when determining if the Board should classify a Board-supervised institution as a small entity. 65 See 12 CFR part 217. 66 See 12 CFR part 225. 67 See 12 CFR part 252. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Risk, Securities. 12 CFR Part 225 Administrative practice and procedure, Banks, Banking, Capital planning, Holding companies, Reporting E:\FR\FM\18MRR2.SGM 18MRR2 15596 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations and recordkeeping requirements, Securities, Stress testing. 12 CFR Part 252 Administrative practice and procedure, Banks, banking, Credit, Federal Reserve System, Holding companies, Investments, Qualified financial contracts, Reporting and recordkeeping requirements, Securities. Authority and Issuance For the reasons stated in the Supplementary Information, the Board of Governors of the Federal Reserve System amends 12 CFR chapter II as follows: PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q) 1. The authority citation for part 217 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371. 2. Section 217.11 is revised to read as follows: ■ jbell on DSKJLSW7X2PROD with RULES2 § 217.11 Capital conservation buffer, countercyclical capital buffer amount, and GSIB surcharge. (a) Capital conservation buffer—(1) Composition of the capital conservation buffer. The capital conservation buffer is composed solely of common equity tier 1 capital. (2) Definitions. For purposes of this section, the following definitions apply: (i) Eligible retained income. (A) The eligible retained income of a Boardregulated institution is the Boardregulated institution’s net income, calculated in accordance with the instructions to the Call Report or the FR Y–9C, as applicable, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. (B) Notwithstanding paragraph (a)(2)(i)(A) of this section, the eligible retained income of a Board-regulation institution subject to 12 CFR 225.8 is the average of the Board-regulated institution’s net income, calculated in accordance with the instructions to the FR Y–9C for the four calendar quarters preceding the current calendar quarter, if: (1) The Board-regulated institution is subject to a maximum payout ratio determined by its standardized approach capital conservation buffer under paragraph (c)(1)(ii) of this section; and VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 (2) The Board-regulated institution’s standardized approach capital conservation buffer is greater than the sum of: (i) 2.5 percent; (ii) Any applicable countercyclical capital buffer amount calculated in accordance with paragraph (b) of this section; and (iii) Any applicable GSIB surcharge calculated in accordance with paragraph (d) of this section. (ii) Maximum payout amount. A Board-regulated institution’s maximum payout amount for the current calendar quarter is equal to the Board-regulated institution’s eligible retained income, multiplied by its maximum payout ratio. (iii) Maximum payout ratio. The maximum payout ratio is the percentage of eligible retained income that a Boardregulated institution can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. For a Board-regulated institution that is not subject to 12 CFR 225.8, the maximum payout ratio is determined by the Board-regulated institution’s capital conservation buffer, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to § 217.11(a)(4)(iv). For a Board-regulated institution that is subject to 12 CFR 225.8, the maximum payout ratio is determined under paragraph (c)(1)(ii) of this section. (iv) Private sector credit exposure. Private sector credit exposure means an exposure to a company or an individual that is not an exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the European Stability Mechanism, the European Financial Stability Facility, the International Monetary Fund, a MDB, a PSE, or a GSE. (v) Leverage buffer requirement. A bank holding company’s leverage buffer requirement is 2.0 percent. (vi) Stress capital buffer requirement. A bank holding company’s stress capital buffer requirement is the stress capital buffer requirement determined under 12 CFR 225.8. (3) Calculation of capital conservation buffer. (i) A Board-regulated institution that is not subject to 12 CFR 225.8 has a capital conservation buffer equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter: (A) The Board-regulated institution’s common equity tier 1 capital ratio minus the Board-regulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10; PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 (B) The Board-regulated institution’s tier 1 capital ratio minus the Boardregulated institution’s minimum tier 1 capital ratio requirement under § 217.10; and (C) The Board-regulated institution’s total capital ratio minus the Boardregulated institution’s minimum total capital ratio requirement under § 217.10; or (ii) Notwithstanding paragraphs (a)(3)(i)(A) through (C) of this section, if a Board-regulated institution’s common equity tier 1, tier 1 or total capital ratio is less than or equal to the Boardregulated institution’s minimum common equity tier 1, tier 1 or total capital ratio requirement under § 217.10, respectively, the Boardregulated institution’s capital conservation buffer is zero. (4) Limits on distributions and discretionary bonus payments. (i) A Board-regulated institution that is not subject 12 CFR 225.8 shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed its maximum payout amount. (ii) A Board-regulated institution that is not subject 12 CFR 225.8 and that has a capital conservation buffer that is greater than 2.5 percent plus 100 percent of its applicable countercyclical capital buffer amount in accordance with paragraph (b) of this section is not subject to a maximum payout amount under paragraph (a)(2)(ii) of this section. (iii) Except as provided in paragraph (a)(4)(iv) of this section, a Boardregulated institution that is not subject to 12 CFR 225.8 may not make distributions or discretionary bonus payments during the current calendar quarter if the Board-regulated institution’s: (A) Eligible retained income is negative; and (B) Capital conservation buffer was less than 2.5 percent as of the end of the previous calendar quarter. (iv) Prior approval. Notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, the Board may permit a Board-regulated institution that is not subject to 12 CFR 225.8 to make a distribution or discretionary bonus payment upon a request of the Board-regulated institution, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Board-regulated institution. In making such a determination, the Board will consider the nature and extent of the request and E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations 15597 the particular circumstances giving rise to the request. TABLE 1 TO § 217.11(A)(4)(IV)—CALCULATION OF MAXIMUM PAYOUT AMOUNT Capital conservation buffer Maximum payout ratio jbell on DSKJLSW7X2PROD with RULES2 Greater than 2.5 percent plus 100 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount. Less than or equal to 2.5 percent plus 100 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount, and greater than 1.875 percent plus 75 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount. Less than or equal to 1.875 percent plus 75 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount, and greater than 1.25 percent plus 50 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount. Less than or equal to 1.25 percent plus 50 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount and greater than 0.625 percent plus 25 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount. Less than or equal to 0.625 percent plus 25 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount. (v) Other limitations on distributions. Additional limitations on distributions may apply under 12 CFR 225.4 and 12 CFR 263.202 to a Board-regulated institution that is not subject to 12 CFR 225.8. (b) Countercyclical capital buffer amount—(1) General. An advanced approaches Board-regulated institution or a Category III Board-regulated institution must calculate a countercyclical capital buffer amount in accordance with this paragraph (b) for purposes of determining its maximum payout ratio under Table 1 to § 217.11(a)(4)(iv) and, if applicable, Table 2 to § 217.11(c)(4)(iii). (i) Extension of capital conservation buffer. The countercyclical capital buffer amount is an extension of the capital conservation buffer as described in paragraph (a) or (c) of this section, as applicable. (ii) Amount. An advanced approaches Board-regulated institution or a Category III Board-regulated institution has a countercyclical capital buffer amount determined by calculating the weighted average of the countercyclical capital buffer amounts established for the national jurisdictions where the Board-regulated institution’s private sector credit exposures are located, as specified in paragraphs (b)(2) and (3) of this section. (iii) Weighting. The weight assigned to a jurisdiction’s countercyclical capital buffer amount is calculated by dividing the total risk-weighted assets for the Board-regulated institution’s private sector credit exposures located in the jurisdiction by the total risk-weighted assets for all of the Board-regulated institution’s private sector credit exposures. The methodology a Boardregulated institution uses for determining risk-weighted assets for purposes of this paragraph (b) must be VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 the methodology that determines its risk-based capital ratios under § 217.10. Notwithstanding the previous sentence, the risk-weighted asset amount for a private sector credit exposure that is a covered position under subpart F of this part is its specific risk add-on as determined under § 217.210 multiplied by 12.5. (iv) Location. (A) Except as provided in paragraphs (b)(1)(iv)(B) and (C) of this section, the location of a private sector credit exposure is the national jurisdiction where the borrower is located (that is, where it is incorporated, chartered, or similarly established or, if the borrower is an individual, where the borrower resides). (B) If, in accordance with subpart D or E of this part, the Board-regulated institution has assigned to a private sector credit exposure a risk weight associated with a protection provider on a guarantee or credit derivative, the location of the exposure is the national jurisdiction where the protection provider is located. (C) The location of a securitization exposure is the location of the underlying exposures, or, if the underlying exposures are located in more than one national jurisdiction, the national jurisdiction where the underlying exposures with the largest aggregate unpaid principal balance are located. For purposes of this paragraph (b), the location of an underlying exposure shall be the location of the borrower, determined consistent with paragraph (b)(1)(iv)(A) of this section. (2) Countercyclical capital buffer amount for credit exposures in the United States—(i) Initial countercyclical capital buffer amount with respect to credit exposures in the United States. The initial countercyclical capital buffer amount in the United States is zero. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 No payout ratio limitation applies. 60 percent. 40 percent. 20 percent. 0 percent. (ii) Adjustment of the countercyclical capital buffer amount. The Board will adjust the countercyclical capital buffer amount for credit exposures in the United States in accordance with applicable law.1 (iii) Range of countercyclical capital buffer amount. The Board will adjust the countercyclical capital buffer amount for credit exposures in the United States between zero percent and 2.5 percent of risk-weighted assets. (iv) Adjustment determination. The Board will base its decision to adjust the countercyclical capital buffer amount under this section on a range of macroeconomic, financial, and supervisory information indicating an increase in systemic risk including, but not limited to, the ratio of credit to gross domestic product, a variety of asset prices, other factors indicative of relative credit and liquidity expansion or contraction, funding spreads, credit condition surveys, indices based on credit default swap spreads, options implied volatility, and measures of systemic risk. (v) Effective date of adjusted countercyclical capital buffer amount— (A) Increase adjustment. A determination by the Board under paragraph (b)(2)(ii) of this section to increase the countercyclical capital buffer amount will be effective 12 months from the date of announcement, unless the Board establishes an earlier effective date and includes a statement articulating the reasons for the earlier effective date. (B) Decrease adjustment. A determination by the Board to decrease the established countercyclical capital buffer amount under paragraph (b)(2)(ii) 1 The Board expects that any adjustment will be based on a determination made jointly by the Board, OCC, and FDIC. E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 15598 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations of this section will be effective on the day following announcement of the final determination or the earliest date permissible under applicable law or regulation, whichever is later. (vi) Twelve month sunset. The countercyclical capital buffer amount will return to zero percent 12 months after the effective date that the adjusted countercyclical capital buffer amount is announced, unless the Board announces a decision to maintain the adjusted countercyclical capital buffer amount or adjust it again before the expiration of the 12-month period. (3) Countercyclical capital buffer amount for foreign jurisdictions. The Board will adjust the countercyclical capital buffer amount for private sector credit exposures to reflect decisions made by foreign jurisdictions consistent with due process requirements described in paragraph (b)(2) of this section. (c) Calculation of buffers for Boardregulated institutions subject to 12 CFR 225.8— (1) Limits on distributions and discretionary bonus payments. (i) A Board-regulated institution that is subject to 12 CFR 225.8 shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed its maximum payout amount. (ii) Maximum payout ratio. The maximum payout ratio of a Boardregulated institution that is subject to 12 CFR 225.8 is the lowest of the payout ratios determined by its standardized approach capital conservation buffer; if applicable, advanced approaches capital conservation buffer; and, if applicable, leverage buffer; as set forth in Table 2 to § 217.11(c)(4)(iii). (iii) Capital conservation buffer requirements. A Board-regulated institution that is subject to 12 CFR 225.8 has: (A) A standardized approach capital conservation buffer requirement equal to its stress capital buffer requirement plus its applicable countercyclical capital buffer amount in accordance with paragraph (b) of this section plus its applicable GSIB surcharge in accordance with paragraph (d) of this section; and (B) If the Board-regulated institution calculates risk-weighted assets under subpart E of this part, an advanced approaches capital conservation buffer requirement equal to 2.5 percent plus the Board-regulated institution’s countercyclical capital buffer amount in accordance with paragraph (b) of this section plus its applicable GSIB VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 surcharge in accordance with paragraph (d) of this section. (iv) No maximum payout amount limitation. A Board-regulated institution that is subject to 12 CFR 225.8 is not subject to a maximum payout amount under paragraph (a)(2)(ii) of this section if it has: (A) A standardized approach capital conservation buffer, calculated under paragraph (c)(2) of this section, that is greater than its standardized approach capital conservation buffer requirement calculated under paragraph (c)(1)(iii)(A) of this section; (B) If applicable, an advanced approaches capital conservation buffer, calculated under paragraph (c)(3) of this section, that is greater than the Boardregulated institution’s advanced approaches capital conservation buffer requirement calculated under paragraph (c)(1)(iii)(B) of this section; and (C) If applicable, a leverage buffer, calculated under paragraph (c)(4) of this section, that is greater than its leverage buffer requirement as calculated under paragraph (a)(2)(v) of this section. (v) Negative eligible retained income. Except as provided in paragraph (c)(1)(vi) of this section, a Boardregulated institution that is subject to 12 CFR 225.8 may not make distributions or discretionary bonus payments during the current calendar quarter if, as of the end of the previous calendar quarter, the Board-regulated institution’s: (A) Eligible retained income is negative; and (B)(1) Standardized approach capital conservation buffer was less than its stress capital buffer requirement; or (2) If applicable, advanced approaches capital conservation buffer was less than 2.5 percent; or (3) If applicable, leverage buffer was less than its leverage buffer requirement. (vi) Prior approval. Notwithstanding the limitations in paragraphs (c)(1)(i) through (v) of this section, the Board may permit a Board-regulated institution that is subject to 12 CFR 225.8 to make a distribution or discretionary bonus payment upon a request of the Board-regulated institution, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Board-regulated institution. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request. (v) Other limitations on distributions. Additional limitations on distributions may apply under 12 CFR 225.4, 12 CFR 225.8, 12 CFR 252.63, 12 CFR 252.165, PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 and 12 CFR 263.202 to a Boardregulated institution that is subject to 12 CFR 225.8. (2) Standardized approach capital conservation buffer. (i) The standardized approach capital conservation buffer for Board-regulated institutions subject to 12 CFR 225.8 is composed solely of common equity tier 1 capital. (ii) A Board-regulated institution that is subject to 12 CFR 225.8 has a standardized approach capital conservation buffer that is equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter: (A) The ratio calculated by the Boardregulated institution under § 217.10(b)(1) or (c)(1)(i), as applicable, minus the Board-regulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10(a); (B) The ratio calculated by the Boardregulated institution under § 217.10(b)(2) or (c)(2)(i), as applicable, minus the Board-regulated institution’s minimum tier 1 capital ratio requirement under § 217.10(a); and (C) The ratio calculated by the Boardregulated institution under § 217.10(b)(3) or (c)(3)(i), as applicable, minus the Board-regulated institution’s minimum total capital ratio requirement under § 217.10(a). (iii) Notwithstanding paragraph (c)(2)(ii) of this section, if any of the ratios calculated by the Board-regulated institution under § 217.10(b)(1), (2), or (3), or if applicable § 217.10(c)(1)(i), (c)(2)(i), or (c)(3)(i) is less than or equal to the Board-regulated institution’s minimum common equity tier 1 capital ratio, tier 1 capital ratio, or total capital ratio requirement under § 217.10(a), respectively, the Board-regulated institution’s capital conservation buffer is zero. (3) Advanced approaches capital conservation buffer. (i) The advanced approaches capital conservation buffer is composed solely of common equity tier 1 capital. (ii) A Board-regulated institution that calculates risk-weighted assets under subpart E has an advanced approaches capital conservation buffer that is equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter: (A) The ratio calculated by the Boardregulated institution under § 217.10(c)(1)(ii) minus the Boardregulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10(a); (B) The ratio calculated by the Boardregulated institution under § 217.10(c)(2)(ii) minus the Board- E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations regulated institution’s minimum tier 1 capital ratio requirement under § 217.10(a); and (C) The ratio calculated by the Boardregulated institution under § 217.10(c)(3)(ii) minus the Boardregulated institution’s minimum total capital ratio requirement under § 217.10(a). (iii) Notwithstanding paragraph (c)(3)(ii) of this section, if any of the ratios calculated by the Board-regulated institution under § 217.10(c)(1)(ii), (c)(2)(ii), or (c)(3)(ii) is less than or equal to the Board-regulated institution’s minimum common equity tier 1 capital ratio, tier 1 capital ratio, or total capital ratio requirement under § 217.10(a), respectively, the Board-regulated institution’s advanced approaches capital conservation buffer is zero. (4) Leverage buffer. (i) The leverage buffer is composed solely of tier 1 capital. (ii) A global systemically important BHC has a leverage buffer that is equal 15599 to the global systemically important BHC’s supplementary leverage ratio minus 3 percent, calculated as of the last day of the previous calendar quarter. (iii) Notwithstanding paragraph (c)(4)(ii) of this section, if the global systemically important BHC’s supplementary leverage ratio is less than or equal to 3 percent, the global systemically important BHC’s leverage buffer is zero. TABLE 2 TO § 217.11(c)(4)(iii)—CALCULATION OF MAXIMUM PAYOUT RATIO Capital buffer 1 Payout ratio Greater than the Board-regulated institution’s buffer requirement 2 .............................................................................. Less than or equal to 100 percent of the Board-regulated institution’s buffer requirement, and greater than 75 percent of the Board-regulated institution’s buffer requirement. Less than or equal to 75 percent of the Board-regulated institution’s buffer requirement, and greater than 50 percent of the bank holding company’s buffer requirement. Less than or equal to 50 percent of the Board-regulated institution’s buffer requirement, and greater than 25 percent of the Board-regulated institution’s buffer requirement. Less than or equal to 25 percent of the Board-regulated institution’s buffer requirement ........................................... No payout ratio limitation applies. 60 percent. 40 percent. 20 percent. 0 percent. 1 A Board-regulated institution’s ‘‘capital buffer’’ means each of, as applicable, its standardized approach capital conservation buffer, advanced approaches capital conservation buffer, and leverage buffer. 2 A Board-regulated institution’s ‘‘buffer requirement’’ means each of, as applicable, its standardized approach capital conservation buffer requirement, advanced approaches capital conservation buffer requirement, and leverage buffer requirement. (d) GSIB surcharge. A global systemically important BHC must use its GSIB surcharge calculated in accordance with subpart H of this part for purposes of determining its maximum payout ratio under Table 2 to § 217.11(c)(4)(iii). PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 3. 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. 4. Section 225.8 is revised to read as follows: ■ jbell on DSKJLSW7X2PROD with RULES2 § 225.8 Capital planning and stress capital buffer requirement. (a) Purpose. This section establishes capital planning and prior notice and approval requirements for capital distributions by certain bank holding companies. This section also establishes the Board’s process for determining the stress capital buffer requirement applicable to these bank holding companies. (b) Scope and reservation of authority—(1) Applicability. Except as provided in paragraph (c) of this section, this section applies to: VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 (i) Any top-tier bank holding company domiciled in the United States with average total consolidated assets of $100 billion or more ($100 billion asset threshold); (ii) Any other bank holding company domiciled in the United States that is made subject to this section, in whole or in part, by order of the Board; (iii) Any U.S. intermediate holding company subject to this section pursuant to 12 CFR 252.153; and (iv) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board. (2) Average total consolidated assets. For purposes of this section, average total consolidated assets means the average of the total consolidated assets as reported by a bank holding company on its Consolidated Financial Statements for Holding Companies (FR Y–9C) for the four most recent consecutive quarters. If the bank holding company has not filed the FR Y–9C for each of the four most recent consecutive quarters, average total consolidated assets means the average of the company’s total consolidated assets, as reported on the company’s FR Y–9C, for the most recent quarter or consecutive quarters, as applicable. Average total consolidated assets are measured on the as-of date of the most recent FR Y–9C used in the calculation of the average. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 (3) Ongoing applicability. A bank holding company (including any successor bank holding company) that is subject to any requirement in this section shall remain subject to such requirements unless and until its total consolidated assets fall below $100 billion for each of four consecutive quarters, as reported on the FR Y–9C and effective on the as-of date of the fourth consecutive FR Y–9C. (4) Reservation of authority. Nothing in this section shall limit the authority of the Federal Reserve to issue or enforce a capital directive or take any other supervisory or enforcement action, including an action to address unsafe or unsound practices or conditions or violations of law. (5) Rule of construction. Unless the context otherwise requires, any reference to bank holding company in this section shall include a U.S. intermediate holding company and shall include a nonbank financial company supervised by the Board to the extent this section is made applicable pursuant to a rule or order of the Board. (6) Application of this section by order. The Board may apply this section, in whole or in part, to a bank holding company by order based on the institution’s size, level of complexity, risk profile, scope of operations, or financial condition. (c) Transition periods for certain bank holding companies. (1) A bank holding E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 15600 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations company that meets the $100 billion asset threshold (as measured under paragraph (b) of this section) on or before September 30 of a calendar year must comply with the requirements of this section beginning on January 1 of the next calendar year, unless that time is extended by the Board in writing. (2) A bank holding company that meets the $100 billion asset threshold after September 30 of a calendar year must comply with the requirements of this section beginning on January 1 of the second calendar year after the bank holding company meets the $100 billion asset threshold, unless that time is extended by the Board in writing. (3) The Board, or the appropriate Reserve Bank with the concurrence of the Board, may require a bank holding company described in paragraph (c)(1) or (2) of this section to comply with any or all of the requirements of this section if the Board, or appropriate Reserve Bank with concurrence of the Board, determines that the requirement is appropriate on a different date based on the company’s risk profile, scope of operation, or financial condition and provides prior notice to the company of the determination. (d) Definitions. For purposes of this section, the following definitions apply: (1) Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable. (2) Average total nonbank assets means the average of the total nonbank assets, calculated in accordance with the instructions to the FR Y–9LP, for the four most recent calendar quarters or, if the bank holding company has not filed the FR Y–9LP for each of the four most recent calendar quarters, for the most recent quarter or quarters, as applicable. (3) BHC baseline scenario means a scenario that reflects the bank holding company’s expectation of the economic and financial outlook, including expectations related to the bank holding company’s capital adequacy and financial condition. (4) BHC stress scenario means a scenario designed by a bank holding company that stresses the specific vulnerabilities of the bank holding company’s risk profile and operations, including those related to the bank holding company’s capital adequacy and financial condition. (5) Capital action means any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that the Federal Reserve determines could impact a bank holding company’s consolidated capital. (6) Capital distribution means a redemption or repurchase of any debt or VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that the Federal Reserve determines to be in substance a distribution of capital. (7) Capital plan means a written presentation of a bank holding company’s capital planning strategies and capital adequacy process that includes the mandatory elements set forth in paragraph (e)(2) of this section. (8) Capital plan cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year. (9) Capital policy means a bank holding company’s written principles and guidelines used for capital planning, capital issuance, capital usage and distributions, including internal capital goals; the quantitative or qualitative guidelines for capital distributions; the strategies for addressing potential capital shortfalls; and the internal governance procedures around capital policy principles and guidelines. (10) Common equity tier 1 capital has the same meaning as under 12 CFR part 217. (11) Effective capital distribution limitations means any limitations on capital distributions established by the Board by order or regulation, including pursuant to 12 CFR 217.11, 225.4, 252.63, 252.165, and 263.202, provided that, for any limitations based on riskweighted assets, such limitations must be calculated using the standardized approach, as set forth in 12 CFR part 217, subpart D. (12) Final planned capital distributions means the planned capital distributions included in a capital plan that include the adjustments made pursuant to paragraph (h) of this section, if any. (13) Global systemically important BHC means a bank holding company identified as a global systemically important BHC under 12 CFR 217.402. (14) GSIB surcharge has the same meaning as under 12 CFR 217.403. (15) Large and noncomplex bank holding company means any bank holding company subject to this section that: (i) Has, as of December 31 of the calendar year prior to the capital plan cycle: (A) Average total consolidated assets of less than $250 billion; (B) Average total nonbank assets of less than $75 billion; and PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 (ii) Is not a global systemically important BHC. (16) Nonbank financial company supervised by the Board means a company that the Financial Stability Oversight Council has determined under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323) shall be supervised by the Board and for which such determination is still in effect. (17) Planning horizon means the period of at least nine consecutive quarters, beginning with the quarter preceding the quarter in which the bank holding company submits its capital plan, over which the relevant projections extend. (18) Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the bank holding company by regulation or order, including, as applicable, the bank holding company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the bank holding company shall not use the advanced approaches to calculate its regulatory capital ratios. (19) Severely adverse scenario has the same meaning as under 12 CFR part 252, subpart E. (20) Stress capital buffer requirement means the amount calculated under paragraph (f) of this section. (21) Supervisory stress test means a stress test conducted using a severely adverse scenario and the assumptions contained in 12 CFR part 252, subpart E. (22) U.S. intermediate holding company means the top-tier U.S. company that is required to be established pursuant to 12 CFR 252.153. (e) Capital planning requirements and procedures—(1) Annual capital planning. (i) A bank holding company must develop and maintain a capital plan. (ii) A bank holding company must submit its complete capital plan to the Board and the appropriate Reserve Bank by April 5 of each calendar year, or such later date as directed by the Board or by the appropriate Reserve Bank with concurrence of the Board. (iii) The bank holding company’s board of directors or a designated committee thereof must at least annually and prior to submission of the capital plan under paragraph (e)(1)(ii) of this section: (A) Review the robustness of the bank holding company’s process for assessing capital adequacy; (B) Ensure that any deficiencies in the bank holding company’s process for E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations assessing capital adequacy are appropriately remedied; and (C) Approve the bank holding company’s capital plan. (2) Mandatory elements of capital plan. A capital plan must contain at least the following elements: (i) An assessment of the expected uses and sources of capital over the planning horizon that reflects the bank holding company’s size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including: (A) Estimates of projected revenues, losses, reserves, and pro forma capital levels, including regulatory capital ratios, and any additional capital measures deemed relevant by the bank holding company, over the planning horizon under a range of scenarios, including any scenarios provided by the Federal Reserve, the BHC baseline scenario, and at least one BHC stress scenario; (B) A discussion of the results of any stress test required by law or regulation, and an explanation of how the capital plan takes these results into account; and (C) A description of all planned capital actions over the planning horizon. Planned capital actions must be consistent with effective capital distribution limitations, except as may be adjusted pursuant to paragraph (h) of this section. In determining whether a bank holding company’s planned capital distributions are consistent with effective capital distribution limitations, a bank holding company must assume that: (1) Any countercyclical capital buffer amount currently applicable to the bank holding company remains at the same level, except that the bank holding company must reflect any increases or decreases in the countercyclical capital buffer amount that have been announced by the Board at the times indicated by the Board’s announcement for when such increases or decreases will take effect; and (2) Any GSIB surcharge currently applicable to the bank holding company when the capital plan is submitted remains at the same level, except that the bank holding company must reflect any increase in its GSIB surcharge pursuant to 12 CFR 217.403(d)(1), beginning in the fifth quarter of the planning horizon. (ii) A detailed description of the bank holding company’s process for assessing capital adequacy, including: (A) A discussion of how the bank holding company will, under expected and stressful conditions, maintain capital commensurate with its risks, VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 maintain capital above the regulatory capital ratios, and serve as a source of strength to its subsidiary depository institutions; (B) A discussion of how the bank holding company will, under expected and stressful conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary; (iii) The bank holding company’s capital policy; and (iv) A discussion of any expected changes to the bank holding company’s business plan that are likely to have a material impact on the bank holding company’s capital adequacy or liquidity. (3) Data collection. Upon the request of the Board or appropriate Reserve Bank, the bank holding company shall provide the Federal Reserve with information regarding: (i) The bank holding company’s financial condition, including its capital; (ii) The bank holding company’s structure; (iii) Amount and risk characteristics of the bank holding company’s on- and off-balance sheet exposures, including exposures within the bank holding company’s trading account, other trading-related exposures (such as counterparty-credit risk exposures) or other items sensitive to changes in market factors, including, as appropriate, information about the sensitivity of positions to changes in market rates and prices; (iv) The bank holding company’s relevant policies and procedures, including risk management policies and procedures; (v) The bank holding company’s liquidity profile and management; (vi) The loss, revenue, and expense estimation models used by the bank holding company for stress scenario analysis, including supporting documentation regarding each model’s development and validation; and (vii) Any other relevant qualitative or quantitative information requested by the Board or by the appropriate Reserve Bank to facilitate review of the bank holding company’s capital plan under this section. (4) Resubmission of a capital plan. (i) A bank holding company must update and resubmit its capital plan to the appropriate Reserve Bank within 30 calendar days of the occurrence of one of the following events: (A) The bank holding company determines there has been or will be a PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 15601 material change in the bank holding company’s risk profile, financial condition, or corporate structure since the bank holding company last submitted the capital plan to the Board and the appropriate Reserve Bank under this section; or (B) The Board, or the appropriate Reserve Bank with concurrence of the Board, directs the bank holding company in writing to revise and resubmit its capital plan for any of the following reasons: (1) The capital plan is incomplete or the capital plan, or the bank holding company’s internal capital adequacy process, contains material weaknesses; (2) There has been, or will likely be, a material change in the bank holding company’s risk profile (including a material change in its business strategy or any risk exposure), financial condition, or corporate structure; (3) The BHC stress scenario(s) are not appropriate for the bank holding company’s business model and portfolios, or changes in financial markets or the macro-economic outlook that could have a material impact on a bank holding company’s risk profile and financial condition require the use of updated scenarios; or (4) For a bank holding company subject to paragraph (i) of this section, the capital plan or the condition of the bank holding company raise any of the issues described in paragraph (i)(2) of this section. (ii) A bank holding company may resubmit its capital plan to the Federal Reserve if the Board or the appropriate Reserve Bank objects to the capital plan. (iii) The Board, or the appropriate Reserve Bank with concurrence of the Board, may extend the 30-day period in paragraph (e)(4)(i) of this section for up to an additional 60 calendar days, or such longer period as the Board or the appropriate Reserve Bank, with concurrence of the Board, determines appropriate. (iv) Any updated capital plan must satisfy all the requirements of this section; however, a bank holding company may continue to rely on information submitted as part of a previously submitted capital plan to the extent that the information remains accurate and appropriate. (5) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this section and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261). E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 15602 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations (f) Calculation of the stress capital buffer requirement—(1) General. The Board will determine the stress capital buffer requirement that applies under 12 CFR 217.11 pursuant to paragraph (f) of this section. (2) Stress capital buffer requirement calculation. A bank holding company’s stress capital buffer requirement is equal to the greater of: (i) The following calculation: (A) The ratio of a bank holding company’s common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, as of the final quarter of the previous capital plan cycle, unless otherwise determined by the Board; minus (B) The lowest projected ratio of the bank holding company’s common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, in any quarter of the planning horizon under a supervisory stress test; plus (C) The ratio of: (1) The sum of the bank holding company’s planned common stock dividends (expressed as a dollar amount) for each of the fourth through seventh quarters of the planning horizon; to (2) The risk-weighted assets of the bank holding company in the quarter in which the bank holding company had its lowest projected ratio of common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, in any quarter of the planning horizon under a supervisory stress test; and (ii) 2.5 percent. (3) Recalculation of stress capital buffer requirement. If a bank holding company resubmits its capital plan pursuant to paragraph (e)(4) of this section, the Board may recalculate the bank holding company’s stress capital buffer requirement. The Board will provide notice of whether the bank holding company’s stress capital buffer requirement will be recalculated within 75 calendar days after the date on which the capital plan is resubmitted, unless the Board provides notice to the company that it is extending the time period. (g) Review of capital plans by the Federal Reserve. The Board, or the appropriate Reserve Bank with concurrence of the Board, will consider the following factors in reviewing a bank holding company’s capital plan: (1) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses potential risks stemming from activities across the bank holding company and VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 the bank holding company’s capital policy; (2) The reasonableness of the bank holding company’s capital plan, the assumptions and analysis underlying the capital plan, and the robustness of its capital adequacy process; (3) Relevant supervisory information about the bank holding company and its subsidiaries; (4) The bank holding company’s regulatory and financial reports, as well as supporting data that would allow for an analysis of the bank holding company’s loss, revenue, and reserve projections; (5) The results of any stress tests conducted by the bank holding company or the Federal Reserve; and (6) Other information requested or required by the Board or the appropriate Reserve Bank, as well as any other information relevant, or related, to the bank holding company’s capital adequacy. (h) Federal Reserve notice of stress capital buffer requirement; final planned capital distributions—(1) Notice. The Board will provide a bank holding company with notice of its stress capital buffer requirement and an explanation of the results of the supervisory stress test. Unless otherwise determined by the Board, notice will be provided by June 30 of the calendar year in which the capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section or within 90 calendar days of receiving notice that the Board will recalculate the bank holding company’s stress capital buffer requirement pursuant to paragraph (f)(3) of this section. (2) Response to notice—(i) Request for reconsideration of stress capital buffer requirement. A bank holding company may request reconsideration of a stress capital buffer requirement provided under paragraph (h)(1) of this section. To request reconsideration of a stress capital buffer requirement, a bank holding company must submit to the Board a request pursuant to paragraph (j) of this section. (ii) Adjustments to planned capital distributions. Within two business days of receipt of notice of a stress capital buffer requirement under paragraph (h)(1) or (j)(5) of this section, as applicable, a bank holding company must: (A) Determine whether the planned capital distributions for the fourth through seventh quarters of the planning horizon under the BHC baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Board under paragraph (h)(1) or (j)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect; and (1) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the BHC baseline scenario would not be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (j)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect, the bank holding company must adjust its planned capital distributions such that its planned capital distributions would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (j)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect; or (2) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the BHC baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (j)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect, the bank holding company may adjust its planned capital distributions. A bank holding company may not adjust its planned capital distributions to be inconsistent with the effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (j)(5) of this section, as applicable; and (B) Notify the Board of any adjustments made to planned capital distributions for the fourth through seventh quarters of the planning horizon under the BHC baseline scenario. (3) Final planned capital distributions. The Board will consider the planned capital distributions, including any adjustments made pursuant to paragraph (h)(2)(ii) of this section, to be the bank holding company’s final planned capital distributions on the later of: (i) The expiration of the time for requesting reconsideration under paragraph (j) of this section; and (ii) The expiration of the time for adjusting planned capital distributions pursuant to paragraph (h)(2)(ii) of this section. (4) Effective date of final stress capital buffer requirement. (i) The Board will provide a bank holding company with its final stress capital buffer requirement E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations and confirmation of the bank holding company’s final planned capital distributions by August 31 of the calendar year that a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section, unless otherwise determined by the Board. A stress capital buffer requirement will not be considered final so as to be agency action subject to judicial review under 5 U.S.C. 704 during the pendency of a request for reconsideration made pursuant to paragraph (j) of this section or before the time for requesting reconsideration has expired. (ii) Unless otherwise determined by the Board, a bank holding company’s final planned capital distributions and final stress capital buffer requirement shall: (A) Be effective on October 1 of the calendar year in which a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section; and (B) Remain in effect until superseded. (5) Publication. With respect to any bank holding company subject to this section, the Board may disclose publicly any or all of the following: (i) The stress capital buffer requirement provided to a bank holding company under paragraph (h)(1) or (j)(5) of this section; (ii) Adjustments made pursuant to paragraph (h)(2)(ii); (iii) A summary of the results of the supervisory stress test; and (iv) Other information. (i) Federal Reserve action on a capital plan —(1) Timing of action. Board or the appropriate Reserve Bank with concurrence of the Board, will object, in whole or in part, to the capital plan or provide the bank holding company with a notice of non-objection to the capital plan: (i) By June 30 of the calendar year in which a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section; and (ii) For a capital plan resubmitted pursuant to paragraph (e)(4) of this section, within 75 calendar days after the date on which a capital plan is resubmitted, unless the Board provides notice to the company that it is extending the time period. (2) Basis for objection to a capital plan. The Board, or the appropriate Reserve Bank with concurrence of the Board, may object to a capital plan submitted by a bank holding company that is not a large and noncomplex bank holding company if it determines that: (i) Until January 1, 2021, except as provided in paragraph (i)(2)(ii) of this section, for a bank holding company that was subject to this section as of January 1, 2019, but whose capital plan VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 has not been subject to review and a potential qualitative objection under the criteria listed in paragraph (i)(2)(i)(A) through (C) of this section for any period of four consecutive years: (A) The bank holding company has material unresolved supervisory issues, including but not limited to issues associated with its capital adequacy process; (B) The assumptions and analysis underlying the bank holding company’s capital plan, or the bank holding company’s methodologies and practices that support its capital planning process, are not reasonable or appropriate; or (C) The bank holding company’s capital planning process or proposed capital distributions otherwise constitute an unsafe or unsound practice, or would violate any law, regulation, Board order, directive, or condition imposed by, or written agreement with, the Board or the appropriate Reserve Bank. In determining whether a capital plan or any proposed capital distribution would constitute an unsafe or unsound practice, the Board or the appropriate Reserve Bank would consider whether the bank holding company is and would remain in sound financial condition after giving effect to the capital plan and all proposed capital distributions. (ii) Notwithstanding paragraph (i)(2)(i) of this section, a bank holding company that was subject to this section as of January 1, 2019, and that receives a qualitative objection in the fourth year of the four-year period described in paragraph (i)(2)(i), pursuant to the criteria in paragraph (i)(2)(i)(A) through (C) of this section, will remain subject to a qualitative objection under this section until January 1 of the year after the first year in which the bank holding company does not receive a qualitative objection. (3) Notification of decision. The Board or the appropriate Reserve Bank will notify the bank holding company in writing of the reasons for a decision to object to a capital plan. (4) Publication of summary results. The Board may disclose publicly its decision to object or not object to a bank holding company’s capital plan under this section. Any disclosure under this paragraph (i)(4) will occur by June 30 of the calendar year in which a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section, unless otherwise determined by the Board. (j) Administrative remedies; request for reconsideration. The following requirements and procedures apply to any request under this paragraph (j): PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 15603 (1) General. To request reconsideration of an objection to a capital plan, provided under paragraph (i) of this section, or of a stress capital buffer requirement, provided under paragraph (h) of this section, a bank holding company must submit a written request for reconsideration. (2) Timing of request. (i) A request for reconsideration of an objection to a capital plan, provided under paragraph (i) of this section, must be received within 15 calendar days of receipt of a notice of objection to a capital plan. (ii) A request for reconsideration of a stress capital buffer requirement, provided under paragraph (h) of this section, must be received within 15 calendar days of receipt of a notice of a bank holding company’s stress capital buffer requirement. (3) Contents of request. (i) A request for reconsideration must include a detailed explanation of why reconsideration should be granted (that is, why a stress capital buffer requirement or objection to a capital plan should be reconsidered). With respect to any information that was not previously provided to the Federal Reserve in the bank holding company’s capital plan, the request should include an explanation of why the information should be considered. (ii) A request for reconsideration may include a request for an informal hearing on the bank holding company’s request for reconsideration. (4) Hearing. (i) The Board may, in its sole discretion, order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. (ii) An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party. (5) Response to request. (i) Within 30 calendar days of receipt of the bank holding company’s request for reconsideration of an objection to a capital plan submitted under paragraph (j)(2) of this section or within 30 days of the conclusion of an informal hearing conducted under paragraph (j)(4) of this section, the Board will notify the company of its decision to affirm, modify, or withdraw the objection to the bank holding company’s capital plan, or a specific capital distribution, provided that the Board may extend this period upon notice to the bank holding company. (ii) Within 30 calendar days of receipt of the bank holding company’s request for reconsideration of its stress capital buffer requirement submitted under E:\FR\FM\18MRR2.SGM 18MRR2 jbell on DSKJLSW7X2PROD with RULES2 15604 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations paragraph (j)(2) of this section or within 30 days of the conclusion of an informal hearing conducted under paragraph (j)(4) of this section, the Board will notify the company of its decision to affirm or modify the bank holding company’s stress capital buffer requirement, provided that the Board may extend this period upon notice to the bank holding company. (6) Distributions during the pendency of a request for reconsideration. During the pendency of the Board’s decision under paragraph (j)(5) of this section, the bank holding company may make capital distributions that are consistent with effective distribution limitations, unless prior approval is required under paragraph (k)(1) of this section. (k) Approval requirements for certain capital actions—(1) Circumstances requiring approval—(i) Qualitative objection to and resubmission of a capital plan. Unless it receives prior approval pursuant to paragraph (k)(3) of this section, a bank holding company may not make a capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio) under the following circumstances: (A) The Board, or the appropriate Reserve Bank with the concurrence of the Board, objects to a capital plan and until such time as the Board, or the appropriate Reserve Bank with concurrence of the Board, issues a nonobjection to the bank holding company’s capital plan; (B) The capital distribution would occur after the occurrence of an event requiring resubmission under paragraph (e)(4)(i)(A) or (B) of this section. (ii) Transition for certain planned capital actions. For the period July 1, 2020, to September 30, 2020, a bank holding company is authorized to make capital distributions that do not exceed an amount equal to the average of capital distributions over the four quarters to which the Board or the appropriate Reserve Bank indicated its non-objection for the previous capital plan cycle. A bank holding company may request prior approval to make capital distributions in excess of the amount authorized for the period July 1, 2020, to September 30, 2020, pursuant to paragraph (k)(2) of this section. (2) Contents of request. A request for a capital distribution under this section must contain the following information: (i) The bank holding company’s capital plan or a discussion of changes to the bank holding company’s capital plan since it was last submitted to the Federal Reserve; (ii) The purpose of the transaction; VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 (iii) A description of the capital distribution, including for redemptions or repurchases of securities, the gross consideration to be paid and the terms and sources of funding for the transaction, and for dividends, the amount of the dividend(s); and (iv) Any additional information requested by the Board or the appropriate Reserve Bank (which may include, among other things, an assessment of the bank holding company’s capital adequacy under a severely adverse scenario, a revised capital plan, and supporting data). (3) Approval of certain capital distributions. (i) The Board, or the appropriate Reserve Bank with concurrence of the Board, will act on a request for prior approval of a capital distribution within 30 calendar days after the receipt of all the information required under paragraph (k)(2) of this section. (ii) In acting on a request for prior approval of a capital distribution, the Board, or appropriate Reserve Bank with concurrence of the Board, will apply the considerations and principles in paragraphs (g) and (i) of this section, as appropriate. In addition, the Board, or the appropriate Reserve Bank with concurrence of the Board, may disapprove the transaction if the bank holding company does not provide all of the information required to be submitted under paragraph (k)(2) of this section. (4) Disapproval and hearing. (i) The Board, or the appropriate Reserve Bank with concurrence of the Board, will notify the bank holding company in writing of the reasons for a decision to disapprove any proposed capital distribution. Within 15 calendar days after receipt of a disapproval by the Board, the bank holding company may submit a written request for a hearing. (ii) The Board may, in its sole discretion, order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party. (iii) Written notice of the final decision of the Board shall be given to the bank holding company within 60 calendar days of the conclusion of any informal hearing ordered by the Board, provided that the Board may extend this period upon notice to the requesting party. (iv) While the Board’s decision is pending and until such time as the Board, or the appropriate Reserve Bank PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 with concurrence of the Board, approves the capital distribution at issue, the bank holding company may not make such capital distribution. (l) Post notice requirement. A bank holding company must notify the Board and the appropriate Reserve Bank within 15 days of making a capital distribution if: (1) The capital distribution was approved pursuant to paragraph (k)(3) of this section; or (2) The dollar amount of the capital distribution will exceed the dollar amount of the bank holding company’s final planned capital distributions, as measured on an aggregate basis beginning in the fourth quarter of the planning horizon through the quarter at issue. PART 252—ENHANCED PRUDENTIAL STANDARDS (REGULATION YY) 5. The authority citation for part 252 continues to read as follows: ■ Authority: 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. Subpart E—Supervisory Stress Test Requirements for Certain U.S. Banking Organizations With $100 Billion or More in Total Consolidated Assets and Nonbank Financial Companies Supervised by the Board 6. In § 252.16, republish paragraph (b) and add paragraphs (b)(1) through (3) to read as follows: ■ § 252.16 Reports of stress test results. * * * * * (b) Contents of reports. The report required under paragraph (a) of this section must include the following information for the baseline scenario, severely adverse scenario, and any other scenario required under § 252.14(b)(3): (1) A description of the types of risks being included in the stress test; (2) A summary description of the methodologies used in the stress test; and (3) For each quarter of the planning horizon, estimates of aggregate losses, pre-provision net revenue, provision for credit losses, net income, and regulatory capital ratios; * * * * * ■ 7. In § 252.44, redesignate paragraph (c) as paragraph (d) and add new paragraph (c) to read as follows: § 252.44 Analysis conducted by the Board. * * * * * (c) In conducting a stress test under this section, the Board will make the E:\FR\FM\18MRR2.SGM 18MRR2 Federal Register / Vol. 85, No. 53 / Wednesday, March 18, 2020 / Rules and Regulations following assumptions regarding a covered company’s capital actions over the planning horizon: (1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital; (2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument; (3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and (4) The covered company will not make any issuances of common stock or preferred stock. * * * * * Subpart F—Company-Run Stress Test Requirements for Certain U.S. Bank Holding Companies and Nonbank Financial Companies Supervised by the Board 8. In § 252.54, revise paragraph (b)(2) to read as follows: ■ § 252.54 Stress test. * * * * (b) * * * (2) Additional components. (i) The Board may require a covered company with significant trading activity to include a trading and counterparty component in its severely adverse scenario in the stress test required by this section. A covered company has significant trading activity if it has: (A) Aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets; (B) Is not a large and noncomplex bank holding company as the term is used in 12 CFR 225.8. (ii) The Board may require a covered company to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy. * * * * * ■ 9. Section 252.56 is amended by revising paragraph (b) as follows: jbell on DSKJLSW7X2PROD with RULES2 * § 252.56 Methodologies and practices. * * * * * (b) Assumptions regarding capital actions. In conducting a stress test under § 252.54, a covered company is required to make the following VerDate Sep<11>2014 20:40 Mar 17, 2020 Jkt 250001 assumptions regarding its capital actions over the planning horizon: (1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital; (2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument; (3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and (4) The covered company will not make any issuances of common stock or preferred stock. * * * * * ■ 10. Appendix B to part 252 is amended by revising sections 2.6 and 2.7 and adding section 3.4 to read as follows: Appendix B to Part 252—Stress Test Policy Statement * * * * * 2.6. Incorporation of Business Plan Changes (a) A firm’s stress capital buffer requirement does not incorporate changes to its business plan that are likely to have a material impact on a covered company’s capital adequacy and funding profile (material business plan changes). For example, planned issuances of common or preferred stock in connection with a planned merger or acquisition will not be included in the stress capital buffer requirement calculation. In addition, the common stock dividends attributable to issuances in connection with a planned merger or acquisition reflected in the covered company’s pro-forma balance sheet estimates will also not be included in the stress capital buffer requirement calculation. Material business plan changes, including those resulting from a merger or acquisition, are incorporated into a covered company’s capital and risk-weighted assets upon consummation of the transaction or occurrence of the change. As a result, the amount of capital required will adjust based on changes to the covered company’s riskweighted assets. (b) If the material business plan change resulted in or would result in a material change in a covered company’s risk profile, the company is required to resubmit its capital plan and the Board may determine to recalculate the stress capital buffer requirement based on the resubmitted capital plan. 2.7. Credit Supply Maintenance (a) The supervisory stress test incorporates the assumption that aggregate credit supply does not contract during the stress period. The aim of supervisory stress testing is to assess whether firms are sufficiently capitalized to absorb losses during times of economic stress, while also meeting obligations and continuing to lend to PO 00000 Frm 00031 Fmt 4701 Sfmt 9990 15605 households and businesses. The assumption that a balance sheet of consistent magnitude is maintained allows supervisors to evaluate the health of the banking sector assuming firms continue to lend during times of stress. (b) In order to implement this policy, the Federal Reserve must make assumptions about new loan balances. To predict losses on new originations over the planning horizon, newly originated loans are assumed to have the same risk characteristics as the existing portfolio, where applicable, with the exception of loan age and delinquency status. These newly originated loans would be part of a covered company’s normal business, even in a stressed economic environment. While an individual firm may assume that it reacts to rising losses by sharply restricting its lending (e.g., by exiting a particular business line), the banking industry as a whole cannot do so without creating a ‘‘credit crunch’’ and substantially increasing the severity and duration of an economic downturn. The assumption that the magnitude of firm balance sheets will be fixed in the supervisory stress test ensures that covered companies cannot assume they will ‘‘shrink to health,’’ and serves the Federal Reserve’s goal of helping to ensure that major financial firms remain sufficiently capitalized to accommodate credit demand in a severe downturn. In addition, by precluding the need to make assumptions about how underwriting standards might tighten or loosen during times of economic stress, the Federal Reserve follows the principle of consistency and comparability and promotes consistency across covered companies. (c) In projecting the denominator for the calculation of the leverage ratio, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board’s regulations. * * * * * 3.4. Simple approach for projecting riskweighted assets (a) In projecting risk-weighted assets, the Federal Reserve will generally assume that a covered company’s risk-weighted assets remain unchanged over the planning horizon. This assumption allows the Federal Reserve to independently project the riskweighted assets of covered companies in line with the goal of simplicity (Principle 1.4). In addition, this approach is forward-looking (Principle 1.2), as this assumption removes reliance on historical data and past outcomes from the projection of risk-weighted assets. (b) In projecting a firm’s risk-weighted assets, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board’s regulations in the calculation of risk-weighted assets. By order of the Board of Governors of the Federal Reserve System, March 5, 2020. Ann Misback, Secretary of the Board. [FR Doc. 2020–04838 Filed 3–17–20; 8:45 am] BILLING CODE P E:\FR\FM\18MRR2.SGM 18MRR2

Agencies

FEDERAL RESERVE SYSTEM

[Federal Register Volume 85, Number 53 (Wednesday, March 18, 2020)]
[Rules and Regulations]
[Pages 15576-15605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04838]

[[Page 15575]]

Vol. 85

Wednesday,

No. 53

March 18, 2020

Part II

Federal Reserve System

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12 CFR Parts 217, 225, and 252

Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and Stress
Test Rules; Final Rule

Federal Register / Vol. 85 , No. 53 / Wednesday, March 18, 2020 /
Rules and Regulations

[[Page 15576]]

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FEDERAL RESERVE SYSTEM

12 CFR Parts 217, 225, and 252

[Docket No. R-1603]
RIN 7100-AF02

Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and
Stress Test Rules

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is adopting a rule (final rule) that simplifies the
Board's capital framework while preserving strong capital requirements
for large firms. The final rule would integrate the Board's regulatory
capital rule (capital rule) with the Comprehensive Capital Analysis and
Review (CCAR), as implemented through the Board's capital plan rule
(capital plan rule). The final rule makes amendments to the capital
rule, capital plan rule, stress test rules, and Stress Testing Policy
Statement. Under the final rule, the Board will use the results of its
supervisory stress test to establish the size of a firm's stress
capital buffer requirement, which replaces the static 2.5 percent of
risk-weighted assets component of a firm's capital conservation buffer
requirement. Through the integration of the capital rule and CCAR, the
final rule would remove redundant elements of the current capital and
stress testing frameworks that currently operate in parallel rather
than together, including the CCAR quantitative objection and the
assumption that a firm makes all capital actions under stress. The
final rule applies to bank holding companies and U.S. intermediate
holding companies of foreign banking organizations that have $100
billion or more in total consolidated assets.

DATES: Effective May 18, 2020.

FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Senior Associate Director,
(202) 263-4833, Constance Horsley, Deputy Associate Director, (202)
452-5239, Juan Climent, Manager (202) 872-7526, Andrew Willis, Lead
Financial Institution Policy Analyst, (202) 912-4323, Christopher
Appel, Senior Financial Institution Policy Analyst II, (202) 973-6862,
Hillel Kipnis, Senior Financial Institution Policy Analyst II, (202)
452-2924, and Palmer Osteen, Financial Institution Policy Analyst,
(202) 785-6025, Division of Supervision and Regulation; Benjamin
McDonough, Assistant General Counsel, (202) 452-2036, Julie Anthony,
Senior Counsel, (202) 475-6682, Mark Buresh, Senior Counsel, (202) 452-
5270, Asad Kudiya, Senior Counsel, (202) 475-6358, or Mary Watkins,
Senior Attorney, (202) 452-3722, Legal Division, Board of Governors of
the Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD)
only, call (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background and Overview of the Final Rule
A. Background on the Stress Testing and Regulatory Capital
Frameworks
B. Overview of the Proposed Rule and Summary of Comments
C. Overview of the Final Rule
III. The Stress Capital Buffer Requirement
A. Assumptions, Methodologies and Calculation Mechanics Used in
Determining the Stress Capital Buffer Requirement
i. Capital Distribution Assumptions
ii. Balance Sheet Assumptions
iii. Business Plan Changes
iv. Calculation Mechanics
B. Volatility of Capital Requirements and Severity of Scenarios
i. Predictability of Capital Requirements and Stress Test
Scenario Volatility
ii. Abruptness of Buffer Restrictions
C. Stress Leverage Buffer
D. Effective Dates for Stress Capital Buffer Requirement
IV. Changes to the Capital Plan Rule
A. Quantitative Objection
B. Requirements for a Firm's Planned Capital Distributions
C. Elimination of Prior Approval
D. Timeline for Reviewing Capital Plans and Calculating the
Stress Capital Buffer Requirement
E. Request for Reconsideration
F. Capital Plan Resubmission and Circumstances Warranting
Recalculation of the Stress
V. Changes to the Capital Rule and Mechanics of Distribution
Limitations
VI. Changes to the Stress Test Rules
VII. Impact Analysis
VIII. Changes to Regulatory Reports
IX. Administrative Law Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Use of Plain Language

I. Introduction

Over the past ten years, stress testing has become a fundamental
element of the Federal Reserve's supervision program for large banking
organizations. In the same time period, the Board has strengthened the
ongoing regulatory capital requirements applicable to these firms. On
April 10, 2018, the Board issued a proposal to simplify its stress
testing and regulatory capital frameworks with the introduction of the
stress capital buffer requirement (the proposal).\1\ This final rule
adopts the stress capital buffer requirement set forth in the proposal
with certain adjustments. As in the proposal, the Board will use the
results of its supervisory stress test to determine a firm's stress
capital buffer requirement. A firm's stress capital buffer requirement,
which varies based on a firm's risk, replaces the fixed 2.5 percent of
risk-weighted assets portion of its capital conservation buffer
requirement. A firm that does not maintain capital ratios above its
minimums plus its buffer requirements faces restrictions on its capital
distributions and discretionary bonus payments. This approach
integrates CCAR with the capital rule, simplifies the Board's overall
approach to capital regulation, and preserves strong capital
requirements. Separate from the final rule, the Board intends to
propose at a future date modifications to further simplify and increase
the transparency of the stress testing framework.
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\1\ See 80 FR 18160 (April 25, 2018).
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II. Background and Overview of the Final Rule

A. Background on the Stress Testing and Regulatory Capital Frameworks

At the height of the 2008-2009 financial crisis, the Board created
the Supervisory Capital Assessment Program (SCAP) as a way to help
restore confidence in the largest U.S. banking organizations. SCAP
estimated potential losses at those firms assuming that economic and
financial conditions worsened. Building on the success of SCAP, the
Board implemented the capital plan rule, which requires the largest
firms to develop and maintain capital plans supported by robust
processes for assessing their capital adequacy. The CCAR exercise
established a quantitative assessment of firms' capital adequacy for
all subject firms and a qualitative assessment of the capital planning
practices of the largest and most complex firms' capital planning
practices. The quantitative assessment includes an evaluation of firms'
capital adequacy and their ability to continue to lend and absorb
potential losses under severely adverse conditions. Under the CCAR
quantitative evaluation, a firm is required to demonstrate the ability
to maintain capital ratios above the minimum requirements under stress,
taking into account nine quarters of planned capital distributions. In
the qualitative assessment, the Federal Reserve evaluated how the
largest and most complex firms identify, measure,

[[Page 15577]]

and determine capital needs for their material risks.
At the same time that the Board was building the stress testing
program, it was also making changes to its capital rule to address
weaknesses observed during the 2008-2009 financial crisis.\2\ These
changes included the establishment of a minimum common equity tier 1
(CET1) capital requirement and a fixed capital conservation buffer
equal to 2.5 percent of risk-weighted assets.\3\ Large banking
organizations also became subject to a countercyclical capital buffer
requirement, and the largest and most systemically important firms--
global systemically important bank holding companies, or GSIBs--became
subject to an additional capital buffer based on a measure of their
systemic risk, the GSIB surcharge.\4\ The capital rule's buffer
requirements impose increasingly strict automatic limits on capital
distributions as a firm's capital ratios decline toward the minimum
requirements. For example, a firm in the bottom quartile of its capital
conservation buffer may not make any capital distributions without
prior approval from the Board.
---------------------------------------------------------------------------

\2\ See 12 CFR part 217.
\3\ See 12 CFR 217.11.
\4\ See 80 FR 49082 (August 14, 2015).
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Stress testing and stronger capital requirements have significantly
improved the resilience of the U.S. banking system. The common equity
capital ratios of firms subject to CCAR have more than doubled since
2009. Combined, these firms hold more than $1 trillion of CET1 capital.
Notwithstanding these important improvements, the Board believes it is
prudent to periodically review its regulations to ensure they are
achieving their goals in an effective and efficient manner.
Importantly, although the capital plan rule and the capital rule share
similar goals, they were developed separately, and this has led to
certain significant redundancies in the Board's capital framework. In
keeping with other recent efforts to improve the efficiency and risk-
sensitivity of its regulations, the Board is adopting this final rule
to integrate the overlapping requirements in the capital plan rule and
the capital rule to increase the efficiency and simplicity of the
Board's capital framework while maintaining its risk sensitivity and
improvements in capital adequacy.

B. Overview of the Proposed Rule and Summary of Comments

Under the proposed rule, for each firm subject to the capital plan
rule, the Board would have calculated a stress capital buffer
requirement based on the results of the supervisory stress test and
four quarters of planned common stock dividends. The stress capital
buffer requirement would have replaced the fixed 2.5 percent component
of a firm's capital conservation buffer requirement. The proposal also
would have introduced a stress leverage buffer on top of the 4 percent
minimum leverage ratio requirement for firms subject to the capital
plan rule. A firm's stress capital buffer requirement would have been
``floored'' at 2.5 percent of risk-weighted assets, whereas the stress
leverage buffer requirement would not have included a floor. A firm
would have been required to maintain risk-based and leverage-based
capital ratios above its buffer requirements in order to avoid
restrictions on its capital distributions and certain discretionary
bonus payments. The proposal also would have made changes to the
Board's capital plan and stress test rules and related policy
statements, and would have eliminated: (1) The assumption that a firm
would make all planned capital distributions over the planning horizon,
(2) the assumption that a firm's balance sheet assets would increase
over the planning horizon, (3) the quantitative objection in CCAR; and
(4) the 30 percent dividend payout ratio as a criterion for heightened
scrutiny of a firm's capital plan.
The Board received twenty-six comments on the proposal from banking
organizations, public interest groups, private individuals, and other
interested parties. Many commenters were supportive of the proposal's
goal of integrating CCAR and the Board's capital rule. Commenters had
mixed views, however, on the calibration of the stress capital buffer
requirement, the need for a stress leverage buffer, the proposed
changes to the assumptions in the Board's stress testing framework, and
the flexibility provided to firms in their capital planning.\5\
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\5\ The Board received a number of comments that were outside of
the scope of the proposal. In particular, commenters recommended
further revisions related to the U.S. GSIB capital surcharge rule,
total loss absorbing capacity rule, and current expected credit
losses standard.
---------------------------------------------------------------------------

Some commenters asserted that the proposed stress capital buffer
requirement was too stringent, particularly when combined with the GSIB
surcharge and the countercyclical capital buffer, and suggested
alternatives. Other commenters asserted that it was important for the
Federal Reserve to not take action that would lower capital
requirements for any firm given improvements in capital since the 2008-
2009 financial crisis and that the Board should retain the assumption
that firms make nine quarters of dividends and share repurchases in the
stress test.
Some commenters urged the Board to eliminate the proposed stress
leverage buffer requirement, noting that its inclusion adds complexity
to capital requirements and is inconsistent with the role of the
leverage ratio as a backstop to risk-based capital requirements. These
commenters were concerned that the proposed stress leverage buffer
requirement would increase the probability that a banking
organization's binding post-stress capital constraint would be a
leverage requirement rather than a risk-based requirement. Some of
these commenters argued that there should be a clearer delineation
between the capital framework's risk-based and non-risk-based measures.
Other commenters supported adopting the proposed stress leverage buffer
requirement and urged the Board to retain a post-stress capital
requirement for the supplementary leverage ratio to maintain the
practice of evaluating off-balance sheet exposures in the supervisory
stress test.
Regarding the proposed changes to the assumptions in the stress
test, some commenters argued that the Board should not include four
quarters of common stock dividends in the stress capital buffer
requirement because the capital rule already contains a distribution
limitation mechanism to restrict a firm from making dividend payments
if its capital ratios were at or below its minimums plus buffer
requirements. Other commenters argued that not only should the Board
include four quarters of dividends in the stress capital buffer
requirement, but that the Board also should retain its assumption that
a firm makes nine quarters of share repurchases and dividends as
certain firms made dividend payments and executed share repurchases
well into the beginning of the 2008-2009 financial crisis.
Several commenters supported the proposed modifications to the
balance sheet growth assumptions. Other commenters asserted that the
Board should assume that trading assets would decline under stress, as
such a reduction would align with reasonable expectations under stress.
Still other commenters disagreed with the proposed modification to the
balance sheet growth assumptions, as the current assumption that
balance sheet assets would grow over the planning horizon helped to
ensure that firms can lend and support the real economy during stress.
These commenters were concerned that the proposed revisions would not
ensure that banks would

[[Page 15578]]

continue their credit intermediation function during a recession.
Some commenters asserted that, in light of the proposal integrating
CCAR with the capital rule, the Board should address the potential
volatility of Board's stress testing framework, including revising the
Board's scenario design process and revising the definition of eligible
retained income in the capital rule to ensure that the distribution
restrictions in the capital rule gradually restrict a firm's ability to
make capital distributions. Finally, regarding the ability of a firm to
make distributions in excess of those in its capital plan, some
commenters supported allowing the firm to exceed its planned capital
distributions if its capital ratios were above those projected in the
bank holding company baseline scenario projections.\6\ Others
recommended allowing a firm to increase its planned capital
distributions without prior approval from the Board as long as the firm
did not exceed the distributions permitted under the capital rule's
capital conservation buffer requirement. Other commenters supported
maintaining the requirement that a firm seek approval from the Board
before making capital distributions in excess of those in its capital
plan, arguing that removing this requirement would weaken capital
standards by allowing banks additional leeway in making capital
distributions.
---------------------------------------------------------------------------

\6\ The capital plan rule requires firms to submit a request to
the Board for approval of a capital distribution that exceeds the
amount of capital distributions described in a firm's annual capital
plan submission.
---------------------------------------------------------------------------

C. Overview of the Final Rule

The final rule integrates the capital plan rule and the capital
rule by using the results of the supervisory stress test to establish a
firm's stress capital buffer requirement and establish a unified
approach to capital distribution limitations. Specifically, a firm's
stress capital buffer requirement is calculated as: (1) The difference
between the firm's starting and minimum projected CET1 capital ratios
under the severely adverse scenario in the supervisory stress test
(stress test losses) plus (2) the sum of the dollar amount of the
firm's planned common stock dividends for each of the fourth through
seventh quarters of the planning horizon as a percentage of risk-
weighted assets (dividend add-on).\7\ A firm must maintain capital
ratios above the sum of its minimum requirements and buffer
requirements in order to avoid restrictions on capital distributions
and discretionary bonus payments.
---------------------------------------------------------------------------

\7\ The planning horizon is the period of at least nine
consecutive quarters over which the relevant projections extend,
beginning with the quarter preceding the quarter in which the firm
submits its capital plan.
---------------------------------------------------------------------------

In a change from the proposal, the final rule does not include a
stress leverage buffer requirement in order to maintain a clear
distinction between the capital framework's risk-based and non-risk-
based capital requirements. In addition, to address the potential
volatility of the stress capital buffer requirement and to ensure that
the distribution limitations in the capital rule work as intended, the
final rule revises the definition of eligible retained income to a
quarterly average net income measure under certain conditions.
The final rule adjusts the distribution assumptions used in CCAR by
no longer presuming that a firm will make all planned capital
distributions, including common stock dividends and repurchases, over
the nine-quarter planning horizon. Instead, a firm's stress capital
buffer requirement includes four quarters of planned common stock
dividends (in the fourth through seventh quarters of the nine-quarter
planning horizon). In a change from the proposal, to simplify the
calculation of the dividend add-on and to create consistency between
the calculation of the dividend add-on and the portion of the stress
capital buffer requirement attributable to the decline in CET1 ratios,
the Board will no longer calculate the dividend add-on as the sum of
the ratios of the dollar amount of the firm's planned common stock
dividends divided by the projected risk-weighted assets for each of the
fourth through seventh quarters of the planning horizon. Instead the
divided-add-on will be calculated by dividing the sum of the four
quarters of planned common stock dividends by the projected risk-
weighted assets from the quarter in which the firm's projected CET1
capital ratio reaches its minimum in the supervisory stress test.
In addition, the final rule adjusts the methodology used in the
supervisory stress test to assume that a firm takes actions to maintain
a constant level of assets, including loans, trading assets, and
securities over the planning horizon. In a change from the proposal, to
simplify the stress test and to avoid potentially double-counting the
impact of a merger or acquisition, the stress capital buffer
requirement in the final rule does not include the projected impact of
material business plan changes. Instead, any impact of these business
changes will be reflected in a firm's ongoing capital ratios once the
business plan change is consummated. As in current CCAR, the Board may
require a firm to resubmit its capital plan and recalculate the firm's
stress capital buffer requirement in the event of material business
changes.
The final rule also modifies certain elements in CCAR to further
the goal of establishing a unified approach to capital distribution
limitations. Specifically, the final rule eliminates the once-a-year
quantitative objection process, given the integration of stress-test
results into the stress capital buffer requirement's automatic
distribution limitations.\8\ Relatedly, the final rule eliminates the
30 percent dividend payout ratio as a criterion for heightened scrutiny
of a firm's capital plan.
---------------------------------------------------------------------------

\8\ In March 2019, the Board eliminated the CCAR qualitative
objection for most firms. 84 FR 8953 (March 13, 2019). Specifically,
a firm that participates in four assessments and successfully passes
the qualitative evaluation in the fourth year is no longer subject
to a potential qualitative objection.
---------------------------------------------------------------------------

Finally, while the final rule continues to require a firm to
describe its planned capital distributions in a capital plan, a firm is
no longer required to seek prior approval if it makes capital
distributions in excess of those included in its capital plan (so long
as the firm is otherwise in compliance with the capital rule's
automatic restrictions on distributions). This approach harmonizes the
approach to capital distributions in the capital plan rule and the
capital rule. A similar change was made to provide additional
flexibility in the ``adjustment process'' to permit a firm to increase
its planned capital distributions upon receipt of its initial stress
capital buffer requirement.\9\
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\9\ Upon completion of the supervisory stress test, the Federal
Reserve will provide each firm with the results of its post-stress
capital analysis, and each firm will have an opportunity to make a
one-time adjustment to its planned capital actions.
---------------------------------------------------------------------------

III. The Stress Capital Buffer Requirement

This section describes the calculation of the stress capital buffer
requirement, including its calibration, and the changes to the
assumptions in the Board's stress testing framework. The final rule
adopts the calculation of the stress capital buffer requirement as
proposed. It also includes a revised definition of eligible retained
income, which affects how the stress capital buffer requirement limits
capital distributions. As discussed below, and in response to comments,
the final rule does not include a stress leverage buffer requirement.

[[Page 15579]]

A. Assumptions, Methodologies and Calculation Mechanics Used in
Determining the Stress Capital Buffer Requirement

The calculation of the stress capital buffer requirement generally
includes the changes described in the proposal related to capital
distribution and balance sheet assumptions. This section discusses the
comments received on the proposed calculation of the stress capital
buffer requirement and changes made in response to comments.
i. Capital Distribution Assumptions
In its assessment of capital plans through CCAR, the Board assumed
that a firm would make all nine quarters of its planned capital
distributions, including dividend payments and share repurchases, under
stress. The proposal would have modified this assumption to no longer
assume that a firm made these planned capital distributions but,
instead, would have included four quarters of planned common stock
dividends in the calculation of the stress capital buffer requirement.
In addition, the proposal would have eliminated the 30 percent dividend
payout ratio as a criterion for heightened scrutiny of a firm's capital
plan.
Commenters generally were supportive of the proposal to eliminate
all nine quarters of planned capital distributions. Several commenters
similarly were opposed to including four quarters of planned dividends
in the calculation of the stress capital buffer requirement, viewing it
as unnecessary, complicated, and unduly punitive given the capital
rule's existing automatic restrictions on capital distributions. These
commenters asserted that if the Board maintains this requirement, it
should allow a firm to continue to pay its planned dividends if the
firm's capital ratios were in the dividend add-on portion of its buffer
requirements. In addition, several commenters asserted that the
underlying rationale for including four quarters of planned dividends
does not apply to U.S. intermediate holding companies of foreign
banking organizations given their ownership structures.
Other commenters were supportive of including distributions in the
calculation of the stress capital buffer requirement to create strong
incentives for disciplined, forward-looking capital planning. Some
commenters also argued that requiring a four-quarter dividend add-on is
arbitrary and inconsistent with historical experience, while other
commenters recommended that repurchases and redemptions should also
factor into the stress capital buffer requirement.
After considering these comments, the Board is adopting the
proposed changes to the capital distribution assumptions, as proposed.
Although including four quarters of planned common stock dividends in
the calculation of a firm's stress capital buffer requirement adds a
level of complexity to the stress capital buffer requirement
calculation process, this approach is one way of promoting forward-
looking dividend planning given historical experience. During the last
financial crisis, many firms continued to make significant
distributions of capital, including through dividends, without due
consideration of the effects that a prolonged economic downturn could
have on their capital adequacy. In addition, the dividend add-on
requirement is one way to mitigate the procyclicality of the Board's
stress testing framework, because dividends tend to be higher when the
economy is strong and earnings are high.\10\
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\10\ As in the current supervisory post-stress capital
assessment, the Board will continue to assume in the supervisory
stress test that a firm will make payments on any instrument that
qualifies as additional tier 1 capital or tier 2 capital equal to
the stated dividend, or contractual interest or principal due on
such instrument during the quarter. Based on supervisory experience,
reductions in these payments are generally viewed by market
participants as a sign of material weakness, and firms are therefore
likely to make them even under stressful conditions (see 12 CFR
217.20(c) and (d)).
---------------------------------------------------------------------------

To further simplify the Board's stress test framework, the final
rule also removes the 30 percent dividend payout ratio applied as a
criterion for heightened supervisory scrutiny of a firm's capital plan.
This criterion was adopted to encourage firms to increase payouts
through additional share repurchases rather than dividends. A dividend
payout ratio criterion is no longer necessary because the final rule's
automatic distribution limitations, combined with the perceived market
signaling effect of dividend cuts, will sufficiently restrict dividend
increases in the future.
One commenter suggested that the Board include issuances related to
employee compensation in the stress capital buffer requirement
calculation as an offset to the impact on retained earnings that would
be embedded in the stress test results. The final rule does not include
most other capital actions in the stress test and excluding employee
stock issuances, along with related share repurchases, is consistent
with this approach. This approach also will make the stress test
results more comparable across firms and more transparent to the
public. Similar to other capital actions that are not included in the
stress test results, in real-time, issuances related to employee
compensation increase a firm's capital ratio and, therefore, impact the
firm's ability to avoid the automatic distribution limitations. For
these reasons, the final rule excludes such issuances in the
calculation of the stress capital buffer requirement, consistent with
the proposal.
ii. Balance Sheet Assumption
Under the proposal, the Board would have modified its methodology
for projecting a firm's balance sheet in the supervisory stress test.
The proposal would have updated the Board's Stress Testing Policy
Statement to include the assumption that a firm takes actions to
maintain its current level of assets, including securities, trading
assets, and loans, over the planning horizon.\11\ This assumption would
have simplified the current supervisory stress test and also dissuaded
firms from planning to reduce credit supply in a stress scenario. In
addition, the proposal would have revised the Stress Testing Policy
Statement to reflect that, in its projections, the Board would assume
that a firm's risk-weighted assets and leverage ratio denominator
remain unchanged over the planning horizon except for changes primarily
related to deductions from regulatory capital or changes in the Board's
regulations.
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\11\ While the Board will assume in the supervisory post-stress
capital assessment that a firm's balance sheet does not grow, in a
firm's company-run stress tests, the Board expects each firm's
projected balance sheet to be consistent with each scenario and the
firm's business strategy.
---------------------------------------------------------------------------

Many commenters supported the proposed change to assume that the
size of a firm's balance sheet remains constant over the planning
horizon, arguing that this change would make the supervisory
projections more realistic. Commenters opposing the proposed change
argued that the Federal Reserve should continue to model balance sheet
growth, noting that bank balance-sheets have grown during periods of
stress and that CCAR should continue to evaluate whether a firm could
continue to provide credit and support the real economy. Other
commenters suggested that rather than assuming no growth, the Board's
projections should assume that market declines and losses would reduce
trading assets and risk-weighted assets. Commenters also requested that
the Board require firms to make consistent assumptions in stress tests
conducted by the firm.
Consistent with the proposal, the final rule revises the Board's
Stress Testing Policy Statement to include the assumption that a firm
takes actions to

[[Page 15580]]

maintain its current level of assets over the planning horizon.
Although a firm's balance sheet may change in different ways in periods
of stress, a constant balance sheet assumption simplifies the Board's
stress testing framework, while dissuading firms from planning to
reduce credit supply in a stress scenario.
iii. Business Plan Changes
Similar to the Board's current methodology, the proposal would have
reflected the impact of expected changes to a firm's business plan that
are likely to have a material impact on the firm's capital adequacy and
funding profile (material business plan changes) in balance sheet,
risk-weighted asset, and leverage ratio denominator projections for
purposes of calculating the stress capital buffer requirement.\12\ One
commenter suggested that the Board not reflect the impact of a material
business plan change, such as a merger or acquisition, in a firm's
stress capital buffer requirement because the impact would be reflected
in the firm's balance sheet and risk-weighted assets once the merger or
acquisition is consummated. This commenter argued that this approach
would result in double-counting the impact of a merger or acquisition.
---------------------------------------------------------------------------

\12\ A firm's capital plan must include a discussion of any
expected changes to its business plan that are likely to have a
material impact on the firm's capital adequacy or liquidity. See 12
CFR 225.8(e)(2)(iv).
---------------------------------------------------------------------------

The final rule does not incorporate material business plan changes
in a firm's stress capital buffer requirement. For example, planned
issuances of common or preferred stock in connection with a planned
merger or acquisition will not be included in the stress capital buffer
requirement calculation. In addition, any planned common stock
dividends attributable to issuances that would be made in connection
with a planned merger or acquisition will also not be included in the
stress capital buffer requirement calculation.\13\ Excluding material
business plan changes from the stress capital buffer requirement would
simplify the framework and reduce burden. Material changes to a firm's
business plan resulting from a merger or acquisition are incorporated
into a firm's capital and risk-weighted assets upon consummation of the
transaction. Including these changes in a firm's stress capital buffer
requirement may overstate the impact of the business plan change while
also adding complexity associated with predicting the impact of the
material change in a firm's balance sheet.
---------------------------------------------------------------------------

\13\ Specifically, the dividend add-on portion of a firm's
stress capital buffer requirement will exclude dividends planned for
the fourth through seventh quarters of the planning horizon to the
extent that these dividends are associated with a material business
plan change. To isolate and exclude dividends associated with a
material business plan change from other dividends, the Board will
rely on information submitted in the capital plans and may collect
additional information from firms.
---------------------------------------------------------------------------

In addition, the final rule would continue to require a firm to
include in its capital plan a discussion of any expected changes to the
firm's business plan that are likely to have a material impact on the
capital adequacy or liquidity position of the firm. This requirement
would help to ensure that a firm appropriately plans for changes to its
business. If the material business plan change resulted in or would
result in a material change in a firm's risk profile, the firm would be
required to resubmit its capital plan and the Board may determine to
recalculate the stress capital buffer requirement based on the
resubmitted capital plan.
The final rule would make conforming changes to the Board's stress
testing rules to align with exclusion of material business plan changes
in the calculation of the stress capital buffer requirement. The final
rule also would make conforming changes to the Stress Test Policy
Statement.
iii. Calculation Mechanics
The proposal would have established a firm's stress capital buffer
requirement based on the difference between the firm's starting and
minimum projected CET1 capital ratios under the severely adverse
scenario in the supervisory stress test. One commenter argued that the
stress capital buffer requirement should be based on absolute dollar
values of capital depletion rather than ratios, because a firm's losses
in the stress test do not necessarily correspond to risk-weighted
assets or total balance-sheet assets. In addition, one commenter argued
for more frequent recalibration of a firm's stress capital buffer
requirement.\14\
---------------------------------------------------------------------------

\14\ See Section IV.F for further discussion on the
recalculation of the stress capital buffer requirement.
---------------------------------------------------------------------------

To ensure the capital framework is sufficiently risk-sensitive, the
stress capital buffer requirement under the final rule is based on
projected changes in a firm's capital ratio.\15\ Using the change in
projected capital ratios, and not the projected dollars of losses,
allows a firm's capital requirements to be sensitive to changes in its
risk-weighted assets throughout the year. Under this approach, the
Federal Reserve assumes that stress losses are related to a firm's
risk-weighted assets. Under the commenter's recommendation, any
increase in risk-weighted assets during the course of the year would be
treated as having zero dollars of losses in the stress test, thereby
reducing risk sensitivity of the capital requirements. With respect to
frequency of the stress capital buffer requirement calculation,
calculating the stress capital buffer requirement with the same
frequency as the stress test promotes both stability in capital
requirements and risk sensitivity. As discussed in Section IV.F, if a
firm experiences or will experience a material change in its risk
profile, the Board may determine to recalculate the firm's stress
capital buffer requirement. The Board is therefore adopting the
calculation of the stress capital buffer requirement as proposed.
---------------------------------------------------------------------------

\15\ A firm's stress capital buffer requirement will be
calculated up to a single decimal place (e.g.-2.7).
---------------------------------------------------------------------------

B. Volatility of Capital Requirements and Severity of Scenarios

i. Predictability of Capital Requirements and Stress Test Scenario
Volatility
Commenters raised concerns about potential volatility in capital
requirements as a result of the Board's stress testing framework under
the proposal. Some commenters suggested calculation changes to limit
the year-over-year changes in a firm's stress capital buffer
requirement. Another commenter suggested reducing volatility by basing
the stress capital buffer requirement on firm-developed models, to be
reviewed by the Federal Reserve.
While the proposal would not have amended the Board's scenario
design framework, commenters recommended that the Board enhance the
transparency of the scenario design process, including by providing
more parameters and shock ranges, in order to reduce the uncertainty
associated with capital requirements. Commenters had a number of
recommendations for enhancing the transparency of scenarios used in the
supervisory stress test. Many commenters supported publishing each
year's severely adverse scenario for notice and comment. Other
commenters, however, thought that publishing the scenario for comment
may lead to pressure to not include salient risks that reflect current
market conditions.
Some degree of volatility is inherent to risk-based capital
requirements, including those determined by stress testing, as such
requirements are sensitive to changes in a firm's activities, exposures
and changes to macroeconomic conditions. In addition, some volatility
in stress test results is to be expected because the stress test is

[[Page 15581]]

designed to capture a firm's vulnerability to plausible and salient
risks to the U.S. financial system. The Federal Reserve continues to
study potential ways to mitigate unnecessary volatility in
requirements, while retaining plausible changes in the scenarios to
reflect changing risks.
To provide firms and the public with greater transparency regarding
the Board's process for designing supervisory scenarios for stress
testing, in 2013 the Board finalized a Policy Statement on the Scenario
Design Framework for Stress Testing (Scenario Policy Statement).\16\ On
February 5, 2019, the Board released materials intended to increase the
transparency of the stress testing program.\17\ First, the Board
updated the Scenario Policy Statement to provide additional information
regarding the path of home price variables, in particular, reducing
uncertainty about the path of these variables in the severely adverse
scenario. Second, the Board adopted a final Stress Testing Policy
Statement to provide additional information about the Board's
principles and policies with regard to supervisory stress test model
development and validation.\18\ As described in the Stress Testing
Policy Statement, material changes to the supervisory stress test
models are phased in over two years to reduce year-over-year volatility
stemming from updates to the supervisory models.\19\ This approach
contributes to the stability of the results of the supervisory stress
test by ensuring changes in model projections primarily reflect changes
in underlying risk factors and scenarios, year over year. Third, the
Board provided additional information about the models used in the
supervisory stress test.\20\ The Board is committed to continuing to
provide additional information, including modeled loss rates by loan
and borrower characteristics, of its stress test models as it has done
most recently for its corporate loan and credit card models.\21\
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\16\ See 12 CFR part 252, Appendix A.
\17\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm.
\18\ See 12 CFR part 252, Appendix B.
\19\ The Policy Statement defines a model change as highly
material if its use results in a change in the CET1 ratio of 50
basis points or more for one or more firms, relative to the model
used in prior years' supervisory exercises. See 12 CFR 252, Appendix
B 2.3.
\20\ See 84 FR 6784 (February 5, 2019).
\21\ See Board of Governors of the Federal Reserve System, Dodd
Frank Act Stress Test 2019: Supervisory Stress Test Methodology
(March 2019), https://www.federalreserve.gov/publications/files/2019-march-supervisory-stress-test-methodology.pdf.
---------------------------------------------------------------------------

Regarding the publication of scenarios for comment, the Board is
considering these comments and weighing the benefit of increased
transparency against the costs, including, increased risk of window-
dressing by firms and reduced flexibility by the Board to respond to
salient risks. Finally, the Board received no comments on the use of
the severely adverse scenario to size a firm's stress capital buffer
requirement, although some commenters expressed concern regarding the
scope of application of additional components of the severely adverse
scenario. Because these additional components capture risks that are
not sufficiently captured by the macroeconomic scenario, the final rule
maintains the supervisory stress test's severely adverse scenario as
the basis for the calculation of a firm's stress capital buffer
requirement and makes no changes to the scenario design process.
ii. Abruptness of Buffer Restrictions
In light of the proposed integration of the supervisory stress test
results into the capital rule, several commenters suggested that the
Board revisit the mechanics of the capital conservation buffer
requirement's payout restrictions, including the definition of eligible
retained income. Specifically, commenters noted the case of a
relatively healthy firm in normal economic conditions that distributes
the full amount of its earnings in each of the preceding four quarters,
such that its eligible retained income in the current quarter is zero.
Under the proposal, if such a firm's capital ratios were to
immaterially fall below its buffer requirements due to an increase in
its stress capital buffer requirement, that firm would have been
prohibited from making any distributions. To address this issue, some
commenters recommended the calculation provided under the definition of
eligible retained income should be based on a firm's prior four
quarters of earnings gross of distributions. Other commenters suggested
adopting a prospective payout restriction based on earnings recognized
since the end of the last quarter in which a firm failed to meet its
full stress capital buffer requirement. Some commenters noted that
because firms are more likely to decrease share repurchases before
decreasing dividends and executive compensation, the capital
conservation buffer's payout restrictions should initially restrict
only repurchases, and subsequently restrict dividends and executive
compensation if a firm's capital levels declined further.
The proposal would have used the current capital rule's definition
of eligible retained income, which was adopted in the wake of the
financial crisis when firms tended to retain a substantial portion of
their earnings. Under a more benign business environment, firms tend to
distribute all or nearly all of their net income, resulting in very low
or zero eligible retained income and potential sudden and severe
distribution limitations if a firm's capital ratio unexpectedly falls
below its capital conservation buffer requirement. To reduce the
potential for such a scenario, in connection with the stress capital
buffer requirement, the final rule replaces the capital rule's current
concept of eligible retained income with quarterly average net income--
the average of a firm's previous four quarters of net income--in
certain cases. Specifically, to the extent that a firm's risk-based
capital ratios determined under the standardized approach exceed the
minimum requirements plus 2.5 percent plus any applicable GSIB
surcharge and countercyclical capital buffer amount, the firm would use
quarterly average net income to determine its eligible retained income.
For example, under the final rule, if a firm has a stress capital
buffer requirement of 5.5 percent, and its CET1 capital ratio falls to
3 percent above the minimum requirement, the firm would use the average
of its past four quarters of net income to calculate its maximum
distributable amount. However, to ensure that firms subject to the
stress capital buffer requirement are not subject to a capital
conservation buffer requirement that is less strict than that the
requirements that apply more broadly under the current capital rule, if
this firm's CET1 capital ratio falls below 2.5 percent above the
minimum requirements, the firm would be required to calculate its
maximum distributable amount by using the previous four quarters of net
income net of any distributions and associated tax effects not already
reflected in net income.
Even though income and capital ratios will not be reported on a
firm's filings until later in the quarter, firms that are subject to
the stress capital buffer requirement are expected to know their
capital positions and be able to calculate any distribution
restrictions on a daily basis. If a firm has any uncertainty regarding
its quarter-end capital ratios prior to filing its regulatory reports,
it should be conservative with capital distributions (including
repurchases) during the beginning of a calendar quarter in order to
avoid a situation in which it distributes more than the amount
permitted under the capital rule. Under the final rule, all other

[[Page 15582]]

aspects of the stress capital buffer requirement are being finalized as
proposed. Moving from the current definition of eligible retained
income to a quarterly average net income measure in the capital rule
makes the automatic limitations on a firm's distributions more gradual
as the firm's capital ratios decline.

C. Stress Leverage Buffer

The proposal would have included a stress leverage buffer
requirement that would be determined based on the supervisory stress
test. Some commenters urged the Board to remove the proposed stress
leverage buffer requirement, noting that it could undermine the purpose
of leverage-based measures to act as a simple, risk-insensitive
backstop to risk-based capital requirements. These commenters were
concerned that the proposed stress leverage buffer requirement would
increase the probability that a banking organization's binding post-
stress capital constraint would be a leverage requirement rather than a
risk-based one, and would add complexity to the capital rule. One
commenter suggested that if the Board adopts the proposed stress
leverage buffer requirement, it should revise the capital rule such
that the stress leverage buffer requirement does not result in payout
restrictions, but would only prompt heightened scrutiny through the
Federal Reserve's ongoing supervisory processes. Other commenters
supported adopting the proposed stress leverage buffer requirement and
some urged the Board to retain a post-stress capital requirement for
the supplementary leverage ratio to maintain the practice of evaluating
off-balance sheet exposures in the supervisory stress test.
Because leverage requirements are not risk-sensitive, the Board has
long held the view that leverage ratio requirements should serve as a
robust backstop to the risk-based requirements. In light of the
integration of CCAR and the Board's non-stress capital requirements,
which include leverage ratio requirements that serve as a backstop to
the risk-based requirements, the final rule does not contain a stress
leverage buffer requirement. Non-stress leverage ratio requirements
continue to apply to all firms. The final rule results in unchanged
CET1 capital requirements and not imposing a stress leverage buffer
requirement increases the likelihood that that risk-based requirements
will be the binding requirement for firms.

D. Effective Dates for Stress Capital Buffer Requirement

A firm's stress capital buffer requirement becomes effective on
October 1 of each year, and remains in effect until September 30 of the
following year, unless the firm receives an updated stress capital
buffer requirement from the Board.\22\ The final rule will be effective
May 18, 2020, and a firm's first stress capital buffer requirement will
be effective on October 1, 2020.\23\
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\22\ A firm may receive an updated stress capital buffer
requirement in connection with a resubmitted capital plan or in
connection with a request for reconsideration (as described in
section IV of this preamble).
\23\ To provide a transition between the 2019 CCAR cycle and the
first stress capital buffer requirement, for the period from July 1
through September 30, 2020, a firm will be authorized to make
capital distributions that do not exceed the four-quarter average of
capital distributions for which the Board or Reserve Bank indicated
its non-objection in the previous capital plan cycle, unless
otherwise determined by the Board.
---------------------------------------------------------------------------

IV. Changes to the Capital Plan Rule

This section describes changes to the capital plan rule.
Specifically, the final rule adopts the proposal's elimination of the
quantitative objection and the process by which a firm determines the
final planned capital distributions included in its capital plan. As
discussed below and in response to comment, under certain conditions,
the final rule no longer requires a firm to request prior approval to
make distributions that exceed the amount included in its capital plan.
The final rule also clarifies the timeline and procedures related to a
firm's stress capital buffer requirement, requests for reconsideration,
and capital plan resubmissions.

A. Quantitative Objection

The proposal would have replaced the ability for the Board to
object to a firm's capital plan if the firm did not demonstrate the
ability to maintain capital ratios above the minimum requirements on a
post-stress basis with the automatic distribution limitations included
in the capital rule, which would include the firm's stress capital
buffer requirement. Commenters generally were supportive of the
elimination of the quantitative objection, and the final rule
eliminates the quantitative objection as proposed.
One commenter requested that the Board clarify that it would not
qualitatively object to a firm's capital plan based on quantitative
weaknesses in the firm's capital position. As noted above, the Board
adopted a final rule in March 2019 to limit the use of the qualitative
objection. For those firms that remain subject to the qualitative
objection in CCAR 2020, the Board will not evaluate the firm's ability
to maintain capital ratios above minimum requirements on a post-stress
basis as a factor in its decision to object or not object to the firm's
capital plan on a qualitative basis. As proposed, in determining
whether to object to a firm's capital plan, the Board will consider
whether the firm has material unresolved supervisory issues, the
assumptions and analysis underlying its capital plan, and the capital
planning process and methodologies of the firm.

B. Requirements for a Firm's Planned Capital Distributions

To help ensure that a firm's planned capital distributions are
consistent with statutory and regulatory requirements, the proposal
would have required a firm to limit the planned capital distributions
included in its capital plan for the fourth through seventh quarters of
the planning horizon to those that would be consistent with any
effective capital distribution limitations that would apply under the
firm's own baseline projections (BHC baseline scenario).\24\ The
proposal specified that a firm would be required to plan for all
limitations on capital distributions in the Board's rules, except those
specifically related to the advanced approaches capital conservation
buffer requirement and total loss-absorbing capacity buffer requirement
calculated using the advanced approaches.\25\ As discussed further in
Section IV.D, the proposal would have required a firm to adjust its
planned distributions to be consistent with these distribution
limitations under the BHC baseline scenario, assuming the new stress
capital buffer requirement applied.
---------------------------------------------------------------------------

\24\ Under the proposal, a firm would have been required to
ensure its planned capital distributions were consistent with any
limitations on capital distributions in effect, including those
related to any applicable capital buffer requirement, that it
anticipates would apply under baseline conditions under the capital
rule's standardized approach in the upcoming year. However, the
proposal would not have required a firm to consider planned
discretionary bonus payments.
\25\ See e.g., 12 CFR 217.11, 12 CFR 252.63, 12 CFR 252.165, and
12 CFR part 263.
---------------------------------------------------------------------------

The Board did not receive any comments on the requirement that
firms must plan to be in compliance with the capital rules in their BHC
baseline scenario projection, and the Board is adopting this aspect of
the proposed rule without modification.

C. Elimination of Prior Approval

The proposal would have retained the requirement that a firm
generally seek

[[Page 15583]]

prior approval from the Board to make a capital distribution in which
the dollar amount of the firm's capital distributions exceeded the
amount described in its capital plan. The Board sought comment on
alternative approaches to this requirement, including the advantages or
disadvantages of providing additional flexibility for a firm to make
capital distributions in excess of the capital distributions included
in its capital plan.
Some commenters asserted that the prior approval requirement is
unnecessary and duplicative in light of automatic distribution
restrictions already in place in the capital rule. These commenters
argued that retaining this requirement would result in undue burden on
firms and would be inconsistent with the proposal's goal of simplifying
the Board's capital requirements. These commenters also argued that
eliminating prior approval would support flexible capital planning by
allowing firms to adapt to actual capital and earnings. Other
commenters were supportive of retaining the requirement. These
commenters argued that providing additional flexibility to make capital
distributions would further weaken capital standards by allowing firms
additional leeway in making capital distributions and would be
unnecessary in light of firm profitability and recent distributions.
Commenters provided a number of suggestions for allowing firms to
increase their planned capital distributions without seeking approval
from the Board, including eliminating the prior approval requirement
altogether. For, example, some commenters supported allowing a firm to
exceed the capital distributions included in its capital plan on the
condition that the firm's capital ratios exceeded its BHC baseline
scenario projections. Others recommended that all increases in planned
capital distributions become subject to an expedited prior approval
requirement, such as the process applied to de minimis capital
distribution increases, or that the Board remove the ``blackout
period'' during which a firm is not permitted to request prior
approval. These commenters also argued that the stress capital buffer
requirement should be used to satisfy prior approval requirements in
the capital rule, which requires a firm to seek prior approval for
redemptions and repurchases of regulatory capital instruments.\26\
---------------------------------------------------------------------------

\26\ As part of a separate final rule to simplify elements of
the capital rule, the Board amended section 20 of the capital rule
to remove the requirement to obtain prior approval of the Board
before redeeming or repurchasing CET1 capital instruments only to
the extent otherwise required by law or regulation. That final rule
largely removes prior approval requirements for redemptions and
repurchases of CET1 capital under the capital rule. Firms must
obtain prior approval to redeem or repurchase CET1 capital only to
the extent otherwise required by law or regulation, such as the
requirements under section 225.4 of Regulation Y or section 11 of
the Federal Reserve Act. See 12 CFR 217.20(f) and 84 FR 35234 (July
22, 2019).
---------------------------------------------------------------------------

After reviewing the comments, the Board has modified the proposed
rule so that, as a general matter, a firm will no longer be required to
request prior approval to make distributions in excess of those
included in its capital plan, provided that the distribution is
consistent with distribution limitations included in the capital rule.
Removing the requirements to request prior approval for incremental
capital distributions reduces burden, further integrates the capital
plan rule and the capital rule, and provides firms with additional
flexibility in capital planning. Under the final rule, firms will
remain subject to the automatic distribution limitations in the capital
rule, which will include a firm's stress capital buffer requirement.
While the final rule provides firms additional flexibility, the
capital plan rule requires that a firm engage in capital planning. A
firm's processes for managing and allocating its capital resources are
critical to its financial strength and resiliency and also to the
stability and effective functioning of the U.S. financial system. The
capital plan rule requires a firm to develop and maintain a capital
plan that includes an assessment of the sources and uses of capital and
reflects forward-looking projections of revenue and losses to monitor
and maintain their internal capital adequacy. A capital plan must be
reviewed and approved at least annually by the firm's board of
directors or a designated subcommittee thereof. The firm's planned
capital actions should be consistent with the firm's capital policy,
including the amounts of planned dividends and repurchases. Taken
together, these requirements help ensure disciplined capital planning.
In addition, a firm's capital plan and capital planning processes will
continue to be reviewed through the supervisory process and, if
applicable, through the qualitative objection.
The final rule also requires a firm to provide the Board and
appropriate Reserve Bank with notice within 15 days after making any
capital distributions in excess of those included in its capital plan.
A firm would provide notice of additional distributions through an
update to a firm's FR Y-14A Schedule C, Regulatory Capital Instruments.
This reporting requirement will allow the Board to continue to monitor
a firm's capital distributions.
Under the final rule, there remain certain circumstances under
which a firm will be required to seek prior approval to distribute
capital. Specifically, if a firm receives a qualitative objection to
its capital plan, it would be required to seek prior approval before
making any capital distributions. In addition, if a firm or the Board
determines that a firm must resubmit its capital plan, the firm would
be required to seek prior approval before making any capital
distributions until the firm received prior approval to make
distributions or receives notice regarding recalculation of its stress
capital buffer requirement. Maintaining prior approval requirements in
these instances is appropriate given the circumstances that would give
rise to a qualitative objection or a resubmitted capital plan. In the
case of a qualitative objection, the Federal Reserve has determined
that the firm's capital planning processes are inadequate or
unreasonable, or would constitute an unsafe or unsound practice. In the
case of a resubmitted capital plan, either the firm or the Board has
determined that a material change to the firm's risk profile or
financial condition has occurred or will occur, which may indicate that
a firm's stress capital buffer requirement no longer adequately
reflects its risk profile. Finally, the final rule provides a
transition provision during the quarter before the first stress capital
buffer requirement is effective to permit a firm to seek prior approval
for any distribution that would exceed an amount equal to the average
of the capital distributions for the four quarters to which the Board
previously indicated its non-objection.
With respect to the limited circumstances under which prior
approval would still be required, the final rule makes certain targeted
amendments to the prior approval process. Specifically, the final rule
clarifies that a firm is required to submit either its current capital
plan or a description of changes to its capital plan as part of its
request for prior approval. This would permit the Board to consider a
prior approval request in advance of receiving a resubmitted plan.\27\
The final rule would not change

[[Page 15584]]

other aspects of the prior approval process, including other
informational requirements and the Board's process for considering
these requests. In considering a request for prior approval in the
past, the Board has generally permitted a firm to make capital
distributions that are consistent with distributions included in its
capital plan.
---------------------------------------------------------------------------

\27\ A firm must resubmit its capital plan within 30 calendar
days of determining that a resubmission is required or of receiving
notice that a resubmission is required. In some cases, a
resubmission may be triggered by an anticipated change to the
corporate structure or risk profile of the firm. By allowing the
Federal Reserve to consider a prior approval request in advance of
receiving a resubmitted plan, the final rule would provide the Board
additional flexibility to consider and act on a request based on a
discussion of the changes to the capital plan rather than receipt of
the capital plan. Consistent with past practice, a firm would be
able to incorporate by reference portions of its previously filed
capital plan to the extent that those portions are unaffected by the
change requiring submission.
---------------------------------------------------------------------------

In 2016, the Board amended the capital plan rule to include a
``blackout period,'' during which a firm was prohibited from submitting
a request for prior approval to make an additional capital
distribution. This requirement helped to ensure that the Board's
quantitative analysis in CCAR would represent a comprehensive and
current evaluation of the firm's capital adequacy. Under the final
rule, the calculation of a firm's stress capital buffer requirement no
longer includes capital distributions (except for dividends in
projection quarters four through seven), so a request by a firm for
prior approval to make an additional capital distribution would not
impact the calculation of a firm's stress capital buffer requirement.
In addition, given the circumstances during which prior approval will
be required and the potential for a capital plan resubmission at any
time of the year, a ``blackout period'' is unnecessary. Therefore and
in response to comments received, the final rule removes the ``blackout
period'' for additional capital distribution requests.

D. Timeline for Reviewing Capital Plans and Calculating the Stress
Capital Buffer Requirement

The proposal included an updated timeline for the capital plan
cycle under the stress capital buffer framework. The proposal
maintained the Board's timeline for providing a firm with the results
of the supervisory stress test and review of its capital plan. Under
the proposal, a firm would have received notice of its stress capital
buffer requirement by June 30 of each year.
Some commenters expressed concerns regarding the effective date of
a stress capital buffer requirement, which are discussed in Section
III.D.
The final rule generally adopts the timeline as proposed. Under the
final rule, the as-of date for the capital plan cycle will be December
31 of the previous calendar year, and the planning horizon for capital
planning will be a period of nine consecutive quarters from that date.
Firms will generally submit their capital plans and related regulatory
reports by April 5. The Board will generally determine each firm's
stress capital buffer requirement in the second quarter of the year
(April through June).\28\ By June 30, the Board generally will disclose
to the public each firm's stress capital buffer requirement.
---------------------------------------------------------------------------

\28\ For firms subject to a potential qualitative objection, the
qualitative assessment will take place from April to June. By June
30, the Board generally will disclose the decision to object or not
object to the capital plan of any firm subject to a qualitative
objection.
---------------------------------------------------------------------------

Commenters requested further clarity regarding public disclosure of
the stress test results and stress capital buffer requirements. Some
commenters requested that the Board disclose only one set of results.
Other commenters expressed concerns regarding public disclosure of
planned dividends and requests for reconsideration. The final rule
clarifies, but does not require, that the Board to disclose of certain
types of information. Consistent with current practice, the Board
anticipates disclosing summary information regarding a firm's stress
losses.\29\ The Board may consider additional changes to further
streamline its stress testing disclosure practices.
---------------------------------------------------------------------------

\29\ As discussed further in Section IV.E. and IV.F., a firm may
request reconsideration of its stress capital buffer requirement and
the Board may recalculate a firm's stress capital buffer requirement
if a firm resubmits its capital plan. In the event that a firm
receives a revised stress capital buffer requirement, a firm would
be required to disclose its revised stress capital buffer
requirement and its buffer on the FR Y-9C form.
---------------------------------------------------------------------------

The final rule will not be effective before a firm is required to
submit its capital plan and the results of its company-run stress test,
if applicable, for the 2020 stress testing cycle. The final rule will
be effective prior to the Board conducting the supervisory stress test.
Accordingly, the results of a company-run stress test will reflect
different assumptions, particularly regarding capital actions and
material business plan changes, than would be used as part of the
supervisory stress test. A firm will be required to disclose the
results of its company-run stress test within 15 days of the Board
disclosing the results of the supervisory stress test. The Board
intends to clarify in its disclosures for 2020 that the assumptions
used in the supervisory stress test are different from the assumptions
used in the company-run stress tests for 2020 and, therefore, the
results are not comparable.
Under the proposal, within two business days of receipt of notice
of its stress capital buffer requirement, a firm would have been
required to assess whether its planned capital distributions are
consistent with the effective capital distribution limitations under
the BHC baseline scenario throughout the fourth through seventh
quarters of the planning horizon, assuming that the firm's new stress
capital buffer requirement replaced any existing stress capital buffer
requirement. In the event of an inconsistency, a firm would have been
required to reduce the capital distributions in its capital plan to be
consistent with such limitations for those quarters of the planning
horizon.\30\ A firm would have been required to notify the Board of any
reductions in capital distributions in its capital plan (adjustment
process).
---------------------------------------------------------------------------

\30\ In addition, a firm that is not required to reduce its
planned capital distributions will be permitted to do so after
receiving its initial notice.
---------------------------------------------------------------------------

Some commenters expressed concerns regarding the adjustment
process. These commenters argued that modifications to the adjustment
process were necessary to support flexible capital planning in light of
variability in the supervisory stress test, particularly if the Board
retained dividend add-on or prior approval requirements. For example,
some commenters requested that firms be permitted to increase planned
issuances in order to meet the requirements in the BHC baseline
scenario projections and to allow planned increases in capital
distributions.
In response to comments, the Board has revised this process in the
final rule to allow firms to make any adjustments to their planned
capital distributions during the two-day adjustments process, provided
that the revised planned capital distributions are consistent with the
effective capital distribution limitations that would apply on a pro
forma basis under the BHC baseline scenario throughout the fourth
through seventh quarters of the planning horizon. Allowing a firm to
increase its planned distributions would provide firms additional
flexibility in capital planning, including by allowing firms to reflect
the results of the supervisory stress test. Any increases in planned
dividends in quarters four through seven of the planning horizon would
be reflected in a firm's stress capital buffer requirement.
Each firm's updated annual stress capital buffer requirement
generally will become effective on October 1 and be in effect until
September 30 of the

[[Page 15585]]

following calendar year. Table 1 below summarizes key actions and the
dates that these actions generally will occur in the annual capital
plan cycle under the final rule.

Table 1--Key Dates and Actions in the Annual Capital Plan Cycle
------------------------------------------------------------------------
Date Action
------------------------------------------------------------------------
December 31 of the preceding As-of date of the capital plan cycle.
calendar year.
By February 15............... Board publishes scenarios for the
upcoming capital plan cycle.
By April 5................... Each firm submits its capital plan
(including results of the bank holding
company's stress tests) and relevant
regulatory reports.
April through June........... Board conducts its supervisory stress
test and calculates each firm's stress
capital buffer requirement.
By June 30................... The Board provides to a firm notice of
its stress capital buffer requirement. A
firm will have 15 days to make a request
for reconsideration.
Within two business days of Each firm must analyze its planned
notice. capital distributions for the period of
October 1 through September 30 of the
following calendar year, adjust its
planned distributions if necessary, and
provide the Board its final planned
capital distributions.
October 1 through September Effective dates of a firm's stress
30 of the following calendar capital buffer requirement.
year.
------------------------------------------------------------------------

The Board's previous review and approval of planned capital actions
covers the four-quarter period between July 1 of each year and June 30
of the following calendar year. The stress capital buffer requirement
becomes effective on October 1, 2020. As a result, a firm will not have
any approved planned capital actions for the period July 1 to September
30, 2020. To provide a transition to the stress capital buffer
requirement, the final rule authorizes a firm to make capital
distributions for the period July 1 to September 30, 2020, that do not
exceed a four quarter average of capital distributions to which the
Board indicated its non-objection for the previous capital plan cycle,
unless otherwise determined by the Board. A firm may seek prior
approval to make additional capital distributions beyond this four-
quarter average amount using the prior approval process discussed in
Section IV.C.

E. Requests for Reconsideration

The proposed rule would have modified the process for requesting
reconsideration of an objection to a capital plan and extended this
process to include the ability to request reconsideration of the stress
capital buffer requirement. Under the proposal, a firm that requested
reconsideration of its stress capital buffer requirement would have
been required to submit a request to the Board in writing within 15
days of receipt of the firm's stress capital buffer requirement, and
the Board would have responded in writing within 30 days. The firm's
request would have been required to include an explanation of why the
firm believes that its stress capital buffer requirement should be
reconsidered.
The proposed procedures were intended to provide a firm with an
opportunity to respond to its stress capital buffer requirement or a
qualitative objection to its capital plan, and to help ensure that the
stress capital buffer requirement is appropriately sized and that the
Board has considered all relevant aspects of the firm's capital
planning and capital adequacy process. Some commenters argued that the
proposed timeline for the reconsideration process should be extended,
asserting that the proposed October 1 effective date of the stress
capital buffer requirement would provide insufficient time to prepare
for changes in capital requirements and, as a result, reduce the
usefulness of the reconsideration process. These commenters argued that
a firm would be required to prepare for a stress capital buffer
requirement during the pendency of a request for reconsideration,
reducing the value of the reconsideration process.
The final rule maintains the proposed reconsideration process and
timeline without modification. This process is based on the process
that has been included in the capital plan rule since its adoption in
2011.\31\ The reconsideration process is intended to provide the firm
with a meaningful opportunity to request reconsideration of the stress
capital buffer requirement or objection to a capital plan, including
through the presentation of additional information, while promoting an
efficient process. In particular, the timeline is intended to provide
an opportunity for response, while ensuring that the results of the
supervisory stress test and a firm's most recent capital plan are
reflected in the firm's ongoing capital requirements and planned
distributions as quickly as possible. Prolonging the period for
requesting reconsideration or responding to a request for
reconsideration also would delay incorporation of more current
information about a firm's risk profile that are not contested,
including its balance sheet, into the firm's stress capital buffer
requirement or capital plan. In addition, the final rule provides that
the Board may extend the time for acting on a request for
reconsideration, which would allow the Board to request and the firm to
submit additional information or delay the effective date of a stress
capital buffer requirement, if needed. Finally, as discussed in Section
III.B the Board has adopted changes to its stress testing framework to
increase transparency and certainty. By providing greater transparency
and predictability, these changes also may reduce the likelihood that a
request for reconsideration is made.
---------------------------------------------------------------------------

\31\ 76 FR 74631 (December 1, 2011).
---------------------------------------------------------------------------

The capital plan rule provides that a firm that requests
reconsideration of an objection to its capital plan may request an
informal hearing as part of its request for reconsideration. The Board,
in its sole discretion, may order an informal hearing if the Board
finds that a hearing is appropriate or necessary to resolve issues of
fact raised in the request for recommendation. The proposal would have
extended this option to requests for reconsideration of a stress
capital buffer requirement. The Board did not receive comments on the
informal hearing procedures provisions as applied to the stress capital
buffer requirement. Thus, the final rule provides firms with an
opportunity to request an informal hearing as part of

[[Page 15586]]

their request for reconsideration of either an objection to a capital
plan or a stress capital buffer requirement.

F. Capital Plan Resubmission and Circumstances Warranting Recalculation
of the Stress Capital Buffer Requirement

The proposal would have maintained the circumstances under which a
firm was required to resubmit a capital plan and the process for
reviewing a resubmitted capital plan. In particular, the Board could
have required a firm to resubmit its capital plan if the Board
determines that there has been a material change in the firm's risk
profile, financial condition, or corporate structure or if the bank
holding company stress scenario(s) used in the firm's most recent
capital plan are no longer appropriate for the firm's business model
and portfolios, or if changes in financial markets or the macro-
economic outlook that could have a material impact on a firm's risk
profile and financial condition require the use of updated scenarios
(material change). Additionally, a firm would have been required to
resubmit its capital plan if it determines there has been or will be a
material change since the firm last submitted its capital plan to the
Board.
The proposal would have integrated the existing resubmission
process with the stress capital buffer requirement by permitting the
Board to recalculate a firm's stress capital buffer requirement if the
firm chose to or was required to resubmit its capital plan. Under the
proposal, the Board would have reviewed a resubmitted capital plan
within 75 calendar days after receipt and, at the Board's discretion,
provided the firm with an updated stress capital buffer requirement.
Upon a determination that a firm has had a material change in its risk
profile, the Board could have conducted an updated supervisory stress
test and recalculated the firm's stress capital buffer requirement
based on the resubmitted capital plan.\32\ As with the process for
submitting the annual capital plan, the planned capital distributions
in the firm's resubmitted capital plan would have been required to be
consistent with any capital distribution limitations that would have
applied on a pro forma basis over the planning horizon. Any updated
stress capital buffer requirement would have been in effect until the
firm's updated stress capital buffer requirement from the next annual
assessment by the Board became effective (unless the firm experienced
another material change prior to that date).
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\32\ For this purpose, the planning horizon would have been the
nine quarter period beginning on the date after the as-of date of
the projections. For instance, if the as-of date of the projections
was June 30, 2020, the planning horizon would have extended from
July 1, 2020, through September 30, 2022.
---------------------------------------------------------------------------

Some commenters supported the inclusion of a process to recalculate
a firm's stress capital buffer requirement, but expressed concern about
the circumstances under which a stress capital buffer requirement would
be recalculated as well as the methodology for recalculation. In
particular, some commenters expressed concern regarding the proposed
approach of recalculating a firm's stress capital buffer requirement
based on a resubmitted capital plan. One commenter argued that
recalculation of a stress capital buffer requirement based on a
resubmitted plan would discourage a firm from resubmitting a capital
plan. Some commenters urged the Board to separate the process for
recalculating a stress capital buffer requirement from resubmission of
a capital plan, suggesting instead that recalculation of the stress
capital buffer requirement be made at the option of the firm or
automatically based on information reported on the FR Y-14 reports.
Other commenters expressed concern regarding the methodology for
recalculation, asserting that recalculation based on a new or different
stress scenario could produce a significantly different stress capital
buffer requirement. Finally, some commenters expressed concerns about
the resubmission process generally, including the distribution
limitations on firms that resubmit a capital plan as well as the
circumstances under which a resubmission would be required.
The final rule adopts the proposed process for recalculating a
firm's stress capital buffer requirement based on a resubmitted capital
plan.\33\ The circumstances that require a firm to resubmit its capital
plan may also indicate that its stress capital buffer requirement no
longer reflects its risk profile. Accordingly, the automatic
distribution limitations that would apply if the firm held capital
within its buffer also may not be sufficient. As commenters observed, a
firm may resubmit a capital plan for a variety of reasons. Not every
change to a firm's capital plan or balance sheet would be significant
enough to warrant recalculation of its stress capital buffer
requirement. In some cases, a capital plan may be resubmitted based on
anticipated changes in the corporate structure or business of the firm,
and a stress capital buffer requirement may be more accurately
evaluated after consummation of the anticipated change. Accordingly,
the final rule provides the Board discretion in determining when and
how to recalculate a stress capital buffer requirement based on a
resubmitted capital plan. If a firm resubmits its capital plan, the
Board will inform the firm of whether its stress capital buffer
requirement will be recalculated within 75 days of the capital plan
being resubmitted. In response to concerns regarding the restrictions
on distributions triggered by a resubmission, as discussed in Section
IV.C., the final rule would simplify and clarify the submission
requirements for prior approval requests made as a result of a
resubmitted capital plan. The final rule also would maintain the
criteria for resubmission of a capital plan based on a material change.
These criteria help support an effective capital planning process.
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\33\ The final rule also would maintain the process for
reviewing a resubmitted capital plan for a firm subject to the
qualitative objection.
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V. Changes to the Capital Rule and Mechanics of Distribution
Limitations

Under the capital rule, a firm is subject to restrictions on
distributions and discretionary bonus payments if the firm's capital
ratios are at or below its minimums plus its capital conservation
buffer requirement.\34\ For all firms, the capital conservation buffer
requirement is composed of CET1 capital and is equal to 2.5 percent of
risk-weighted assets, plus any applicable countercyclical capital
buffer amount and GSIB surcharge.
---------------------------------------------------------------------------

\34\ See 12 CFR 217.11.
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To incorporate the stress capital buffer requirement into the
capital rule, the proposal would have revised the capital rule to
include the stress capital buffer requirement in the capital
conservation buffer framework. A firm would have been subject to the
most stringent distribution limitation, if any, as determined by the
firm's standardized approach capital conservation buffer requirement,
the firm's stress leverage buffer requirement and, if applicable, the
firm's advanced approaches capital conservation buffer requirement, and
the enhanced supplementary leverage ratio standard.\35\ A firm's
standardized

[[Page 15587]]

approach capital conservation buffer requirement would have been equal
to the sum of: (1) Its stress capital buffer requirement as calculated
using the standardized approach, (2) as applicable, the firm's GSIB
surcharge; and, (3) as applicable, the firm's countercyclical capital
amount.\36\ A firm's advanced approaches capital conservation buffer
requirement would have been equal to the sum of: (1) 2.5 percent of
risk-weighted assets calculated using the advanced approaches, (2) as
applicable, the firm's GSIB surcharge; and, (3) as applicable, the
firm's countercyclical capital buffer amount. Similarly, under the
proposal, a firm would have compared its leverage buffer to its stress
leverage buffer requirement.
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\35\ Consistent with the proposal, the final rule does not alter
the substance of the buffer applicable to GSIBs under the Board's
enhanced supplementary leverage ratio standards. The regulatory
language implementing this buffer is revised by the final rule to
integrate the enhanced supplementary leverage ratio buffer with the
stress capital buffer requirement within the capital rule.
\36\ The existing buffer framework in the capital rule would
have remained unchanged for firms not subject to the capital plan
rule.
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Under the proposal, a firm would have been subject to the most
stringent distribution limitation as determined by the firm's
standardized approach capital conservation buffer requirement, the
firm's stress leverage buffer requirement and, if applicable, the
firm's advanced approaches capital conservation buffer requirement, and
the enhanced supplementary leverage ratio standard. A firm would have
determined the maximum amount it could pay in capital distributions and
discretionary bonus payments during a given quarter by multiplying the
firm's eligible retained income by its applicable payout ratio, if any,
as determined under Table 2 to 12 CFR 217.11 of the proposed rule.
Several commenters supported the proposal to separate the
standardized approach capital conservation buffer and the advanced
approaches capital conservation buffer and to only incorporate the
stress capital buffer requirement into the standardized approach
capital conservation buffer. Arguments in favor of not incorporating
the stress capital buffer requirement into the advanced approaches
capital conservation buffer generally focused on the complexity such an
approach would add to the rule by combining two different model-based
approaches (i.e., the advanced approaches and the stress test).
However, some commenters supported applying the stress capital buffer
requirement over advanced approaches risk-weighted assets by scaling
the stress capital buffer requirement by the ratio of a firm's
standardized risk-weighted assets to its advanced approaches risk-
weighted assets.
Some commenters argued that the stress capital buffer requirement
would remove the need for firms to calculate risk-weighted assets using
the advanced approaches because both effectively measured capital needs
based on a firm's internal risk-based methodologies. These commenters
recommended removal of the advanced approaches from the capital rule
altogether, or that the Board narrow the scope of the advanced
approaches to only the largest, most systemic firms. Some commenters
also supported removing the advanced approaches from the capital rule
for reasons unrelated to this rulemaking.
The final rule includes the buffer framework with certain revisions
from the proposal. Most notably, the final rule includes a revised
definition of eligible retained income and does not include the
proposed stress leverage buffer.\37\
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\37\ The revisions to eligible retained income are discussed in
greater detail in Section III.A and the stress leverage buffer
requirement is discussed in greater detail in Section III.D.
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As discussed in the proposal, the interaction of the stress capital
buffer requirement and a firm's risk-based capital ratios calculated
using the advanced approaches would add excessive complexity to the
rule, whether through the use of a scaling factor or other calibration
adjustment. Consistent with the rationale in the proposal, the final
rule does not incorporate the stress capital buffer requirement into
the advanced approaches capital conservation buffer.
The Board is not removing the advanced approaches from the capital
rule in this final rule. The concerns related to the interaction of the
advanced approaches and the stress capital buffer requirement are
addressed in the final rule by limiting the application of the stress
capital buffer requirement to the standardized approach capital
requirements. The Board continues to believe that large and more
systemic firms should be subject to more risk-sensitive capital
requirements commensurate with their risk profiles.
Some commenters supported the Board's proposal to include any
applicable countercyclical capital amount in the capital conservation
buffer requirement, noting that it is not redundant with the stress
capital buffer requirement, as each addressed different risks
independently. Other commenters argued that the stress capital buffer
requirement could make the countercyclical capital buffer redundant,
and recommended that the Board make only sparing use of the
countercyclical capital buffer. Some commenters urged the Board to
remove the countercyclical capital buffer from the capital rule,
arguing that it was fully redundant with the stress capital buffer
requirement due to countercyclical features of the stress tests.
Commenters also argued that countercyclical capital requirements could
be set more effectively through the stress capital buffer requirement
than the countercyclical capital buffer. Commenters also argued that,
if the countercyclical capital buffer were retained, any activation of
the countercyclical capital buffer should be reflected in the stress
testing framework.
Consistent with the proposal, the final rule retains the
countercyclical capital buffer as a tool the Board could use to address
situations when systemic vulnerabilities are meaningfully above normal.
The stress capital buffer requirement is not redundant with the
countercyclical capital buffer. The countercyclical capital buffer is a
macroprudential tool intended to strengthen the resiliency of financial
firms and the financial system, by allowing the Board to raise capital
standards when credit growth in the economy becomes excessive. The
Board's stress testing scenario design framework is designed to
mitigate the inherent procyclicality in the stress test, not to serve
as an explicit countercyclical offset to the financial system. As a
result, there may be circumstances where the countercyclical capital
buffer is the appropriate tool to address systemic vulnerabilities, and
it is important to retain this tool as a potential option going
forward.
One commenter urged the Board to recognize the ability of long-term
debt issued under the Board's Total Loss-Absorbing Capacity (TLAC) rule
to absorb losses in the same manner as common equity tier 1 capital.
The commenter therefore recommended that firms be permitted to satisfy
all or a portion of the stress capital buffer requirement with internal
long-term debt or common equity tier 1 capital.
Only a subset of firms subject to the capital plan rule are subject
to the TLAC rule--U.S. GSIBs and the U.S. intermediate holding
companies of non-U.S. GSIBs--and these firms are among the larger and
more systemic firms subject to the capital plan rule. Providing these
firms with greater flexibility to satisfy the buffers would be
inconsistent with the general principle that larger and more systemic
firms

[[Page 15588]]

should be subject to more stringent and risk-sensitive requirements. In
addition, the loss-absorbing capacity of long-term debt issued under
the Board's TLAC rule is not identical to the loss-absorbing capacity
of CET1 capital as the way in which long-term debt could absorb losses
varies by circumstance. As a result, the Board is maintaining the
requirement that the standardized approach capital conservation buffer
and the advanced approaches capital conservation buffer must be
satisfied with common equity tier 1 capital.
Several commenters raised concerns that the stress capital buffer
requirement would be redundant with the GSIB surcharge. Some commenters
noted that both the stress capital buffer requirement and GSIB
surcharge account for risks arising from capital markets activities and
for counterparty risks.
One commenter suggested that the Board address the potential
double-counting of risks by making the stress capital buffer
requirement an alternative to the current capital conservation buffer
requirements. Specifically, the commenter suggested that a firm's
buffer requirement be the greater of (1) its stress capital buffer
requirement, and (2) 2.5 percent, plus any applicable GSIB surcharge
and countercyclical capital buffer amount. Other commenters suggested
additional similar structures for a firm's buffer requirement.
Commenters asked that the Board exclude the GSIB surcharge from the
standardized approach capital conservation buffer, pending revisions to
the Board's GSIB surcharge rule.
The final rule, consistent with the proposal, establishes the
buffer requirement for the standardized approach capital conservation
buffer equal to a firm's stress capital buffer requirement, plus any
applicable GSIB surcharge and countercyclical capital buffer amount.
The stress capital buffer requirement, which will incorporate losses
from the global market shock and the large counterparty default
component, is not duplicative of the GSIB surcharge. The stress capital
buffer requirement is calculated based on each firm's vulnerability to
adverse economic or financial market conditions. The global market
shock measures the trading mark-to-market losses associated with sudden
changes in asset prices, and the large counterparty default scenario
component measures the risk of losses due to an unexpected default of
the counterparty whose default on all derivatives and securities
financing transactions would generate the largest stressed losses for a
firm. These components of the supervisory stress test do not capture
the potential adverse impact of the failure of a GSIB on the financial
system as a whole, which is captured only by the GSIB surcharge.
Several commenters also raised concerns regarding the methodologies
used to determine the GSIB surcharge. Some commenters favored the
elimination of the GSIB framework's Method 1 score, while other
commenters favored the elimination of the Method 2 score. In addition,
commenters raised concerns with specific GSIB indicators' ability to
capture systemic risk and recommended changes to the indicators.
Several commenters also made recommendations on ways to recalibrate the
GSIB surcharge, such as revisiting the calibration of Method 2 in light
of post-crisis reforms. Others suggested updates to the GSIB surcharge
coefficients and denominators. A commenter also recommended that the
Board introduce a more gradated surcharge scale to avoid potential
cliff effects. Commenters urged the Board to make changes to the GSIB
surcharge methodologies effective concurrently with the effective date
of the stress capital buffer requirement.
The Board is not revising the GSIB surcharge rule in connection
with the final rule. As noted, the GSIB surcharge is designed to
address risks that differ from those addressed by the stress capital
buffer requirement. As discussed in the preamble to the final GSIB
surcharge rule, the GSIB surcharge, including the amount of the
surcharges and the calculation of Method 1 and Method 2 scores, is
designed to address the risks to the financial system presented by
systemically important firms.
Taken together, the components of a firm's buffer requirements each
serve independent functions. Specifically, the stress capital buffer
requirement ensures that a firm has sufficient capital to continue to
serve as a financial intermediary during stress. The GSIB surcharge
ensures that a GSIB internalizes the cost that its failure would have
on the broader economy. The countercyclical capital buffer ensures
capital when there is an elevated risk of above-normal losses. For
these reasons, the stress capital buffer requirement, as adopted in the
final rule, serves as an appropriate complement to the other capital
buffers and the GSIB surcharges.
The proposal would not have amended the current definitions of
``distribution'' and ``capital distribution'' found in the capital rule
and capital plan rule, respectively.\38\ Unlike the definition of
distribution in the capital rule, the definition of capital
distribution in the capital plan rule does not provide an exception for
distributions accompanied by an offsetting issuance. The broader
definition included in the capital plan rule ensures that all
distributions, including those offset by issuances, are included in a
firm's capital plan. However, because distributions offset by
equivalent issuances within a quarter do not affect a firm's capital
position, this type of distribution is not included in the definition
in the capital rule. As discussed in Section IV.C, some commenters
raised concerns regarding these differing definitions in the context of
their recommendation to eliminate the prior approval requirement to
make incremental capital actions. As the final rule eliminates the
prior approval requirement, the Board is adopting this aspect of the
proposal without modification and will continue to monitor this issue.
---------------------------------------------------------------------------

\38\ Under the capital rule, the definition of distribution
includes reductions in tier 1 capital through a repurchase or any
other means, except when the institution, in the same quarter as the
repurchase, fully replaces the tier 1 instrument by issuing a
similar instrument. Under the capital plan rule, a capital
distribution means a redemption or repurchase of any debt or equity
capital instrument, a payment of common or preferred stock
dividends, a payment that may be temporarily or permanently
suspended by the issuer on any instrument that is eligible for
inclusion in the numerator of any minimum regulatory capital ratio,
and any similar transaction that the Board determines to be in
substance a distribution of capital.
---------------------------------------------------------------------------

VI. Changes to the Stress Test Rules

The proposal would have revised the capital action assumptions in
the Board's supervisory stress test and the company-run stress tests
conducted under Regulation YY, in order to harmonize the publicly
disclosed supervisory and company-run stress test results with the
stress capital buffer requirement.\39\ The proposal would not have
included the four quarter dividend add-on in the required capital
actions in the stress test rules.
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\39\ In the proposal, a firm's company-run stress test, would no
longer include in their capital action assumptions: (1) Actual
capital actions for the first quarter of the planning horizon; (2)
any common stock dividends; or (3) issuance of common or preferred
stock relating to expensed employee compensation. For the first
quarter of the planning horizon, firms will include any payments on
any other instrument that is eligible for inclusion in the numerator
of a regulatory capital ratio equal to the stated dividend,
interest, or principal due on such instrument during the quarter.
The capital action assumptions used in the company-run and
supervisory stress tests will not include the four quarters of
planned dividends.
---------------------------------------------------------------------------

The Board received several comments on the capital distribution
assumptions, which were addressed above in Section

[[Page 15589]]

III.B.i; however, there were no comments on the proposal to ensure that
the capital actions in the company-run stress test rule matched the
capital actions in the calculation of the stress capital buffer
requirement. Therefore, the final rule adopts changes to the capital
action assumptions in the Board's supervisory stress test and company-
run stress test to be consistent with one another. \40\
---------------------------------------------------------------------------

\40\ The supervisory and company-run stress tests conducted
under Regulation YY will not include four quarters of planned
dividends.
---------------------------------------------------------------------------

As discussed above in Section III.B.i, the final rule does not
include a planned material business plan change (e.g. merger,
acquisition, or divestiture) in a firm's stress capital buffer
requirement. In order to harmonize the publicly disclosed supervisory
and company-run stress test results with the stress capital buffer
requirement, the final rule removes the requirement to include
issuances in connection with a planned merger or acquisition to the
extent that the merger or acquisition is reflected in the covered
company's pro forma balance sheet estimates. Consistent with current
requirements, the final rule will continue to require a firm to include
in its capital plan a discussion of any expected changes to the firm's
business plan that are likely to have a material impact on the capital
adequacy or liquidity position of the firm. Firms will continue to be
expected to include the impact of a material business plan change on
the FR Y-14A reports, including the Schedule A--Summary, Schedule C--
Regulatory Capital Instruments, and Schedule F--Business Plan Changes.
The proposal would have incorporated the definition of
``significant trading activity'' into the Board's company-run stress
test requirements in order to increase transparency regarding the
application of an additional trading and counterparty scenario
component.\41\ Currently, significant trading activity is defined by
reference to the Capital Assessments and Stress Testing report (FR Y-
14Q). The FR Y-14Q defines a firm with significant trading activity as
any domestic bank holding company or U.S. intermediate holding company
that is subject to supervisory stress tests and that (1) has aggregate
trading assets and liabilities of $50 billion or more, or aggregate
trading assets and liabilities equal to 10 percent or more of total
consolidated assets, and (2) is not a ``large and noncomplex firm''
under the Board's capital plan rule. The proposal would have adopted
this FR Y-14 definition of significant trading activity in the stress
test rules for the annual company-run stress test. Commenters did not
comment on this aspect of the proposal and it is finalized as proposed.
---------------------------------------------------------------------------

\41\ See 12 CFR part 252, subpart F.
---------------------------------------------------------------------------

While the Board's scenario design framework was not part of the
proposal, commenters raised issues with the severity and plausibility
of the supervisory scenarios. Some commenters argued that the Board's
scenario design process resulted in scenarios that were implausibly
severe and required firms to hold more capital than would be necessary
to withstand stressful conditions. Commenters suggested that the Board
introduce limits on the overall severity of the severely adverse
scenario, as they argue that supervisory scenarios were more severe
than historical experience. Another suggestion was to introduce a rule
for scenario plausibility, including modifying the global market shock
to make it more realistic and to ensure that the macroeconomic scenario
is consistent with the global market shock.
As described in Appendix A to 12 CFR part 252, severely adverse
scenarios are designed to be plausible, relevant, and guided in large
part by historical experience in severe U.S. recessions.\42\ By design,
the severity of the scenarios is meant to mimic past recessions and
financial crises with the addition of certain salient risks in order to
ensure that firms can withstand stress and continue to lend. In
addition, the Board may factor in particular risks to the scenario to
make appropriate adjustments to the paths of specific economic
variables that are historically less typical in order to highlight
systemic risks. A comparison of the severity of recent CCAR scenarios
to benchmarks in past recessions or financial crises, both domestic and
international, suggests that the scenarios used in the 2017 through
2019 CCAR assessments are plausibly severe. As in the current
supervisory post-stress capital assessment in CCAR, under the proposal,
the supervisory stress test will continue to use a common set of
scenarios, models, and assumptions across firms.
---------------------------------------------------------------------------

\42\ See 12 CFR part 252, Appendix A.
---------------------------------------------------------------------------

Commenters also suggested that the Board enhance the transparency
of the models used in the supervisory stress test by publishing model
specifications for comment, or publishing its methodology for comment
each year. One commenter opposed providing more information about
supervisory models or publishing the model specifications for comment.
The commenter suggested such publication could lead to firms adopting
stress test models that are similar to the supervisory models,
potentially causing models to have common weaknesses that create risks
to financial stability.
While the Board's methodology for conducting the supervisory stress
test was not part of the proposal, the Board received several comments
regarding the Board's models and methodology for conducting the
supervisory stress test. Many of the comments focused on the
assumptions associated with the global market shock and large
counterparty default scenario component. These commenters' recommended
reflecting the impact of the global market shock in capital deductions,
reflecting variation margin in counterparty losses, capping trading
losses and associated capital deductions at the total amount of a
firm's trading exposure, and eliminating the double-counting of losses
between the global market shock and the macroeconomic scenario. Other
comments focused on other supervisory models, such as suggesting that
the supervisory net income projections should reflect firm-specific
considerations, such as tax attributes and that the FR Y-14 should
collect credit risk mitigation transactions so that the Federal Reserve
could reflect these transactions in its projections. Finally,
commenters suggested that the Federal Reserve consider the impact of
incorporating the current expected credit loss (CECL) methodology into
the supervisory stress test.\43\
---------------------------------------------------------------------------

\43\ See ASU 2016-13, ``Financial Instruments--Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments.''
---------------------------------------------------------------------------

Since the Board issued the proposal in 2018, the Board separately
has taken steps to respond to these comments. For example, in February
2019, the Board adopted a final stress test policy statement, which
reduced the materiality threshold for phasing-in material model
changes.\44\ Additionally, in order to address the suggestion to
reflect the impact of the global market shock on regulatory capital
deductions, the Board will begin collecting information regarding this
impact on the FR Y-14A starting in CCAR 2020. Similarly, the Board will
also begin collecting more granular information related to tax
attributes on the FR Y-14A starting in CCAR 2020, to further understand
the impact of tax related items under stress.
---------------------------------------------------------------------------

\44\ See 12 CFR part 252, Appendix A.
---------------------------------------------------------------------------

Regarding CECL, the Board has met with various affected parties,
including firms subject to the supervisory stress test, and has
determined to maintain the current modeling framework for loan

[[Page 15590]]

allowances in its supervisory stress test through 2021.\45\ The Board
continues to consider how to implement CECL in its stress testing
methodology and will continue to seek feedback on the best way to
implement CECL in stress testing.
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\45\ See Board of Governors of the Federal Reserve System,
``Statement on the current expected credit loss methodology (CECL)
and stress testing'' December 21, 2018, available online at:
www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181221b1.pdf.
---------------------------------------------------------------------------

VII. Impact Analysis

The Board analyzed the impact of the final rule on the capital
requirements of affected firms. This analysis compared the capital
required to avoid limitations on capital distributions under the
current framework and under the final rule.\46\ In addition, the impact
analysis considered the potential effects of the rule on economic
activity.
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\46\ The analysis made certain simplifying assumptions. For
example, the Board assumed the impact of the flat balance sheet
assumption on projected losses and revenue in the stress test offset
each other but included the impact of the assumption on the
denominator of the projected capital ratios.
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The Board used data from the 2013 to 2019 CCAR exercises to obtain
a through-the-cycle view of the impact of the rule.\47\ While 2013 to
2019 represents a period of generally favorable economic and financial
conditions, capital distributions--a key driver of the impact of the
rule relative to current requirements--varied cyclically, rising from a
relatively low level in 2013 to a high level in 2019. The impact of the
rule will also vary through the economic and credit cycle based on the
risk profile and planned capital distributions of individual firms, as
well as on the specific severely adverse stress scenario used in the
supervisory stress test.
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\47\ Firms were subject to a CET1 capital requirement over the
entire planning horizon of the supervisory stress test beginning
with the 2015 CCAR exercise. For the 2013 and 2014 CCAR exercises,
tier 1 common equity capital serves as a proxy for CET1 capital and
is broadly similar to CET1 but includes fewer deductions, among
other differences. The supervisory stress test began in 2013.
---------------------------------------------------------------------------

Based on data from CCAR 2013 to CCAR 2019, the rule is estimated to
result in largely unchanged CET1 capital requirements: CET1 capital
requirements are estimated to increase, on average, by $11 billion, a
one percent increase from current requirements. As such, viewed
through-the-cycle, the rule preserves the current requirements for the
highest quality capital. Looking across CCAR years, the impact of the
proposal on CET1 capital requirements ranges from a decline of $59
billion to an increase of $78 billion.
The Board expects that the impact of the rule would vary for GSIBs
relative to the smaller and less complex firms that are subject to the
stress capital buffer requirement. On average, from 2013 to 2019, the
rule is expected to lead to an increase in CET1 capital requirements
for GSIBs of $46 billion, a seven percent increase in their current
aggregate CET1 capital requirement. By contrast, the CET1 capital
requirements for firms subject to Category II-IV standards are expected
to decrease by $35 billion, a 10 percent decrease relative to their
current aggregate requirement. While the less stringent balance sheet
and distribution assumptions in the supervisory stress test lower
capital requirements for all firms, the increased requirement for GSIBs
results from the integration of a stress test-based capital requirement
with each firm's GSIB surcharge.\48\
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\48\ The fact that the required capital as measured by Board's
stress tests typically acts as the most binding capital requirement
in the current framework for many GSIBs reduces the impact of
incorporating the GSIB surcharge to the stress capital buffer
requirement, which is currently not included in the minimum capital
standards in the stress tests.
---------------------------------------------------------------------------

In part due to an elimination of the stress leverage buffer
requirement, the rule is estimated to lower aggregate tier 1 capital
requirements by $49 billion, based on average CCAR results from 2013 to
2019, a four percent decrease relative to aggregate current tier 1
capital requirements.\49\ Modified balance sheet and distribution
assumptions in the supervisory stress test also contribute to the
decline. On average, the tier 1 capital requirement for GSIBs, the
riskiest and most systemically important firms, remains unchanged by
the final rule. The tier 1 capital requirements for firms subject to
Category II-IV standards is expected to decrease by $49 billion, a 12
percent decrease relative to their current aggregate requirement.
Looking across CCAR years, the impact of the rule would range from an
aggregate reduction in tier 1 capital requirements of $102 billion to
an aggregate increase in tier 1 capital requirements of $77 billion.
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\49\ Common equity tier 1 capital was developed after the
financial crisis and consists of the highest quality regulatory
capital. Prior to the financial crisis, tier 1 capital, which
consists of common equity and non-cumulative perpetual preferred
stock, was the main measure of capital adequacy.
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As the final rule has differential effects depending on the
required form of regulatory capital, the Board studied the effect on
overall bank funding costs to provide another view of the impact of the
rule. The Board expects that the rule would slightly reduce the yearly
dollar funding costs of capital and long-term debt needed to meet
requirements. The changes in CET1 and tier 1 capital requirements drive
these funding cost impacts.
Firms often maintain ``management buffers'' of tier 1 and CET1
capital that exceed regulatory requirements. As the final rule
significantly changes how stress tests factor into capital
requirements, firms may change their approach to management buffers in
response to the rule. Such a change could lead to changes in levels of
capital that differ from the changes in requirements reported above.
The Board examined the impact of the rule on risk sensitivity, as
stress losses will determine capital requirements only for firms above
the stress capital buffer requirement floor. Combining firm-by-firm
data across supervisory stress test exercises from 2013 to 2019, the
Board estimated that about half of the observations would have a stress
capital buffer requirement above 2.5 percent. In comparison, about 90
percent of the observations in past CCAR exercises, which included the
prior capital distribution assumptions and growing balance sheets,
experienced capital declines of greater than 2.5 percent.
The Board also assessed the macroeconomic consequences of the final
rule using models that consider the benefit of higher amounts of
regulatory capital in reducing the frequency of financial crisis versus
the cost of reduced lending.\50\ Based on the estimated change in
average capital requirements through the cycle, the proposal is
expected to have little to no impact on the long-run level of GDP.
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\50\ See Firestone, S., A. Lorenc and B. Ranish, 2019, An
empirical economic assessment of the costs and benefits of bank
capital in the United States, Federal Reserve Bank of St. Louis
Review, 101, pp. 203-230; and Basel Committee on Banking
Supervision, 2010, An assessment of the long-term economic impact of
stronger capital and liquidity requirements, white paper.
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VIII. Changes to Regulatory Reports

The proposal would have modified the Consolidated Financial
Statements for Holding Companies Report (FR Y-9C; OMB: 7100-0128) to
collect information regarding the stress capital buffer requirement
applicable to a firm and the Capital Assessments and Stress Testing
Report (FR Y-14A; OMB No. 7100-0341). Specifically, the proposal would
have added new line items to the quarterly FR Y-9C in order to collect
information regarding a firm's stress capital buffer requirement,
stress leverage buffer requirement, and GSIB surcharge and
countercyclical capital

[[Page 15591]]

buffer amount, as applicable, and information necessary to calculate a
firm's distribution limitations, including its capital conservation
buffer, advanced approaches capital conservation buffer, leverage
buffer, eligible retained income, and distributions. The proposal would
have also added similar items to the applicable FR Y-14A schedule. This
information would enable the Board and the public to identify any
distribution limitations and monitor a bank holding company's
performance on a quarterly basis and allow the Board to compare a
firm's projected capital ratios to expected buffer requirements and
implement the proposed evaluation of planned capital actions under the
BHC baseline scenario.\51\
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\51\ A firm generally will only be required to report this
information annually in connection with its capital plan submission.
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One commenter suggested that it was unnecessary to report eligible
retained income, maximum payout ratio, maximum payout amount, and
distributions and discretionary bonus payments unless the firm is
subject to a maximum payout ratio.
The Board is adopting the proposed adjustments to the FR Y-9C, with
some modifications to reflect changes made to the final rule. Firms
will be required to report all items related to their buffer and
potential limitations to provide critical information to the Board and
public about the firm's capital adequacy and ability to continue to
operate under stress. As the final rule does not include a stress
leverage buffer requirement, the corresponding new line items on the FR
Y-9C have been removed from the final FR Y-9C forms and instructions.
Responses to these items will enable the Board and public to monitor a
firm's capital adequacy relative to its requirements. The responses
will also ensure that the Board and public can estimate the potential
consequences for a firm if it were to undergo a period of stress.
The proposed changes to the FR Y-14A are also being adopted as
proposed, with some modifications to reflect changes made to the final
rule. Similar to the FR Y-9C, line items related to the stress leverage
buffer requirement have not been added to the FR Y-14A in the final
rule. In addition, the Board has not added items to the FR Y-14A
related to buffer requirements that are reported on the FR Y-9C by
firms not subject to the capital plan rule, as these items are not
applicable to FR Y-14 reporters. The changes to the FR Y-14A reporting
forms and instructions are essential to understand a firm's projected
capital positions under stress and will help shape the Federal
Reserve's evaluation of the firm's capital planning processes.
As described in Section IV above, the final rule provides that,
within two business days of receipt of notice of its stress capital
buffer requirement, a firm will be required to assess whether its
planned capital distributions are consistent with the effective capital
distribution limitations that will apply on a pro forma basis under the
BHC baseline scenario throughout the fourth through seventh quarters of
the planning horizon. In the event of an inconsistency, a firm will be
required to reduce the capital distributions in its capital plan to be
consistent with such limitations for those quarters of the planning
horizon and provide the Board with its final planned capital actions
following any such adjustments.\52\
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\52\ The final rule also permits a firm to reduce its planned
capital distributions if the firm's planned capital distributions
are consistent with effective capital distribution limitations.
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To implement this requirement, a firm will be required to report
its capital distributions on the FR Y-14A filed in connection with its
initial capital plan on April 5, and in the event of any downward
adjustments to its planned capital distributions, resubmit the FR Y-14A
summary schedule within two business days of receiving its stress
capital buffer requirement, that reflect the stress capital buffer
requirement and its reduced planned capital distributions.\53\ At the
time a firm submits its capital plan and FR Y-14A report as of December
31, the firm will not be aware of its stress capital buffer requirement
for the upcoming cycle. For simplicity, the instructions contemplate
that the firm will report the stress capital buffer requirement
currently in effect, and assume that the stress capital buffer
requirement remain constant through the planning horizon. However, the
capital plan rule requires the firm's planned capital distributions to
be consistent with effective capital distribution limitations in the
fourth through seventh quarters of the planning horizon and not the
distribution limitations in effect in the prior cycle. Thus, it will be
possible for a firm to include planned capital distributions in its FR
Y-14A as of December 31 that will exceed those permitted under the
previous cycle's capital plan, but be consistent with the capital plan
rule because the firm's stress capital buffer requirement declined.
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\53\ In the event that a firm requests reconsideration of its
stress capital buffer requirement, a firm must evaluate its planned
capital distributions in light of any modifications to its stress
capital buffer requirement. The firm may be required to reduce or
permitted to increase its capital distributions depending on any
modifications, and must provide the Board with its final planned
capital actions reflecting those adjustments. In the event of any
adjustment, the firm will be required to file the FR Y-14A to
reflect its revised planned capital distributions.
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The Board is also making changes to its regulatory reports to
reflect the changes to the circumstances in which a firm is required to
seek prior approval from the Federal Reserve before making capital
distributions in excess of these included in the firm's capital plan.
Currently, a firm is required to submit an updated FR Y-14A Schedule C,
Regulatory Capital Instruments prior to making any additional capital
distributions. As discussed in Section IV.C, the Board is eliminating
the prior approval requirement. To reflect these changes in the
regulatory reports, a firm will be required to submit an updated FR Y-
14A Schedule C, Regulatory Capital Instruments, within 15 days after
notice of distributions in excess of planned distributions as required
under the capital plan rule. This reporting requirement will allow the
Board to continue to monitor a firm's capital distributions while
reducing burden.

IX. Administrative Law Matters

A. Paperwork Reduction Act

Certain provisions of the final rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3501-3521). The Board may not conduct or sponsor, and
a 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 Board reviewed the final rule under the
authority delegated to the Board by OMB. The Board did not receive any
specific comments on the PRA for the FR Y-14 or FR Y-13.
Regarding the proposed changes to the FR Y-9C, one commenter
suggested that it was unnecessary for firms subject to the capital plan
rule to report eligible retained income, maximum payout ratio, maximum
payout amount, and distributions and discretionary bonus payments
unless the firm is subject to a maximum payout ratio. As noted above,
responses to these items will enable the Board and public to monitor a
firm's capital adequacy relative to its requirements. The responses
will also ensure that the Board and public can estimate the potential
consequences for a firm if it were to undergo a period of stress.
The final rule contains reporting requirements subject to the PRA.
As described further below, the Board is revising the reporting
requirements

[[Page 15592]]

found in section 12 CFR 225.8. Additionally, the Board is revising
certain other collections of information to reflect the changes
proposed in the proposed rule.
Adopted Revision, With Extension for Three Years, of the Following
Information Collections:
(1) Report title: Financial Statements for Holding Companies.
Agency form number: FR Y-9C; FR Y-9LP; FR Y-9SP; FR Y-9ES; FR Y-
9CS.
OMB control number: 7100-0128.
Effective date: December 31, 2020.
Frequency: Quarterly, semiannually, and annually.
Affected public: Businesses or other for-profit.
Respondents: Bank holding companies (BHCs), savings and loan
holding companies (SLHCs),\54\ securities holding companies (SHCs), and
U.S. intermediate holding companies (IHCs) (collectively, holding
companies (HCs)).
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\54\ An SLHC must file one or more of the FR Y-9 family of
reports unless it is: (1) A grandfathered unitary SLHC with
primarily commercial assets and thrifts that make up less than 5
percent of its consolidated assets; or (2) a SLHC that primarily
holds insurance-related assets and does not otherwise submit
financial reports with the SEC pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934.
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Estimated number of respondents:
FR Y-9C (non AA HCs) with less than $5 billion in total assets--
155,
FR Y-9C (non AA HCs) with $5 billion or more in total assets--189,
FR Y-9C (AA HCs)--19,
FR Y-9LP--434,
FR Y-9SP--3,960,
FR Y-9ES--83,
FR Y-9CS--236.
Estimated average hours per response:
Reporting
FR Y-9C (non AA HCs) with less than $5 billion in total assets--
40.48,
FR Y-9C (non AA HCs) with $5 billion or more in total assets--
46.45,
FR Y-9C (AA HCs)--48.59,
FR Y-9LP--5.27,
FR Y-9SP--5.40,
FR Y-9ES--0.50,
FR Y-9CS--0.50.
Recordkeeping
FR Y-9C (non AA HCs) with less than $5 billion in total assets--1,
FR Y-9C (non AA HCs) with $5 billion or more in total assets--1,
FR Y-9C (AA HCs)--1,
FR Y-9LP--1,
FR Y-9SP--0.50,
FR Y-9ES--0.50,
FR Y-9CS--0.50.
Estimated annual burden hours:
Reporting
FR Y-9C (non AA HCs) with less than $5 billion in total assets--
25,098,
FR Y-9C (non AA HCs) with $5 billion or more in total assets--
35,116,
FR Y-9C (AA HCs)--3,693,
FR Y-9LP--9,149,
FR Y-9SP--42,768,
FR Y-9ES--42,
FR Y-9CS--471.
Recordkeeping
FR Y-9C (non AA HCs) with less than $5 billion in total assets--
620,
FR Y-9C (non AA HCs) with $5 billion or more in total assets--756,
FR Y-9C (AA HCs)--76,
FR Y-9LP--1,736,
FR Y-9SP--3,960,
FR Y-9ES--42,
FR Y-9CS--472.
General description of report: The FR Y-9 family of reporting forms
continues to be the primary source of financial data on holding
companies that examiners rely on in the intervals between on-site
inspections. Financial data from these reporting forms are used to
detect emerging financial problems, to review performance and conduct
pre-inspection analysis, to monitor and evaluate capital adequacy, to
evaluate holding company mergers and acquisitions, and to analyze a
holding company's overall financial condition to ensure the safety and
soundness of its operations. The FR Y-9C, FR Y-9LP, and FR Y-9SP serve
as standardized financial statements for the consolidated holding
company. The Board requires HCs to provide standardized financial
statements to fulfill the Board's statutory obligation to supervise
these organizations. The FR Y-9ES is a financial statement for HCs that
are Employee Stock Ownership Plans. The Board uses the FR Y-9CS (a
free-form supplement) to collect additional information deemed to be
critical and needed in an expedited manner. HCs file the FR Y-9C on a
quarterly basis, the FR Y-9LP quarterly, the FR Y-9SP semiannually, the
FR Y-9ES annually, and the FR Y-9CS on a schedule that is determined
when this supplement is used.
Legal authorization and confidentiality: The Board has the
authority to impose the reporting and recordkeeping requirements
associated with the FR Y-9 family of reports on BHCs pursuant to
section 5 of the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C.
1844); on SLHCs pursuant to section 10(b)(2) and (3) of the Home
Owners' Loan Act (12 U.S.C. 1467a(b)(2) and (3)), as amended by
sections 369(8) and 604(h)(2) of the Dodd-Frank Wall Street and
Consumer Protection Act (Dodd-Frank Act); on U.S. IHCs pursuant to
section 5 of the BHC Act (12 U.S.C 1844), as well as pursuant to
sections 102(a)(1) and 165 of the Dodd-Frank Act (12 U.S.C. 511(a)(1)
and 5365); and on securities holding companies pursuant to section 618
of the Dodd-Frank Act (12 U.S.C. 1850a(c)(1)(A)). The obligation to
submit the FR Y-9 series of reports, and the recordkeeping requirements
set forth in the respective instructions to each report, are mandatory.
With respect to the FR Y-9C report, Schedule HI's data item 7(g)
``FDIC deposit insurance assessments,'' Schedule HC-P's data item 7(a)
``Representation and warranty reserves for 1-4 family residential
mortgage loans sold to U.S. government agencies and government
sponsored agencies,'' and Schedule HC-P's data item 7(b)
``Representation and warranty reserves for 1-4 family residential
mortgage loans sold to other parties'' are considered confidential
commercial and financial information. Such treatment is appropriate
under exemption 4 of the Freedom of Information Act (FOIA) (5 U.S.C.
552(b)(4)) because these data items reflect commercial and financial
information that is both customarily and actually treated as private by
the submitter, and which the Board has previously assured submitters
will be treated as confidential. It also appears that disclosing these
data items may reveal confidential examination and supervisory
information, and in such instances, this information would also be
withheld pursuant to exemption 8 of the FOIA (5 U.S.C. 552(b)(8)),
which protects information related to the supervision or examination of
a regulated financial institution.
In addition, for both the FR Y-9C report and the FR Y-9SP report,
Schedule HC's memorandum item 2.b., the name and email address of the
external auditing firm's engagement partner, is considered confidential
commercial information and protected by exemption 4 of the FOIA (5
U.S.C. 552(b)(4)) if the identity of the engagement partner is treated
as private information by HCs. The Board has assured respondents that
this information will be treated as confidential since the collection
of this data item was proposed in 2004.
Aside from the data items described above, the remaining data items
on the FR Y-9C report and the FR Y-9SP report are generally not
accorded confidential treatment. The data items collected on FR Y-9LP,
FR Y-9ES, and FR Y-9CS reports, are also generally not accorded
confidential treatment. As provided in the Board's Rules Regarding
Availability of Information (12 CFR part 261), however, a respondent
may request confidential treatment for any

[[Page 15593]]

data items the respondent believes should be withheld pursuant to a
FOIA exemption. The Board will review any such request to determine if
confidential treatment is appropriate, and will inform the respondent
if the request for confidential treatment has been denied.
To the extent the instructions to the FR Y-9C, FR Y-9LP, FR Y-9SP,
and FR Y-9ES reports each respectively direct the financial institution
to retain the workpapers and related materials used in preparation of
each report, such material would only be obtained by the Board as part
of the examination or supervision of the financial institution.
Accordingly, such information is considered confidential pursuant to
exemption 8 of the FOIA (5 U.S.C. 552(b)(8)). In addition, the
workpapers and related materials may also be protected by exemption 4
of the FOIA, to the extent such financial information is treated as
confidential by the respondent (5 U.S.C. 552(b)(4)).
Current actions: The final rule will modify the FR Y-9C for holding
companies subject to the capital plan rule in order to collect
information regarding a firm's stress capital buffer requirement, GSIB
surcharge, countercyclical capital buffer amount, as applicable, and
any applicable distribution limitations under the regulatory capital
rule. Specifically, the final rule will add new line items to the FR Y-
9C Schedule HC-R Part I to collect the following information from
holding companies subject to the capital plan rule: (1) The firm's
capital conservation buffer requirements (including its standardized
approach capital conservation buffer requirement and the advanced
approaches capital conservation buffer requirement) and leverage buffer
requirement; (2) the firm's capital conservation buffer, advanced
approaches capital conservation buffer, and, as applicable, leverage
buffer as of the preceding quarter-end, which is the difference between
the firm's relevant capital ratio and the relevant minimum requirement;
and (3) information needed to calculate the firm's maximum payout
amount, including the firm's planned total capital distributions,
eligible retained income, and maximum payout ratio. The new line items
will apply to top-tier holding companies subject to the Board's capital
plan rule (BHCs and IHCs with total consolidated assets of $100 billion
or more), for a total of 39 of the existing FR Y-9C respondents. The
Board estimates that revisions to the FR Y-9 would increase the
estimated average hours per response for FR Y-9C (non AA HCs) with $5
billion or more in total assets filers by 0.11 hours and FR Y-9C (AA
HCs) filers by 1 hour. The Board estimates that revisions to the FR Y-9
would increase the estimated annual burden by 159 hours. The draft
reporting form and instructions for the FR Y-9C are available at
https://www.federalreserve.gov/apps/reportforms/review.aspx.
(2) Report title: Capital Assessments and Stress Testing.
Agency form number: FR Y-14A/Q/M.
OMB control number: 7100-0341.
Effective date: The revisions are effective with the December 31,
2020, as-of date, except for the revisions to FR Y-14A, Schedule C,
which are effective when the final rule goes into effect.
Frequency: Annually, quarterly, and monthly.
Affected public: Businesses or other for-profit.
Respondents: These collections of information are applicable to
bank holding companies (BHCs), U.S. intermediate holding companies
(IHCs), and savings and loan holding companies (SLHCs) \55\ with $100
billion or more in total consolidated assets, as based on: (i) The
average of the firm's total consolidated assets in the four most recent
quarters as reported quarterly on the firm's Consolidated Financial
Statements for Holding Companies (FR Y-9C); or (ii) if the firm has not
filed an FR Y-9C for each of the most recent four quarters, then the
average of the firm's total consolidated assets in the most recent
consecutive quarters as reported quarterly on the firm's FR Y-9Cs.
Reporting is required as of the first day of the quarter immediately
following the quarter in which the respondent meets this asset
threshold, unless otherwise directed by the Board.
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\55\ SLHCs with $100 billion or more in total consolidated
assets become members of the FR Y-14Q and FR Y-14M panels effective
June 30, 2020, and the FR Y-14A panel effective December 31, 2020.
See 84 FR 59032 (November 1, 2019).
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Estimated number of respondents: FR Y-14A/Q--36; FR Y-14M--34.\56\
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\56\ The estimated number of respondents for the FR Y-14M is
lower than for the FR Y-14Q and FR Y-14A because, in recent years,
certain respondents to the FR Y-14A and FR Y-14Q have not met the
materiality thresholds to report the FR Y-14M due to their lack of
mortgage and credit activities. The Board expects this situation to
continue for the foreseeable future.
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Estimated average hours per response:
FR Y-14A--1,085,
FR Y-14Q--1,920,
FR Y-14M--1,072,
FR Y-14 Ongoing Automation Revisions--480,
FR Y-14 Attestation--2,560.
Estimated annual burden hours:
FR Y-14A--39,060,
FR Y-14Q--276,480,
FR Y-14M--437,376,
FR Y-14 Ongoing Automation Revisions--17,280,
FR Y-14 Attestation--33,280.
General description of report: This family of information
collections is composed of the following three reports:
The FR Y-14A collects quantitative projections of balance sheet,
income, losses, and capital across a range of macroeconomic scenarios
and qualitative information on methodologies used to develop internal
projections of capital across scenarios.\57\
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\57\ On October 10, 2019, the Board issued a final rule that
eliminated the requirement for firms subject to Category IV
standards to conduct and publicly disclose the results of a company-
run stress test. See 84 FR 59032 (Nov. 1, 2019). That final rule
maintained the existing FR Y-14 substantive reporting requirements
for these firms in order to provide the Board with the data it needs
to conduct supervisory stress testing and inform the Board's ongoing
monitoring and supervision of its supervised firms. However, as
noted in the final rule, the Board intends to provide greater
flexibility to banking organizations subject to Category IV
standards in developing their annual capital plans and consider
further change to the FR Y-14 forms as part of a separate proposal.
See 84 FR 59032, 59063.
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The quarterly FR Y-14Q collects granular data on various asset
classes, including loans, securities, trading assets, and PPNR for the
reporting period.
The monthly FR Y-14M is comprised of three retail portfolio- and
loan-level schedules, and one detailed address-matching schedule to
supplement two of the portfolio and loan-level schedules.
The data collected through the FR Y-14A/Q/M reports provide the
Board with the information needed to help ensure that large firms have
strong, firm[hyphen]wide risk measurement and management processes
supporting their internal assessments of capital adequacy and that
their capital resources are sufficient given their business focus,
activities, and resulting risk exposures. The FR Y-14 reports are used
to support the Board's annual Comprehensive Capital Analysis and Review
(CCAR) and Dodd-Frank Act Stress Test (DFAST) exercises, which
complement other Board supervisory efforts aimed at enhancing the
continued viability of large firms, including continuous monitoring of
firms' planning and management of liquidity and funding resources, as
well as regular assessments of credit, market and operational risks,
and associated risk management practices. Information gathered in this
data collection is also used in the supervision and regulation of
respondent financial institutions.

[[Page 15594]]

Respondent firms are currently required to complete and submit up to 17
filings each year: One annual FR Y-14A filing, four quarterly FR Y-14Q
filings, and 12 monthly FR Y-14M filings. Compliance with the
information collection is mandatory.
Legal authorization and confidentiality: The Board has the
authority to require BHCs file the FR Y-14 reports pursuant to section
5(c) of the BHC Act (12 U.S.C. 1844(c)), and pursuant to section 165(i)
of the Dodd-Frank Act (12 U.S.C. 5365(i)), as amended by section 401(a)
and (e) of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA).\58\ The Board has authority to require SLHCs
file the FR Y-14 reports pursuant to section 10(b) of the Home Owners'
Loan Act (12 U.S.C. 1467a(b)), as amended by section 369(8) and
604(h)(2) of the Dodd-Frank Act. Lastly, the Board has authority to
require IHCs file the FR Y-14 reports pursuant to section 5 of the BHC
Act (12 U.S.C 1844), as well as pursuant to sections 102(a)(1) and 165
of the Dodd-Frank Act (12 U.S.C. 5311(a)(1) and 5365).\59\ In addition,
section 401(g) of EGRRCPA (12 U.S.C. 5365) note, provides that the
Board has the authority to establish enhanced prudential standards for
foreign banking organizations with total consolidated assets of $100
billion or more, and clarifies that nothing in section 401 ``shall be
construed to affect the legal effect of the final rule of the Board . .
. entitled `Enhanced Prudential Standard for [BHCs] and Foreign Banking
Organizations' (79 FR 17240 (March 27, 2014)), as applied to foreign
banking organizations with total consolidated assets equal to or
greater than $100 million.'' \60\ The information reported in the FR Y-
14 reports is collected as part of the Board's supervisory process, and
therefore, such information is afforded confidential treatment pursuant
to exemption 8 of the Freedom of Information Act (FOIA) (5 U.S.C.
552(b)(8)). In addition, confidential commercial or financial
information, which a submitter actually and customarily treats as
private, and which has been provided pursuant to an express assurance
of confidentiality by the Board, is considered exempt from disclosure
under exemption 4 of the FOIA (5 U.S.C. 552(b)(4).
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\58\ Public Law 115-174, Title IV Sec. 401(a) and (e), 132
Stat. 1296, 1356-59 (2018).
\59\ Section 165(b)(2) of the Dodd-Frank Act, 12 U.S.C.
5365(b)(2), refers to ``foreign-based bank holding company.''
Section 102(a)(1) of the Dodd-Frank Act, 12 U.S.C. 5311(a)(1),
defines ``bank holding company'' for purposes of Title I of the
Dodd-Frank Act to include foreign banking organizations that are
treated as bank holding companies under section 8(a) of the
International Banking Act of 1978, 12 U.S.C. 3106(a). The Board has
required, pursuant to section 165(b)(1)(B)(iv) of the Dodd-Frank
Act, 12 U.S.C. 5365(b)(1)(B)(iv), certain foreign banking
organizations subject to section 165 of the Dodd-Frank Act to form
U.S. intermediate holding companies. Accordingly, the parent
foreign-based organization of a U.S. IHC is treated as a BHC for
purposes of the BHC Act and section 165 of the Dodd-Frank Act.
Because Section 5(c) of the BHC Act authorizes the Board to require
reports from subsidiaries of BHCs, section 5(c) provides additional
authority to require U.S. IHCs to report the information contained
in the FR Y-14 reports.
\60\ The Board's Final Rule referenced in section 401(g) of
EGRRCPA specifically stated that the Board would require IHCs to
file the FR Y-14 reports. See 79 FR 17240, 17304 (March 27, 2014).
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Current actions: To implement the reporting requirements of the
final rule, the Board revised the FR Y-14A report to in order to
collect information regarding a firm's capital conservation buffer
requirements (including the stress capital buffer requirement) and any
applicable distribution limitations under the regulatory capital rule.
Specifically, the Board revised the FR Y-14A, Schedule A.1.d (Capital)
report to collect the following items under firm baseline conditions:
(1) The firm's capital conservation buffer requirement and, as
applicable, leverage buffer requirement for each quarter of the
planning horizon; (2) the firm's capital conservation buffer and, as
applicable, leverage buffer as of the preceding quarter-end for each
quarter of the planning horizon, which is the difference between the
firm's relevant capital ratio and the relevant minimum requirement; and
(3) information needed to calculate the firm's maximum payout amount,
including the firm's planned total capital distributions, eligible
retained income, and maximum payout ratio for each quarter of the
planning horizon. Finally, to align with the final rule, the Board has
revised the FR Y-14A instructions to require a firm to submit an
updated FR Y-14A, Schedule C (Regulatory Capital Instruments), within
15 days after notice of distributions in excess of planned
distributions as required under the capital plan rule. The Board
estimates that revisions to the FR Y-14 would increase the estimated
average hours per response for FR Y-14A filers by 20 hours. The Board
estimates that revisions to the FR Y-14 would increase the estimated
annual burden by 720 hours. The draft reporting form and instructions
for the FR Y-14A are available at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(3) Title of information collection: Reporting and Recordkeeping
Requirements Associated with Regulation Y (Capital Plans).
Agency form number: FR Y-13.
OMB control number: 7100-0342.
Effective date: Effective date of the final rule.
Frequency: Annually.
Affected public: Businesses or other for-profit.
Respondents: BHCs and IHCs.
Estimated number of respondents:
Reporting
Section 225.8(e)(1)(ii)--34.
Section 225.8(e)(3)--25.
Section 225.8(e)(4)--10.
Section 225.8(h)(2)(ii)(B)--2.
Section 225.8(j)--2.
Sections 225.8(k)(1) and (2)--3.
Section 225.8(k)(4)--2.
Recordkeeping
Section 225.8(e)(1)(i)--34.
Section 225.8(e)(1)(iii)--34.
Estimated average hours per response:
Reporting \61\
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\61\ The reporting requirement in section 225.8(l) is identical
to a reporting requirement in the FR Y-14A. The burden associated
with this requirement is accounted for in the burden estimate for
the FR Y-14 information collection.
---------------------------------------------------------------------------

Section 225.8(e)(1)(ii)--80.
Section 225.8(e)(3)--1,005.
Section 225.8(e)(4)--100.
Section 225.8(h)(2)(ii)(B)--2.
Section 225.8(j)--16.
Sections 225.8(k)(1) and (2)--100.
Section 225.8(k)(4)--16.
Recordkeeping
Section 225.8(e)(1)(i)--8,920.
Section 225.8(e)(1)(iii)--100.
Estimated annual burden hours:
Reporting
Section 225.8(e)(1)(ii)--2,720.
Section 225.8(e)(3)--25,125.
Section 225.8(e)(4)--1,000.
Section 225.8(h)(2)(ii)(B)--4.
Section 225.8(j)--32.
Sections 225.8(k)(1) and (2)--300.
Section 225.8(k)(4)--32.
Recordkeeping
Section 225.8(e)(1)(i)--303,280.
Section 225.8(e)(1)(iii)--3,400.
General description of report: Regulation Y (12 CFR part 225)
requires large bank holding companies (BHCs) and U.S. intermediate
holding companies (IHCs) to submit capital plans to the Federal Reserve
on an annual basis and to request prior approval from the Federal
Reserve under certain circumstances before making a capital
distribution.
Legal authorization and confidentiality: Section 616(a) of the

[[Page 15595]]

Dodd-Frank Act amended section 5(b) of the Bank Holding Company Act of
1956 (BHC Act) (12 U.S.C. 1844(b)) to specifically authorize the Board
to issue regulations and orders relating to capital requirements for
BHCs. The Board is also authorized to collect and require reports from
BHCs pursuant to section 5(c) of the BHC Act (12 U.S.C. 1844(c)).
Additionally, the Board's rulemaking authority for the information
collection and disclosure requirements associated with the FR Y-13 is
found in sections 908 and 910 of the International Lending Supervision
Act of 1983, as amended (12 U.S.C. 3907 and 3909). Additional support
for FR Y-13 is found in sections 165 and 166 of the Dodd-Frank Act (12
U.S.C. 5365 and 5366).\62\ The obligation to respond to this
information collection is mandatory.
---------------------------------------------------------------------------

\62\ Section 165 requires the Board to impose enhances
prudential standards on large BHCs, including stress testing
requirements; enhanced capital, liquidity, and risk management
requirements; and a requirement to establish a risk committee.
Section 166 requires the Board to impose early remediation
requirements on large BHCs under which a large BHC experiencing
financial distress must take specific remedial actions in order to
minimize the probability that the company will become insolvent and
to minimize the potential harm of such insolvency the United States.
---------------------------------------------------------------------------

The capital plan information submitted by the covered BHC will
consist of confidential and proprietary modeling information and highly
sensitive business plans, such as acquisition plans submitted to the
Board for approval. Therefore, it appears the information will be
subject to withholding under exemption 4 of the Freedom of Information
Act (5 U.S.C. 552(b)(4)).
Current actions: The final rule modifies the process by which a
firm determines the final planned capital distributions included in its
capital plan. In addition, under certain conditions, the final rule
removes the requirement for a firm to request prior approval to make
distributions that exceed the amount included in its capital plan. The
final rule also modifies the timeline and procedures related to a
firm's stress capital buffer requirement, requests for reconsideration,
and capital plan resubmissions. The Board estimates that response to
notice; adjustments to planned capital distributions (reporting)
(225.8(h)(2)(ii)) would be 2 hours per response. The Board estimates
that revisions to the FR Y-13 would decrease the estimated annual
burden by 2,028 hours.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (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.\63\
However, a final 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 Small
Business Administration (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.\64\
For the reasons described below and under section 605(b) of the RFA,
the Board certifies that the final rule will not have a significant
economic impact on a substantial number of small entities. As of
December 31, 2019, there were 2,799 bank holding companies, 171 savings
and loan holding companies, and 497 state member banks that would fit
the SBA's current definition of ``small entity'' for purposes of the
RFA.
---------------------------------------------------------------------------

\63\ 5 U.S.C. 601 et. seq.
\64\ 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.
See 84 FR 34261 (July 18, 2019). Consistent with the General
Principles of Affiliation in 13 CFR 121.103, the Board counts the
assets of all domestic and foreign affiliates when determining if
the Board should classify a Board-supervised institution as a small
entity.
---------------------------------------------------------------------------

In connection with the proposed rule, the Board stated that it did
not believe the proposed rule would have a significant economic impact
on a substantial number of small entities. Nevertheless, the Board
published and invited comment on an initial regulatory flexibility
analysis of the proposed rule. No comments were received on the initial
regulatory flexibility analysis.
The Board is finalizing amendments to Regulations Q,\65\ Y,\66\ and
YY \67\ that would affect the regulatory requirements that apply to
bank holding companies with total consolidated assets of $50 billion or
more, any nonbank financial company supervised by the Board that
becomes subject to the capital planning requirements pursuant to a rule
or order of the Board, and to U.S. intermediate holding companies
established pursuant to Regulation YY. The reasons and justification
for the final rule are described above in more detail in this
SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

\65\ See 12 CFR part 217.
\66\ See 12 CFR part 225.
\67\ See 12 CFR part 252.
---------------------------------------------------------------------------

The Board has considered whether to conduct a final regulatory
flexibility analysis in connection with this final rule. However, the
assets of institutions subject to this final rule substantially exceed
the $600 million asset threshold under which a banking organization is
considered a ``small entity'' under SBA regulations. Because the final
rule is not likely to apply to any depository institution or company
with assets of $600 million or less, it is not expected to apply to any
small entity for purposes of the RFA. The Board does not believe that
the final rule duplicates, overlaps, or conflicts with any other
Federal rules. In light of the foregoing, the Board certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities supervised.

C. Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed rule in a
simple and straightforward manner, and invites comment on the use of
plain language.
For example:
Have we organized the material to suit your needs? If not,
how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Will a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes will make the regulation easier to
understand?
Will more, but shorter, sections be better? If so, which
sections should be changed?
What else could we do to make the regulation easier to
understand?

List of Subjects

12 CFR Part 217

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

12 CFR Part 225

Administrative practice and procedure, Banks, Banking, Capital
planning, Holding companies, Reporting

[[Page 15596]]

and recordkeeping requirements, Securities, Stress testing.

12 CFR Part 252

Administrative practice and procedure, Banks, banking, Credit,
Federal Reserve System, Holding companies, Investments, Qualified
financial contracts, Reporting and recordkeeping requirements,
Securities.

Authority and Issuance

For the reasons stated in the Supplementary Information, the Board
of Governors of the Federal Reserve System amends 12 CFR chapter II as
follows:

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

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

Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.

0
2. Section 217.11 is revised to read as follows:

Sec. 217.11 Capital conservation buffer, countercyclical capital
buffer amount, and GSIB surcharge.

(a) Capital conservation buffer--(1) Composition of the capital
conservation buffer. The capital conservation buffer is composed solely
of common equity tier 1 capital.
(2) Definitions. For purposes of this section, the following
definitions apply:
(i) Eligible retained income. (A) The eligible retained income of a
Board-regulated institution is the Board-regulated institution's net
income, calculated in accordance with the instructions to the Call
Report or the FR Y-9C, as applicable, for the four calendar quarters
preceding the current calendar quarter, net of any distributions and
associated tax effects not already reflected in net income.
(B) Notwithstanding paragraph (a)(2)(i)(A) of this section, the
eligible retained income of a Board-regulation institution subject to
12 CFR 225.8 is the average of the Board-regulated institution's net
income, calculated in accordance with the instructions to the FR Y-9C
for the four calendar quarters preceding the current calendar quarter,
if:
(1) The Board-regulated institution is subject to a maximum payout
ratio determined by its standardized approach capital conservation
buffer under paragraph (c)(1)(ii) of this section; and
(2) The Board-regulated institution's standardized approach capital
conservation buffer is greater than the sum of:
(i) 2.5 percent;
(ii) Any applicable countercyclical capital buffer amount
calculated in accordance with paragraph (b) of this section; and
(iii) Any applicable GSIB surcharge calculated in accordance with
paragraph (d) of this section.
(ii) Maximum payout amount. A Board-regulated institution's maximum
payout amount for the current calendar quarter is equal to the Board-
regulated institution's eligible retained income, multiplied by its
maximum payout ratio.
(iii) Maximum payout ratio. The maximum payout ratio is the
percentage of eligible retained income that a Board-regulated
institution can pay out in the form of distributions and discretionary
bonus payments during the current calendar quarter. For a Board-
regulated institution that is not subject to 12 CFR 225.8, the maximum
payout ratio is determined by the Board-regulated institution's capital
conservation buffer, calculated as of the last day of the previous
calendar quarter, as set forth in Table 1 to Sec. 217.11(a)(4)(iv).
For a Board-regulated institution that is subject to 12 CFR 225.8, the
maximum payout ratio is determined under paragraph (c)(1)(ii) of this
section.
(iv) Private sector credit exposure. Private sector credit exposure
means an exposure to a company or an individual that is not an exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the European Stability
Mechanism, the European Financial Stability Facility, the International
Monetary Fund, a MDB, a PSE, or a GSE.
(v) Leverage buffer requirement. A bank holding company's leverage
buffer requirement is 2.0 percent.
(vi) Stress capital buffer requirement. A bank holding company's
stress capital buffer requirement is the stress capital buffer
requirement determined under 12 CFR 225.8.
(3) Calculation of capital conservation buffer. (i) A Board-
regulated institution that is not subject to 12 CFR 225.8 has a capital
conservation buffer equal to the lowest of the following ratios,
calculated as of the last day of the previous calendar quarter:
(A) The Board-regulated institution's common equity tier 1 capital
ratio minus the Board-regulated institution's minimum common equity
tier 1 capital ratio requirement under Sec. 217.10;
(B) The Board-regulated institution's tier 1 capital ratio minus
the Board-regulated institution's minimum tier 1 capital ratio
requirement under Sec. 217.10; and
(C) The Board-regulated institution's total capital ratio minus the
Board-regulated institution's minimum total capital ratio requirement
under Sec. 217.10; or
(ii) Notwithstanding paragraphs (a)(3)(i)(A) through (C) of this
section, if a Board-regulated institution's common equity tier 1, tier
1 or total capital ratio is less than or equal to the Board-regulated
institution's minimum common equity tier 1, tier 1 or total capital
ratio requirement under Sec. 217.10, respectively, the Board-regulated
institution's capital conservation buffer is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A
Board-regulated institution that is not subject 12 CFR 225.8 shall not
make distributions or discretionary bonus payments or create an
obligation to make such distributions or payments during the current
calendar quarter that, in the aggregate, exceed its maximum payout
amount.
(ii) A Board-regulated institution that is not subject 12 CFR 225.8
and that has a capital conservation buffer that is greater than 2.5
percent plus 100 percent of its applicable countercyclical capital
buffer amount in accordance with paragraph (b) of this section is not
subject to a maximum payout amount under paragraph (a)(2)(ii) of this
section.
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a
Board-regulated institution that is not subject to 12 CFR 225.8 may not
make distributions or discretionary bonus payments during the current
calendar quarter if the Board-regulated institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent as of the
end of the previous calendar quarter.
(iv) Prior approval. Notwithstanding the limitations in paragraphs
(a)(4)(i) through (iii) of this section, the Board may permit a Board-
regulated institution that is not subject to 12 CFR 225.8 to make a
distribution or discretionary bonus payment upon a request of the
Board-regulated institution, if the Board determines that the
distribution or discretionary bonus payment would not be contrary to
the purposes of this section, or to the safety and soundness of the
Board-regulated institution. In making such a determination, the Board
will consider the nature and extent of the request and

[[Page 15597]]

the particular circumstances giving rise to the request.

Table 1 to Sec. 217.11(a)(4)(iv)--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
Capital conservation buffer Maximum payout ratio
------------------------------------------------------------------------
Greater than 2.5 percent plus 100 percent of the No payout ratio
Board-regulated institution's applicable limitation applies.
countercyclical capital buffer amount.
Less than or equal to 2.5 percent plus 100 60 percent.
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount, and greater than 1.875 percent plus 75
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount.
Less than or equal to 1.875 percent plus 75 40 percent.
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount, and greater than 1.25 percent plus 50
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount.
Less than or equal to 1.25 percent plus 50 20 percent.
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount and greater than 0.625 percent plus 25
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount.
Less than or equal to 0.625 percent plus 25 0 percent.
percent of the Board-regulated institution's
applicable countercyclical capital buffer
amount.
------------------------------------------------------------------------

(v) Other limitations on distributions. Additional limitations on
distributions may apply under 12 CFR 225.4 and 12 CFR 263.202 to a
Board-regulated institution that is not subject to 12 CFR 225.8.
(b) Countercyclical capital buffer amount--(1) General. An advanced
approaches Board-regulated institution or a Category III Board-
regulated institution must calculate a countercyclical capital buffer
amount in accordance with this paragraph (b) for purposes of
determining its maximum payout ratio under Table 1 to Sec.
217.11(a)(4)(iv) and, if applicable, Table 2 to Sec.
217.11(c)(4)(iii).
(i) Extension of capital conservation buffer. The countercyclical
capital buffer amount is an extension of the capital conservation
buffer as described in paragraph (a) or (c) of this section, as
applicable.
(ii) Amount. An advanced approaches Board-regulated institution or
a Category III Board-regulated institution has a countercyclical
capital buffer amount determined by calculating the weighted average of
the countercyclical capital buffer amounts established for the national
jurisdictions where the Board-regulated institution's private sector
credit exposures are located, as specified in paragraphs (b)(2) and (3)
of this section.
(iii) Weighting. The weight assigned to a jurisdiction's
countercyclical capital buffer amount is calculated by dividing the
total risk-weighted assets for the Board-regulated institution's
private sector credit exposures located in the jurisdiction by the
total risk-weighted assets for all of the Board-regulated institution's
private sector credit exposures. The methodology a Board-regulated
institution uses for determining risk-weighted assets for purposes of
this paragraph (b) must be the methodology that determines its risk-
based capital ratios under Sec. 217.10. Notwithstanding the previous
sentence, the risk-weighted asset amount for a private sector credit
exposure that is a covered position under subpart F of this part is its
specific risk add-on as determined under Sec. 217.210 multiplied by
12.5.
(iv) Location. (A) Except as provided in paragraphs (b)(1)(iv)(B)
and (C) of this section, the location of a private sector credit
exposure is the national jurisdiction where the borrower is located
(that is, where it is incorporated, chartered, or similarly established
or, if the borrower is an individual, where the borrower resides).
(B) If, in accordance with subpart D or E of this part, the Board-
regulated institution has assigned to a private sector credit exposure
a risk weight associated with a protection provider on a guarantee or
credit derivative, the location of the exposure is the national
jurisdiction where the protection provider is located.
(C) The location of a securitization exposure is the location of
the underlying exposures, or, if the underlying exposures are located
in more than one national jurisdiction, the national jurisdiction where
the underlying exposures with the largest aggregate unpaid principal
balance are located. For purposes of this paragraph (b), the location
of an underlying exposure shall be the location of the borrower,
determined consistent with paragraph (b)(1)(iv)(A) of this section.
(2) Countercyclical capital buffer amount for credit exposures in
the United States--(i) Initial countercyclical capital buffer amount
with respect to credit exposures in the United States. The initial
countercyclical capital buffer amount in the United States is zero.
(ii) Adjustment of the countercyclical capital buffer amount. The
Board will adjust the countercyclical capital buffer amount for credit
exposures in the United States in accordance with applicable law.\1\
---------------------------------------------------------------------------

\1\ The Board expects that any adjustment will be based on a
determination made jointly by the Board, OCC, and FDIC.
---------------------------------------------------------------------------

(iii) Range of countercyclical capital buffer amount. The Board
will adjust the countercyclical capital buffer amount for credit
exposures in the United States between zero percent and 2.5 percent of
risk-weighted assets.
(iv) Adjustment determination. The Board will base its decision to
adjust the countercyclical capital buffer amount under this section on
a range of macroeconomic, financial, and supervisory information
indicating an increase in systemic risk including, but not limited to,
the ratio of credit to gross domestic product, a variety of asset
prices, other factors indicative of relative credit and liquidity
expansion or contraction, funding spreads, credit condition surveys,
indices based on credit default swap spreads, options implied
volatility, and measures of systemic risk.
(v) Effective date of adjusted countercyclical capital buffer
amount--(A) Increase adjustment. A determination by the Board under
paragraph (b)(2)(ii) of this section to increase the countercyclical
capital buffer amount will be effective 12 months from the date of
announcement, unless the Board establishes an earlier effective date
and includes a statement articulating the reasons for the earlier
effective date.
(B) Decrease adjustment. A determination by the Board to decrease
the established countercyclical capital buffer amount under paragraph
(b)(2)(ii)

[[Page 15598]]

of this section will be effective on the day following announcement of
the final determination or the earliest date permissible under
applicable law or regulation, whichever is later.
(vi) Twelve month sunset. The countercyclical capital buffer amount
will return to zero percent 12 months after the effective date that the
adjusted countercyclical capital buffer amount is announced, unless the
Board announces a decision to maintain the adjusted countercyclical
capital buffer amount or adjust it again before the expiration of the
12-month period.
(3) Countercyclical capital buffer amount for foreign
jurisdictions. The Board will adjust the countercyclical capital buffer
amount for private sector credit exposures to reflect decisions made by
foreign jurisdictions consistent with due process requirements
described in paragraph (b)(2) of this section.
(c) Calculation of buffers for Board-regulated institutions subject
to 12 CFR 225.8-- (1) Limits on distributions and discretionary bonus
payments. (i) A Board-regulated institution that is subject to 12 CFR
225.8 shall not make distributions or discretionary bonus payments or
create an obligation to make such distributions or payments during the
current calendar quarter that, in the aggregate, exceed its maximum
payout amount.
(ii) Maximum payout ratio. The maximum payout ratio of a Board-
regulated institution that is subject to 12 CFR 225.8 is the lowest of
the payout ratios determined by its standardized approach capital
conservation buffer; if applicable, advanced approaches capital
conservation buffer; and, if applicable, leverage buffer; as set forth
in Table 2 to Sec. 217.11(c)(4)(iii).
(iii) Capital conservation buffer requirements. A Board-regulated
institution that is subject to 12 CFR 225.8 has:
(A) A standardized approach capital conservation buffer requirement
equal to its stress capital buffer requirement plus its applicable
countercyclical capital buffer amount in accordance with paragraph (b)
of this section plus its applicable GSIB surcharge in accordance with
paragraph (d) of this section; and
(B) If the Board-regulated institution calculates risk-weighted
assets under subpart E of this part, an advanced approaches capital
conservation buffer requirement equal to 2.5 percent plus the Board-
regulated institution's countercyclical capital buffer amount in
accordance with paragraph (b) of this section plus its applicable GSIB
surcharge in accordance with paragraph (d) of this section.
(iv) No maximum payout amount limitation. A Board-regulated
institution that is subject to 12 CFR 225.8 is not subject to a maximum
payout amount under paragraph (a)(2)(ii) of this section if it has:
(A) A standardized approach capital conservation buffer, calculated
under paragraph (c)(2) of this section, that is greater than its
standardized approach capital conservation buffer requirement
calculated under paragraph (c)(1)(iii)(A) of this section;
(B) If applicable, an advanced approaches capital conservation
buffer, calculated under paragraph (c)(3) of this section, that is
greater than the Board-regulated institution's advanced approaches
capital conservation buffer requirement calculated under paragraph
(c)(1)(iii)(B) of this section; and
(C) If applicable, a leverage buffer, calculated under paragraph
(c)(4) of this section, that is greater than its leverage buffer
requirement as calculated under paragraph (a)(2)(v) of this section.
(v) Negative eligible retained income. Except as provided in
paragraph (c)(1)(vi) of this section, a Board-regulated institution
that is subject to 12 CFR 225.8 may not make distributions or
discretionary bonus payments during the current calendar quarter if, as
of the end of the previous calendar quarter, the Board-regulated
institution's:
(A) Eligible retained income is negative; and
(B)(1) Standardized approach capital conservation buffer was less
than its stress capital buffer requirement; or
(2) If applicable, advanced approaches capital conservation buffer
was less than 2.5 percent; or
(3) If applicable, leverage buffer was less than its leverage
buffer requirement.
(vi) Prior approval. Notwithstanding the limitations in paragraphs
(c)(1)(i) through (v) of this section, the Board may permit a Board-
regulated institution that is subject to 12 CFR 225.8 to make a
distribution or discretionary bonus payment upon a request of the
Board-regulated institution, if the Board determines that the
distribution or discretionary bonus payment would not be contrary to
the purposes of this section, or to the safety and soundness of the
Board-regulated institution. In making such a determination, the Board
will consider the nature and extent of the request and the particular
circumstances giving rise to the request.
(v) Other limitations on distributions. Additional limitations on
distributions may apply under 12 CFR 225.4, 12 CFR 225.8, 12 CFR
252.63, 12 CFR 252.165, and 12 CFR 263.202 to a Board-regulated
institution that is subject to 12 CFR 225.8.
(2) Standardized approach capital conservation buffer. (i) The
standardized approach capital conservation buffer for Board-regulated
institutions subject to 12 CFR 225.8 is composed solely of common
equity tier 1 capital.
(ii) A Board-regulated institution that is subject to 12 CFR 225.8
has a standardized approach capital conservation buffer that is equal
to the lowest of the following ratios, calculated as of the last day of
the previous calendar quarter:
(A) The ratio calculated by the Board-regulated institution under
Sec. 217.10(b)(1) or (c)(1)(i), as applicable, minus the Board-
regulated institution's minimum common equity tier 1 capital ratio
requirement under Sec. 217.10(a);
(B) The ratio calculated by the Board-regulated institution under
Sec. 217.10(b)(2) or (c)(2)(i), as applicable, minus the Board-
regulated institution's minimum tier 1 capital ratio requirement under
Sec. 217.10(a); and
(C) The ratio calculated by the Board-regulated institution under
Sec. 217.10(b)(3) or (c)(3)(i), as applicable, minus the Board-
regulated institution's minimum total capital ratio requirement under
Sec. 217.10(a).
(iii) Notwithstanding paragraph (c)(2)(ii) of this section, if any
of the ratios calculated by the Board-regulated institution under Sec.
217.10(b)(1), (2), or (3), or if applicable Sec. 217.10(c)(1)(i),
(c)(2)(i), or (c)(3)(i) is less than or equal to the Board-regulated
institution's minimum common equity tier 1 capital ratio, tier 1
capital ratio, or total capital ratio requirement under Sec.
217.10(a), respectively, the Board-regulated institution's capital
conservation buffer is zero.
(3) Advanced approaches capital conservation buffer. (i) The
advanced approaches capital conservation buffer is composed solely of
common equity tier 1 capital.
(ii) A Board-regulated institution that calculates risk-weighted
assets under subpart E has an advanced approaches capital conservation
buffer that is equal to the lowest of the following ratios, calculated
as of the last day of the previous calendar quarter:
(A) The ratio calculated by the Board-regulated institution under
Sec. 217.10(c)(1)(ii) minus the Board-regulated institution's minimum
common equity tier 1 capital ratio requirement under Sec. 217.10(a);
(B) The ratio calculated by the Board-regulated institution under
Sec. 217.10(c)(2)(ii) minus the Board-

[[Page 15599]]

regulated institution's minimum tier 1 capital ratio requirement under
Sec. 217.10(a); and
(C) The ratio calculated by the Board-regulated institution under
Sec. 217.10(c)(3)(ii) minus the Board-regulated institution's minimum
total capital ratio requirement under Sec. 217.10(a).
(iii) Notwithstanding paragraph (c)(3)(ii) of this section, if any
of the ratios calculated by the Board-regulated institution under Sec.
217.10(c)(1)(ii), (c)(2)(ii), or (c)(3)(ii) is less than or equal to
the Board-regulated institution's minimum common equity tier 1 capital
ratio, tier 1 capital ratio, or total capital ratio requirement under
Sec. 217.10(a), respectively, the Board-regulated institution's
advanced approaches capital conservation buffer is zero.
(4) Leverage buffer. (i) The leverage buffer is composed solely of
tier 1 capital.
(ii) A global systemically important BHC has a leverage buffer that
is equal to the global systemically important BHC's supplementary
leverage ratio minus 3 percent, calculated as of the last day of the
previous calendar quarter.
(iii) Notwithstanding paragraph (c)(4)(ii) of this section, if the
global systemically important BHC's supplementary leverage ratio is
less than or equal to 3 percent, the global systemically important
BHC's leverage buffer is zero.

Table 2 to Sec. 217.11(c)(4)(iii)--Calculation of Maximum Payout Ratio
------------------------------------------------------------------------
Capital buffer \1\ Payout ratio
------------------------------------------------------------------------
Greater than the Board-regulated institution's No payout ratio
buffer requirement \2\. limitation applies.
Less than or equal to 100 percent of the Board- 60 percent.
regulated institution's buffer requirement, and
greater than 75 percent of the Board-regulated
institution's buffer requirement.
Less than or equal to 75 percent of the Board- 40 percent.
regulated institution's buffer requirement, and
greater than 50 percent of the bank holding
company's buffer requirement.
Less than or equal to 50 percent of the Board- 20 percent.
regulated institution's buffer requirement, and
greater than 25 percent of the Board-regulated
institution's buffer requirement.
Less than or equal to 25 percent of the Board- 0 percent.
regulated institution's buffer requirement.
------------------------------------------------------------------------
\1\ A Board-regulated institution's ``capital buffer'' means each of, as
applicable, its standardized approach capital conservation buffer,
advanced approaches capital conservation buffer, and leverage buffer.
\2\ A Board-regulated institution's ``buffer requirement'' means each
of, as applicable, its standardized approach capital conservation
buffer requirement, advanced approaches capital conservation buffer
requirement, and leverage buffer requirement.

(d) GSIB surcharge. A global systemically important BHC must use
its GSIB surcharge calculated in accordance with subpart H of this part
for purposes of determining its maximum payout ratio under Table 2 to
Sec. 217.11(c)(4)(iii).

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

0
3. 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
4. Section 225.8 is revised to read as follows:

Sec. 225.8 Capital planning and stress capital buffer requirement.

(a) Purpose. This section establishes capital planning and prior
notice and approval requirements for capital distributions by certain
bank holding companies. This section also establishes the Board's
process for determining the stress capital buffer requirement
applicable to these bank holding companies.
(b) Scope and reservation of authority--(1) Applicability. Except
as provided in paragraph (c) of this section, this section applies to:
(i) Any top-tier bank holding company domiciled in the United
States with average total consolidated assets of $100 billion or more
($100 billion asset threshold);
(ii) Any other bank holding company domiciled in the United States
that is made subject to this section, in whole or in part, by order of
the Board;
(iii) Any U.S. intermediate holding company subject to this section
pursuant to 12 CFR 252.153; and
(iv) Any nonbank financial company supervised by the Board that is
made subject to this section pursuant to a rule or order of the Board.
(2) Average total consolidated assets. For purposes of this
section, average total consolidated assets means the average of the
total consolidated assets as reported by a bank holding company on its
Consolidated Financial Statements for Holding Companies (FR Y-9C) for
the four most recent consecutive quarters. If the bank holding company
has not filed the FR Y-9C for each of the four most recent consecutive
quarters, average total consolidated assets means the average of the
company's total consolidated assets, as reported on the company's FR Y-
9C, for the most recent quarter or consecutive quarters, as applicable.
Average total consolidated assets are measured on the as-of date of the
most recent FR Y-9C used in the calculation of the average.
(3) Ongoing applicability. A bank holding company (including any
successor bank holding company) that is subject to any requirement in
this section shall remain subject to such requirements unless and until
its total consolidated assets fall below $100 billion for each of four
consecutive quarters, as reported on the FR Y-9C and effective on the
as-of date of the fourth consecutive FR Y-9C.
(4) Reservation of authority. Nothing in this section shall limit
the authority of the Federal Reserve to issue or enforce a capital
directive or take any other supervisory or enforcement action,
including an action to address unsafe or unsound practices or
conditions or violations of law.
(5) Rule of construction. Unless the context otherwise requires,
any reference to bank holding company in this section shall include a
U.S. intermediate holding company and shall include a nonbank financial
company supervised by the Board to the extent this section is made
applicable pursuant to a rule or order of the Board.
(6) Application of this section by order. The Board may apply this
section, in whole or in part, to a bank holding company by order based
on the institution's size, level of complexity, risk profile, scope of
operations, or financial condition.
(c) Transition periods for certain bank holding companies. (1) A
bank holding

[[Page 15600]]

company that meets the $100 billion asset threshold (as measured under
paragraph (b) of this section) on or before September 30 of a calendar
year must comply with the requirements of this section beginning on
January 1 of the next calendar year, unless that time is extended by
the Board in writing.
(2) A bank holding company that meets the $100 billion asset
threshold after September 30 of a calendar year must comply with the
requirements of this section beginning on January 1 of the second
calendar year after the bank holding company meets the $100 billion
asset threshold, unless that time is extended by the Board in writing.
(3) The Board, or the appropriate Reserve Bank with the concurrence
of the Board, may require a bank holding company described in paragraph
(c)(1) or (2) of this section to comply with any or all of the
requirements of this section if the Board, or appropriate Reserve Bank
with concurrence of the Board, determines that the requirement is
appropriate on a different date based on the company's risk profile,
scope of operation, or financial condition and provides prior notice to
the company of the determination.
(d) Definitions. For purposes of this section, the following
definitions apply:
(1) Advanced approaches means the risk-weighted assets calculation
methodologies at 12 CFR part 217, subpart E, as applicable.
(2) Average total nonbank assets means the average of the total
nonbank assets, calculated in accordance with the instructions to the
FR Y-9LP, for the four most recent calendar quarters or, if the bank
holding company has not filed the FR Y-9LP for each of the four most
recent calendar quarters, for the most recent quarter or quarters, as
applicable.
(3) BHC baseline scenario means a scenario that reflects the bank
holding company's expectation of the economic and financial outlook,
including expectations related to the bank holding company's capital
adequacy and financial condition.
(4) BHC stress scenario means a scenario designed by a bank holding
company that stresses the specific vulnerabilities of the bank holding
company's risk profile and operations, including those related to the
bank holding company's capital adequacy and financial condition.
(5) Capital action means any issuance of a debt or equity capital
instrument, any capital distribution, and any similar action that the
Federal Reserve determines could impact a bank holding company's
consolidated capital.
(6) Capital distribution means a redemption or repurchase of any
debt or equity capital instrument, a payment of common or preferred
stock dividends, a payment that may be temporarily or permanently
suspended by the issuer on any instrument that is eligible for
inclusion in the numerator of any minimum regulatory capital ratio, and
any similar transaction that the Federal Reserve determines to be in
substance a distribution of capital.
(7) Capital plan means a written presentation of a bank holding
company's capital planning strategies and capital adequacy process that
includes the mandatory elements set forth in paragraph (e)(2) of this
section.
(8) Capital plan cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
(9) Capital policy means a bank holding company's written
principles and guidelines used for capital planning, capital issuance,
capital usage and distributions, including internal capital goals; the
quantitative or qualitative guidelines for capital distributions; the
strategies for addressing potential capital shortfalls; and the
internal governance procedures around capital policy principles and
guidelines.
(10) Common equity tier 1 capital has the same meaning as under 12
CFR part 217.
(11) Effective capital distribution limitations means any
limitations on capital distributions established by the Board by order
or regulation, including pursuant to 12 CFR 217.11, 225.4, 252.63,
252.165, and 263.202, provided that, for any limitations based on risk-
weighted assets, such limitations must be calculated using the
standardized approach, as set forth in 12 CFR part 217, subpart D.
(12) Final planned capital distributions means the planned capital
distributions included in a capital plan that include the adjustments
made pursuant to paragraph (h) of this section, if any.
(13) Global systemically important BHC means a bank holding company
identified as a global systemically important BHC under 12 CFR 217.402.
(14) GSIB surcharge has the same meaning as under 12 CFR 217.403.
(15) Large and noncomplex bank holding company means any bank
holding company subject to this section that:
(i) Has, as of December 31 of the calendar year prior to the
capital plan cycle:
(A) Average total consolidated assets of less than $250 billion;
(B) Average total nonbank assets of less than $75 billion; and
(ii) Is not a global systemically important BHC.
(16) Nonbank financial company supervised by the Board means a
company that the Financial Stability Oversight Council has determined
under section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5323) shall be supervised by the Board and
for which such determination is still in effect.
(17) Planning horizon means the period of at least nine consecutive
quarters, beginning with the quarter preceding the quarter in which the
bank holding company submits its capital plan, over which the relevant
projections extend.
(18) Regulatory capital ratio means a capital ratio for which the
Board has established minimum requirements for the bank holding company
by regulation or order, including, as applicable, the bank holding
company's regulatory capital ratios calculated under 12 CFR part 217
and the deductions required under 12 CFR 248.12; except that the bank
holding company shall not use the advanced approaches to calculate its
regulatory capital ratios.
(19) Severely adverse scenario has the same meaning as under 12 CFR
part 252, subpart E.
(20) Stress capital buffer requirement means the amount calculated
under paragraph (f) of this section.
(21) Supervisory stress test means a stress test conducted using a
severely adverse scenario and the assumptions contained in 12 CFR part
252, subpart E.
(22) U.S. intermediate holding company means the top-tier U.S.
company that is required to be established pursuant to 12 CFR 252.153.
(e) Capital planning requirements and procedures--(1) Annual
capital planning. (i) A bank holding company must develop and maintain
a capital plan.
(ii) A bank holding company must submit its complete capital plan
to the Board and the appropriate Reserve Bank by April 5 of each
calendar year, or such later date as directed by the Board or by the
appropriate Reserve Bank with concurrence of the Board.
(iii) The bank holding company's board of directors or a designated
committee thereof must at least annually and prior to submission of the
capital plan under paragraph (e)(1)(ii) of this section:
(A) Review the robustness of the bank holding company's process for
assessing capital adequacy;
(B) Ensure that any deficiencies in the bank holding company's
process for

[[Page 15601]]

assessing capital adequacy are appropriately remedied; and
(C) Approve the bank holding company's capital plan.
(2) Mandatory elements of capital plan. A capital plan must contain
at least the following elements:
(i) An assessment of the expected uses and sources of capital over
the planning horizon that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions, including:
(A) Estimates of projected revenues, losses, reserves, and pro
forma capital levels, including regulatory capital ratios, and any
additional capital measures deemed relevant by the bank holding
company, over the planning horizon under a range of scenarios,
including any scenarios provided by the Federal Reserve, the BHC
baseline scenario, and at least one BHC stress scenario;
(B) A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(C) A description of all planned capital actions over the planning
horizon. Planned capital actions must be consistent with effective
capital distribution limitations, except as may be adjusted pursuant to
paragraph (h) of this section. In determining whether a bank holding
company's planned capital distributions are consistent with effective
capital distribution limitations, a bank holding company must assume
that:
(1) Any countercyclical capital buffer amount currently applicable
to the bank holding company remains at the same level, except that the
bank holding company must reflect any increases or decreases in the
countercyclical capital buffer amount that have been announced by the
Board at the times indicated by the Board's announcement for when such
increases or decreases will take effect; and
(2) Any GSIB surcharge currently applicable to the bank holding
company when the capital plan is submitted remains at the same level,
except that the bank holding company must reflect any increase in its
GSIB surcharge pursuant to 12 CFR 217.403(d)(1), beginning in the fifth
quarter of the planning horizon.
(ii) A detailed description of the bank holding company's process
for assessing capital adequacy, including:
(A) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain capital commensurate with
its risks, maintain capital above the regulatory capital ratios, and
serve as a source of strength to its subsidiary depository
institutions;
(B) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain sufficient capital to
continue its operations by maintaining ready access to funding, meeting
its obligations to creditors and other counterparties, and continuing
to serve as a credit intermediary;
(iii) The bank holding company's capital policy; and
(iv) A discussion of any expected changes to the bank holding
company's business plan that are likely to have a material impact on
the bank holding company's capital adequacy or liquidity.
(3) Data collection. Upon the request of the Board or appropriate
Reserve Bank, the bank holding company shall provide the Federal
Reserve with information regarding:
(i) The bank holding company's financial condition, including its
capital;
(ii) The bank holding company's structure;
(iii) Amount and risk characteristics of the bank holding company's
on- and off-balance sheet exposures, including exposures within the
bank holding company's trading account, other trading-related exposures
(such as counterparty-credit risk exposures) or other items sensitive
to changes in market factors, including, as appropriate, information
about the sensitivity of positions to changes in market rates and
prices;
(iv) The bank holding company's relevant policies and procedures,
including risk management policies and procedures;
(v) The bank holding company's liquidity profile and management;
(vi) The loss, revenue, and expense estimation models used by the
bank holding company for stress scenario analysis, including supporting
documentation regarding each model's development and validation; and
(vii) Any other relevant qualitative or quantitative information
requested by the Board or by the appropriate Reserve Bank to facilitate
review of the bank holding company's capital plan under this section.
(4) Resubmission of a capital plan. (i) A bank holding company must
update and resubmit its capital plan to the appropriate Reserve Bank
within 30 calendar days of the occurrence of one of the following
events:
(A) The bank holding company determines there has been or will be a
material change in the bank holding company's risk profile, financial
condition, or corporate structure since the bank holding company last
submitted the capital plan to the Board and the appropriate Reserve
Bank under this section; or
(B) The Board, or the appropriate Reserve Bank with concurrence of
the Board, directs the bank holding company in writing to revise and
resubmit its capital plan for any of the following reasons:
(1) The capital plan is incomplete or the capital plan, or the bank
holding company's internal capital adequacy process, contains material
weaknesses;
(2) There has been, or will likely be, a material change in the
bank holding company's risk profile (including a material change in its
business strategy or any risk exposure), financial condition, or
corporate structure;
(3) The BHC stress scenario(s) are not appropriate for the bank
holding company's business model and portfolios, or changes in
financial markets or the macro-economic outlook that could have a
material impact on a bank holding company's risk profile and financial
condition require the use of updated scenarios; or
(4) For a bank holding company subject to paragraph (i) of this
section, the capital plan or the condition of the bank holding company
raise any of the issues described in paragraph (i)(2) of this section.
(ii) A bank holding company may resubmit its capital plan to the
Federal Reserve if the Board or the appropriate Reserve Bank objects to
the capital plan.
(iii) The Board, or the appropriate Reserve Bank with concurrence
of the Board, may extend the 30-day period in paragraph (e)(4)(i) of
this section for up to an additional 60 calendar days, or such longer
period as the Board or the appropriate Reserve Bank, with concurrence
of the Board, determines appropriate.
(iv) Any updated capital plan must satisfy all the requirements of
this section; however, a bank holding company may continue to rely on
information submitted as part of a previously submitted capital plan to
the extent that the information remains accurate and appropriate.
(5) Confidential treatment of information submitted. The
confidentiality of information submitted to the Board under this
section and related materials shall be determined in accordance with
applicable exemptions under the Freedom of Information Act (5 U.S.C.
552(b)) and the Board's Rules Regarding Availability of Information (12
CFR part 261).

[[Page 15602]]

(f) Calculation of the stress capital buffer requirement--(1)
General. The Board will determine the stress capital buffer requirement
that applies under 12 CFR 217.11 pursuant to paragraph (f) of this
section.
(2) Stress capital buffer requirement calculation. A bank holding
company's stress capital buffer requirement is equal to the greater of:
(i) The following calculation:
(A) The ratio of a bank holding company's common equity tier 1
capital to risk-weighted assets, as calculated under 12 CFR part 217,
subpart D, as of the final quarter of the previous capital plan cycle,
unless otherwise determined by the Board; minus
(B) The lowest projected ratio of the bank holding company's common
equity tier 1 capital to risk-weighted assets, as calculated under 12
CFR part 217, subpart D, in any quarter of the planning horizon under a
supervisory stress test; plus
(C) The ratio of:
(1) The sum of the bank holding company's planned common stock
dividends (expressed as a dollar amount) for each of the fourth through
seventh quarters of the planning horizon; to
(2) The risk-weighted assets of the bank holding company in the
quarter in which the bank holding company had its lowest projected
ratio of common equity tier 1 capital to risk-weighted assets, as
calculated under 12 CFR part 217, subpart D, in any quarter of the
planning horizon under a supervisory stress test; and
(ii) 2.5 percent.
(3) Recalculation of stress capital buffer requirement. If a bank
holding company resubmits its capital plan pursuant to paragraph (e)(4)
of this section, the Board may recalculate the bank holding company's
stress capital buffer requirement. The Board will provide notice of
whether the bank holding company's stress capital buffer requirement
will be recalculated within 75 calendar days after the date on which
the capital plan is resubmitted, unless the Board provides notice to
the company that it is extending the time period.
(g) Review of capital plans by the Federal Reserve. The Board, or
the appropriate Reserve Bank with concurrence of the Board, will
consider the following factors in reviewing a bank holding company's
capital plan:
(1) The comprehensiveness of the capital plan, including the extent
to which the analysis underlying the capital plan captures and
addresses potential risks stemming from activities across the bank
holding company and the bank holding company's capital policy;
(2) The reasonableness of the bank holding company's capital plan,
the assumptions and analysis underlying the capital plan, and the
robustness of its capital adequacy process;
(3) Relevant supervisory information about the bank holding company
and its subsidiaries;
(4) The bank holding company's regulatory and financial reports, as
well as supporting data that would allow for an analysis of the bank
holding company's loss, revenue, and reserve projections;
(5) The results of any stress tests conducted by the bank holding
company or the Federal Reserve; and
(6) Other information requested or required by the Board or the
appropriate Reserve Bank, as well as any other information relevant, or
related, to the bank holding company's capital adequacy.
(h) Federal Reserve notice of stress capital buffer requirement;
final planned capital distributions--(1) Notice. The Board will provide
a bank holding company with notice of its stress capital buffer
requirement and an explanation of the results of the supervisory stress
test. Unless otherwise determined by the Board, notice will be provided
by June 30 of the calendar year in which the capital plan was submitted
pursuant to paragraph (e)(1)(ii) of this section or within 90 calendar
days of receiving notice that the Board will recalculate the bank
holding company's stress capital buffer requirement pursuant to
paragraph (f)(3) of this section.
(2) Response to notice--(i) Request for reconsideration of stress
capital buffer requirement. A bank holding company may request
reconsideration of a stress capital buffer requirement provided under
paragraph (h)(1) of this section. To request reconsideration of a
stress capital buffer requirement, a bank holding company must submit
to the Board a request pursuant to paragraph (j) of this section.
(ii) Adjustments to planned capital distributions. Within two
business days of receipt of notice of a stress capital buffer
requirement under paragraph (h)(1) or (j)(5) of this section, as
applicable, a bank holding company must:
(A) Determine whether the planned capital distributions for the
fourth through seventh quarters of the planning horizon under the BHC
baseline scenario would be consistent with effective capital
distribution limitations assuming the stress capital buffer requirement
provided by the Board under paragraph (h)(1) or (j)(5) of this section,
as applicable, in place of any stress capital buffer requirement in
effect; and
(1) If the planned capital distributions for the fourth through
seventh quarters of the planning horizon under the BHC baseline
scenario would not be consistent with effective capital distribution
limitations assuming the stress capital buffer requirement provided by
the Board under paragraph (h)(1) or (j)(5) of this section, as
applicable, in place of any stress capital buffer requirement in
effect, the bank holding company must adjust its planned capital
distributions such that its planned capital distributions would be
consistent with effective capital distribution limitations assuming the
stress capital buffer requirement provided by the Board under paragraph
(h)(1) or (j)(5) of this section, as applicable, in place of any stress
capital buffer requirement in effect; or
(2) If the planned capital distributions for the fourth through
seventh quarters of the planning horizon under the BHC baseline
scenario would be consistent with effective capital distribution
limitations assuming the stress capital buffer requirement provided by
the Board under paragraph (h)(1) or (j)(5) of this section, as
applicable, in place of any stress capital buffer requirement in
effect, the bank holding company may adjust its planned capital
distributions. A bank holding company may not adjust its planned
capital distributions to be inconsistent with the effective capital
distribution limitations assuming the stress capital buffer requirement
provided by the Board under paragraph (h)(1) or (j)(5) of this section,
as applicable; and
(B) Notify the Board of any adjustments made to planned capital
distributions for the fourth through seventh quarters of the planning
horizon under the BHC baseline scenario.
(3) Final planned capital distributions. The Board will consider
the planned capital distributions, including any adjustments made
pursuant to paragraph (h)(2)(ii) of this section, to be the bank
holding company's final planned capital distributions on the later of:
(i) The expiration of the time for requesting reconsideration under
paragraph (j) of this section; and
(ii) The expiration of the time for adjusting planned capital
distributions pursuant to paragraph (h)(2)(ii) of this section.
(4) Effective date of final stress capital buffer requirement. (i)
The Board will provide a bank holding company with its final stress
capital buffer requirement

[[Page 15603]]

and confirmation of the bank holding company's final planned capital
distributions by August 31 of the calendar year that a capital plan was
submitted pursuant to paragraph (e)(1)(ii) of this section, unless
otherwise determined by the Board. A stress capital buffer requirement
will not be considered final so as to be agency action subject to
judicial review under 5 U.S.C. 704 during the pendency of a request for
reconsideration made pursuant to paragraph (j) of this section or
before the time for requesting reconsideration has expired.
(ii) Unless otherwise determined by the Board, a bank holding
company's final planned capital distributions and final stress capital
buffer requirement shall:
(A) Be effective on October 1 of the calendar year in which a
capital plan was submitted pursuant to paragraph (e)(1)(ii) of this
section; and
(B) Remain in effect until superseded.
(5) Publication. With respect to any bank holding company subject
to this section, the Board may disclose publicly any or all of the
following:
(i) The stress capital buffer requirement provided to a bank
holding company under paragraph (h)(1) or (j)(5) of this section;
(ii) Adjustments made pursuant to paragraph (h)(2)(ii);
(iii) A summary of the results of the supervisory stress test; and
(iv) Other information.
(i) Federal Reserve action on a capital plan --(1) Timing of
action. Board or the appropriate Reserve Bank with concurrence of the
Board, will object, in whole or in part, to the capital plan or provide
the bank holding company with a notice of non-objection to the capital
plan:
(i) By June 30 of the calendar year in which a capital plan was
submitted pursuant to paragraph (e)(1)(ii) of this section; and
(ii) For a capital plan resubmitted pursuant to paragraph (e)(4) of
this section, within 75 calendar days after the date on which a capital
plan is resubmitted, unless the Board provides notice to the company
that it is extending the time period.
(2) Basis for objection to a capital plan. The Board, or the
appropriate Reserve Bank with concurrence of the Board, may object to a
capital plan submitted by a bank holding company that is not a large
and noncomplex bank holding company if it determines that:
(i) Until January 1, 2021, except as provided in paragraph
(i)(2)(ii) of this section, for a bank holding company that was subject
to this section as of January 1, 2019, but whose capital plan has not
been subject to review and a potential qualitative objection under the
criteria listed in paragraph (i)(2)(i)(A) through (C) of this section
for any period of four consecutive years:
(A) The bank holding company has material unresolved supervisory
issues, including but not limited to issues associated with its capital
adequacy process;
(B) The assumptions and analysis underlying the bank holding
company's capital plan, or the bank holding company's methodologies and
practices that support its capital planning process, are not reasonable
or appropriate; or
(C) The bank holding company's capital planning process or proposed
capital distributions otherwise constitute an unsafe or unsound
practice, or would violate any law, regulation, Board order, directive,
or condition imposed by, or written agreement with, the Board or the
appropriate Reserve Bank. In determining whether a capital plan or any
proposed capital distribution would constitute an unsafe or unsound
practice, the Board or the appropriate Reserve Bank would consider
whether the bank holding company is and would remain in sound financial
condition after giving effect to the capital plan and all proposed
capital distributions.
(ii) Notwithstanding paragraph (i)(2)(i) of this section, a bank
holding company that was subject to this section as of January 1, 2019,
and that receives a qualitative objection in the fourth year of the
four-year period described in paragraph (i)(2)(i), pursuant to the
criteria in paragraph (i)(2)(i)(A) through (C) of this section, will
remain subject to a qualitative objection under this section until
January 1 of the year after the first year in which the bank holding
company does not receive a qualitative objection.
(3) Notification of decision. The Board or the appropriate Reserve
Bank will notify the bank holding company in writing of the reasons for
a decision to object to a capital plan.
(4) Publication of summary results. The Board may disclose publicly
its decision to object or not object to a bank holding company's
capital plan under this section. Any disclosure under this paragraph
(i)(4) will occur by June 30 of the calendar year in which a capital
plan was submitted pursuant to paragraph (e)(1)(ii) of this section,
unless otherwise determined by the Board.
(j) Administrative remedies; request for reconsideration. The
following requirements and procedures apply to any request under this
paragraph (j):
(1) General. To request reconsideration of an objection to a
capital plan, provided under paragraph (i) of this section, or of a
stress capital buffer requirement, provided under paragraph (h) of this
section, a bank holding company must submit a written request for
reconsideration.
(2) Timing of request. (i) A request for reconsideration of an
objection to a capital plan, provided under paragraph (i) of this
section, must be received within 15 calendar days of receipt of a
notice of objection to a capital plan.
(ii) A request for reconsideration of a stress capital buffer
requirement, provided under paragraph (h) of this section, must be
received within 15 calendar days of receipt of a notice of a bank
holding company's stress capital buffer requirement.
(3) Contents of request. (i) A request for reconsideration must
include a detailed explanation of why reconsideration should be granted
(that is, why a stress capital buffer requirement or objection to a
capital plan should be reconsidered). With respect to any information
that was not previously provided to the Federal Reserve in the bank
holding company's capital plan, the request should include an
explanation of why the information should be considered.
(ii) A request for reconsideration may include a request for an
informal hearing on the bank holding company's request for
reconsideration.
(4) Hearing. (i) The Board may, in its sole discretion, order an
informal hearing if the Board finds that a hearing is appropriate or
necessary to resolve disputes regarding material issues of fact.
(ii) An informal hearing shall be held within 30 calendar days of a
request, if granted, provided that the Board may extend this period
upon notice to the requesting party.
(5) Response to request. (i) Within 30 calendar days of receipt of
the bank holding company's request for reconsideration of an objection
to a capital plan submitted under paragraph (j)(2) of this section or
within 30 days of the conclusion of an informal hearing conducted under
paragraph (j)(4) of this section, the Board will notify the company of
its decision to affirm, modify, or withdraw the objection to the bank
holding company's capital plan, or a specific capital distribution,
provided that the Board may extend this period upon notice to the bank
holding company.
(ii) Within 30 calendar days of receipt of the bank holding
company's request for reconsideration of its stress capital buffer
requirement submitted under

[[Page 15604]]

paragraph (j)(2) of this section or within 30 days of the conclusion of
an informal hearing conducted under paragraph (j)(4) of this section,
the Board will notify the company of its decision to affirm or modify
the bank holding company's stress capital buffer requirement, provided
that the Board may extend this period upon notice to the bank holding
company.
(6) Distributions during the pendency of a request for
reconsideration. During the pendency of the Board's decision under
paragraph (j)(5) of this section, the bank holding company may make
capital distributions that are consistent with effective distribution
limitations, unless prior approval is required under paragraph (k)(1)
of this section.
(k) Approval requirements for certain capital actions--(1)
Circumstances requiring approval--(i) Qualitative objection to and
resubmission of a capital plan. Unless it receives prior approval
pursuant to paragraph (k)(3) of this section, a bank holding company
may not make a capital distribution (excluding any capital distribution
arising from the issuance of a capital instrument eligible for
inclusion in the numerator of a regulatory capital ratio) under the
following circumstances:
(A) The Board, or the appropriate Reserve Bank with the concurrence
of the Board, objects to a capital plan and until such time as the
Board, or the appropriate Reserve Bank with concurrence of the Board,
issues a non-objection to the bank holding company's capital plan;
(B) The capital distribution would occur after the occurrence of an
event requiring resubmission under paragraph (e)(4)(i)(A) or (B) of
this section.
(ii) Transition for certain planned capital actions. For the period
July 1, 2020, to September 30, 2020, a bank holding company is
authorized to make capital distributions that do not exceed an amount
equal to the average of capital distributions over the four quarters to
which the Board or the appropriate Reserve Bank indicated its non-
objection for the previous capital plan cycle. A bank holding company
may request prior approval to make capital distributions in excess of
the amount authorized for the period July 1, 2020, to September 30,
2020, pursuant to paragraph (k)(2) of this section.
(2) Contents of request. A request for a capital distribution under
this section must contain the following information:
(i) The bank holding company's capital plan or a discussion of
changes to the bank holding company's capital plan since it was last
submitted to the Federal Reserve;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(iv) Any additional information requested by the Board or the
appropriate Reserve Bank (which may include, among other things, an
assessment of the bank holding company's capital adequacy under a
severely adverse scenario, a revised capital plan, and supporting
data).
(3) Approval of certain capital distributions. (i) The Board, or
the appropriate Reserve Bank with concurrence of the Board, will act on
a request for prior approval of a capital distribution within 30
calendar days after the receipt of all the information required under
paragraph (k)(2) of this section.
(ii) In acting on a request for prior approval of a capital
distribution, the Board, or appropriate Reserve Bank with concurrence
of the Board, will apply the considerations and principles in
paragraphs (g) and (i) of this section, as appropriate. In addition,
the Board, or the appropriate Reserve Bank with concurrence of the
Board, may disapprove the transaction if the bank holding company does
not provide all of the information required to be submitted under
paragraph (k)(2) of this section.
(4) Disapproval and hearing. (i) The Board, or the appropriate
Reserve Bank with concurrence of the Board, will notify the bank
holding company in writing of the reasons for a decision to disapprove
any proposed capital distribution. Within 15 calendar days after
receipt of a disapproval by the Board, the bank holding company may
submit a written request for a hearing.
(ii) The Board may, in its sole discretion, order an informal
hearing if the Board finds that a hearing is appropriate or necessary
to resolve disputes regarding material issues of fact. An informal
hearing shall be held within 30 calendar days of a request, if granted,
provided that the Board may extend this period upon notice to the
requesting party.
(iii) Written notice of the final decision of the Board shall be
given to the bank holding company within 60 calendar days of the
conclusion of any informal hearing ordered by the Board, provided that
the Board may extend this period upon notice to the requesting party.
(iv) While the Board's decision is pending and until such time as
the Board, or the appropriate Reserve Bank with concurrence of the
Board, approves the capital distribution at issue, the bank holding
company may not make such capital distribution.
(l) Post notice requirement. A bank holding company must notify the
Board and the appropriate Reserve Bank within 15 days of making a
capital distribution if:
(1) The capital distribution was approved pursuant to paragraph
(k)(3) of this section; or
(2) The dollar amount of the capital distribution will exceed the
dollar amount of the bank holding company's final planned capital
distributions, as measured on an aggregate basis beginning in the
fourth quarter of the planning horizon through the quarter at issue.

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
5. The authority citation for part 252 continues to read as follows:

Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.

Subpart E--Supervisory Stress Test Requirements for Certain U.S.
Banking Organizations With $100 Billion or More in Total
Consolidated Assets and Nonbank Financial Companies Supervised by
the Board

0
6. In Sec. 252.16, republish paragraph (b) and add paragraphs (b)(1)
through (3) to read as follows:

Sec. 252.16 Reports of stress test results.

* * * * *
(b) Contents of reports. The report required under paragraph (a) of
this section must include the following information for the baseline
scenario, severely adverse scenario, and any other scenario required
under Sec. 252.14(b)(3):
(1) A description of the types of risks being included in the
stress test;
(2) A summary description of the methodologies used in the stress
test; and
(3) For each quarter of the planning horizon, estimates of
aggregate losses, pre-provision net revenue, provision for credit
losses, net income, and regulatory capital ratios;
* * * * *

0
7. In Sec. 252.44, redesignate paragraph (c) as paragraph (d) and add
new paragraph (c) to read as follows:

Sec. 252.44 Analysis conducted by the Board.

* * * * *
(c) In conducting a stress test under this section, the Board will
make the

[[Page 15605]]

following assumptions regarding a covered company's capital actions
over the planning horizon:
(1) The covered company will not pay any dividends on any
instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that
qualify as additional tier 1 capital or tier 2 capital equal to the
stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of
any capital instrument that is eligible for inclusion in the numerator
of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock
or preferred stock.
* * * * *

Subpart F--Company-Run Stress Test Requirements for Certain U.S.
Bank Holding Companies and Nonbank Financial Companies Supervised
by the Board

0
8. In Sec. 252.54, revise paragraph (b)(2) to read as follows:

Sec. 252.54 Stress test.

* * * * *
(b) * * *
(2) Additional components. (i) The Board may require a covered
company with significant trading activity to include a trading and
counterparty component in its severely adverse scenario in the stress
test required by this section. A covered company has significant
trading activity if it has:
(A) Aggregate trading assets and liabilities of $50 billion or
more, or aggregate trading assets and liabilities equal to 10 percent
or more of total consolidated assets;
(B) Is not a large and noncomplex bank holding company as the term
is used in 12 CFR 225.8.
(ii) The Board may require a covered company to include one or more
additional components in its severely adverse scenario in the stress
test required by this section based on the company's financial
condition, size, complexity, risk profile, scope of operations, or
activities, or risks to the U.S. economy.
* * * * *

0
9. Section 252.56 is amended by revising paragraph (b) as follows:

Sec. 252.56 Methodologies and practices.

* * * * *
(b) Assumptions regarding capital actions. In conducting a stress
test under Sec. 252.54, a covered company is required to make the
following assumptions regarding its capital actions over the planning
horizon:
(1) The covered company will not pay any dividends on any
instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that
qualify as additional tier 1 capital or tier 2 capital equal to the
stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of
any capital instrument that is eligible for inclusion in the numerator
of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock
or preferred stock.
* * * * *

0
10. Appendix B to part 252 is amended by revising sections 2.6 and 2.7
and adding section 3.4 to read as follows:

Appendix B to Part 252--Stress Test Policy Statement

* * * * *

2.6. Incorporation of Business Plan Changes

(a) A firm's stress capital buffer requirement does not
incorporate changes to its business plan that are likely to have a
material impact on a covered company's capital adequacy and funding
profile (material business plan changes). For example, planned
issuances of common or preferred stock in connection with a planned
merger or acquisition will not be included in the stress capital
buffer requirement calculation. In addition, the common stock
dividends attributable to issuances in connection with a planned
merger or acquisition reflected in the covered company's pro-forma
balance sheet estimates will also not be included in the stress
capital buffer requirement calculation. Material business plan
changes, including those resulting from a merger or acquisition, are
incorporated into a covered company's capital and risk-weighted
assets upon consummation of the transaction or occurrence of the
change. As a result, the amount of capital required will adjust
based on changes to the covered company's risk-weighted assets.
(b) If the material business plan change resulted in or would
result in a material change in a covered company's risk profile, the
company is required to resubmit its capital plan and the Board may
determine to recalculate the stress capital buffer requirement based
on the resubmitted capital plan.

2.7. Credit Supply Maintenance

(a) The supervisory stress test incorporates the assumption that
aggregate credit supply does not contract during the stress period.
The aim of supervisory stress testing is to assess whether firms are
sufficiently capitalized to absorb losses during times of economic
stress, while also meeting obligations and continuing to lend to
households and businesses. The assumption that a balance sheet of
consistent magnitude is maintained allows supervisors to evaluate
the health of the banking sector assuming firms continue to lend
during times of stress.
(b) In order to implement this policy, the Federal Reserve must
make assumptions about new loan balances. To predict losses on new
originations over the planning horizon, newly originated loans are
assumed to have the same risk characteristics as the existing
portfolio, where applicable, with the exception of loan age and
delinquency status. These newly originated loans would be part of a
covered company's normal business, even in a stressed economic
environment. While an individual firm may assume that it reacts to
rising losses by sharply restricting its lending (e.g., by exiting a
particular business line), the banking industry as a whole cannot do
so without creating a ``credit crunch'' and substantially increasing
the severity and duration of an economic downturn. The assumption
that the magnitude of firm balance sheets will be fixed in the
supervisory stress test ensures that covered companies cannot assume
they will ``shrink to health,'' and serves the Federal Reserve's
goal of helping to ensure that major financial firms remain
sufficiently capitalized to accommodate credit demand in a severe
downturn. In addition, by precluding the need to make assumptions
about how underwriting standards might tighten or loosen during
times of economic stress, the Federal Reserve follows the principle
of consistency and comparability and promotes consistency across
covered companies.
(c) In projecting the denominator for the calculation of the
leverage ratio, the Federal Reserve will account for the effect of
changes associated with the calculation of regulatory capital or
changes to the Board's regulations.
* * * * *

3.4. Simple approach for projecting risk-weighted assets

(a) In projecting risk-weighted assets, the Federal Reserve will
generally assume that a covered company's risk-weighted assets
remain unchanged over the planning horizon. This assumption allows
the Federal Reserve to independently project the risk-weighted
assets of covered companies in line with the goal of simplicity
(Principle 1.4). In addition, this approach is forward-looking
(Principle 1.2), as this assumption removes reliance on historical
data and past outcomes from the projection of risk-weighted assets.
(b) In projecting a firm's risk-weighted assets, the Federal
Reserve will account for the effect of changes associated with the
calculation of regulatory capital or changes to the Board's
regulations in the calculation of risk-weighted assets.

By order of the Board of Governors of the Federal Reserve
System, March 5, 2020.
Ann Misback,
Secretary of the Board.
[FR Doc. 2020-04838 Filed 3-17-20; 8:45 am]
BILLING CODE P

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