Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations: Eligible Retained Income, 17003-17006 [2020-06371]

Download as PDF 17003 Rules and Regulations Federal Register Vol. 85, No. 59 Thursday, March 26, 2020 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. FEDERAL RESERVE SYSTEM 12 CFR Part 252 [Regulation YY; Docket No. R–1706] RIN 7100–AF80 Total Loss-Absorbing Capacity, LongTerm Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations: Eligible Retained Income Board of Governors of the Federal Reserve System (Board). ACTION: Interim final rule with request for comments. lotter on DSKBCFDHB2PROD with RULES AGENCY: SUMMARY: In light of recent disruptions in economic conditions caused by the coronavirus disease 2019 (COVID–19) and current strains in U.S. financial markets, the Board is issuing an interim final rule that revises the definition of eligible retained income for purposes of the Board’s total loss-absorbing capacity (TLAC) rule. The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the TLAC rule more gradual and aligns to recent action taken by the Board and the other Federal banking agencies in the capital rule. DATES: The interim final rule is effective March 26, 2020. Comments on the interim final rule must be received no later than May 11, 2020. ADDRESSES: You may submit comments, identified by Docket No. R–1706; 7100– AF80, by any of the following methods: • Agency website: https:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/general info/foia/ProposedRegs.cfm. • Email: regs.comments@ federalreserve.gov. Include docket and VerDate Sep<11>2014 15:56 Mar 25, 2020 Jkt 250001 RIN numbers in the subject line of the message. • FAX: (202) 452–3819 or (202) 452– 3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. All public comments will be made available on the Board’s website at https://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or to remove personally identifiable information at the commenter’s request. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays. For security reasons, the Board requires that visitors make an appointment to inspect comments. You may do so by calling (202) 452–3684. FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Associate Director, (202) 530–6360, Constance Horsley, Deputy Associate Director, (202) 452– 5239, Juan Climent, Manager, (202) 460 2180, Sean Healey, Lead Financial Institution Policy Analyst, (202) 912– 4611, Division of Supervision and Regulation; Benjamin McDonough, Assistant General Counsel, (202) 452– 2036, or Mark Buresh, Senior Counsel, (202) 452–5270, 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. Background II. The Interim Final Rule III. Impact Assessment IV. Administrative Law Matters A. Administrative Procedure Act B. Congressional Review Act C. Paperwork Reduction Act D. Regulatory Flexibility Act E. Use of Plain Language I. Background In December 2016, the Board issued a final rule (TLAC rule) to require the largest domestic and foreign banking organizations operating in the United PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 States to maintain a minimum amount of total loss-absorbing capacity (TLAC), consisting of a minimum amount of long-term debt (LTD) and tier 1 capital.1 In addition, the TLAC rule prescribed certain buffers above the minimum TLAC amounts that could result in limitations on the capital distributions and certain discretionary bonus payments of a firm. The final rule also included a separate requirement that these companies maintain a minimum amount of LTD. The TLAC rule applies to the largest and most systemic U.S. banking organizations (U.S. GSIBs) and the U.S. operations of the largest and most systemic foreign banking organizations (covered IHCs), because the failure or material financial distress of these companies has the greatest potential to disrupt U.S. financial stability (collectively, covered companies).2 The TLAC and LTD requirements in the final rule build on, and serve as a complement to, the regulatory capital requirements in the Board’s capital rule.3 Banking organizations subject to the capital rule must maintain a minimum amount of regulatory capital and maintain a capital buffer above the minimum capital requirements in order to avoid restrictions on capital distributions and discretionary bonus payments.4 The requirements in the capital rule take the form of ratios of different forms of regulatory capital to risk-based and leverage-based measures of assets. The requirements of the TLAC rule are based on many of the same measures as those that are in the capital rule. For example, the TLAC requirements are based on the risk-based and leverage1 82 FR 8266 (January 27, 2017); 12 CFR part 252, subparts G and P. 2 See 12 CFR 252.60; 12 CFR 252.160. 3 While capital rule’s requirements are intended to ensure that a banking organization has sufficient capital to remain a going concern, the objective of the TLAC rule is to reduce the financial stability impact of the failure of a covered company by requiring sufficient loss-absorbing capacity on both a going concern and a gone-concern basis. A firm’s regulatory capital, and especially its equity capital, is likely to be significantly or completely depleted in the lead up to a bankruptcy or resolution. Thus, if a firm is to re-emerge from resolution with sufficient capital to successfully operate as a going concern, there must be a source of capital for the firm. The TLAC rule therefore requires covered companies to maintain LTD because LTD can absorb losses and serve as a source of capital in resolution. 4 See 12 CFR part 217. E:\FR\FM\26MRR1.SGM 26MRR1 17004 Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Rules and Regulations lotter on DSKBCFDHB2PROD with RULES based measures used in the capital rule and the TLAC rule also includes buffer requirements in addition to the minimum TLAC requirements (TLAC buffer requirements) that function in a manner similar to the buffer requirements in the capital rule. As with the capital rule, the TLAC buffer requirements were established to encourage better capital conservation by covered companies and to enhance the resilience of the banking system during stress periods.5 In particular, the TLAC buffer requirements were intended to limit the ability of covered companies to distribute capital in the form of dividends and discretionary bonus payments and therefore strengthen the ability of covered companies to continue lending and conducting other financial intermediation activities during stress periods. A covered company with TLAC levels that fall short of the TLAC buffer requirements faces limitations on capital distributions and discretionary bonus payments, in a manner designed to parallel the restrictions on capital distributions and discretionary bonus payments under the capital rule. II. The Interim Final Rule The Board, together with the other federal banking agencies (collectively, the agencies), recently revised a core aspect of the buffer requirements in the capital rule, the definition of ‘‘eligible retained income.’’ 6 The Board is now issuing this interim final rule to carry over this change to the TLAC buffer requirements. Before these revisions to the capital rule, the limitations on capital distributions could have been sudden and severe if a banking organization was to experience even a modest reduction in its capital ratios, undermining the ability of the banking organization to use its capital buffers. This same concern applies to covered companies and the TLAC buffer requirements because, as noted, the TLAC buffers uses the former definition of eligible retained income. The interim final rule revises the definition of eligible retained income under the TLAC rule to be consistent with the recently revised definition of eligible retained income in the capital rule. By modifying the definition of eligible retained income and thereby allowing covered companies to use their capital buffers in a more gradual manner, the interim final rule should help to promote lending activity and other financial intermediation activities 5 78 6 85 FR 62018, 62034 (Oct. 11, 2013). FR 15909 (March 20, 2020). VerDate Sep<11>2014 15:56 Mar 25, 2020 Jkt 250001 by covered companies and avoid compounding negative impacts on the financial markets.7 Under the TLAC rule, if a covered company’s TLAC levels fall within its TLAC buffer requirements, the maximum amount of capital distributions and discretionary bonus payments it can make is a function of its eligible retained income. The original definition of eligible retained income under the TLAC rule, as under the capital rule, was four quarters of net income, net of distributions and associated tax effects not already reflected in net income. Under a benign business environment, some covered companies may decide to distribute all or nearly all of their net income. Because the measure of eligible retained income subtracts capital distributions made during the previous year, a period of sudden stress following a period of relatively benign conditions could result in very low or zero eligible retained income. In this or similar scenarios, a covered company could face sudden and severe distribution limitations even if its TLAC ratio only marginally falls below applicable buffer requirements. Recent events have suddenly and significantly impacted financial markets. The spread of COVID–19 has disrupted economic activity in many countries. In addition, financial markets have experienced significant volatility. The magnitude and persistence of the overall effects on the economy remain highly uncertain. In light of these developments, covered companies may realize a sudden, unanticipated drop in capital ratios. This could create a strong incentive for covered companies to limit their lending and other financial intermediation activities in order to avoid facing abrupt limitations on capital distributions. To better allow a covered company to continue lending during times of stress, the Board is issuing the interim final rule to revise the definition of eligible retained income in the TLAC rule to the greater of (1) a covered company’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a covered company’s net income over the preceding four quarters. This definition will apply with respect to all of the TLAC buffer requirements under the TLAC rule.8 This definition is As discussed above, the revised definition of eligible net income in the interim final rule allows a covered company to more gradually reduce distributions as it enters stress, and provides a covered company with stronger incentives to continue to lend in such a scenario. On the other hand, by enabling a covered company to gradually decrease capital distributions as it enters stress (rather than mandating a sharp decrease), the rule could incrementally reduce the covered company’s loss-absorption capacity in stress. The definition of eligible retained income affects the distributions of covered companies with TLAC levels within their TLAC buffer requirements. It does not have an impact on minimum TLAC or LTD levels, per se. As such, the revised definition of eligible retained income in the interim final rule is not likely to have any noticeable effect on the TLAC or LTD requirements applicable to covered companies. 7 The interim final rule does not make changes to any other rule or regulation that may limit capital distributions or discretionary bonus payments by covered companies. 8 Under the TLAC rule, a U.S. GSIB is subject to the external TLAC risk-weighted buffer, which sits above the minimum risk-based TLAC requirement, and the external TLAC leverage buffer, which sits above the minimum total-leverage exposure-based TLAC requirement. 12 CFR 252.63(c). Similarly, a covered IHC is subject to covered IHC TLAC buffer, which sits above the minimum risk-based TLAC requirement. 12 CFR 252.165(d). 9 85 FR 15909 (March 20, 2020). PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 consistent with the recently revised definition of eligible retained income in the capital rule.9 This interim final rule is intended to facilitate use by a covered company of its TLAC buffers as intended and serve as a financial intermediary and source of credit to the economy. As noted, this revision would reduce the likelihood that a covered company is suddenly subject to abrupt and restrictive distribution limitations in a scenario of lower than expected TLAC levels. Question 1: What would be the advantages and disadvantages of defining eligible retained income as the average of a covered company’s net income over the preceding four quarters instead of the greater of (i) a covered company’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of a covered company’s net income over the preceding four quarters? Question 2: Under what circumstances, if any, should a covered company be restricted from making any capital distributions? III. Impact Assessment E:\FR\FM\26MRR1.SGM 26MRR1 Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Rules and Regulations lotter on DSKBCFDHB2PROD with RULES IV. Administrative Law Matters A. Administrative Procedure Act The Board is issuing the interim final rule without prior notice and the opportunity for public comment and the delayed effective date ordinarily prescribed by the Administrative Procedure Act (APA)).10 Pursuant to section 553(b)(B) of the APA, general notice and the opportunity for public comment are not required with respect to a rulemaking when an ‘‘agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.’’ 11 The Board believes that the public interest is best served by implementing the interim final rule immediately upon publication in the Federal Register. As discussed above, the spread of COVID– 19 has disrupted economic activity in the United States. In addition, U.S. financial markets have featured extreme levels of volatility. The magnitude and persistence of COVID–19 on the economy remain uncertain. In light of the current market uncertainty, covered companies have a strong incentive to limit their lending activity in order to avoid facing abrupt restrictions on distributions. By making the automatic limitations on a covered company’s distributions more gradual as the covered company’s TLAC levels decline, the interim final rule would allow covered companies to focus on continuing to lend to creditworthy households and businesses rather than on managing their TLAC levels and reducing the potential of exacerbating negative impacts on the financial markets. For these reasons, the Board finds that there is good cause consistent with the public interest to issue the rule without advance notice and comment.12 The APA also requires a 30-day delayed effective date, except for (1) substantive rules which grant or recognize an exemption or relieve a restriction; (2) interpretative rules and statements of policy; or (3) as otherwise provided by the agency for good cause.13 Because the rule relieves a restriction, the interim final rule is exempt from the APA’s delayed effective date requirement.14 While the Board believes that there is good cause to issue the rule without advance notice and comment and with U.S.C. 553. U.S.C. 553(b)(3)(B) 12 5 U.S.C. 553(b)(3)(B); 553(d)(3). 13 5 U.S.C. 553(d). 14 5 U.S.C. 553(d)(1). an immediate effective date, the Board is interested in the views of the public and requests comment on all aspects of the interim final rule. B. Congressional Review Act For purposes of Congressional Review Act, the OMB makes a determination as to whether a final rule constitutes a ‘‘major’’ rule.15 If a rule is deemed a ‘‘major rule’’ by the Office of Management and Budget (OMB), the Congressional Review Act generally provides that the rule may not take effect until at least 60 days following its publication.16 The Congressional Review Act defines a ‘‘major rule’’ as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreignbased enterprises in domestic and export markets.17 For the same reasons set forth above, the Board is adopting the interim final rule without the delayed effective date generally prescribed under the Congressional Review Act. The delayed effective date required by the Congressional Review Act does not apply to any rule for which an agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rule issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.18 In light of current market uncertainty, the Board believes that delaying the effective date of the rule would be contrary to the public interest. In addition, as discussed above, the revised definition of eligible retained income in the interim final rule is not likely to have any significant effect on the requirements of the TLAC rule. As required by the Congressional Review Act, the Board will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review. 10 5 11 5 VerDate Sep<11>2014 15:56 Mar 25, 2020 15 5 U.S.C. 801 et seq. U.S.C. 801(a)(3). 17 5 U.S.C. 804(2). 18 5 U.S.C. 808. 16 5 Jkt 250001 PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 17005 C. Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act (PRA), an agency 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 has reviewed this interim final rule pursuant to authority delegated by the OMB and has determined that it does not contain any collections of information pursuant to the PRA. D. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) 19 requires an agency to consider whether the rules it proposes will have a significant economic impact on a substantial number of small entities.20 The RFA applies only to rules for which an agency publishes a general notice of proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed previously, consistent with section 553(b)(B) of the APA, the Board has determined for good cause that general notice and opportunity for public comment is unnecessary, and therefore the Board is not issuing a notice of proposed rulemaking. Accordingly, the Board has concluded that the RFA’s requirements relating to initial and final regulatory flexibility analysis do not apply. Nevertheless, the Board seeks comment on whether, and the extent to which, the interim final rule would affect a significant number of small entities. E. Use of Plain Language Section 722 of the Gramm-LeachBliley Act 21 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 interim final rule in a simple and straightforward manner. The Board invites comments on whether there are additional steps it could take to make the rule easier to understand. For example: • Has the Board organized the material to suit your needs? If not, how could this material be better organized? • Are the requirements in the regulation clearly stated? If not, how could the regulation be more clearly stated? 19 5 U.S.C. 601 et seq. regulations issued by the Small Business Administration, a small entity includes a depository institution, bank holding company, or savings and loan holding company with total assets of $600 million or less and trust companies with total assets of $41.5 million or less. See 13 CFR 121.201. 21 12 U.S.C. 4809. 20 Under E:\FR\FM\26MRR1.SGM 26MRR1 17006 Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Rules and Regulations • Does the regulation contain language or jargon that is not clear? If so, which language requires clarification? • Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes to the format would make the regulation easier to understand? • What else could we do to make the regulation easier to understand? List of Subjects in 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. Board of Governors of the Federal Reserve System 12 CFR Chapter II Authority and Issuance For the reasons stated in the preamble, the Board of Governors of the Federal Reserve System amends 12 CFR chapter II as follows: PART 252—ENHANCED PRUDENTIAL STANDARDS (REGULATION YY) 1. The authority citation for part 252 is revised to read as follows: ■ four calendar quarters preceding the current calendar quarter. * * * * * Subpart P—[Amended] 3. Section 252.165 is amended by revising paragraph (d)(2)(i) to read as follows: ■ § 252.165 Covered IHC total lossabsorbing capacity requirement and buffer. * * * * * (d) * * * (2) * * * (i) Eligible retained income. The eligible retained income of a Covered IHC is the greater of: (A) The Covered IHC’s net income, calculated in accordance with the instructions to the FR Y–9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the Covered IHC’s net income, calculated in accordance with the instructions to the FR Y–9C, for the four calendar quarters preceding the current calendar quarter. * * * * * By order of the Board of Governors of the Federal Reserve System, March 23, 2020. Michele Taylor Fennell, Assistant Secretary of the Board. [FR Doc. 2020–06371 Filed 3–24–20; 4:15 pm] Authority: 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 1828, 1831n, 1831o, 1831p–1, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. BILLING CODE P DEPARTMENT OF COMMERCE International Trade Administration Subpart G—[Amended] 19 CFR Part 351 2. Section 252.63 is amended by revising paragraph (c)(2)(i) to read as follows: ■ [Docket Number: 200320–0083] RIN 0625–AB19 § 252.63 External total loss-absorbing capacity requirement and buffer. lotter on DSKBCFDHB2PROD with RULES * * * * * (c) * * * (2) * * * (i) Eligible retained income. The eligible retained income of a global systemically important BHC is the greater of: (A) The global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y–9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y–9C, for the VerDate Sep<11>2014 15:56 Mar 25, 2020 Jkt 250001 Temporary Rule Modifying AD/CVD Service Requirements Due to COVID– 19 Enforcement and Compliance, International Trade Administration, Commerce. ACTION: Temporary final rule. AGENCY: SUMMARY: The Department Commerce (Commerce)’s Enforcement and Compliance Unit (E&C) is temporarily modifying certain requirements for serving documents containing business proprietary information in antidumping and countervailing duty (AD/CVD) cases to facilitate the effectuation of service through electronic means. The goal is to promote public health and slow the spread of COVID–19. These temporary modifications will be in place until May 19, 2020, unless extended. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 Effective March 24, 2020, through 17:00 hours EST, May 19, 2020. FOR FURTHER INFORMATION CONTACT: Evangeline D. Keenan, Director, APO/ Dockets Unit, at 202–482–3354. SUPPLEMENTARY INFORMATION: DATES: Background In light of the recent COVID–19 outbreak, the U.S. Government is encouraging American citizens to work from home whenever possible. The service requirements in E&C’s regulations are often effectuated by hand delivery or by U.S. mail delivery of hard copy documents, which often takes place in an office setting. In turn, this poses a risk to the personnel tasked with serving or accepting service by hand or mail, as well as those around them. Accordingly, Enforcement & Compliance (E&C) will temporarily deem service of submissions containing business proprietary information (BPI) to be effectuated when the BPI submissions are filed by parties in ACCESS (E&C’s online document portal), with certain exceptions, with the goal of promoting public health and slowing the spread of COVID–19 while at the same time permitting the continued administration of antidumping and countervailing duty proceedings. In general, 19 CFR 351.303(f)(1) states that a person filing a document with Commerce simultaneously must serve a copy of the document on all relevant persons by personal service or first class mail. 19 CFR 351.303(f)(3) provides that case and rebuttal briefs must be made by personal service, overnight mail, courier, or in the case of service outside the United States, by first class airmail. E&C is temporarily modifying the means by which a person may serve documents containing BPI, as follows. For BPI documents submitted with final bracketing on the due date (i.e., documents not submitted under the one-day lag rule, 19 CFR 351.303(c)(2)(i)), E&C will deem service to be effectuated upon the filing of the submission in ACCESS. E&C will notify interested parties that the document has been filed through daily ACCESS BPI Release Digest emails. This modification does not apply to service to pro se parties or parties represented by a nonAPO-authorized representative. For BPI documents submitted under the one-day lag rule, 19 CFR 351.303(c)(2)(i), E&C is temporarily waiving the service requirement for bracketing-not-final BPI submissions filed on the due date. In addition, E&C will deem service to be effectuated upon the filing in ACCESS of the complete E:\FR\FM\26MRR1.SGM 26MRR1

Agencies

FEDERAL RESERVE SYSTEM

[Federal Register Volume 85, Number 59 (Thursday, March 26, 2020)]
[Rules and Regulations]
[Pages 17003-17006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06371]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

========================================================================


Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Rules 
and Regulations

[[Page 17003]]



FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. R-1706]
RIN 7100-AF80


Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding 
Company Requirements for Systemically Important U.S. Bank Holding 
Companies and Intermediate Holding Companies of Systemically Important 
Foreign Banking Organizations: Eligible Retained Income

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

ACTION: Interim final rule with request for comments.

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

SUMMARY: In light of recent disruptions in economic conditions caused 
by the coronavirus disease 2019 (COVID-19) and current strains in U.S. 
financial markets, the Board is issuing an interim final rule that 
revises the definition of eligible retained income for purposes of the 
Board's total loss-absorbing capacity (TLAC) rule. The revised 
definition of eligible retained income will make any automatic 
limitations on capital distributions that could apply under the TLAC 
rule more gradual and aligns to recent action taken by the Board and 
the other Federal banking agencies in the capital rule.

DATES: The interim final rule is effective March 26, 2020. Comments on 
the interim final rule must be received no later than May 11, 2020.

ADDRESSES: You may submit comments, identified by Docket No. R-1706; 
7100-AF80, by any of the following methods:
     Agency website: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
and RIN numbers in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.

    All public comments will be made available on the Board's website 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays. For security reasons, the 
Board requires that visitors make an appointment to inspect comments. 
You may do so by calling (202) 452-3684.

FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Associate Director, 
(202) 530-6360, Constance Horsley, Deputy Associate Director, (202) 
452-5239, Juan Climent, Manager, (202) 460 2180, Sean Healey, Lead 
Financial Institution Policy Analyst, (202) 912-4611, Division of 
Supervision and Regulation; Benjamin McDonough, Assistant General 
Counsel, (202) 452-2036, or Mark Buresh, Senior Counsel, (202) 452-
5270, 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. Background
II. The Interim Final Rule
III. Impact Assessment
IV. Administrative Law Matters
    A. Administrative Procedure Act
    B. Congressional Review Act
    C. Paperwork Reduction Act
    D. Regulatory Flexibility Act
    E. Use of Plain Language

I. Background

    In December 2016, the Board issued a final rule (TLAC rule) to 
require the largest domestic and foreign banking organizations 
operating in the United States to maintain a minimum amount of total 
loss-absorbing capacity (TLAC), consisting of a minimum amount of long-
term debt (LTD) and tier 1 capital.\1\ In addition, the TLAC rule 
prescribed certain buffers above the minimum TLAC amounts that could 
result in limitations on the capital distributions and certain 
discretionary bonus payments of a firm. The final rule also included a 
separate requirement that these companies maintain a minimum amount of 
LTD.
---------------------------------------------------------------------------

    \1\ 82 FR 8266 (January 27, 2017); 12 CFR part 252, subparts G 
and P.
---------------------------------------------------------------------------

    The TLAC rule applies to the largest and most systemic U.S. banking 
organizations (U.S. GSIBs) and the U.S. operations of the largest and 
most systemic foreign banking organizations (covered IHCs), because the 
failure or material financial distress of these companies has the 
greatest potential to disrupt U.S. financial stability (collectively, 
covered companies).\2\
---------------------------------------------------------------------------

    \2\ See 12 CFR 252.60; 12 CFR 252.160.
---------------------------------------------------------------------------

    The TLAC and LTD requirements in the final rule build on, and serve 
as a complement to, the regulatory capital requirements in the Board's 
capital rule.\3\ Banking organizations subject to the capital rule must 
maintain a minimum amount of regulatory capital and maintain a capital 
buffer above the minimum capital requirements in order to avoid 
restrictions on capital distributions and discretionary bonus 
payments.\4\ The requirements in the capital rule take the form of 
ratios of different forms of regulatory capital to risk-based and 
leverage-based measures of assets.
---------------------------------------------------------------------------

    \3\ While capital rule's requirements are intended to ensure 
that a banking organization has sufficient capital to remain a going 
concern, the objective of the TLAC rule is to reduce the financial 
stability impact of the failure of a covered company by requiring 
sufficient loss-absorbing capacity on both a going concern and a 
gone-concern basis. A firm's regulatory capital, and especially its 
equity capital, is likely to be significantly or completely depleted 
in the lead up to a bankruptcy or resolution. Thus, if a firm is to 
re-emerge from resolution with sufficient capital to successfully 
operate as a going concern, there must be a source of capital for 
the firm. The TLAC rule therefore requires covered companies to 
maintain LTD because LTD can absorb losses and serve as a source of 
capital in resolution.
    \4\ See 12 CFR part 217.
---------------------------------------------------------------------------

    The requirements of the TLAC rule are based on many of the same 
measures as those that are in the capital rule. For example, the TLAC 
requirements are based on the risk-based and leverage-

[[Page 17004]]

based measures used in the capital rule and the TLAC rule also includes 
buffer requirements in addition to the minimum TLAC requirements (TLAC 
buffer requirements) that function in a manner similar to the buffer 
requirements in the capital rule.
    As with the capital rule, the TLAC buffer requirements were 
established to encourage better capital conservation by covered 
companies and to enhance the resilience of the banking system during 
stress periods.\5\ In particular, the TLAC buffer requirements were 
intended to limit the ability of covered companies to distribute 
capital in the form of dividends and discretionary bonus payments and 
therefore strengthen the ability of covered companies to continue 
lending and conducting other financial intermediation activities during 
stress periods. A covered company with TLAC levels that fall short of 
the TLAC buffer requirements faces limitations on capital distributions 
and discretionary bonus payments, in a manner designed to parallel the 
restrictions on capital distributions and discretionary bonus payments 
under the capital rule.
---------------------------------------------------------------------------

    \5\ 78 FR 62018, 62034 (Oct. 11, 2013).
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II. The Interim Final Rule

    The Board, together with the other federal banking agencies 
(collectively, the agencies), recently revised a core aspect of the 
buffer requirements in the capital rule, the definition of ``eligible 
retained income.'' \6\ The Board is now issuing this interim final rule 
to carry over this change to the TLAC buffer requirements.
---------------------------------------------------------------------------

    \6\ 85 FR 15909 (March 20, 2020).
---------------------------------------------------------------------------

    Before these revisions to the capital rule, the limitations on 
capital distributions could have been sudden and severe if a banking 
organization was to experience even a modest reduction in its capital 
ratios, undermining the ability of the banking organization to use its 
capital buffers. This same concern applies to covered companies and the 
TLAC buffer requirements because, as noted, the TLAC buffers uses the 
former definition of eligible retained income.
    The interim final rule revises the definition of eligible retained 
income under the TLAC rule to be consistent with the recently revised 
definition of eligible retained income in the capital rule. By 
modifying the definition of eligible retained income and thereby 
allowing covered companies to use their capital buffers in a more 
gradual manner, the interim final rule should help to promote lending 
activity and other financial intermediation activities by covered 
companies and avoid compounding negative impacts on the financial 
markets.\7\
---------------------------------------------------------------------------

    \7\ The interim final rule does not make changes to any other 
rule or regulation that may limit capital distributions or 
discretionary bonus payments by covered companies.
---------------------------------------------------------------------------

    Under the TLAC rule, if a covered company's TLAC levels fall within 
its TLAC buffer requirements, the maximum amount of capital 
distributions and discretionary bonus payments it can make is a 
function of its eligible retained income. The original definition of 
eligible retained income under the TLAC rule, as under the capital 
rule, was four quarters of net income, net of distributions and 
associated tax effects not already reflected in net income. Under a 
benign business environment, some covered companies may decide to 
distribute all or nearly all of their net income. Because the measure 
of eligible retained income subtracts capital distributions made during 
the previous year, a period of sudden stress following a period of 
relatively benign conditions could result in very low or zero eligible 
retained income. In this or similar scenarios, a covered company could 
face sudden and severe distribution limitations even if its TLAC ratio 
only marginally falls below applicable buffer requirements.
    Recent events have suddenly and significantly impacted financial 
markets. The spread of COVID-19 has disrupted economic activity in many 
countries. In addition, financial markets have experienced significant 
volatility. The magnitude and persistence of the overall effects on the 
economy remain highly uncertain. In light of these developments, 
covered companies may realize a sudden, unanticipated drop in capital 
ratios. This could create a strong incentive for covered companies to 
limit their lending and other financial intermediation activities in 
order to avoid facing abrupt limitations on capital distributions.
    To better allow a covered company to continue lending during times 
of stress, the Board is issuing the interim final rule to revise the 
definition of eligible retained income in the TLAC rule to the greater 
of (1) a covered company's net income for the four preceding calendar 
quarters, net of any distributions and associated tax effects not 
already reflected in net income, and (2) the average of a covered 
company's net income over the preceding four quarters. This definition 
will apply with respect to all of the TLAC buffer requirements under 
the TLAC rule.\8\ This definition is consistent with the recently 
revised definition of eligible retained income in the capital rule.\9\
---------------------------------------------------------------------------

    \8\ Under the TLAC rule, a U.S. GSIB is subject to the external 
TLAC risk-weighted buffer, which sits above the minimum risk-based 
TLAC requirement, and the external TLAC leverage buffer, which sits 
above the minimum total-leverage exposure-based TLAC requirement. 12 
CFR 252.63(c). Similarly, a covered IHC is subject to covered IHC 
TLAC buffer, which sits above the minimum risk-based TLAC 
requirement. 12 CFR 252.165(d).
    \9\ 85 FR 15909 (March 20, 2020).
---------------------------------------------------------------------------

    This interim final rule is intended to facilitate use by a covered 
company of its TLAC buffers as intended and serve as a financial 
intermediary and source of credit to the economy. As noted, this 
revision would reduce the likelihood that a covered company is suddenly 
subject to abrupt and restrictive distribution limitations in a 
scenario of lower than expected TLAC levels.
    Question 1: What would be the advantages and disadvantages of 
defining eligible retained income as the average of a covered company's 
net income over the preceding four quarters instead of the greater of 
(i) a covered company's net income for the four preceding calendar 
quarters, net of any distributions and associated tax effects not 
already reflected in net income, and (ii) the average of a covered 
company's net income over the preceding four quarters?
    Question 2: Under what circumstances, if any, should a covered 
company be restricted from making any capital distributions?

III. Impact Assessment

    As discussed above, the revised definition of eligible net income 
in the interim final rule allows a covered company to more gradually 
reduce distributions as it enters stress, and provides a covered 
company with stronger incentives to continue to lend in such a 
scenario. On the other hand, by enabling a covered company to gradually 
decrease capital distributions as it enters stress (rather than 
mandating a sharp decrease), the rule could incrementally reduce the 
covered company's loss-absorption capacity in stress.
    The definition of eligible retained income affects the 
distributions of covered companies with TLAC levels within their TLAC 
buffer requirements. It does not have an impact on minimum TLAC or LTD 
levels, per se. As such, the revised definition of eligible retained 
income in the interim final rule is not likely to have any noticeable 
effect on the TLAC or LTD requirements applicable to covered companies.

[[Page 17005]]

IV. Administrative Law Matters

A. Administrative Procedure Act

    The Board is issuing the interim final rule without prior notice 
and the opportunity for public comment and the delayed effective date 
ordinarily prescribed by the Administrative Procedure Act (APA)).\10\ 
Pursuant to section 553(b)(B) of the APA, general notice and the 
opportunity for public comment are not required with respect to a 
rulemaking when an ``agency for good cause finds (and incorporates the 
finding and a brief statement of reasons therefor in the rules issued) 
that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' \11\
---------------------------------------------------------------------------

    \10\ 5 U.S.C. 553.
    \11\ 5 U.S.C. 553(b)(3)(B)
---------------------------------------------------------------------------

    The Board believes that the public interest is best served by 
implementing the interim final rule immediately upon publication in the 
Federal Register. As discussed above, the spread of COVID-19 has 
disrupted economic activity in the United States. In addition, U.S. 
financial markets have featured extreme levels of volatility. The 
magnitude and persistence of COVID-19 on the economy remain uncertain. 
In light of the current market uncertainty, covered companies have a 
strong incentive to limit their lending activity in order to avoid 
facing abrupt restrictions on distributions. By making the automatic 
limitations on a covered company's distributions more gradual as the 
covered company's TLAC levels decline, the interim final rule would 
allow covered companies to focus on continuing to lend to creditworthy 
households and businesses rather than on managing their TLAC levels and 
reducing the potential of exacerbating negative impacts on the 
financial markets. For these reasons, the Board finds that there is 
good cause consistent with the public interest to issue the rule 
without advance notice and comment.\12\
---------------------------------------------------------------------------

    \12\ 5 U.S.C. 553(b)(3)(B); 553(d)(3).
---------------------------------------------------------------------------

    The APA also requires a 30-day delayed effective date, except for 
(1) substantive rules which grant or recognize an exemption or relieve 
a restriction; (2) interpretative rules and statements of policy; or 
(3) as otherwise provided by the agency for good cause.\13\ Because the 
rule relieves a restriction, the interim final rule is exempt from the 
APA's delayed effective date requirement.\14\
---------------------------------------------------------------------------

    \13\ 5 U.S.C. 553(d).
    \14\ 5 U.S.C. 553(d)(1).
---------------------------------------------------------------------------

    While the Board believes that there is good cause to issue the rule 
without advance notice and comment and with an immediate effective 
date, the Board is interested in the views of the public and requests 
comment on all aspects of the interim final rule.

B. Congressional Review Act

    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\15\ If a rule is deemed a ``major rule'' by the Office of 
Management and Budget (OMB), the Congressional Review Act generally 
provides that the rule may not take effect until at least 60 days 
following its publication.\16\
---------------------------------------------------------------------------

    \15\ 5 U.S.C. 801 et seq.
    \16\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in (A) 
an annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\17\
---------------------------------------------------------------------------

    \17\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    For the same reasons set forth above, the Board is adopting the 
interim final rule without the delayed effective date generally 
prescribed under the Congressional Review Act. The delayed effective 
date required by the Congressional Review Act does not apply to any 
rule for which an agency for good cause finds (and incorporates the 
finding and a brief statement of reasons therefor in the rule issued) 
that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.\18\ In light of 
current market uncertainty, the Board believes that delaying the 
effective date of the rule would be contrary to the public interest. In 
addition, as discussed above, the revised definition of eligible 
retained income in the interim final rule is not likely to have any 
significant effect on the requirements of the TLAC rule.
---------------------------------------------------------------------------

    \18\ 5 U.S.C. 808.
---------------------------------------------------------------------------

    As required by the Congressional Review Act, the Board will submit 
the final rule and other appropriate reports to Congress and the 
Government Accountability Office for review.

C. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA), an agency 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 has reviewed this interim final rule pursuant to authority 
delegated by the OMB and has determined that it does not contain any 
collections of information pursuant to the PRA.

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \19\ requires an agency to 
consider whether the rules it proposes will have a significant economic 
impact on a substantial number of small entities.\20\ The RFA applies 
only to rules for which an agency publishes a general notice of 
proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed 
previously, consistent with section 553(b)(B) of the APA, the Board has 
determined for good cause that general notice and opportunity for 
public comment is unnecessary, and therefore the Board is not issuing a 
notice of proposed rulemaking. Accordingly, the Board has concluded 
that the RFA's requirements relating to initial and final regulatory 
flexibility analysis do not apply.
---------------------------------------------------------------------------

    \19\ 5 U.S.C. 601 et seq.
    \20\ Under regulations issued by the Small Business 
Administration, a small entity includes a depository institution, 
bank holding company, or savings and loan holding company with total 
assets of $600 million or less and trust companies with total assets 
of $41.5 million or less. See 13 CFR 121.201.
---------------------------------------------------------------------------

    Nevertheless, the Board seeks comment on whether, and the extent to 
which, the interim final rule would affect a significant number of 
small entities.

E. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \21\ 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 
interim final rule in a simple and straightforward manner. The Board 
invites comments on whether there are additional steps it could take to 
make the rule easier to understand. For example:
---------------------------------------------------------------------------

    \21\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

     Has the Board organized the material to suit your needs? 
If not, how could this material be better organized?
     Are the requirements in the regulation clearly stated? If 
not, how could the regulation be more clearly stated?

[[Page 17006]]

     Does the regulation contain language or jargon that is not 
clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     What else could we do to make the regulation easier to 
understand?

List of Subjects in 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.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

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

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
1. The authority citation for part 252 is revised to read as follows:

    Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 
1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367, 
5368, 5371.

Subpart G--[Amended]

0
2. Section 252.63 is amended by revising paragraph (c)(2)(i) to read as 
follows:


Sec.  252.63  External total loss-absorbing capacity requirement and 
buffer.

* * * * *
    (c) * * *
    (2) * * *
    (i) Eligible retained income. The eligible retained income of a 
global systemically important BHC is the greater of:
    (A) The global systemically important BHC's net income, calculated 
in accordance with the instructions to the FR Y-9C, for the four 
calendar quarters preceding the current calendar quarter, net of any 
distributions and associated tax effects not already reflected in net 
income; and
    (B) The average of the global systemically important BHC's net 
income, calculated in accordance with the instructions to the FR Y-9C, 
for the four calendar quarters preceding the current calendar quarter.
* * * * *

Subpart P--[Amended]

0
3. Section 252.165 is amended by revising paragraph (d)(2)(i) to read 
as follows:


Sec.  252.165  Covered IHC total loss-absorbing capacity requirement 
and buffer.

* * * * *
    (d) * * *
    (2) * * *
    (i) Eligible retained income. The eligible retained income of a 
Covered IHC is the greater of:
    (A) The Covered IHC's net income, calculated in accordance with the 
instructions to the FR Y-9C, for the four calendar quarters preceding 
the current calendar quarter, net of any distributions and associated 
tax effects not already reflected in net income; and
    (B) The average of the Covered IHC's net income, calculated in 
accordance with the instructions to the FR Y-9C, for the four calendar 
quarters preceding the current calendar quarter.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, March 23, 2020.
Michele Taylor Fennell,
Assistant Secretary of the Board.
[FR Doc. 2020-06371 Filed 3-24-20; 4:15 pm]
BILLING CODE P

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