[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Rules and Regulations]
[Pages 35234-35280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15131]
[[Page 35233]]
Vol. 84
Monday,
No. 140
July 22, 2019
Part III
Department of the Treasury
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Office of the Comptroller of the Currency
Federal Reserve System
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Federal Deposit Insurance Corporation
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12 CFR Parts 3, 217 and 324
Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant
to the Economic Growth and Regulatory Paperwork Reduction Act of 1996;
Final Rule
Federal Register / Vol. 84 , No. 140 / Monday, July 22, 2019 / Rules
and Regulations
[[Page 35234]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2017-0018]
RIN 1557-AE10
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulation Q; Docket No. R-1576]
RIN 7100 AE74
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE59
Regulatory Capital Rule: Simplifications to the Capital Rule
Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act
of 1996
AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation (collectively, the agencies) are adopting a final
rule (final rule) to simplify certain aspects of the capital rule. The
final rule is responsive to the agencies' March 2017 report to Congress
pursuant to the Economic Growth and Regulatory Paperwork Reduction Act
of 1996, in which the agencies committed to meaningfully reduce
regulatory burden, especially on community banking organizations. The
key elements of the final rule apply solely to banking organizations
that are not subject to the advanced approaches capital rule (non-
advanced approaches banking organizations). Under the final rule, non-
advanced approaches banking organizations will be subject to simpler
regulatory capital requirements for mortgage servicing assets, certain
deferred tax assets arising from temporary differences, and investments
in the capital of unconsolidated financial institutions than those
currently applied. The final rule also simplifies, for non-advanced
approaches banking organizations, the calculation for the amount of
capital issued by a consolidated subsidiary of a banking organization
and held by third parties (sometimes referred to as a minority
interest) that is includable in regulatory capital. In addition, the
final rule makes technical amendments to, and clarifies certain aspects
of, the agencies' capital rule for both non-advanced approaches banking
organizations and advanced approaches banking organizations (technical
amendments). Revisions to the definition of high-volatility commercial
real estate exposure in the agencies' capital rule are being addressed
in a separate rulemaking.
DATES: This rule is effective October 1, 2019, except for the
amendments to 12 CFR 3.21, 3.22, 3.300, 217.21, 217.22, 217.300(b) and
(d), 324.21, 324.22, and 324.300, which are effective April 1, 2020.
For more information, see SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT:
OCC: David Elkes, Risk Expert, Capital and Regulatory Policy (202)
649-6370; or Carl Kaminski, Special Counsel, or Henry Barkhausen,
Counsel, or Chris Rafferty Attorney, Chief Counsel's Office, (202) 649-
5490, for persons who are deaf or hearing impaired, TTY, (202) 649-
5597, Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; or Andrew Willis, Lead
Financial Institutions Policy Analyst, (202) 912-4323, Division of
Supervision and Regulation; or Benjamin McDonough, Assistant General
Counsel (202) 452-2036; Gillian Burgess, Senior Counsel (202) 736-5564,
or Mark Buresh, Counsel (202) 452-5270, Legal Division, Board of
Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Benedetto Bosco, Chief, Capital Policy Section,
[email protected]; Richard Smith, Capital Markets Policy Analyst,
[email protected]; Michael Maloney, Senior Policy Analyst,
[email protected]; [email protected]; Capital Markets Branch,
Division of Risk Management Supervision, (202) 898-6888; or Catherine
Wood, Counsel, [email protected]; Michael Phillips, Counsel,
[email protected]; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION: The portions of the final rule related to
simpler requirements for mortgage servicing assets, certain deferred
tax assets, investments in the capital of unconsolidated financial
institutions, and minority interest (incorporated in the amendatory
instructions 7, 8, 24, 30, 31, 47.b, 53, 54, and 70) are effective on
April 1, 2020. The portions of the final rule related to the technical
amendments (incorporated in the amendatory instructions 1-6, 9-23, 25-
29, 32-46, 47.a, 48-52, and 55-69) are effective October 1, 2019. Any
banking organization subject to the capital rule may elect to adopt the
technical amendments that are effective October 1, 2019, prior to that
date.
Table of Contents
I. Introduction
A. Related Rulemakings
B. Current Capital Treatment
1. MSAs, Temporary Difference DTAs and Investments in the
Capital of Unconsolidated Financial Institutions
2. Minority Interest
II. Summary of the Simplifications Proposal
A. Proposed Simplifications to the Capital Rule
B. Summary of Comments Received on the Simplifications Proposal
III. Final Rule
A. MSAs, Temporary Difference DTAs, and Investments in the
Capital of Unconsolidated Financial Institutions
1. MSAs and Temporary Difference DTAs
2. Investments in the Capital of Unconsolidated Financial
Institutions
3. Regulatory Treatment for Advanced Approaches Banking
Organizations
B. Minority Interest
C. Capital Treatment for Advanced Approaches Banking
Organizations
D. Technical Amendments to the Capital Rule
E. Effective Dates of Amendments
IV. Abbreviations
V. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995 Determination
E. Riegle Community Development and Regulatory Improvement Act
of 1994
I. Introduction
On October 27, 2017, the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (Board),
and the Federal Deposit Insurance Corporation (FDIC) published a notice
of proposed rulemaking (simplifications proposal) \1\ with the goal of
reducing regulatory compliance burden, particularly on community
banking organizations, by simplifying certain aspects of the agencies'
risk-based and leverage capital requirements (capital rule).\2\
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\1\ 82 FR 49984 (October 27, 2017).
\2\ The Board and the OCC issued a joint final rule on October
11, 2013 (78 FR 62018) and the FDIC issued a substantially identical
interim final rule on September 10, 2013 (78 FR 55340). In April
2014, the FDIC adopted the interim final rule as a final rule with
no substantive changes. 79 FR 20754 (April 14, 2014).
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The agencies had previously adopted in 2013 rules designed to
strengthen the capital rule's requirements and improve risk
sensitivity. These rules were intended to address weaknesses that
became apparent during the financial crisis of 2007-08. Since 2013, the
quality of banking organizations' capital has significantly improved
and the quantity of capital has increased.
The capital rule adopted in 2013 provides two methodologies for
determining risk-weighted assets: (i) A standardized approach and (ii)
a more complex, models-based approach, which includes both the internal
ratings-based approach for measuring credit risk exposure and the
advanced measurement approach for measuring operational risk exposure
(advanced approaches).\3\ The standardized approach applies to all
banking organizations that are subject to the agencies' risk-based
capital rule, whereas the advanced approaches apply only to certain
large or internationally active banking organizations (advanced
approaches banking organizations).\4\
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\3\ 12 CFR part 3, subparts D & E (OCC); 12 CFR part 217,
subparts D & E (Board); 12 CFR part 324, subparts D & E (FDIC).
\4\ 12 CFR 3.1(c), 12 CFR 3.100(b) (OCC); 12 CFR 217.1(c), 12
CFR 217.100(b) (Board); 12 CFR 324.1(c), 12 CFR 324.100(b) (FDIC).
Advanced approaches banking organizations are required to calculate
capital ratios under both the standardized and advanced approaches
in the capital rule and are subject to whichever ratio is lower
between the two approaches.
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In connection with the agencies' review of all the banking
regulations under the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (EGRPRA),\5\ the agencies received over 230
comment letters from depository institutions and their holding
companies, trade associations, consumer and community groups, and other
interested parties.\6\ The agencies also received numerous oral and
written comments at public outreach meetings.\7\ Many of the commenters
stated that certain aspects of the capital rule are unduly burdensome
and complex. After reviewing the comments, the agencies issued a Joint
Report to Congress: Economic Growth and Regulatory Paperwork Reduction
Act (the 2017 EGRPRA report) in March 2017,\8\ highlighting the
agencies' intent to meaningfully reduce regulatory burden, especially
on community banking organizations, while maintaining safety and
soundness in the banking system and retaining the quality and quantity
of regulatory capital.
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\5\ EGRPRA requires that regulations prescribed by the agencies
be reviewed at least once every 10 years. The purpose of this review
is to identify, with input from the public, outdated or unnecessary
regulations and consider how to reduce regulatory burden on insured
depository institutions while, at the same time, ensuring their
safety and soundness and the safety and soundness of the financial
system. Public Law 104-208, 110 Stat. 3009 (1996).
\6\ 79 FR 32172 (June 4, 2014); 80 FR 7980 (February 13, 2015);
80 FR 32046 (June 5, 2015); and 80 FR 79724 (December 23, 2015).
\7\ Comments received during the EGRPRA review process and
transcripts of outreach meetings can be found at http://egrpra.ffiec.gov/.
\8\ 82 FR 15900 (March 30, 2017).
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In particular, the agencies indicated in the 2017 EGRPRA report
their intent to issue a rule that would simplify, for non-advanced
approaches banking organizations, (i) the current regulatory capital
treatment for concentrations of mortgage servicing assets (MSAs),
deferred tax assets (DTAs) arising from temporary differences that an
institution could not realize through net operating loss carrybacks
(temporary difference DTAs), and investments in the capital of
unconsolidated financial institutions; and (ii) the calculation for the
amount of minority interest includable in regulatory
capital.9 10 The 2017 EGRPRA report also highlighted the
agencies' intent to replace the capital rule's treatment of high
volatility commercial real estate (HVCRE) exposures with a simpler
treatment for most acquisition, development, or construction exposures.
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\9\ Temporary differences arise when financial events or
transactions are recognized in one period for financial reporting
purposes and in another period, or periods, for tax purposes.
\10\ Minority interest is the amount of capital that can count
toward regulatory requirements in cases in which a banking
organization's consolidated subsidiary has issued capital that is
held by third parties.
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A. Related Rulemakings
The agencies have issued several other rulemakings over the last
two years to simplify certain aspects of the capital rule. For example,
the capital rule included transitional arrangements for certain
requirements. Under such transitional arrangements in the capital rule,
any amount of MSAs, temporary difference DTAs, and investments in the
capital of unconsolidated financial institutions that a banking
organization did not deduct from common equity tier 1 capital was risk
weighted at 100 percent until January 1, 2018. In 2017, the agencies
adopted a rule (transition rule) to allow non-advanced approaches
banking organizations to continue to apply the transition treatment in
effect in 2017 (including the 100 percent risk weight for MSAs,
temporary difference DTAs, and significant investments in the capital
of unconsolidated financial institutions) while the agencies considered
the simplifications proposal. This final rule supersedes the transition
rule and eliminates the transition provisions that are no longer
operative.\11\
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\11\ 82 FR 55309 (Nov. 21, 2017). These changes to the capital
rule's transition provisions did not apply to advanced approaches
banking organizations.
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On May 24, 2018, the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA) \12\ became law. As described in more
detail below, section 214 of EGRRCPA amended the capital treatment for
HVCRE exposures. Accordingly, the agencies proposed changes to the
regulatory capital treatment of HVCRE exposures to implement section
214 through a separate rulemaking.\13\
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\12\ Public Law 115-174 (May 24, 2018).
\13\ 83 FR 48990 (September 28, 2018).
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Additionally, consistent with section 201 of EGRRCPA,\14\ the
agencies issued a notice of proposed rulemaking providing an optional
simple leverage-based measure of capital adequacy for certain community
banking organizations (community bank leverage ratio (CBLR)
proposal).\15\ Under the CBLR proposal, certain qualifying community
banking organizations that maintain a community bank leverage ratio
above 9 percent would be considered to have met the well capitalized
ratio requirements for purposes of section 38 of the Federal Deposit
Insurance Act, as applicable, and the generally applicable capital
requirements under the capital rule.\16\
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\14\ Public law 115-174, section 201; 84 FR 3062 (February 8,
2019).
\15\ 84 FR 3062 (February 8, 2019).
\16\ See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); 12 CFR
324.10(a) (FDIC).
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The agencies recently published two notices of proposed rulemakings
on frameworks that would more closely match the regulatory capital and
liquidity requirements for certain large banking organizations with
their risk profiles (tailoring proposals).\17\ The tailoring proposals,
which are consistent with changes mandated by section 401 of EGRRCPA,
would revise the scope of which banking organizations meet the
definition of advanced approaches banking organizations, thereby
potentially affecting which banking organizations would be able to
apply the final rule. Each of these related rulemakings and their
interactions are described in further detail in various sections of
this Supplementary Information.
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\17\ 83 FR 61408 (November 29, 2018); 83 FR 66024 (December 21,
2018). See also https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm.
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B. Current Capital Treatment
1. MSAs, Temporary Difference DTAs, and Investments in the Capital of
Unconsolidated Financial Institutions
Under the current capital rule, a banking organization must deduct
from common equity tier 1 capital amounts of MSAs, temporary difference
DTAs, and significant investments in the capital of unconsolidated
financial institutions in the form of common stock (collectively,
threshold items) that individually exceed 10 percent of the banking
organization's common equity tier 1 capital.\18\ In addition, a banking
organization must also deduct from its common equity tier 1 capital the
aggregate amount of threshold items not deducted under the 10 percent
threshold deduction but that nonetheless exceeds 15 percent of the
banking organization's common equity tier 1 capital minus certain
deductions from and adjustments to common equity tier 1 capital (15
percent common equity tier 1 capital deduction threshold). In the
absence of the agencies' transition rule described above, any amount of
these three items that a banking organization did not deduct from
common equity tier 1 capital was risk weighted at 100 percent until
December 31, 2017 and at 250 percent thereafter.19 20
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\18\ A significant investment in the capital of an
unconsolidated financial institution is defined as an investment in
the capital of an unconsolidated financial institution where the
banking organization owns more than 10 percent of the issued and
outstanding common stock of the unconsolidated financial
institution. 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC).
\19\ In addition, the calculation of the aggregate 15 percent
common equity tier 1 capital deduction threshold for these items was
to become stricter as any amount above 15 percent of common equity
tier 1, less the amount of those items already deducted as a result
of the 10 percent common equity tier 1 capital deduction threshold,
would be deducted from a banking organization's common equity tier 1
capital. 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d) (Board); 12 CFR
324.22(d) (FDIC).
\20\ See 82 FR 55309 (Nov. 21, 2017).
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In addition to deductions for the threshold items, the capital rule
requires deductions from regulatory capital if a banking organization
holds (i) non-significant investments in the capital of an
unconsolidated financial institution above a certain threshold \21\ or
(ii) significant investments in the capital of an unconsolidated
financial institution that are not in the form of common stock.
Specifically, the capital rule requires that a banking organization
deduct from its regulatory capital any amount of the organization's
non-significant investments in the capital of unconsolidated financial
institutions that exceeds 10 percent of the banking organization's
common equity tier 1 capital (the 10 percent threshold for non-
significant investments) \22\ in accordance with the corresponding
deduction approach of the capital rule.\23\ In addition, significant
investments in the capital of unconsolidated financial institutions not
in the form of common stock also must be deducted from regulatory
capital in their entirety in accordance with the capital rule's
corresponding deduction approach.\24\
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\21\ A non-significant investment in the capital of an
unconsolidated financial institution is defined as an investment in
the capital of an unconsolidated financial institution where the
institution owns 10 percent or less of the issued and outstanding
common stock of the unconsolidated financial institution (non-
significant investment in the capital of an unconsolidated financial
institution). 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC).
\22\ 12 CFR 3.22(c)(4) (OCC); 12 CFR 217.22(c)(4) (Board); 12
CFR 324.22(c)(4) (FDIC).
\23\ 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 12
CFR 324.22(c)(2) (FDIC).
\24\ 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); 12
CFR 324.22(c)(5) (FDIC).
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2. Minority Interest
Because minority interest is generally not available to absorb
losses at the banking organization's consolidated level, the capital
rule limits the amount of minority interest that a banking organization
may include in regulatory capital. For example, tier 1 minority
interest is created when a consolidated subsidiary of the banking
organization issues tier 1 capital to third parties. The restrictions
in the capital rule relating to minority interest are currently based
on the amount of capital held by a consolidated subsidiary relative to
the amount of capital the subsidiary would need to hold to avoid any
restrictions on capital distributions and certain discretionary bonus
payments under the capital rule's capital conservation buffer
framework. Many community banking organizations have asserted that the
capital rule's current calculation of the minority interest limitation
is complex and results in burdensome regulatory capital calculations
and confusing regulatory capital reporting instructions.
II. Summary of the Simplifications Proposal
A. Proposed Simplifications to the Capital Rule
Consistent with the 2017 EGRPRA report, the agencies issued the
simplifications proposal with the aim of simplifying the capital rule
and reducing regulatory burden for certain banking organizations.
Specifically, for non-advanced approaches banking organizations, the
simplifications proposal would have eliminated: (i) The 10 percent
common equity tier 1 capital deduction threshold, which applies
individually to holdings of MSAs, temporary difference DTAs, and
significant investments in the capital of unconsolidated financial
institutions in the form of common stock; (ii) the 15 percent common
equity tier 1 capital deduction threshold, which applies to the
aggregate amount of such items; (iii) the 10 percent threshold for non-
significant investments, which applies to holdings of regulatory
capital of unconsolidated financial institutions; and (iv) the
deduction treatment for significant investments in the capital of
unconsolidated financial institutions that are not in the form of
common stock.\25\ Under the simplifications proposal, for non-advanced
approaches banking organizations, the capital rule would have no longer
applied distinct treatments to significant and to non-significant
investments in the capital of unconsolidated financial institutions.
Rather, the regulatory capital treatment for an investment in the
capital of unconsolidated financial institutions would be based on the
type of instrument underlying the investment.
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\25\ 12 CFR 3.22(c) and (d) (OCC); 12 CFR 217.22(c) and (d)
(Board); 12 CFR 324.22(c) and (d) (FDIC).
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Instead of the current capital rule's complex treatments for MSAs,
temporary difference DTAs, and investments in the capital of
unconsolidated financial institutions, the simplifications proposal
would have required non-advanced approaches banking organizations to
deduct from common equity tier 1 capital any amount of MSAs, temporary
difference DTAs, and investments in the capital of unconsolidated
financial institutions that individually exceed 25 percent of common
equity tier 1 capital of the banking organization (the 25 percent
common equity tier 1 capital deduction threshold). The simplifications
proposal would have required a banking organization to apply a 250
percent risk weight to MSAs or temporary difference DTAs \26\ not
deducted from capital.\27\ For investments in the capital of
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unconsolidated financial institutions, the simplifications proposal
would have required a banking organization to risk weight each exposure
not deducted according to the risk weight applicable to the exposure
category of the investment.
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\26\ The agencies note that they are not proposing to change the
current treatment of DTAs arising from timing differences that could
be realized through net operating loss carrybacks. Such DTAs are not
subject to deduction and are assigned a 100 percent risk weight.
\27\ As noted, on November 21, 2017, the agencies finalized a
rule applicable to non-advanced approaches banking organizations to
maintain the transition provisions in the capital rule in effect
during 2017 for several regulatory capital deductions and for
minority interest while the agencies considered the simplifications
proposal. 82 FR 55309. See 12 CFR 3.300(b)(4)-(5) and (d) (OCC); 12
CFR 217.300(b)(4)-(5) and (d) (Board); 12 CFR 324.300(b)(4)-(5) and
(d) (FDIC).
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Second, the simplifications proposal would have introduced a
significantly simpler methodology for non-advanced approaches banking
organizations to calculate minority interest limitations.\28\ The
existing capital rule's limitations for common equity tier 1 minority
interest, tier 1 minority interest, and total capital minority interest
are based on the capital requirements and capital ratios of each of the
banking organization's consolidated subsidiaries that have issued
capital instruments held by third parties. The proposal would have
simplified the minority interest limitations for non-advanced
approaches banking organizations by basing such limitations on the
parent banking organization's capital levels rather than on the amount
of capital its subsidiaries would need to meet the minimum capital
requirements on their own. Specifically, under the proposal, a non-
advanced approaches banking organization would have been allowed to
include common equity tier 1, tier 1, and total capital minority
interest up to 10 percent of the banking organization's common equity
tier 1, tier 1, and total capital (before the inclusion of any minority
interest), respectively.
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\28\ 12 CFR 3.21 (OCC); 12 CFR 217.21 (Board); 12 CFR 324.21
(FDIC).
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Third, the simplifications proposal would have replaced the
existing HVCRE exposure category as applied in the standardized
approach with a newly defined exposure category titled high volatility
acquisition, development, or construction (HVADC) exposure. The
simplifications proposal introduced the HVADC exposure in an effort to
simplify and clarify the capital requirements for acquisition,
development, and construction exposures. Given its broader proposed
scope of application, the simplifications proposal would have
introduced a reduced risk weight for HVADC exposures relative to the
current risk weight for HVCRE exposures under the capital rule's
standardized approach. Subsequent to the proposal, on May 24, 2018,
section 214 of EGRRCPA became law, which provides a statutory
definition of a high volatility commercial real estate acquisition,
development, or construction (HVCRE ADC) loan.\29\ On September 18,
2018, the agencies published a proposed rule to conform the capital
rule with the statutory definition of HVCRE ADC, which superseded the
aspect of the simplifications proposal that would have replaced the
HVCRE exposure definition with HVADC exposure definition.\30\ The
agencies are issuing another proposal in connection with the
statutorily mandated revisions to the capital rule's definition of
HVCRE exposure in a separate rulemaking.
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\29\ 12 U.S.C. 1831bb.
\30\ 83 FR 48990 (Sept. 28, 2018).
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Under the simplifications proposal, advanced approaches banking
organizations would not have been permitted to apply the simplified
treatment for MSAs, temporary difference DTAs, investments in the
capital of unconsolidated financial institutions and minority interest.
These banking organizations would continue to apply the more risk
sensitive treatments included in the capital rule.
The simplifications proposal also would have made certain technical
changes to the capital rule, including some changes to the advanced
approaches, to clarify certain provisions, update cross-references, and
correct typographical errors.
B. Summary of Comments
Collectively, the agencies received nearly 100 comment letters on
the simplifications proposal from banking organizations, trade
associations, public interest groups, and individuals. This summary
excludes any comments pertaining to the proposed revisions to the
definition of HVCRE exposure, as such matters are being addressed in a
different rulemaking.
As described in further detail in subsequent sections of this
Supplementary Information, commenters generally supported the
simplifications proposal. Several commenters, however, requested that
the agencies apply the proposed simplifications to a broader set of
banking organizations. A number of commenters believed the proposed
simplifications were insufficient with respect to the threshold
deductions for MSAs, temporary difference DTAs, and investments in the
capital of unconsolidated financial institutions. Some commenters
favored increasing or removing the 25 percent common equity tier 1
capital deduction threshold while other commenters disagreed with the
proposed 250 percent risk weight for these exposures. While commenters
expressed general support for the simplifications proposal's simpler
regulatory capital limitations for minority interest, a few commenters
asserted this revision could result in unintended consequences. The
agencies also received comments related to potential additional
technical amendments and simplifications to the capital rule, which are
also described below.
III. Final Rule
A. MSAs, Temporary Difference DTAs, and Investments in the Capital of
Unconsolidated Financial Institutions
The simplification proposal would have set the 25 percent common
equity tier 1 capital deduction threshold for MSAs, temporary
difference DTAs, and investments in the capital of unconsolidated
financial institutions to prevent, in a simple manner, unsafe and
unsound concentration levels of these exposure categories in regulatory
capital. The agencies believe that the 25 percent common equity tier 1
capital deduction threshold would have appropriately balanced risk-
sensitivity and complexity for non-advanced approaches banking
organizations.
The agencies received various comments that generally supported the
proposed revisions to the treatment of MSAs, temporary difference DTAs,
and investments in the capital of unconsolidated financial
institutions. Several commenters requested that the scope of these
proposed simplifications be applied universally to all banking
organizations, including advanced approaches banking organizations.
Many commenters favored the increased 25 percent deduction threshold,
while other commenters requested higher deduction limits (e.g., 50
percent or 100 percent of tier 1 capital). Some commenters requested
the full removal of the deduction threshold while others suggested that
such treatment be required only for banking organizations meeting
certain size and/or capital levels.
Numerous commenters requested that a 100 percent risk weight be
applied to non-deducted MSAs, arguing that this lower risk weight is
consistent with historical practice and evolving risk-management
policies. These commenters stated that the proposed 250 percent risk
weight would place banking organizations at a competitive disadvantage,
potentially driving their MSA business line out of the banking sector
and leading to increased MSA concentrations among mortgage servicers
that are not subject to the same prudential requirements as banking
organizations. Several commenters were particularly concerned that the
proposed 250 percent risk weight would reduce aggregate demand for
MSAs, create a less liquid market for MSAs and
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result in fewer mortgages being sold in the secondary market and higher
rates for mortgage borrowers. Many of the commenters requested that
more liberal deduction thresholds and risk weights be applied to
banking organizations with consolidated assets below a certain amount
(e.g., $50 billion). Some commenters argued that instead of applying a
250 percent risk weight for MSAs, the agencies should apply a 250
percent risk weight for MSAs associated with holdings of subprime
mortgages. A few commenters questioned the agencies' analysis in
support of the proposal, arguing that it overstated the risks posed by
MSAs and that corrections to the agencies' analysis would lead to the
potential conclusion that any deduction threshold for MSAs is
unnecessary.
Some of the comments regarding the proposal on temporary difference
DTAs and investments in the capital of unconsolidated financial
institutions overlapped with comments on the proposed revisions to
MSAs. For instance, while there was general support for the proposed
deduction threshold for those items, some commenters favored higher
thresholds and a reduced risk weight (e.g., a 100 percent risk weight
instead of the proposed 250 risk weight). Regarding temporary
difference DTAs, several commenters cited other factors such as the
U.S. generally accepted accounting principles (GAAP) current expected
credit loss framework (CECL) \31\ and changes to the tax code as
support for a more favorable capital treatment for such exposures.
These commenters stated that a higher capital threshold and lower risk
weight should be applied to temporary difference DTAs because these
external factors affect the size and volatility of DTAs. Regarding the
proposed revisions for investments in the capital of unconsolidated
financial institutions, several commenters specified that, for smaller
banking organizations, the threshold deduction should be 50 percent of
common equity tier 1 capital rather than the proposed 25 percent limit,
and that the agencies should retain the existing 100 percent risk
weight for certain non-deducted investments in the capital of
unconsolidated financial institutions. One commenter suggested that
further increases may be appropriate if certain long-term debt
instruments issued by global systemically important bank holding
companies (GSIBs) are within the scope of investments in the capital of
unconsolidated financial institutions.
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\31\ See Joint statement on New Accounting Standard on Financial
Instruments--Credit Loss, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160617b1.pdf.
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As discussed below, the agencies have considered the concerns
raised by commenters and believe that the proposed treatment of MSAs,
temporary difference DTAs, and investments in the capital of
unconsolidated financial institutions provides an appropriate balance
of burden relief while maintaining safety and soundness in the banking
industry. As such, the agencies are finalizing these proposed
simplifications, without modification. The agencies expect that these
changes will reduce regulatory compliance burden, but will not have a
significant impact on the capital ratios for most non-advanced
approaches firms. Some non-advanced approaches banking organizations
with substantial holdings of MSAs, temporary difference DTAs, and
investments in the capital of unconsolidated financial institutions may
experience a capital benefit.
a. MSAs and Temporary Difference DTAs
The agencies have long limited the inclusion of intangible and
higher-risk assets, such as MSAs and DTAs, in regulatory capital due to
the relatively high level of uncertainty regarding the ability of
banking organizations to both value and realize value from these
assets, especially under adverse financial conditions. The agencies
believe that it is therefore important to limit the inclusion of MSAs
and temporary difference DTAs in regulatory capital. In addition, the
agencies believe that the uncertainty regarding the ability of banking
organizations to realize value from MSAs and temporary difference DTAs
warrants an elevated risk weight for the amount of these assets not
deducted from regulatory capital.
In June 2016, the agencies, together with the National Association
of Credit Unions, submitted a Report to the Congress entitled The
Effect of Capital Rules on Mortgage Servicing Assets (MSA report).\32\
One of the key conclusions of the MSA report is that MSA valuations are
inherently subjective and subject to uncertainty, as they rely on
assessments of future economic variables. This reliance can lead to
variance in MSA valuations across banking organizations. Moreover,
adverse financial conditions may cause liquidity strains for banking
organizations seeking to sell or transfer their MSAs.
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\32\ Report to the Congress on the Effect of Capital Rules on
Mortgage Servicing Assets (June 2016).
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The concerns that led to the conclusion in the MSA report that MSAs
are inherently subject to valuation risk remain valid. MSAs do not
trade in active, open markets with readily available and observable
prices. In addition, MSA portfolios typically do not share homogenous
risk characteristics. As noted in the MSA report, the factors that make
MSAs challenging to value, including predicting changes in market
interest rates and default rates, also make it challenging to
successfully hedge MSAs. The MSA report also noted that the
profitability of banking organizations can be affected by holdings of
MSAs because of the business risk related to litigation and compliance
costs associated with mortgage servicing.
The final rule's revised treatment for MSAs should continue to
protect banking organizations from the uncertainty arising from the
liquidity risk, valuation risk, and business risks described above.
Moreover, during periods of financial stress, MSAs may be subject to
sudden and large fluctuations in value and to limited marketability
that calls into question the ability to quickly divest of MSAs at their
full estimated value during periods of financial stress.
The regulatory capital framework in effect prior to 2013 permitted
limited recognition of qualifying intangible assets, including MSAs, in
regulatory capital. In addition, that framework required banking
organizations to value each intangible asset included in tier 1 capital
at least quarterly at the lesser of 90 percent of the fair value of
each intangible asset, or 100 percent of the remaining unamortized book
value. The fair value limitation for MSAs was consistent with section
475 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), which states that the amount of readily marketable
purchased mortgage servicing assets (PMSAs) that an insured depository
institution may include in regulatory capital cannot be more than 90
percent of the PMSAs' fair value.\33\
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\33\ 12 U.S.C. 1828 note.
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The capital rule requires deduction of all intangible assets except
MSAs, which are deducted when the amount exceeds certain thresholds, as
described above. However, since 2013, the capital rule removed the 90
percent fair value limitation on MSAs. Section 475 of FDICIA provides
the agencies with the authority to remove the 90 percent limitation on
PMSAs, subject to a joint determination by the agencies that its
removal would not have an adverse effect on the deposit insurance fund
or the safety and soundness of insured
[[Page 35239]]
depository institutions. The agencies determined that the treatment of
MSAs (including PMSAs) under the capital rule was consistent with a
determination that the 90 percent limitation could be removed because
the treatment under the capital rule (that is, applying a 250 percent
risk weight to any non-deducted MSAs) was more conservative than the
FDICIA fair value limitation and a 100 percent risk weight, which was
the risk weight applied to MSAs under the regulatory capital framework
prior to 2013.\34\
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\34\ As noted in the MSA Report, the limitation of MSAs to 90
percent of their fair value under the previous regulatory capital
framework could result in an effective risk weight of up to 215
percent for MSAs to the extent that a banking institution either (1)
used the fair value measurement method to determine the carrying
amount of the MSAs or (2) used the amortization method and took an
impairment on the MSAs to bring the carrying amount down to fair
value.
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The treatment of MSAs under the final rule is consistent with a
determination that the 90 percent fair value limitation is not
necessary given the 25 percent common equity tier 1 capital deduction
threshold for MSAs in addition to the requirement that any non-deducted
MSA exposures (including PMSAs) be risk weighted at 250 percent. The
agencies believe that risk-weighting non-deducted MSAs at less than 250
percent, e.g., 100 percent, would require the agencies to reevaluate
the need for a fair value limitation to mitigate the additional risk,
which would introduce additional complexity.
Temporary difference DTAs are assets from which banking
organizations may not be able to realize value, especially under
adverse financial conditions. A banking organization's ability to
realize its temporary difference DTAs is dependent on future taxable
income; thus, the revised deduction threshold, together with a 250
percent risk weight for non-deducted temporary difference DTAs, will
continue to protect banking organization capital against the
possibility that the banking organization would need to establish or
increase valuation allowances for DTAs during periods of financial
stress. Relative to the treatment in the current rule, the 25 percent
common equity tier 1 capital deduction threshold in the final rule may
also serve to mitigate the adverse effects of potential increases in
temporary difference DTAs stemming from CECL or from changes to the tax
code.
b. Investments in the Capital of Unconsolidated Financial Institutions
As noted, the agencies proposed removing, for non-advanced
approaches banking organizations, the distinct treatment for the
capital rule's different categories of investments in the capital of
unconsolidated financial institutions in the capital rule (i.e., non-
significant investments in the capital of unconsolidated financial
institutions, significant investments in the capital of unconsolidated
financial institutions that are in the form of common stock, and
significant investments in the capital of unconsolidated financial
institutions that are not in the form of common stock). Commenters
generally supported the proposed removal of this distinction, and the
agencies are finalizing the revision as proposed. In order to avoid
adding complexity and regulatory burden, the final rule does not
dictate which specific investments a non-advanced approaches banking
organization must deduct and which it must risk weight in cases where
the banking organization exceeds the 25 percent common equity tier 1
capital deduction threshold for investments in the capital of
unconsolidated financial institutions. Consistent with the proposal,
the final rule will provide banking organization with flexibility when
deciding which investments in the capital of unconsolidated financial
institutions to risk weight and which to deduct. The agencies would be
able to address any potential safety and soundness concerns that may
arise from this flexible treatment through the supervisory process.
The final rule's treatment of investments in the capital of
unconsolidated financial institutions should reduce complexity while
maintaining appropriate incentives to reduce interconnectedness among
financial companies. Under the final rule, and consistent with the
proposal, non-advanced approaches banking organizations are required to
risk weight any investments in the capital of unconsolidated financial
institutions that are not deducted according to the relevant treatment
for the exposure category of the investment.
One commenter asked that the agencies clarify whether a non-
advanced approaches banking organization will be able to include
significant equity investments in the capital of unconsolidated
financial institutions in the 100 percent risk weight category similar
to non-significant equity exposures under section 52(b)(3)(iii).
Under the final rule, non-advanced approaches banking organizations
will not be required to differentiate among categories of investments
in the capital of unconsolidated financial institutions. The risk
weight for such equity exposures generally will be 100 percent,
provided the exposures qualify for this preferential risk weight.\35\
For non-advanced approaches banking organizations, the final rule
eliminates the exclusion of significant investments in the capital of
unconsolidated financial institutions in the form of common stock from
being eligible for a 100 percent risk weight.\36\ The application of
the 100 percent risk weight (i) requires a banking organization to
follow an enumerated process for calculating adjusted carrying value
and (ii) mandates the equity exposures that must be included in
determining whether the threshold has been reached. Equity exposures
that do not qualify for a preferential risk weight will generally
receive risk weights of either 300 percent or 400 percent, depending on
whether the equity exposures are publicly traded.
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\35\ 12 CFR 3.52 and .53 (OCC); 12 CFR 217.52 and .53 (Board);
12 CFR 324.52 and .53 (FDIC). Note that for purposes of calculating
the 10 percent non-significant equity bucket, the capital rule
excludes equity exposures that are assigned a risk weight of zero
percent and 20 percent, and community development equity exposures
and the effective portion of hedge pairs, both of which are assigned
a 100 percent risk weight. In addition, the 10 percent non-
significant bucket excludes equity exposures to an investment firm
that would not meet the definition of traditional securitization
were it not for the application of criterion 8 of the definition of
traditional securitization, and has greater than immaterial
leverage.
\36\ Equity exposures that exceed, in the aggregate, 10 percent
of a non-advanced approaches banking organization's total capital
would then be assigned a risk weight based upon the approaches
available in sections 52 and 53 of the capital rule. 12 CFR 3.52 and
.53 (OCC); 12 CFR 217.52 and .53 (Board); 12 CFR 324.52 and .53
(FDIC).
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This revised approach is intended to balance simplicity and risk-
sensitivity for non-advanced approaches banking organizations by
applying a single definition of investments in the capital of
unconsolidated financial institutions, and simplifying the capital
requirements for investments in the capital of unconsolidated financial
institutions.
One commenter asked that the agencies clarify the definition of
financial institution, and within that definition, explain what is
meant by financial instruments, asset management activities, and
investment or financial advisory activities. This issue is beyond the
scope of the final rule; however, the agencies will consider if
clarifications to the capital rule's definition of financial
institution are necessary.
B. Minority Interest
Under the simplifications proposal, the agencies would have
simplified, for non-advanced approaches banking organizations, the
calculations limiting
[[Page 35240]]
the inclusion of minority interest in regulatory capital. Specifically,
the proposal would have allowed non-advanced approaches banking
organizations to include: (i) Common equity tier 1 minority interest
comprising up to 10 percent of the parent banking organization's common
equity tier 1 capital; (ii) tier 1 minority interest comprising up to
10 percent of the parent banking organization's tier 1 capital; and
(iii) total capital minority interest comprising up to 10 percent of
the parent banking organization's total capital. In each case, the
parent banking organization's regulatory capital for purposes of these
limitations would be measured before the inclusion of any minority
interest and after the deductions from and adjustments to the
regulatory capital of the parent banking organization described in
sections 22(a) and (b) of the capital rule.\37\
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\37\ 12 CFR 3.22(a) and (b) (OCC); 12 CFR 217.22(a) and (b)
(Board); 12 CFR 324.22 (a) and (b) (FDIC).
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Many commenters expressed general support for the proposed
revisions to simplify the regulatory capital limitations for minority
interest. A few commenters, however, asserted that the proposal could
result in unintended consequences. For example, one commenter stated
that determining the amount of includable minority interest solely
based on the capital level of the banking organization parent without
reference to its subsidiary's regulatory capital levels and risk-
weighted assets could amplify the effects of a decrease in capital
levels, particularly in a stressed environment. While the agencies are
concerned with capital at each level of the banking organization
structure, in developing a more simplified calculation, emphasis was
placed on the parent and its ability to support the entire
organization. At present, few institutions have minority interest
holdings that are significant enough to be adversely affected by such a
scenario. However, the agencies will continue monitor banks' positions
through their respective supervisory processes and will address any
concerns at individual banking organizations on a case-by-case basis,
as appropriate. Another commenter favored an alternative method for
calculating includable minority interest that would vary depending on
each measure of regulatory capital (e.g., 80 percent of banking
organization parent's common equity tier 1 capital, 85 percent of its
tier 1 capital, and 115 percent of its total capital), arguing that a
banking organization's total capital ratio at the consolidated level is
likely to decline more rapidly than its other capital ratios when in
stress. The agencies do not see any particular advantage to this
alternative method and maintain that capital levels of the parent are
of paramount importance, particularly in a stressed environment.
One commenter asserted that the proposal may create an undue
incentive to issue tier 2 capital instruments at the holding company
level rather than at the subsidiary bank level, thereby potentially
increasing funding costs. Again, in a stressed environment the parent's
soundness and its capital strength is of paramount importance and by
action of the final rule, the agencies limit the amount of includable
capital instruments that have been issued to minority investors from
subsidiaries.
As with other areas of the simplifications proposal, some
commenters objected to the scope of the proposal related to minority
interest and requested that all banking organizations, including
advanced approaches banking organizations, be allowed to apply the
proposed revisions when calculating capital ratios under the capital
rule's generally applicable capital requirements. One commenter
requested that when a non-advanced approaches banking organization
becomes an advanced approaches banking organization, the banking
organization should be given three years to transition to the more
complex approach for minority interest. Another commenter favored the
complete removal of all minority interest limitations for all non-
advanced approaches banking organizations.
After considering all the comments on this issue, the agencies
continue to have the view that removing the current complex calculation
for the amount of includable minority interest will reduce regulatory
burden without reducing the safety and soundness of non-advanced
approaches banking organizations. In addition, the regulatory capital
of a banking organization should not reflect unlimited amounts of
minority interest because equity and other investments made by a third
party in a consolidated subsidiary of a banking organization merely
supports the separate risks inherent in the subsidiary, and therefore
that capital cannot be expected to be available to fully support risks
in the consolidated organization. In other words, losses within the
consolidated banking organization, outside of the subsidiary, will not
be absorbed by minority interest as it is not freely available to
absorb losses throughout the consolidated banking organization.
Therefore, the minority interest limitation will help to ensure that a
consolidated banking organization's regulatory capital ratios are more
reflective of the loss absorbency of the organization's capital base.
The agencies believe that the minority interest limitations in the
final rule are simpler to calculate than those in the capital rule but
are still appropriately restrictive for non-advanced approaches banking
organizations. These revisions to the treatment of minority interest
are expected to not have a significant impact on the capital ratios for
most non-advanced approaches banking organizations.
The agencies remain focused on ensuring that the capital
requirements applied to banking organizations are appropriately
tailored to an organization's size, complexity, and risk profile. As
described above, the final rule will continue to apply the more risk-
sensitive minority interest calculation to advanced approaches banking
organizations because the agencies believe the largest and most
internationally active banking organizations should be required to
comply with regulations that are commensurate with their size,
complexity, and risk profile. Given the potential complexity in the
capital structures of the largest and most systemically important
institutions, the agencies believe that maintaining the more risk-
sensitive approach for advanced approaches banking organizations better
ensures these organizations do not overstate capital ratios at the
consolidated level as a result of capital held at subsidiaries that
might not be fully available to the parent, thereby protecting the
safety and soundness of the banking sector. For these reasons,
consistent with the proposal, the agencies are finalizing the proposed
revisions to the regulatory capital limitations for minority interest
without revision.
C. Capital Treatment for Advanced Approaches Banking Organizations
Under the proposal, the regulatory treatment for advanced
approaches banking organizations would have continued to apply the
capital rule's current treatment for MSAs, temporary difference DTAs,
investments in the capital of unconsolidated financial institutions,
and minority interest. The proposal stated that the more complex
capital deduction treatments in the capital rule are appropriate for
advanced approaches banking organizations, because their size,
complexity, and international exposure warrant a risk-sensitive
treatment that more aggressively reduces potential interconnectedness
among such firms.
[[Page 35241]]
Some commenters objected to the scope of the simplifications proposal
and requested that all banking organizations, including advanced
approaches banking organizations, be allowed to apply the proposed
revisions when calculating capital ratios under the capital rule's
generally applicable capital requirements.
Subsequent to issuing the simplifications proposal, the agencies
published a tailoring proposal applicable to domestic banking
organizations with total consolidated assets of $100 billion.\38\ The
agencies subsequently issued a separate tailoring proposal to determine
the application of regulatory capital requirements to certain U.S.
intermediate holding companies of foreign banking organizations and
their depository institution subsidiaries and the application of
standardized liquidity requirements with respect to certain U.S.
intermediate holding companies of foreign banking organizations, and
certain subsidiary depository institutions of such U.S. intermediate
holding companies.\39\ Both tailoring proposals were designed to more
closely match the capital and liquidity rules for large banking
organizations with their risk profiles.
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\38\ 83 FR 66024 (December 21, 2018).
\39\ See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm.
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Currently, banking organizations with total consolidated assets of
$250 billion or more, or at least $10 billion in foreign exposure,
generally are considered ``advanced approaches banking organizations.''
\40\ If the agencies were to adopt the tailoring proposals as proposed,
the consequent change in the scope of application of certain
requirements could result in some banking organizations being able to
apply this final rule's changes for threshold deductions and minority
interest when calculating their regulatory capital ratios.
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\40\ See 12 CFR 3.100(b) (OCC); 12 CFR 217.100(b) (Board); 12
CFR 324.100(b) (FDIC).
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The Basel Committee on Banking Supervision (BCBS) recently
completed revisions to its capital standards, revising the
methodologies for credit risk, operational risk, and market risk.\41\
The agencies are considering how to most appropriately implement these
standards in the United States, including potentially replacing the
advanced approaches with the risk-based capital requirements based on
the Basel standardized approaches for credit and operational risk. Any
such changes to applicable risk-based capital requirements would be
subject to notice and comment through a future rulemaking.
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\41\ Available at: https://www.bis.org/bcbs/publ/d424.pdf.
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The agencies are not amending the capital rule to allow advanced
approaches banking organizations to use this final rule when
calculating their risk-based capital ratios for the generally
applicable capital requirements. As the agencies consider implementing
aspects of the Basel reforms, they will further consider the
calculation of regulatory capital for advanced approaches banking
organizations.
D. Technical Amendments to the Capital Rule
The simplifications proposal would have made certain technical
corrections and clarifications to the capital rule. The agencies
identified typographical and technical errors in several provisions of
the capital rule that warrant clarification or updating. Most of the
proposed corrections or technical changes were self-explanatory. In
addition, there were several incorrect or imprecise cross-references
that the agencies proposed to change in an effort to better clarify the
capital rule's requirements, as well as other changes to references
necessary to implement the simplifications described elsewhere in this
Supplementary Information.
The agencies received only a handful of comments related to the
simplifications proposal's technical amendments. There were more
comments about additional potential revisions to the capital rule
spanning a range of topics for the agencies' consideration. For
instance, some commenters requested that the agencies implement the
BCBS's standards related to counterparty credit risk, securities
financing transactions, and securities firms. There were additional
suggested revisions related to the capital rule's operational
requirements for credit risk mitigation, client clearing transactions,
commitments to securitization vehicles, the asset threshold for
advanced approaches and market risk capital rules, as well as
accounting considerations.
Some of the commenters' suggestions have been addressed in
rulemakings that were issued subsequent to this proposal, including
comments related to the HVCRE, CBLR, and tailoring proposals. The
agencies are considering other comments that requested additional
changes outside the scope of this rulemaking and will determine whether
and how to address them in subsequent rulemakings.
The final rule adopts the technical changes as proposed, but
differs from the proposal in minor ways to conform with changes to the
capital rule related to the implementation and transition of the
current expected credit losses methodology for allowances, which were
implemented subsequent to the simplifications proposal.\42\
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\42\ 83 FR 22312 (July 13, 2018). Consistent with the proposal,
the final rule includes various minor corrections and updates in
addition to the items specified in this discussion.
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In section 1 of the OCC's capital rule, the final rule clarifies
that the minimum capital requirements and overall capital adequacy
standards set forth in 12 CFR part 3 do not apply to Federal branches
and agencies of foreign banks that are regulated by the OCC. The OCC
regulates Federal branches and agencies of foreign banks.\43\
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\43\ 12 U.S.C. 3101-3111.
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In section 2, the final rule corrects an error in the definition of
investment in the capital of an unconsolidated financial institution by
changing the word ``and'' to ``or.'' This revision clarifies that an
instrument meeting the definition can be either recognized as capital
for regulatory purposes by a primary supervisor of an unconsolidated
financial institution or can be part of the equity of an unconsolidated
unregulated financial institution, in accordance with GAAP.
The final rule adds ``the European Stability Mechanism'' and ``the
European Financial Stability Facility'' to the capital rule with
respect to (i) the definition of eligible guarantor in section 2, (ii)
the list of entities eligible for a zero percent risk weight in section
32(b), (iii) the list of equity exposures eligible for a zero percent
risk weight in section 52(b)(1), (iv) the list of entities eligible for
assignment of a rating grade associated with a probability of default
of less than 0.03 percent in section 131(d)(2), and (v) certain
supranational entities and multilateral development bank debt positions
eligible for assignment of a zero percent specific risk weighting
factor in section 210(b)(2)(ii). The final rule also excludes such
entities from the definition of (i) corporate exposure in section 2,
(ii) private sector credit exposure in section 11, and (iii) corporate
debt position in section 202. The agencies are making this change to
reflect the roles and functions of the European Stability Mechanism and
the European Financial Stability Facility, which were in early stages
of operation when the current capital rule was issued in 2013 and
therefore were not addressed. The final rule updates the list of
entities included or excluded, as applicable, for these purposes in the
standardized approach and advanced
[[Page 35242]]
approaches of the capital rule and the market risk capital rule.
The agencies are making technical amendments to section 11(a) of
the capital rule, on the capital conservation buffer, to clarify the
calculation of a banking organization's maximum payout amount for a
specific calendar quarter. First, the final rule clarifies that the
eligible retained income during a specific current calendar quarter is
the banking organization's net income, calculated in accordance with
the instructions for the Call Report or the FR Y-9C, as appropriate,
for the four calendar quarters preceding the current calendar
quarter.\44\ Second, the final rule clarifies that the key inputs for
the calculation of a banking organization's capital conservation buffer
during the current calendar quarter are the banking organization's
regulatory capital ratios as of the last day of the previous calendar
quarter.\45\
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\44\ 12 CFR 3.11(a)(2)(i) (OCC); 12 CFR 217.11(a)(2)(i) (Board);
12 CFR 324.11(a)(2)(i) (FDIC).
\45\ 12 CFR 3.11(a)(3)(i) (OCC); 12 CFR 217.11(a)(3)(i) (Board);
12 CFR 324.11(a)(3)(i) (FDIC).
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In section 20(d)(5) of the Board's and OCC's capital rule, the
final rule provides that the reference to AOCI opt-out election is
section 22(b)(2) instead of section 20(b)(2).
In section 20(c) of the capital rule, the OCC's and FDIC's
regulations mistakenly provide that cash dividend payments on
additional tier 1 capital instruments may not be subject to a ``limit''
imposed by the contractual terms governing the instrument. This
requirement was intended to apply only to common equity tier 1 capital
instruments, and not to additional tier 1 capital instruments. The
final rule harmonizes the language of the agencies' capital rule in
section 20(c) by removing this requirement for additional tier 1
instruments.
Through proposed section 20(f) of the Board's capital rule, the
simplifications proposal would have introduced a standalone
requirement, outside the existing qualification criteria for capital,
that a Board-regulated institution obtain the prior approval of the
Board before redeeming a common equity tier 1 capital instrument,
additional tier 1 capital instrument, or tier 2 capital instrument. The
Board has received feedback regarding requiring prior approval for
redemptions and repurchases of capital instruments. In particular, this
feedback noted that there was a high burden associated with obtaining
prior approval for all redemptions and repurchases of common stock
instruments, especially with respect to standard common stock buyback
programs, and that the supervisory function of requiring prior approval
seemed limited where a firm was not subject to other limitations on
capital actions, such as the capital conservation buffer.
In response to the feedback, the Board is modifying proposed
section 20(f). For common equity tier 1 capital instruments, a Board-
regulated institution will be required to obtain the prior approval of
the Board before redeeming or repurchasing common equity tier 1 capital
instruments only to the extent otherwise required by law or regulation.
Thus, prior approval for common equity tier 1 capital redemptions or
repurchases will be required under section 217.20 of the capital rule
only to the extent that a Board-regulated institution is subject to a
separate legal requirement to obtain prior approval for the redemption
or repurchase, such as section 217.11 of the capital rule, sections
225.4 or 225.8 of the Board's Regulation Y, or section 11 of the
Federal Reserve Act.\46\ Depository institution holding companies are
not subject to the same legal requirements as state member banks and,
therefore, generally would be able to redeem or repurchase common
equity tier 1 capital instruments without the prior approval of the
Board, unless there is an independent approval requirement, such as
under the capital plan rule (12 CFR 225.8) as noted above. With respect
to redemptions or repurchases of additional tier 1 capital instruments
and tier 2 capital instruments, the prior approval requirements in the
final rule are the same as in the proposal.
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\46\ 12 CFR 217.11; 12 CFR 225.4; 12 CFR 225.8; 12 U.S.C. 329.
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In section 22(g) of the capital rule, the final rule removes
specific references to certain assets to exclude them from risk
weighting if they are required to be deducted from regulatory capital.
The effect of this change is to exclude from standardized total risk-
weighted assets and, as applicable, advanced approaches total risk-
weighted assets, any items deducted from capital, not only the items
specifically enumerated.
In section 22(h) of the capital rule, the final rule replaces
inaccurate terminology with the properly defined terms ``investment in
the capital of an unconsolidated financial institution'' and
``investment in the [AGENCY]-regulated institution's own capital
instrument,'' as provided in section 2.
The final rule revises, for purposes of clarity, the capital rule's
sections 32(d)(2)(iii) and (iv), and creates a new section 32(d)(2)(v).
The revised section 32(d)(2)(iii) requires banking organizations to
``assign a 20 percent risk weight to an exposure that is a self-
liquidating, trade-related contingent item that arises from the
movement of goods and that has a maturity of three months or less to a
foreign bank whose home country has a CRC of 0, 1, 2, or 3, or is an
OECD member with no CRC.'' This requirement is currently embedded in
section 32(d)(2)(iii) of the capital rule, together with rule text
related to the risk weighting of exposures to a foreign bank whose home
country is not a member of the OECD and does not have a CRC. This
latter provision is a stand-alone requirement in the revised section
32(d)(2)(iv) under the final rule.
In sections 34(c)(1) and 34(c)(2)(i) of the capital rule, the final
rule provides that the counterparty credit risk capital requirement
references subpart D of the capital rule in its entirety rather than
just section 32 of subpart D.
In sections 35(b)(3)(ii), 35(b)(4)(ii), 35(c)(3)(ii), 35(c)(4)(ii),
36(c), 37(b)(2)(i), 38(e)(2), 42(j)(2)(ii)(A), 133(b)(3)(ii), and
133(c)(3)(ii) of the capital rule, the final rule provides that the
risk weight substitution references subpart D of the capital rule in
its entirety rather than just section 32 of subpart D.
In section 61 of the capital rule, the final rule clarifies the
requirement that a non-advanced approaches banking organization with
$50 billion or more in total consolidated assets must complete the
disclosure requirements described in sections 62 and 63, unless it is a
consolidated subsidiary of a bank holding company, savings and loan
holding company, or depository institution that is subject to the
disclosure requirements of section 62, or a subsidiary of a non-U.S.
banking organization that is subject to comparable public disclosure
requirements in its home jurisdiction.
Table 8 of section 63 of the capital rule describes information
related to securitization exposures that banking organizations are
required to disclose. The capital rule revised the risk-based capital
treatment of these items, including the regulatory capital treatment of
after-tax gain-on-sale resulting from a securitization and credit-
enhancing interest-only strips that do not constitute after-tax gain-
on-sale. Because Table 8 does not properly reflect these revisions, the
final rule updates line (i)(2) under quantitative disclosures to
appropriately reflect these revisions.
In section 210(b)(2)(vii) of the Board's capital rule, the final
rule adds references to U.S. intermediate holding companies to clarify
for these firms how
[[Page 35243]]
to calculate capital requirements related to securitization positions
under the Board's market risk capital rule depending on whether they
are using the advanced approaches to calculate risk-weighted assets.
In section 300 of the capital rule, the final rule removes several
transition provisions in order to rescind the transition rule
simultaneously with the simplifications of the threshold deductions and
the treatment of minority interest. In connection with these revisions,
the final rule also would remove several paragraphs that are no longer
operative because the transition period provided ended at the beginning
of 2018. These revisions would take effect on April 1, 2020,
concurrently with the effective date of the simplifications of the
threshold deductions and the treatment of minority interest.
In section 300(c)(2) of the Board's capital rule, the final rule
clarifies that the mergers and acquisitions that can potentially affect
the inclusion of certain non-qualifying capital instruments in a Board-
regulated banking organization's regulatory capital must have occurred
after December 31, 2013.
E. Effective Dates of Amendments
The amendments in this final rule will take effect on either April
1, 2020, or October 1, 2019. Specifically, the simplifications of the
threshold deductions and the treatment of minority interest discussed
in sections III.A and III.B of this Supplementary Information will take
effect on April 1, 2020, in order to allow banking organizations
sufficient time to update systems and the agencies sufficient time to
update reporting forms to reflect the changes to the capital rule made
by this final rule. In addition, the amendments to rescind the
transitions rule discussed in section III.C of this Supplementary
Information also would take effect on April 1, 2020, simultaneously
with the simplifications of the threshold deductions and the treatment
of minority interest. All of the other technical amendments discussed
in section III.C of this Supplementary Information will take effect on
October 1, 2019. The agencies believe that the technical amendments
will require minimal, if any, updates to systems and no updates to
reporting forms and thus should take effect as soon as possible. Any
banking organization subject to the capital rule may elect to adopt the
amendments that are effective October 1, 2019, before that date.
IV. Abbreviations
ADC Acquisition, Development, or Construction
BHC Bank Holding Company
CFR Code of Federal Regulations
CRC Country Risk Classification
DTA Deferred Tax Asset
EGRPRA Economic Growth and Regulatory Paperwork Reduction Act of
1996
FAQ Frequently Asked Question
FR Federal Register
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991
GAAP U.S. generally accepted accounting principles
GSIB Global Systemically Important Bank Holding Company
HVADC High Volatility Acquisition, Construction, or Development
HVCRE High Volatility Commercial Real Estate
IHC U.S. Intermediate Holding Company
LTV Loan-to-Value
MDB Multilateral Development Bank
MSA Mortgage Servicing Asset
NPR Notice of Proposed Rulemaking
OCC Office of the Comptroller of the Currency
OECD Organization for Economic Cooperation and Development
OMB Office of Management and Budget
PD Probability of Default
PMSA Purchased Mortgage Servicing Asset
PRA Paperwork Reduction Act
RCDRIA Riegle Community Development and Regulatory Improvement Act
of 1994
RFA Regulatory Flexibility Act
RIN Regulation Identifier Number
SBA Small Business Administration
SLHC Savings and Loan Holding Company
SMB State Member Banks
UMRA Unfunded Mandates Reform Act of 1995
U.S.C. United States Code
V. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid Office of Management
and Budget (OMB) control number. The revised disclosure requirements
are found in section _.63 of the proposed rule. The OMB control number
for the OCC is 1557-0318, Board is 7100-0313, and FDIC is 3064-0153.
These information collections will be extended for three years,
with revision. The information collection requirements contained in
this final rulemaking have been submitted by the OCC and FDIC to OMB
for review and approval under section 3507(d) of the PRA (44 U.S.C.
3507(d)) and section 1320.11 of the OMB's implementing regulations (5
CFR 1320).
The OCC submitted the information collection requirements at the
proposed rule stage. OMB filed a comment requiring that the OCC examine
public comment in response to the proposed rule and will include in the
supporting statement of the next Information Collection Request (ICR),
to be submitted to OMB at the final rule stage, a description of how
the agency has responded to any public comments on the ICR, including
comments on maximizing the practical utility of the collection and
minimizing the burden. No comments were received regarding the
information collection. The FDIC will be making a nonmaterial
submission to OMB to reflect its updated number of respondents.
The Board reviewed the proposed rule under the authority delegated
to the Board by OMB.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
Proposed Information Collection
Title of Information Collection: Recordkeeping and Disclosure
Requirements Associated with Capital Adequacy.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks, state member banks, state nonmember banks, and
state and Federal savings associations.
Board: State member banks (SMBs), bank holding companies (BHCs),
U.S. intermediate holding companies (IHCs), savings and loan holding
companies (SLHCs), and global systemically important bank holding
companies (GSIBs).
[[Page 35244]]
FDIC: State nonmember banks, state savings associations, and
certain subsidiaries of those entities.
Current Actions: Section _.63 of the final rule would break out the
disclosures in Table 8 to include (i) after-tax gain-on-sale on a
securitization that has been deducted from common equity tier 1 capital
and (ii) credit-enhancing interest-only strip that is assigned a 1,250
percent risk weight. There are no changes in burden associated with the
final rulemaking.
PRA Burden Estimates
OCC
OMB control number: 1557-0318.
Estimated number of respondents: 1,365.
Estimated annual burden hours: 66,081.
Board
Agency form number: FR Q.
OMB control number: 7100-0313.
Estimated number of respondents: 1,431.
Estimated annual burden hours: 79,727 hours.
FDIC
OMB control number: 3064-0153.
Estimated number of respondents: 3,483.
Estimated annual burden hours: 127,840 hours.
The final rule will also require changes to the Consolidated
Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041,
and FFIEC 051; OMB No. 1557-0081, 7100-0036, and 3064-0052),
Consolidated Financial Statements for Holding Companies (FR Y-9C; OMB
No. 7100-0128), and Capital Assessments and Stress Testing (FR Y-14A
and Q; OMB No. 7100-0341), which will be addressed in a separate
Federal Register notice.
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Analysis describing the impact of the rule on
small entities (defined by the Small Business Administration (SBA) for
purposes of the RFA to include commercial banks and savings
institutions with total assets of $550 million or less and trust
companies with total assets of $38.5 million or less) or to certify
that the rule will not have a significant economic impact on a
substantial number of small entities.
As of June 30, 2017, the OCC supervised 907 small entities.\47\
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\47\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $550 million and $38.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or Federal savings association as a small entity.
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The rule will apply to all OCC-supervised entities that are not
subject to the advanced approaches risk-based capital rules, and thus
potentially affects a substantial number of small entities. Further,
the OCC has determined that 131 such entities report either threshold
deduction amounts or minority interest and thus engage in affected
activities to an extent that they would be impacted directly by the
final rule. For the purposes of this analysis, the OCC believes a
substantial number of small entities is five percent of OCC-supervised
small entities, or 45 as of June 30, 2017. Thus, a substantial number
of small entities will be directly impacted by the final rule.
Although a substantial number of small entities will be impacted by
the final rule, the OCC does not find that this impact is economically
significant. To determine whether a final rule will have a significant
effect, the OCC considers whether projected cost increases associated
with the rule are greater than or equal to either 5 percent of a small
bank's total annual salaries and benefits or 2.5 percent of an OCC-
supervised small entity's total non-interest expense. Based on
supervisory experience, the OCC estimates that small banks, on average,
will make a one-time investment of one business week, or 40 hours, to
update policies and procedures, and another one-time investment of 40
hours to make the accounting ledger changes for currently held
threshold deduction amounts and minority interests. Therefore, the OCC
estimates that small banks that do not report any items subject to
threshold deductions or minority interest will incur an estimated one-
time compliance cost of $4,560 per institution (40 hours x $114 per
hour), while those that report items subject to threshold deductions or
minority interest will incur an estimated one-time compliance cost of
$9,120 per institution (80 hours x $114 per hour). The OCC finds that
the value of the change in capital exceeded both of these thresholds
for 1 of the 907 OCC-supervised small entities. For this single small
institution, the decrease in required regulatory capital is $93.3
thousand.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency to consider whether the rules it finalizes will have
a significant economic impact on a substantial number of small
entities. The RFA generally requires that an agency prepare and make
available an initial regulatory flexibility analysis (IRFA) in
connection with a notice of proposed rulemaking and that an agency
prepare a final regulatory flexibility analysis (FRFA) in connection
with promulgating a final rule. A FRFA issued by the Board must contain
(1) a statement of the need for, and objectives of, the rule; (2) a
statement of the significant issues raised by the public comments in
response to the IRFA, a statement of the assessment of the agency of
such issues, and a statement of any changes made in the simplifications
proposal as a result of such comments; (3) the response of the agency
to any comments filed by the Chief Counsel for Advocacy of the Small
Business Administration in response to the proposal, and a detailed
statement of any change made to the proposal in the final rule as a
result of the comments; (4) a description of and an estimate of the
number of small entities to which the rule will apply or an explanation
of why no such estimate is available; (5) a description of the
projected reporting, recordkeeping and other compliance requirements of
the rule, including an estimate of the classes of small entities which
will be subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (6) a description of
the steps the agency has taken to minimize the significant economic
impact on small entities consistent with the stated objectives of
applicable statutes, including a statement of the factual, policy, and
legal reasons for selecting the alternative adopted in the final rule
and why each one of the other significant alternatives to the rule
considered by the agency which affect the impact on small entities was
rejected.\48\
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\48\ 5 U.S.C. 604(a).
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As discussed in the Supplementary Information section, the final
rule revises the treatment of certain assets under the capital rule and
would also make various corrections and clarifications to the capital
rule to address issues that have been identified since the rule was
issued. Under regulations issued by the Small Business Administration,
a small entity includes a bank, bank holding company,
[[Page 35245]]
or savings and loan holding company with assets of $550 million or less
and trust companies with total assets of $38.5 million or less (small
banking organization).\49\ On average during 2018, there were
approximately 3,191 small bank holding companies, 204 small savings and
loan holding companies, and 549 small state member banks.
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\49\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
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The Board solicited public comment on this rule in a notice of
proposed rulemaking and has considered the potential impact of this
rule on small entities in accordance with section 604 of the RFA.\50\
Based on the Board's analysis, and for the reasons stated below, the
Board believes the final rule will not have a significant economic
impact on a substantial number of small entities.
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\50\ 83 FR 18160 (April 25, 2018).
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1. Statement of the need for, and objectives of, the final rule.
As discussed, the Board is issuing this final rule to simplify
aspects of the capital rule for non-advanced approaches banking
organizations and to clarify and correct certain technical items in the
capital rule.
2. Significant issues raised by the public comments in response to
the IRFA and comments filed by the Chief Counsel for Advocacy of the
Small Business Administration in response to the simplifications
proposal and summary of any changes made in the final rule as a result
of such comments.
Commenters did not raise any issues in response to the IRFA. The
Chief Counsel for Advocacy of the Small Business Administration did not
file any comments in response to the proposal.
3. Description and estimate of the number of small entities to
which the final rule will apply.
Aspects of the final rule apply to all state member banks, as well
as all bank holding companies and savings and loan holding companies
that are subject to the Board's regulatory capital rule. Certain
portions of the proposal would not apply to state member banks, bank
holding companies, and savings and loan holding companies that are
subject to the advanced approaches. In general, the Board's capital
rule only apply to bank holding companies and savings and loan holding
companies that are not subject to the Board's Small Bank Holding
Company and Savings and Loan Holding Company Policy Statement, which
applies to bank holding companies and savings and loan holding
companies with less than $3 billion in total assets that also meet
certain additional criteria.\51\ Thus, most bank holding companies and
savings and loan holding companies that would be subject to the final
rule exceed the $550 million asset threshold at which a banking
organization would qualify as a small banking organization.
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\51\ See 12 CFR 217.1(c)(1)(ii) and (iii); 12 CFR part 225,
appendix C; 12 CFR 238.9.
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4. Significant alternatives to the final rule.
The Board does not believe that this final rule will have a
significant economic impact on a substantial number small entities. As
a result, the Board has not adopted any alternatives to the final rule
pursuant to 5 U.S.C. 604(a)(6).
5. Description of the projected reporting, recordkeeping and other
compliance requirements of the rule.
Because the final rule makes only minor changes to the
recordkeeping and reporting requirements that affected small banking
organizations are currently subject to by slightly expanding the
disclosure requirements for securitizations under section 217.63 of the
rule, there would be minimal changes to the information that small
banking organizations must track and report. This is described in
greater detail in the Paperwork Reduction Act portion of this
Supplementary Information.
For non-advanced approaches banking organizations, the final rule
revises the capital deductions for MSAs, temporary difference DTAs, and
investments in the capital of unconsolidated financial institutions by
raising the threshold at which such items must be deducted and
simplifying the number and interaction of required deductions. The
Board expects that the final rule would result in slightly lower
capital requirements compared to the capital rule for a few small
banking organizations that currently deduct MSAs, temporary difference
DTAs, and/or investments in the capital of unconsolidated financial
institutions. Specifically, the Board estimates that 19 small state
member banks and zero small holding companies will have reduced capital
requirements because of the change in the treatment to MSAs, resulting
in an aggregate reduction in capital requirements of approximately
$24.7 million. Further, the Board estimates that 14 small state member
banks and zero small holding companies will have reduced capital
requirements because of the change in treatment to temporary difference
DTAs, resulting in an aggregate reduction in capital requirements of
approximately $6.5 million. The Board does not have sufficient data to
estimate the impact on capital as a result of the change to the
treatment of investments in the capital of unconsolidated financial
institutions. Because few banking organizations are currently subject
to these deductions, the number of affected small banking organizations
and the estimated impact on capital requirements appears to be minimal.
Also for non-advanced approaches banking organizations, the final
rule simplifies the requirements related to the inclusion of minority
interest of subsidiaries in capital. The Board expects that the final
rule generally will result in more minority interest being includable
in capital than is permitted under the current rule. The Board does not
have sufficient data to estimate the impact on capital as a result of
this change. However, only a few small banking organizations currently
include minority interest in capital and minority interest represents a
significant portion of capital for very few banking organizations. As a
result, the impact of this portion of the final rule is not expected to
be significant.
The remaining revisions to the capital rule consist of technical
corrections and clarifications that have been identified since the rule
was issued. None of these revisions constitutes a significant change to
the capital rule and the impact of these revisions on banking
organizations is expected to be immaterial.
Small banking entities are likely to incur some implementation
costs in order to comply with the final rule, such as sytems updates to
calculate, monitor, and report regulatory capital metrics. The changes
necessary to comply with the final rule are limited in nature and thus
the cost of these changes are expected to be minimal. In addition, the
changes are generally simplifying or clarifying and therefore should
help reduce ongoing compliance expenses associated with the capital
rule.
6. Steps taken to minimize the significant economic impact on small
entities.
The Board does not believe that this final rule will have a
significant economic impact on small entities. Further, to the extent
that the final rule impacts small entities, the Board expects that the
final rule will have a beneficial economic impact on small entities by
reducing the burden of the capital rule.
FDIC: The Regulatory Flexibility Act (RFA) generally requires an
agency, in connection with a final rule, to prepare and make available
for public comment
[[Page 35246]]
a final regulatory flexibility analysis that describes the impact of
the final rule on small entities.\52\ However, a regulatory flexibility
analysis is not required if the agency certifies that the rule will not
have a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $550 million who are independently owned and operated
or owned by a holding company with less than $550 million in total
assets.\53\ For the reasons described below and under section 605(b) of
the RFA, the FDIC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
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\52\ 5 U.S.C. 601 et seq.
\53\ The SBA defines a small banking organization as having $550
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See 13 CFR
121.201 (as amended, effective December 2, 2014). ``SBA counts the
receipts, employees, or other measure of size of the concern whose
size is at issue and all of its domestic and foreign affiliates.''
See 13 CFR 121.103. Following these regulations, the FDIC uses a
covered entity's affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the covered entity is
``small'' for the purposes of RFA.
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The FDIC supervises 3,483 depository institutions,\54\ of which,
2,674 are defined as small banking entities by the terms of the
RFA.\55\ The final rule removes the individual and aggregate deduction
thresholds and replaces them with individual, higher deduction
thresholds for: (i) MSAs; (ii) temporary differences DTAs; and (iii)
investments in the capital of unconsolidated financial institutions.
Finally, the final rule amends the methodology that determines the
amount of minority interest that is includable in regulatory capital.
According to Call Report data as of December 31, 2018, 1,586 FDIC-
supervised small banking entities reported some amount of MSAs, net
DTAs, deductions related to investments in unconsolidated financial
institutions, or minority interests that could be affected by this rule
making.
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\54\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\55\ FDIC Call Report, December 31, 2018.
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Estimation Methodology
To estimate the effects of the final rule, the FDIC estimated the
changes to capital that would result by treating MSAs, temporary
difference DTAs, investments in the capital of unconsolidated financial
institutions, and minority interests as prescribed by the final rule,
compared with how they are treated in the agencies' fully phased-in
capital rule, using Call Report data from December 31, 2018.
In cases where an institution reported some minority interest
included in a particular capital tier, the FDIC estimated that
additional minority interest includable in the respective capital tier
under the final rule equaled the smaller of 10 percent of the
institution's respective capital tier base amount (before including any
minority interest) or its total balance sheet minority interest, minus
the amount of minority interest currently included in the respective
capital tier. It is difficult to estimate how the final rule might
change an institution's likelihood to include minority interest in
regulatory capital in the future because it depends upon the future
financial characteristics of individual institutions and the future
decisions of senior management at those institutions, therefore the
FDIC did not estimate it.
In cases where an institution reported taking one or more of the
individual threshold deductions for MSAs, temporary difference DTAs, or
investments in the capital of unconsolidated financial institutions,
the FDIC estimated the effect of the increase in the deduction
thresholds from 10 percent to 25 percent in the final rule by grossing
up the amount deducted, and comparing it to the institution's estimated
capital under the final rule. Additional regulatory capital under the
final rule equaled the amount deducted, grossed up, that was between
the 10 percent and 25 percent thresholds. Any amounts of MSAs and
temporary difference DTAs not deducted were risk-weighted at 250
percent, while non-deducted amounts of investments in the capital of
unconsolidated financial institutions were risk-weighted at 100
percent. It is difficult to estimate how the final rule might change an
institution's likelihood to acquire or retain MSAs, temporary
difference DTAs, or to make investments in the capital of
unconsolidated financial institutions because it depends upon the
future financial characteristics of individual institutions and the
future decisions of senior management at those institutions, therefore
the FDIC did not estimate it.
In cases where an institution did not report taking a threshold
deduction for either temporary difference DTAs or MSAs, the FDIC
estimated the amount of these assets on the balance sheet using
information from the Call Report, as any amounts not deducted under the
final rule are risk-weighted at 250 percent. For temporary difference
DTAs, the FDIC used the difference between net DTAs reported on
schedule RC-F line 2 and net operating loss DTAs reported on RC-R Part
I line 8 as a proxy. For MSAs, the FDIC used gross MSAs reported on RC-
M line 2a. It is difficult to estimate the amounts of investments in
the capital of unconsolidated financial institutions when an
institution did not report taking a threshold deduction for such
investments, therefore the FDIC did not estimate it.
Threshold Deductions
The final rule changes the regulatory capital treatment of MSAs,
temporary difference DTAs, and investments in the capital of
unconsolidated financial institutions for FDIC-supervised small banking
entities. It does so by removing the individual and aggregate deduction
thresholds for these assets and by adopting a single 25 percent common
equity tier 1 capital deduction threshold for each type of asset.
According to the December 31, 2018 Call Report data, 1,582 FDIC-
supervised small banking entities reported holding some MSAs, net DTAs,
or reported taking a threshold deduction due to investments in the
capital of unconsolidated financial institutions. Only 31 small
institutions reported taking one or more of the individual threshold
deductions, or taking the aggregate threshold deduction, due to their
holdings of these assets.\56\ The FDIC estimates that this aspect of
the final rule will provide a net benefit of $45.6 million in the form
of an increase in tier 1 capital to those institutions that currently
have to calculate a deduction, representing approximately 0.08 percent
of tier 1 capital reported by FDIC-supervised small banking entities.
The FDIC expects that the final rule will yield future benefits to
affected FDIC-supervised small banking entities by reducing the
likelihood of regulatory capital deductions due to holding these asset
types. In particular, the final rule relaxes a capital constraint on
FDIC-supervised small banking entities that specialize in mortgage
servicing. The increase in the threshold deduction for MSAs makes it
less likely that a small banking entity would exit or reduce its
activity in the mortgage servicing market.
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\56\ Ibid.
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Minority Interest
The final rule simplifies the capital rule's limitation on the
inclusion of minority interest in regulatory capital. It does so by
allowing FDIC-supervised small banking entities to include minority
interest up to 10 percent of the parent banking organization's common
[[Page 35247]]
equity tier 1, tier 1, or total capital, not including the minority
interest. The FDIC estimates that 6 FDIC-supervised small banking
entities will be affected by the inclusion of minority interest in
regulatory capital calculations.\57\ The FDIC estimates that these
small banking entities will experience a decline in tier 1 capital of
$184,000 due to the inclusion of minority interest, representing less
than 0.01 percent of tier 1 capital reported by FDIC-supervised small
banking entities.
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\57\ Ibid.
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Compliance Costs
Finally, FDIC-supervised small banking entities are likely to incur
some implementation costs in order to comply with the final rule. These
costs would encompass changes to their systems designed to calculate,
manage, and report risk-weighted assets and regulatory capital. Given
the limited nature of the changes necessary to comply with the final
rule, the implementation costs are expected to be minimal.
Additionally, the FDIC believes that the simplifying changes in this
final rule will help reduce some of the compliance costs associated
with capital regulations in the long-term by making the regulations
easier to apply.
The final rule does not impact the recordkeeping and reporting
requirements that affect FDIC-supervised small banking entities and
there is no change to the information that FDIC-supervised small
banking entities must track and report. The FDIC anticipates updating
the relevant reporting forms at a later date to the extent necessary to
align with the capital rule.
Conclusion
The threshold-deduction provisions of the final rule will increase
the amount of eligible regulatory capital for a limited number of FDIC-
supervised small banking entities currently subject to deductions or
limitations on these items, as described above. The minority-interest
provisions of the final rule will slightly decrease the amount of
eligible regulatory capital for a small number of FDIC-supervised small
banking entities.
The agencies received nearly 100 comment letters on the proposed
capital simplifications. Comments on the proposed revisions to the
definition of HVCRE exposure are addressed in a different rulemaking.
Commenters suggested a variety of alternatives to the proposed capital
simplifications. The agencies have provided a discussion of the
comments received and the agencies' consideration of those comments in
Section III of this rulemaking.
The FDIC received two comments on the analysis it presented in the
proposal's RFA Analysis Section. Although both commenters were
concerned with the proposed revisions to the definition of HVCRE
exposure, the FDIC is addressing them to clarify the scope of analysis
done pursuant to the RFA. Both commenters pointed out that the analysis
presented did not consider the effects of the proposal on the entire
banking industry, with one commenter also stating that the sample size
used in the analysis was relatively small. The scope of analysis done
by the FDIC pursuant to the RFA is limited to those institutions which
meet the definition of ``small entities'' as set forth by the Small
Business Administration.
The FDIC does not believe that the final rule duplicates, overlaps,
or conflicts with any other Federal rules.
In light of the foregoing discussion, the FDIC certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \58\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward manner, did not receive
any comments on the use of plain language.
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\58\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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D. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the final rule under the factors set forth in the
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the rule includes a Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this rule will not result in expenditures by State,
local, and Tribal governments, or the private sector, of $100 million
or more in any one year.\59\ Accordingly, the OCC has not prepared a
written statement to accompany this rule.
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\59\ The final rule applies to all OCC-supervised non-advanced
approaches institutions, and as of June 30, 2017, 225 OCC-supervised
banks reported threshold deduction amounts or minority interest. To
estimate administrative costs associated with the final rule, the
OCC estimates the number of employees each activity is likely to
require and the number of hours necessary to assess, implement, and
perfect the required activity. Based on supervisory experience, the
OCC estimates it will take an OCC-supervised institution, on
average, a one-time investment of one business week, or 40 hours, to
update policies and procedures, and another one-time investment of
40 hours to make the accounting ledger changes for currently held
threshold deduction amounts and minority interests. Assuming a
compensation cost of $114 per hour, the OCC estimates that the rule
would impose administrative costs associated with compliance
activities of approximately $6.8 million for OCC supervised non-
advanced approaches institutions in the first year. [(40 hours x
$114 per hour x 1,237 banks) + (40 hours x $114 per hour x 225 banks
with threshold deduction items or minority interest) = $6,666,720)].
The OCC expects these additional administrative costs to occur in
the first year and to be near zero after the first year.
The OCC further estimates that final rule will lead to an
aggregate increase in reported regulatory capital of $1.8 billion
for national banks and Federal savings associations compared to the
amount they would report if they were required to continue to apply
the current capital requirements.
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E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\60\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, each Federal banking agency must
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\61\
---------------------------------------------------------------------------
\60\ 12 U.S.C. 4802(a).
\61\ Id.
---------------------------------------------------------------------------
In accordance with these provisions of RCDRIA, the agencies
considered any administrative burdens, as well as benefits, that the
final rule would place on depository institutions and their customers
in determining the effective date and administrative compliance
requirements of the final rule. In conjunction with the requirements of
RCDRIA, the final rule is effective on October 1, 2019, except that
amendatory instructions 7, 8, 24, 30, 31, 47.b, 53, 54, and 70 are
effective April 1, 2020. Any banking organization subject to the
[[Page 35248]]
capital rule may elect to adopt the amendments that are effective
October 1, 2019, prior to that date.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies.
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Savings associations, State non-member banks.
Office of the Comptroller of the Currency
For the reasons set out in the joint preamble, 12 CFR part 3 is
amended as follows.
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
Subpart A--General Provisions
0
2. Effective October 1, 2019, Sec. 3.1 is amended by revising
paragraph (a) to read as follows:
Sec. 3.1 Purpose, applicability, reservation of authority, and
timing.
(a) Purpose. This part establishes minimum capital requirements and
overall capital adequacy standards for national banks and Federal
savings associations. This part does not apply to Federal branches and
agencies of foreign banks. This part includes methodologies for
calculating minimum capital requirements, public disclosure
requirements related to the capital requirements, and transition
provisions for the application of this part.
* * * * *
0
3. Effective October 1, 2019, Sec. 3.2 is amended by:
0
a. Revising the definitions of ``corporate exposure'', ``eligible
guarantor'', ``International Lending Supervision Act'', and
``Investment in the capital of an unconsolidated financial
institution'';
0
b. Adding in alphabetical order a definition for ``Nonsignificant
investment in the capital of an unconsolidated financial institution'';
and
0
c. Revising the definition of ``Significant investment in the capital
of an unconsolidated financial institution''.
The revisions and addition read as follows:
Sec. 3.2 Definitions.
* * * * *
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multi-lateral development bank
(MDB), a depository institution, a foreign bank, a credit union, or a
public sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
(12) A policy loan; or
(13) A separate account.
* * * * *
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the
International Monetary Fund, the European Central Bank, the European
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank
(MDB), a depository institution, a bank holding company, a savings and
loan holding company, a credit union, a foreign bank, or a qualifying
central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter,
has issued and outstanding an unsecured debt security without credit
enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the
credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the
business of providing credit protection (such as a monoline bond
insurer or re-insurer).
* * * * *
International Lending Supervision Act means the International
Lending Supervision Act of 1983 (12 U.S.C. 3901 et seq.).
* * * * *
Investment in the capital of an unconsolidated financial
institution means a net long position calculated in accordance with
Sec. 3.22(h) in an instrument that is recognized as capital for
regulatory purposes by the primary supervisor of an unconsolidated
regulated financial institution or is an instrument that is part of the
GAAP equity of an unconsolidated unregulated financial institution,
including direct, indirect, and synthetic exposures to capital
instruments, excluding underwriting positions held by the national bank
or Federal savings association for five or fewer business days.
* * * * *
Non-significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
national bank or Federal savings association in the capital of an
unconsolidated financial institution where the advanced approaches
national bank or Federal savings association owns 10 percent or less of
the issued and outstanding common stock of the unconsolidated financial
institution.
* * * * *
Significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
national bank or Federal savings association in the capital of an
unconsolidated financial institution where the advanced approaches
national bank or Federal savings association owns more than 10 percent
of the issued and outstanding common stock of the unconsolidated
financial institution.
* * * * *
0
4. Effective October 1, 2019, Sec. 3.10 is amended by revising
paragraph (c)(4)(ii)(H) to read as follows:
Sec. 3.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(H) The credit equivalent amount of all off-balance sheet exposures
of the national bank or Federal savings association, excluding repo-
style transactions, repurchase or reverse repurchase or securities
borrowing or lending transactions that qualify for sales treatment
under U.S. GAAP, and derivative transactions, determined using the
applicable credit conversion
[[Page 35249]]
factor under Sec. 3.33(b), provided, however, that the minimum credit
conversion factor that may be assigned to an off-balance sheet exposure
under this paragraph is 10 percent; and
* * * * *
0
5. Effective October 1, 2019, Sec. 3.11 is amended by revising
paragraphs (a)(2)(i) and (iv), (a)(3)(i), and Table 1 to Sec. 3.11 to
read as follows:
Sec. 3.11 Capital conservation buffer and countercyclical capital
buffer amount.
* * * * *
(a) * * *
(2) * * *
(i) Eligible retained income. The eligible retained income of a
national bank or Federal savings association is the national bank's or
Federal savings association's net income, calculated in accordance with
the instructions to the Call Report, for the four calendar quarters
preceding the current calendar quarter, net of any distributions and
associated tax effects not already reflected in net income.
* * * * *
(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.
(3) Calculation of capital conservation buffer. (i) A national
bank's or Federal savings association's capital conservation buffer is
equal to the lowest of the following ratios, calculated as of the last
day of the previous calendar quarter:
(A) The national bank or Federal savings association's common
equity tier 1 capital ratio minus the national bank or Federal savings
association 's minimum common equity tier 1 capital ratio requirement
under Sec. 3.10;
(B) The national bank or Federal savings association's tier 1
capital ratio minus the national bank or Federal savings association's
minimum tier 1 capital ratio requirement under Sec. 3.10; and
(C) The national bank or Federal savings association's total
capital ratio minus the national bank or Federal savings association's
minimum total capital ratio requirement under Sec. 3.10; or
* * * * *
Table 1 to Sec. 3.11--Calculation of Maximum Payout Amount
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer Maximum payout ratio
----------------------------------------------------------------------------------------------------------------
Greater than 2.5 percent plus 100 percent of the No payout ratio limitation applies.
national bank's or Federal savings association's
applicable countercyclical capital buffer amount.
Less than or equal to 2.5 percent plus 100 percent of 60 percent.
the national bank's or Federal savings association's
applicable countercyclical capital buffer amount, and
greater than 1.875 percent plus 75 percent of the
national bank's or Federal savings association's
applicable countercyclical capital buffer amount.
Less than or equal to 1.875 percent plus 75 percent of 40 percent.
the national bank's or Federal savings association's
applicable countercyclical capital buffer amount, and
greater than 1.25 percent plus 50 percent of the
national bank's or Federal savings association's
applicable countercyclical capital buffer amount.
Less than or equal to 1.25 percent plus 50 percent of 20 percent.
the national bank's or Federal savings association's
applicable countercyclical capital buffer amount, and
greater than 0.625 percent plus 25 percent of the
national bank's or Federal savings association's
applicable countercyclical capital buffer amount.
Less than or equal to 0.625 percent plus 25 percent of 0 percent.
the national bank's or Federal savings association's
applicable countercyclical capital buffer amount.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
6. Effective October 1, 2019, Section 3.20 is amended by revising
paragraphs (b)(4), (c)(1)(viii), (c)(2), and (d)(2), and (5) to read as
follows:
Sec. 3.20 Capital components and eligibility criteria for regulatory
capital instruments.
* * * * *
(b) * * *
(4) Any common equity tier 1 minority interest, subject to the
limitations in Sec. 3.21.
* * * * *
(c) * * *
(1) * * *
(viii) Any cash dividend payments on the instrument are paid out of
the national bank's or Federal savings association's net income or
retained earnings.
* * * * *
(2) Tier 1 minority interest, subject to the limitations in Sec.
3.21, that is not included in the national bank's or Federal savings
association's common equity tier 1 capital.
* * * * *
(d) * * *
(2) Total capital minority interest, subject to the limitations set
forth in Sec. 3.21, that is not included in the national bank's or
Federal savings association's tier 1 capital.
* * * * *
(5) For a national bank or Federal savings association that makes
an AOCI opt-out election (as defined in paragraph (b)(2) of Sec.
3.22), 45 percent of pretax net unrealized gains on available-for-sale
preferred stock classified as an equity security under GAAP and
available-for-sale equity exposures.
* * * * *
0
7. Effective April 1, 2020, Section 3.21 is revised to read as follows:
Sec. 3.21 Minority interest.
(a)(1) Applicability. For purposes of Sec. 3.20, a national bank
or Federal savings association that is not an advanced approaches
national bank or Federal savings association is subject to the minority
interest limitations in this paragraph (a) if a consolidated subsidiary
of the national bank or Federal savings association has issued
regulatory capital that is not owned by the national bank or Federal
savings association.
(2) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the national bank or Federal savings
association. The amount of common equity tier 1 minority interest that
a national bank or Federal savings association may include in common
equity tier 1 capital must be no greater than 10 percent of the sum of
all common equity tier 1 capital elements of the national bank or
Federal savings association (not including the common equity tier 1
minority interest itself), less any common equity tier 1 capital
regulatory adjustments and deductions in accordance with Sec. 3.22(a)
and (b).
(3) Tier 1 minority interest includable in the tier 1 capital of
the national bank or Federal savings association. The amount of tier 1
minority interest that a national bank or Federal savings association
may include in tier 1 capital
[[Page 35250]]
must be no greater than 10 percent of the sum of all tier 1 capital
elements of the national bank or Federal savings association (not
including the tier 1 minority interest itself), less any tier 1 capital
regulatory adjustments and deductions in accordance with Sec. 3.22(a)
and (b).
(4) Total capital minority interest includable in the total capital
of the national bank or Federal savings association. The amount of
total capital minority interest that a national bank or Federal savings
association may include in total capital must be no greater than 10
percent of the sum of all total capital elements of the national bank
or Federal savings association (not including the total capital
minority interest itself), less any total capital regulatory
adjustments and deductions in accordance with Sec. 3.22(a) and (b).
(b)(1) Applicability. For purposes of Sec. 3.20, an advanced
approaches national bank or Federal savings association is subject to
the minority interest limitations in this paragraph (b) if:
(i) A consolidated subsidiary of the advanced approaches national
bank or Federal savings association has issued regulatory capital that
is not owned by the national bank or Federal savings association; and
(ii) For each relevant regulatory capital ratio of the consolidated
subsidiary, the ratio exceeds the sum of the subsidiary's minimum
regulatory capital requirements plus its capital conservation buffer.
(2) Difference in capital adequacy standards at the subsidiary
level. For purposes of the minority interest calculations in this
section, if the consolidated subsidiary issuing the capital is not
subject to capital adequacy standards similar to those of the advanced
approaches national bank or Federal savings association, the advanced
approaches national bank or Federal savings association must assume
that the capital adequacy standards of the advanced approaches national
bank or Federal savings association apply to the subsidiary.
(3) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the national bank or Federal savings
association. For each consolidated subsidiary of an advanced approaches
national bank or Federal savings association, the amount of common
equity tier 1 minority interest the advanced approaches national bank
or Federal savings association may include in common equity tier 1
capital is equal to:
(i) The common equity tier 1 minority interest of the subsidiary;
minus
(ii) The percentage of the subsidiary's common equity tier 1
capital that is not owned by the advanced approaches national bank or
Federal savings association, multiplied by the difference between the
common equity tier 1 capital of the subsidiary and the lower of:
(A) The amount of common equity tier 1 capital the subsidiary must
hold, or would be required to hold pursuant to this paragraph (b), to
avoid restrictions on distributions and discretionary bonus payments
under Sec. 3.11 or equivalent standards established by the
subsidiary's home country supervisor; or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches national bank or Federal savings association that relate to
the subsidiary multiplied by
(2) The common equity tier 1 capital ratio the subsidiary must
maintain to avoid restrictions on distributions and discretionary bonus
payments under Sec. 3.11 or equivalent standards established by the
subsidiary's home country supervisor.
(4) Tier 1 minority interest includable in the tier 1 capital of
the advanced approaches national bank or Federal savings association.
For each consolidated subsidiary of the advanced approaches national
bank or Federal savings association, the amount of tier 1 minority
interest the advanced approaches national bank or Federal savings
association may include in tier 1 capital is equal to:
(i) The tier 1 minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's tier 1 capital that is not
owned by the advanced approaches national bank or Federal savings
association multiplied by the difference between the tier 1 capital of
the subsidiary and the lower of:
(A) The amount of tier 1 capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches national bank or Federal savings association that relate to
the subsidiary multiplied by
(2) The tier 1 capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor.
(5) Total capital minority interest includable in the total capital
of the national bank or Federal savings association. For each
consolidated subsidiary of the advanced approaches national bank or
Federal savings association, the amount of total capital minority
interest the advanced approaches national bank or Federal savings
association may include in total capital is equal to:
(i) The total capital minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's total capital that is not
owned by the advanced approaches national bank or Federal savings
association multiplied by the difference between the total capital of
the subsidiary and the lower of:
(A) The amount of total capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches national bank or Federal savings association that relate to
the subsidiary multiplied by
(2) The total capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor.
0
8. Effective April 1, 2020, Sec. 3.22 is amended by revising
paragraphs (a)(1), (c), (d), (g), and (h) to read as follows:
Sec. 3.22 Regulatory capital adjustments and deductions.
(a) * * *
(1)(i) Goodwill, net of associated deferred tax liabilities (DTLs)
in accordance with paragraph (e) of this section; and
(ii) For an advanced approaches national bank or Federal savings
association, goodwill that is embedded in the valuation of a
significant investment in the capital of an unconsolidated financial
institution in the form of common stock (and that is reflected in the
consolidated financial statements of the advanced approaches national
bank or Federal savings association), in accordance with paragraph (d)
of this section;
* * * * *
(c) Deductions from regulatory capital related to investments in
capital
[[Page 35251]]
instruments \23\--(1) Investment in the national bank's or Federal
savings association's own capital instruments. A national bank or
Federal savings association must deduct an investment in the national
bank's or Federal savings association's own capital instruments as
follows:
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\23\ The national bank or Federal savings association must
calculate amounts deducted under paragraphs (c) through (f) of this
section after it calculates the amount of ALLL or AACL, as
applicable, includable in tier 2 capital under Sec. 3.20(d)(3).
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(i) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
common stock instruments from its common equity tier 1 capital elements
to the extent such instruments are not excluded from regulatory capital
under Sec. 3.20(b)(1);
(ii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
additional tier 1 capital instruments from its additional tier 1
capital elements; and
(iii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
tier 2 capital instruments from its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
a national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association (as described
in paragraph (c)(4) of this section), non-significant investments in
the capital of unconsolidated financial institutions for an advanced
approaches national bank or Federal savings association (as described
in paragraph (c)(5) of this section), and non-common stock significant
investments in the capital of unconsolidated financial institutions for
an advanced approaches national bank or Federal savings association (as
described in paragraph (c)(6) of this section). Under the corresponding
deduction approach, a national bank or Federal savings association must
make deductions from the component of capital for which the underlying
instrument would qualify if it were issued by the national bank or
Federal savings association itself, as described in paragraphs
(c)(2)(i) through (iii) of this section. If the national bank or
Federal savings association does not have a sufficient amount of a
specific component of capital to effect the required deduction, the
shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the national bank or Federal savings association must treat the
instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 3.20, the national bank or Federal savings
association must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders; and
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 3.300(c)), the national bank or Federal
savings association must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. A national bank or Federal savings association must
deduct investments in the capital of other financial institutions it
holds reciprocally, where such reciprocal cross holdings result from a
formal or informal arrangement to swap, exchange, or otherwise intend
to hold each other's capital instruments, by applying the corresponding
deduction approach.
(4) Investments in the capital of unconsolidated financial
institutions. A national bank or Federal savings association that is
not an advanced approaches national bank or Federal savings association
must deduct its investments in the capital of unconsolidated financial
institutions (as defined in Sec. 3.2) that exceed 25 percent of the
sum of the national bank's or Federal savings association's common
equity tier 1 capital elements minus all deductions from and
adjustments to common equity tier 1 capital elements required under
paragraphs (a) through (c)(3) of this section by applying the
corresponding deduction approach.\24\ The deductions described in this
section are net of associated DTLs in accordance with paragraph (e) of
this section. In addition, a national bank or Federal savings
association that underwrites a failed underwriting, with the prior
written approval of the OCC, for the period of time stipulated by the
OCC, is not required to deduct an investment in the capital of an
unconsolidated financial institution pursuant to this paragraph (c) to
the extent the investment is related to the failed underwriting.\25\
---------------------------------------------------------------------------
\24\ With the prior written approval of the OCC, for the period
of time stipulated by the OCC, a national bank or Federal savings
association that is not an advanced approaches national bank or
Federal savings association is not required to deduct an investment
in the capital of an unconsolidated financial institution pursuant
to this paragraph if the financial institution is in distress and if
such investment is made for the purpose of providing financial
support to the financial institution, as determined by the OCC.
\25\ Any investments in the capital of unconsolidated financial
institutions that do not exceed the 25 percent threshold for
investments in the capital of unconsolidated financial institutions
under this section must be assigned the appropriate risk weight
under subparts D or F of this part, as applicable.
---------------------------------------------------------------------------
(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches national bank or
Federal savings association must deduct its non-significant investments
in the capital of unconsolidated financial institutions (as defined in
Sec. 3.2) that, in the aggregate, exceed 10 percent of the sum of the
advanced approaches national bank's or Federal savings association's
common equity tier 1 capital elements minus all deductions from and
adjustments to common equity tier 1 capital elements required under
paragraphs (a) through (c)(3) of this section (the 10 percent threshold
for non-significant investments) by applying the
[[Page 35252]]
corresponding deduction approach.\26\ The deductions described in this
section are net of associated DTLs in accordance with paragraph (e) of
this section. In addition, an advanced approaches national bank or
Federal savings association that underwrites a failed underwriting,
with the prior written approval of the OCC, for the period of time
stipulated by the OCC, is not required to deduct a non-significant
investment in the capital of an unconsolidated financial institution
pursuant to this paragraph (c) to the extent the investment is related
to the failed underwriting.\27\
---------------------------------------------------------------------------
\26\ With the prior written approval of the OCC, for the period
of time stipulated by the OCC, an advanced approaches national bank
or Federal savings association is not required to deduct a non-
significant investment in the capital of an unconsolidated financial
institution pursuant to this paragraph if the financial institution
is in distress and if such investment is made for the purpose of
providing financial support to the financial institution, as
determined by the OCC.
\27\ Any non-significant investments in the capital of
unconsolidated financial institutions that do not exceed the 10
percent threshold for non-significant investments under this section
must be assigned the appropriate risk weight under subparts D, E, or
F of this part, as applicable.
---------------------------------------------------------------------------
(ii) The amount to be deducted under this section from a specific
capital component is equal to:
(A) The advanced approaches national bank's or Federal savings
association's non-significant investments in the capital of
unconsolidated financial institutions exceeding the 10 percent
threshold for non-significant investments, multiplied by
(B) The ratio of the advanced approaches national bank's or Federal
savings association's non-significant investments in the capital of
unconsolidated financial institutions in the form of such capital
component to the advanced approaches national bank's or Federal savings
association's total non-significant investments in unconsolidated
financial institutions.
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. An
advanced approaches national bank or Federal savings association must
deduct its significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock by
applying the corresponding deduction approach.\28\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, with the prior written
approval of the OCC, for the period of time stipulated by the OCC, an
advanced approaches national bank or Federal savings association that
underwrites a failed underwriting is not required to deduct a
significant investment in the capital of an unconsolidated financial
institution pursuant to this paragraph (c) if such investment is
related to such failed underwriting.
---------------------------------------------------------------------------
\28\ With prior written approval of the OCC, for the period of
time stipulated by the OCC, an advanced approaches national bank or
Federal savings association is not required to deduct a significant
investment in the capital instrument of an unconsolidated financial
institution in distress which is not in the form of common stock
pursuant to this section if such investment is made for the purpose
of providing financial support to the financial institution as
determined by the OCC.
---------------------------------------------------------------------------
(d) MSAs and certain DTAs subject to common equity tier 1 capital
deduction thresholds. (1) A national bank or Federal savings
association that is not an advanced approaches national bank or Federal
savings association must make deductions from regulatory capital as
described in this paragraph (d)(1).
(i) The national bank or Federal savings association must deduct
from common equity tier 1 capital elements the amount of each of the
items set forth in this paragraph (d)(1) that, individually, exceeds 25
percent of the sum of the national bank's or Federal savings
association's common equity tier 1 capital elements, less adjustments
to and deductions from common equity tier 1 capital required under
paragraphs (a) through (c)(3) of this section (the 25 percent common
equity tier 1 capital deduction threshold).\29\
---------------------------------------------------------------------------
\29\ The amount of the items in paragraph (d)(1) of this section
that is not deducted from common equity tier 1 capital must be
included in the risk-weighted assets of the national bank or Federal
savings association and assigned a 250 percent risk weight.
---------------------------------------------------------------------------
(ii) The national bank or Federal savings association must deduct
from common equity tier 1 capital elements the amount of DTAs arising
from temporary differences that the national bank or Federal savings
association could not realize through net operating loss carrybacks,
net of any related valuation allowances and net of DTLs, in accordance
with paragraph (e) of this section. A national bank or Federal savings
association is not required to deduct from the sum of its common equity
tier 1 capital elements DTAs (net of any related valuation allowances
and net of DTLs, in accordance with Sec. 3.22(e)) arising from timing
differences that the national bank or Federal savings association could
realize through net operating loss carrybacks. The national bank or
Federal savings association must risk weight these assets at 100
percent. For a national bank or Federal savings association that is a
member of a consolidated group for tax purposes, the amount of DTAs
that could be realized through net operating loss carrybacks may not
exceed the amount that the national bank or Federal savings association
could reasonably expect to have refunded by its parent holding company.
(iii) The national bank or Federal savings association must deduct
from common equity tier 1 capital elements the amount of MSAs net of
associated DTLs, in accordance with paragraph (e) of this section.
(iv) For purposes of calculating the amount of DTAs subject to
deduction pursuant to paragraph (d)(1) of this section, a national bank
or Federal savings association may exclude DTAs and DTLs relating to
adjustments made to common equity tier 1 capital under paragraph (b) of
this section. A national bank or Federal savings association that
elects to exclude DTAs relating to adjustments under paragraph (b) of
this section also must exclude DTLs and must do so consistently in all
future calculations. A national bank or Federal savings association may
change its exclusion preference only after obtaining the prior approval
of the OCC.
(2) An advanced approaches national bank or Federal savings
association must make deductions from regulatory capital as described
in this paragraph (d)(2).
(i) An advanced approaches national bank or Federal savings
association must deduct from common equity tier 1 capital elements the
amount of each of the items set forth in this paragraph (d)(2) that,
individually, exceeds 10 percent of the sum of the advanced approaches
national bank's or Federal savings association's common equity tier 1
capital elements, less adjustments to and deductions from common equity
tier 1 capital required under paragraphs (a) through (c) of this
section (the 10 percent common equity tier 1 capital deduction
threshold).
(A) DTAs arising from temporary differences that the advanced
approaches national bank or Federal savings association could not
realize through net operating loss carrybacks, net of any related
valuation allowances and net of DTLs, in accordance with paragraph (e)
of this section. An advanced approaches national bank or Federal
savings association is not required to deduct from the sum of its
common equity tier 1 capital elements DTAs (net of any related
valuation allowances and net of DTLs, in accordance with Sec. 3.22(e))
arising from timing differences that the advanced approaches national
bank or Federal savings association could realize
[[Page 35253]]
through net operating loss carrybacks. The advanced approaches national
bank or Federal savings association must risk weight these assets at
100 percent. For a national bank or Federal savings association that is
a member of a consolidated group for tax purposes, the amount of DTAs
that could be realized through net operating loss carrybacks may not
exceed the amount that the national bank or Federal savings association
could reasonably expect to have refunded by its parent holding company.
(B) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(C) Significant investments in the capital of unconsolidated
financial institutions in the form of common stock, net of associated
DTLs in accordance with paragraph (e) of this section.\30\ Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock subject to the 10 percent common equity tier 1
capital deduction threshold may be reduced by any goodwill embedded in
the valuation of such investments deducted by the advanced approaches
national bank or Federal savings association pursuant to paragraph
(a)(1) of this section. In addition, with the prior written approval of
the OCC, for the period of time stipulated by the OCC, an advanced
approaches national bank or Federal savings association that
underwrites a failed underwriting is not required to deduct a
significant investment in the capital of an unconsolidated financial
institution in the form of common stock pursuant to this paragraph
(d)(2) if such investment is related to such failed underwriting.
---------------------------------------------------------------------------
\30\ With the prior written approval of the OCC, for the period
of time stipulated by the OCC, an advanced approaches national bank
or Federal savings association is not required to deduct a
significant investment in the capital instrument of an
unconsolidated financial institution in distress in the form of
common stock pursuant to this section if such investment is made for
the purpose of providing financial support to the financial
institution as determined by the OCC.
---------------------------------------------------------------------------
(ii) An advanced approaches national bank or Federal savings
association must deduct from common equity tier 1 capital elements the
items listed in paragraph (d)(2)(i) of this section that are not
deducted as a result of the application of the 10 percent common equity
tier 1 capital deduction threshold, and that, in aggregate, exceed
17.65 percent of the sum of the advanced approaches national bank's or
Federal savings association's common equity tier 1 capital elements,
minus adjustments to and deductions from common equity tier 1 capital
required under paragraphs (a) through (c) of this section, minus the
items listed in paragraph (d)(2)(i) of this section (the 15 percent
common equity tier 1 capital deduction threshold). Any goodwill that
has been deducted under paragraph (a)(1) of this section can be
excluded from the significant investments in the capital of
unconsolidated financial institutions in the form of common stock.\31\
---------------------------------------------------------------------------
\31\ The amount of the items in paragraph (d)(2) of this section
that is not deducted from common equity tier 1 capital pursuant to
this section must be included in the risk-weighted assets of the
advanced approaches national bank or Federal savings association and
assigned a 250 percent risk weight.
---------------------------------------------------------------------------
(iii) For purposes of calculating the amount of DTAs subject to the
10 and 15 percent common equity tier 1 capital deduction thresholds, an
advanced approaches national bank or Federal savings association may
exclude DTAs and DTLs relating to adjustments made to common equity
tier 1 capital under paragraph (b) of this section. An advanced
approaches national bank or Federal savings association that elects to
exclude DTAs relating to adjustments under paragraph (b) of this
section also must exclude DTLs and must do so consistently in all
future calculations. An advanced approaches national bank or Federal
savings association may change its exclusion preference only after
obtaining the prior approval of the OCC.
* * * * *
(g) Treatment of assets that are deducted. A national bank or
Federal savings association must exclude from standardized total risk-
weighted assets and, as applicable, advanced approaches total risk-
weighted assets any item that is required to be deducted from
regulatory capital.
(h) Net long position. (1) For purposes of calculating an
investment in the national bank's or Federal savings association's own
capital instrument and an investment in the capital of an
unconsolidated financial institution under this section, the net long
position is the gross long position in the underlying instrument
determined in accordance with paragraph (h)(2) of this section, as
adjusted to recognize a short position in the same instrument
calculated in accordance with paragraph (h)(3) of this section.
(2) Gross long position. The gross long position is determined as
follows:
(i) For an equity exposure that is held directly, the adjusted
carrying value as that term is defined in Sec. 3.51(b);
(ii) For an exposure that is held directly and is not an equity
exposure or a securitization exposure, the exposure amount as that term
is defined in Sec. 3.2;
(iii) For an indirect exposure, the national bank's or Federal
savings association's carrying value of the investment in the
investment fund, provided that, alternatively:
(A) A national bank or Federal savings association may, with the
prior approval of the Board, use a conservative estimate of the amount
of its investment in the national bank's or Federal savings
association's own capital instruments or its investment in the capital
of an unconsolidated financial institution held through a position in
an index; or
(B) A national bank or Federal savings association may calculate
the gross long position for investments in the national bank's or
Federal savings association's own capital instruments or investments in
the capital of an unconsolidated financial institution by multiplying
the national bank's or Federal savings association's carrying value of
its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for
investments in the national bank's or Federal savings association's own
capital instruments or investments in the capital of unconsolidated
financial institutions as stated in the prospectus, partnership
agreement, or similar contract defining permissible investments of the
investment fund; or
(2) The investment fund's actual holdings of investments in the
national bank's or Federal savings association's own capital
instruments or investments in the capital of unconsolidated financial
institutions.
(iv) For a synthetic exposure, the amount of the national bank's or
Federal savings association's loss on the exposure if the reference
capital instrument were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument, the following criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position has a residual maturity of at
least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the national bank's
or Federal savings association's Call Report, if the national bank or
Federal savings association has a contractual right or obligation to
sell the long position at a specific point in time and the counterparty
to the contract has an obligation to purchase the long position if the
national bank or
[[Page 35254]]
Federal savings association exercises its right to sell, this point in
time may be treated as the maturity of the long position such that the
maturity of the long position and short position are deemed to match
for purposes of the maturity requirement, even if the maturity of the
short position is less than one year; and
(iii) For an investment in the national bank's or Federal savings
association's own capital instrument under paragraph (c)(1) of this
section or an investment in the capital of an unconsolidated financial
institution under paragraphs (c) and (d) of this section:
(A) A national bank or Federal savings association may only net a
short position against a long position in an investment in the national
bank's or Federal savings association's own capital instrument under
paragraph (c) of this section if the short position involves no
counterparty credit risk.
(B) A gross long position in an investment in the national bank's
or Federal savings association's own capital instrument or an
investment in the capital of an unconsolidated financial institution
resulting from a position in an index may be netted against a short
position in the same index. Long and short positions in the same index
without maturity dates are considered to have matching maturities.
(C) A short position in an index that is hedging a long cash or
synthetic position in an investment in the national bank's or Federal
savings association's own capital instrument or an investment in the
capital of an unconsolidated financial institution can be decomposed to
provide recognition of the hedge. More specifically, the portion of the
index that is composed of the same underlying instrument that is being
hedged may be used to offset the long position if both the long
position being hedged and the short position in the index are reported
as a trading asset or trading liability (whether on- or off-balance
sheet) on the national bank's or Federal savings association's Call
Report, and the hedge is deemed effective by the national bank's or
Federal savings association's internal control processes, which have
not been found to be inadequate by the OCC.
0
9. Effective October 1, 2019, Sec. 3.32 is amended by revising
paragraphs (b), (d)(2), (d)(3)(ii), (j), (k), and (l) to read as
follows:
Sec. 3.32 General risk weights.
* * * * *
(b) Certain supranational entities and multilateral development
banks (MDBs). A national bank or Federal savings association must
assign a zero percent risk weight to an exposure to the Bank for
International Settlements, the European Central Bank, the European
Commission, the International Monetary Fund, the European Stability
Mechanism, the European Financial Stability Facility, or an MDB.
* * * * *
(d) * * *
(2) Exposures to foreign banks. (i) Except as otherwise provided
under paragraphs (d)(2)(iii), (d)(2)(v), and (d)(3) of this section, a
national bank or Federal savings association must assign a risk weight
to an exposure to a foreign bank, in accordance with Table 2 to Sec.
3.32, based on the CRC that corresponds to the foreign bank's home
country or the OECD membership status of the foreign bank's home
country if there is no CRC applicable to the foreign bank's home
country.
Table 2 to Sec. 3.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 20
2..................................................... 50
3..................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 20
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(ii) A national bank or Federal savings association must assign a
20 percent risk weight to an exposure to a foreign bank whose home
country is a member of the OECD and does not have a CRC.
(iii) A national bank or Federal savings association must assign a
20 percent risk-weight to an exposure that is a self-liquidating,
trade-related contingent item that arises from the movement of goods
and that has a maturity of three months or less to a foreign bank whose
home country has a CRC of 0, 1, 2, or 3, or is an OECD member with no
CRC.
(iv) A national bank or Federal savings association must assign a
100 percent risk weight to an exposure to a foreign bank whose home
country is not a member of the OECD and does not have a CRC, with the
exception of self-liquidating, trade-related contingent items that
arise from the movement of goods, and that have a maturity of three
months or less, which may be assigned a 20 percent risk weight.
(v) A national bank or Federal savings association must assign a
150 percent risk weight to an exposure to a foreign bank immediately
upon determining that an event of sovereign default has occurred in the
bank's home country, or if an event of sovereign default has occurred
in the foreign bank's home country during the previous five years.
(3) * * *
(ii) A significant investment in the capital of an unconsolidated
financial institution in the form of common stock pursuant to Sec.
3.22(d)(2)(i)(c);
* * * * *
(j) High-volatility commercial real estate (HVCRE) exposures. A
national bank or Federal savings association must assign a 150 percent
risk weight to an HVCRE exposure.
(k) Past due exposures. Except for an exposure to a sovereign
entity or a residential mortgage exposure or a policy loan, if an
exposure is 90 days or more past due or on nonaccrual:
(1) A national bank or Federal savings association must assign a
150 percent risk weight to the portion of the exposure that is not
guaranteed or that is unsecured;
(2) A national bank or Federal savings association may assign a
risk weight to the guaranteed portion of a past due exposure based on
the risk weight that applies under Sec. 3.36 if the guarantee or
credit derivative meets the requirements of that section; and
(3) A national bank or Federal savings association may assign a
risk weight to the collateralized portion of a past due exposure based
on the risk weight that applies under Sec. 3.37 if the collateral
meets the requirements of that section.
(l) Other assets. (1) A national bank or Federal savings
association must assign a zero percent risk weight to cash owned and
held in all offices of the national bank or Federal savings association
or in transit; to gold bullion held in the national bank's or Federal
savings association's own vaults or held in another depository
institution's vaults on an allocated basis, to the extent the gold
bullion assets are offset by gold bullion liabilities; and to exposures
that arise from the settlement of cash transactions (such as equities,
fixed income, spot foreign exchange and spot commodities) with a
central counterparty where there is no assumption of ongoing
counterparty credit risk by the central counterparty after settlement
of the trade and associated default fund contributions.
(2) A national bank or Federal savings association must assign a 20
percent risk weight to cash items in the process of collection.
(3) A national bank or Federal savings association must assign a
100 percent risk weight to DTAs arising from temporary differences that
the national bank or Federal savings association
[[Page 35255]]
could realize through net operating loss carrybacks.
(4) A national bank or Federal savings association must assign a
250 percent risk weight to the portion of each of the following items
to the extent it is not deducted from common equity tier 1 capital
pursuant to Sec. 3.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the national bank
or Federal savings association could not realize through net operating
loss carrybacks.
(5) A national bank or Federal savings association must assign a
100 percent risk weight to all assets not specifically assigned a
different risk weight under this subpart and that are not deducted from
tier 1 or tier 2 capital pursuant to Sec. 3.22.
(6) Notwithstanding the requirements of this section, a national
bank or Federal savings association may assign an asset that is not
included in one of the categories provided in this section to the risk
weight category applicable under the capital rules applicable to bank
holding companies and savings and loan holding companies at 12 CFR part
217, provided that all of the following conditions apply:
(i) The national bank or Federal savings association is not
authorized to hold the asset under applicable law other than debt
previously contracted or similar authority; and
(ii) The risks associated with the asset are substantially similar
to the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this subpart.
* * * * *
0
10. Effective October 1, 2019, Sec. 3.34 is amended by revising
paragraph (c) to read as follows:
Sec. 3.34 OTC derivative contracts.
* * * * *
(c) Counterparty credit risk for OTC credit derivatives--(1)
Protection purchasers. A national bank or Federal savings association
that purchases an OTC credit derivative that is recognized under Sec.
3.36 as a credit risk mitigant for an exposure that is not a covered
position under subpart F is not required to compute a separate
counterparty credit risk capital requirement under this subpart D
provided that the national bank or Federal savings association does so
consistently for all such credit derivatives. The national bank or
Federal savings association must either include all or exclude all such
credit derivatives that are subject to a qualifying master netting
agreement from any measure used to determine counterparty credit risk
exposure to all relevant counterparties for risk-based capital
purposes.
(2) Protection providers. (i) A national bank or Federal savings
association that is the protection provider under an OTC credit
derivative must treat the OTC credit derivative as an exposure to the
underlying reference asset. The national bank or Federal savings
association is not required to compute a counterparty credit risk
capital requirement for the OTC credit derivative under this subpart D,
provided that this treatment is applied consistently for all such OTC
credit derivatives. The national bank or Federal savings association
must either include all or exclude all such OTC credit derivatives that
are subject to a qualifying master netting agreement from any measure
used to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (c)(2) apply to all relevant
counterparties for risk-based capital purposes unless the national bank
or Federal savings association is treating the OTC credit derivative as
a covered position under subpart F, in which case the national bank or
Federal savings association must compute a supplemental counterparty
credit risk capital requirement under this section.
* * * * *
0
11. Effective October 1, 2019, Sec. 3.35 is amended by revising
paragraphs (b)(3)(ii), (b)(4)(ii), (c)(3)(ii), and (c)(4)(ii) to read
as follows:
Sec. 3.35 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association
must apply the risk weight appropriate for the CCP according to this
subpart D.
(4) * * *
(ii) A clearing member client national bank or Federal savings
association must calculate a risk-weighted asset amount for any
collateral provided to a CCP, clearing member, or custodian in
connection with a cleared transaction in accordance with the
requirements under this subpart D.
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight appropriate for the CCP according to this subpart D.
(4) * * *
(ii) A clearing member national bank or Federal savings association
must calculate a risk-weighted asset amount for any collateral provided
to a CCP, clearing member, or a custodian in connection with a cleared
transaction in accordance with requirements under this subpart D.
* * * * *
0
12. Effective October 1, 2019, Sec. 3.36 is amended by revising
paragraph (c) to read as follows:
Sec. 3.36 Guarantees and credit derivatives: Substitution treatment.
* * * * *
(c) Substitution approach--(1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, a national bank or Federal
savings association may recognize the guarantee or credit derivative in
determining the risk-weighted asset amount for the hedged exposure by
substituting the risk weight applicable to the guarantor or credit
derivative protection provider under this subpart D for the risk weight
assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the exposure amount of the hedged exposure, the
national bank or Federal savings association must treat the hedged
exposure as two separate exposures (protected and unprotected) in order
to recognize the credit risk mitigation benefit of the guarantee or
credit derivative.
(i) The national bank or Federal savings association may calculate
the risk-weighted asset amount for the protected exposure under this
subpart D, where the applicable risk weight is the risk weight
applicable to the guarantor or credit derivative protection provider.
(ii) The national bank or Federal savings association must
calculate the risk-weighted asset amount for the unprotected exposure
under this subpart D, where the applicable risk weight is that of the
unprotected portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraphs (d), (e),
or (f) of this section.
* * * * *
[[Page 35256]]
0
13. Effective October 1, 2019, Sec. 3.37 is amended by revising
paragraph (b)(2)(i) to read as follows:
Sec. 3.37 Collateralized transactions.
* * * * *
(b) * * *
(2) * * *
(i) A national bank or Federal savings association may apply a risk
weight to the portion of an exposure that is secured by the fair value
of financial collateral (that meets the requirements of paragraph
(b)(1) of this section) based on the risk weight assigned to the
collateral under this subpart D. For repurchase agreements, reverse
repurchase agreements, and securities lending and borrowing
transactions, the collateral is the instruments, gold, and cash the
national bank or Federal savings association has borrowed, purchased
subject to resale, or taken as collateral from the counterparty under
the transaction. Except as provided in paragraph (b)(3) of this
section, the risk weight assigned to the collateralized portion of the
exposure may not be less than 20 percent.
* * * * *
0
14. Effective October 1, 2019, Sec. 3.38 is amended by revising
paragraph (e)(2) to read as follows:
Sec. 3.38 Unsettled transactions.
* * * * *
(e) * * *
(2) From the business day after the national bank or Federal
savings association has made its delivery until five business days
after the counterparty delivery is due, the national bank or Federal
savings association must calculate the risk-weighted asset amount for
the transaction by treating the current fair value of the deliverables
owed to the national bank or Federal savings association as an exposure
to the counterparty and using the applicable counterparty risk weight
under this subpart D.
* * * * *
0
15. Effective October 1, 2019, Sec. 3.42 is amended by revising
paragraph (j)(2)(ii)(A) to read as follows:
Sec. 3.42 Risk-weighted assets for securitization exposures.
* * * * *
(j) * * *
(2) * * *
(ii) * * *
(A) If the national bank or Federal savings association purchases
credit protection from a counterparty that is not a securitization SPE,
the national bank or Federal savings association must determine the
risk weight for the exposure according to this subpart D.
* * * * *
0
16. Effective October 1, 2019, Sec. 3.52 is amended by revising
paragraphs (b)(1) and (4) to read as follows:
Sec. 3.52 Simple risk-weight approach (SRWA).
* * * * *
(b) * * *
(1) Zero percent risk weight equity exposures. An equity exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
the European Stability Mechanism, the European Financial Stability
Facility, an MDB, and any other entity whose credit exposures receive a
zero percent risk weight under Sec. 3.32 may be assigned a zero
percent risk weight.
* * * * *
(4) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock that are not deducted from capital pursuant to
Sec. 3.22(d)(2) are assigned a 250 percent risk weight.
* * * * *
0
17. Effective October 1, 2019, Sec. 3.61 is revised to read as
follows:
Sec. 3.61 Purpose and scope.
Sections 3.61 through 3.63 of this subpart establish public
disclosure requirements related to the capital requirements described
in subpart B of this part for a national bank or Federal savings
association with total consolidated assets of $50 billion or more as
reported on the national bank's or Federal savings association's most
recent year-end Call Report that is not an advanced approaches national
bank or Federal savings association making public disclosures pursuant
to Sec. 3.172. An advanced approaches national bank or Federal savings
association that has not received approval from the OCC to exit
parallel run pursuant to Sec. 3.121(d) is subject to the disclosure
requirements described in Sec. Sec. 3.62 and 3.63. A national bank or
Federal savings association with total consolidated assets of $50
billion or more as reported on the national bank's or Federal savings
association's most recent year-end Call Report that is not an advanced
approaches national bank or Federal savings association making public
disclosures subject to Sec. 3.172 must comply with Sec. 3.62 unless
it is a consolidated subsidiary of a bank holding company, savings and
loan holding company, or depository institution that is subject to the
disclosure requirements of Sec. 3.62 or a subsidiary of a non-U.S.
banking organization that is subject to comparable public disclosure
requirements in its home jurisdiction. For purposes of this section,
total consolidated assets are determined based on the average of the
national bank's or Federal savings association's total consolidated
assets in the four most recent quarters as reported on the Call Report
or the average of the national bank or Federal savings association's
total consolidated assets in the most recent consecutive quarters as
reported quarterly on the national bank's or Federal savings
association's Call Report if the national bank or Federal savings
association has not filed such a report for each of the most recent
four quarters.
0
18. Effective October 1, 2019, Sec. 3.63 is amended by revising Tables
3 and 8 to Sec. 3.63 to read as follows:
Sec. 3.63 Disclosures by national bank or Federal savings
associations described in Sec. 3.61.
* * * * *
Table 3 to Sec. 3.63--Capital Adequacy
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures............................... (a) A summary discussion of the national bank's or
Federal savings association's approach to assessing the
adequacy of its capital to support current and future
activities.
Quantitative disclosures.............................. (b) Risk-weighted assets for:
(1) Exposures to sovereign entities;
(2) Exposures to certain supranational entities and
MDBs;
(3) Exposures to depository institutions, foreign
banks, and credit unions;
(4) Exposures to PSEs;
(5) Corporate exposures;
(6) Residential mortgage exposures;
(7) Statutory multifamily mortgages and pre-sold
construction loans;
(8) HVCRE exposures;
[[Page 35257]]
(9) Past due loans;
(10) Other assets;
(11) Cleared transactions;
(12) Default fund contributions;
(13) Unsettled transactions;
(14) Securitization exposures; and
(15) Equity exposures.
(c) Standardized market risk-weighted assets as
calculated under subpart F of this part.
(d) Common equity tier 1, tier 1 and total risk-based
capital ratios:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
(e) Total standardized risk-weighted assets.
----------------------------------------------------------------------------------------------------------------
* * * * *
Table 8 to Sec. 3.63--Securitization
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures............................... (a) The general qualitative disclosure requirement with
respect to a securitization (including synthetic
securitizations), including a discussion of:
(1) The national bank's or Federal savings
association 's objectives for securitizing assets,
including the extent to which these activities
transfer credit risk of the underlying exposures
away from the national bank or Federal savings
association to other entities and including the type
of risks assumed and retained with resecuritization
activity; \1\
(2) The nature of the risks (e.g., liquidity risk)
inherent in the securitized assets;
(3) The roles played by the national bank or Federal
savings association in the securitization process
\2\ and an indication of the extent of the national
bank's or Federal savings association 's involvement
in each of them;
(4) The processes in place to monitor changes in the
credit and market risk of securitization exposures
including how those processes differ for
resecuritization exposures;
(5) The national bank's or Federal savings
association's policy for mitigating the credit risk
retained through securitization and resecuritization
exposures; and
(6) The risk-based capital approaches that the
national bank or Federal savings association follows
for its securitization exposures including the type
of securitization exposure to which each approach
applies.
(b) A list of:
(1) The type of securitization SPEs that the national
bank or Federal savings association, as sponsor,
uses to securitize third-party exposures. The
national bank or Federal savings association must
indicate whether it has exposure to these SPEs,
either on- or off-balance sheet; and
(2) Affiliated entities:
(i) That the national bank or Federal savings
association manages or advises; and
(ii) That invest either in the securitization
exposures that the national bank or Federal
savings association has securitized or in
securitization SPEs that the national bank or
Federal savings association sponsors.\3\
(c) Summary of the national bank's or Federal savings
association's accounting policies for securitization
activities, including:
(1) Whether the transactions are treated as sales or
financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions applied in valuing
retained or purchased interests;
(4) Changes in methods and key assumptions from the
previous period for valuing retained interests and
impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are
valued and whether they are recorded under subpart D
of this part; and
(7) Policies for recognizing liabilities on the
balance sheet for arrangements that could require
the national bank or Federal savings association to
provide financial support for securitized assets.
(d) An explanation of significant changes to any
quantitative information since the last reporting
period.
Quantitative Disclosures.............................. (e) The total outstanding exposures securitized by the
national bank or Federal savings association in
securitizations that meet the operational criteria
provided in Sec. 3.41 (categorized into traditional
and synthetic securitizations), by exposure type,
separately for securitizations of third-party exposures
for which the bank acts only as sponsor.\4\
(f) For exposures securitized by the national bank or
Federal savings association in securitizations that
meet the operational criteria in Sec. 3.41:
(1) Amount of securitized assets that are impaired/
past due categorized by exposure type; \5\ and
(2) Losses recognized by the national bank or Federal
savings association during the current period
categorized by exposure type.\6\
(g) The total amount of outstanding exposures intended
to be securitized categorized by exposure type.
(h) Aggregate amount of:
(1) On-balance sheet securitization exposures
retained or purchased categorized by exposure type;
and
(2) Off-balance sheet securitization exposures
categorized by exposure type.
(i)(1) Aggregate amount of securitization exposures
retained or purchased and the associated capital
requirements for these exposures, categorized between
securitization and resecuritization exposures, further
categorized into a meaningful number of risk weight
bands and by risk-based capital approach (e.g., SSFA);
and
[[Page 35258]]
(2) Aggregate amount disclosed separately by type of
underlying exposure in the pool of any:
(i) After-tax gain-on-sale on a securitization that
has been deducted from common equity tier 1
capital; and
(ii) Credit-enhancing interest-only strip that is
assigned a 1,250 percent risk weight.
(j) Summary of current year's securitization activity,
including the amount of exposures securitized (by
exposure type), and recognized gain or loss on sale by
exposure type.
(k) Aggregate amount of resecuritization exposures
retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is
applied and those not applied; and
(2) Exposures to guarantors categorized according to
guarantor creditworthiness categories or guarantor
name.
----------------------------------------------------------------------------------------------------------------
\1\ The national bank or Federal savings association should describe the structure of resecuritizations in which
it participates; this description should be provided for the main categories of resecuritization products in
which the national bank or Federal savings association is active.
\2\ For example, these roles may include originator, investor, servicer, provider of credit enhancement,
sponsor, liquidity provider, or swap provider.
\3\ Such affiliated entities may include, for example, money market funds, to be listed individually, and
personal and private trusts, to be noted collectively.
\4\ ``Exposures securitized'' include underlying exposures originated by the national bank or Federal savings
association, whether generated by them or purchased, and recognized in the balance sheet, from third parties,
and third-party exposures included in sponsored transactions. Securitization transactions (including
underlying exposures originally on the national bank's or Federal savings association's balance sheet and
underlying exposures acquired by the national bank or Federal savings association from third-party entities)
in which the originating bank does not retain any securitization exposure should be shown separately but need
only be reported for the year of inception. National banks and Federal savings associations are required to
disclose exposures regardless of whether there is a capital charge under this part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the national bank's or Federal savings
association's balance sheet) or credit-related OTTI of interest-only strips and other retained residual
interests, as well as recognition of liabilities for probable future financial support required of the
national bank or Federal savings association with respect to securitized assets.
* * * * *
0
19. Effective October 1, 2019, Sec. 3.131 is amended by revising
paragraph (d)(2) to read as follows:
Sec. 3.131 Mechanics for calculating total wholesale and retail
risk-weighted assets.
* * * * *
(d) * * *
(2) Floor on PD assignment. The PD for each wholesale obligor or
retail segment may not be less than 0.03 percent, except for exposures
to or directly and unconditionally guaranteed by a sovereign entity,
the Bank for International Settlements, the International Monetary
Fund, the European Commission, the European Central Bank, the European
Stability Mechanism, the European Financial Stability Facility, or a
multilateral development bank, to which the national bank or Federal
savings association assigns a rating grade associated with a PD of less
than 0.03 percent.
* * * * *
0
20. Effective October 1, 2019, Sec. 3.133 is amended by revising
paragraphs (b)(3)(ii) and (c)(3)(ii) to read as follows:
Sec. 3.133 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association
must apply the risk weight applicable to the CCP under subpart D of
this part.
* * * * *
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight applicable to the CCP according to subpart D of this
part.
* * * * *
0
21. Effective October 1, 2019, Sec. 3.152 is amended by revising
paragraphs (b)(5) and (6) to read as follows:
Sec. 3.152 Simple risk weight approach (SRWA).
* * * * *
(b) * * *
(5) 300 percent risk weight equity exposures. A publicly traded
equity exposure (other than an equity exposure described in paragraph
(b)(7) of this section and including the ineffective portion of a hedge
pair) is assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure
(other than an equity exposure described in paragraph (b)(7) of this
section) that is not publicly traded is assigned a 400 percent risk
weight.
* * * * *
0
22. Effective October 1, 2019, Sec. 3.202 is amended by revising the
definition of ``Corporate debt position'' in paragraph (b) to read as
follows:
Sec. 3.202 Definitions.
* * * * *
(b) * * *
Corporate debt position means a debt position that is an exposure
to a company that is not a sovereign entity, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank,
a depository institution, a foreign bank, a credit union, a public
sector entity, a GSE, or a securitization.
* * * * *
0
23. Effective October 1, 2019, Sec. 3.210 is amended by revising
paragraph (b)(2)(ii) to read as follows:
Sec. 3.210 Standardized measurement method for specific risk.
* * * * *
(b) * * *
(2) * * *
(ii) Certain supranational entity and multilateral development bank
debt positions. A national bank or Federal savings association may
assign a 0.0 percent specific risk-weighting factor to a debt position
that is an exposure to the Bank for International Settlements, the
European Central Bank, the European Commission, the International
Monetary Fund, the European Stability Mechanism, the European Financial
Stability Facility, or an MDB.
* * * * *
Sec. 3.300 [Amended]
0
24. Effective April 1, 2020, Sec. 3.300 is amended by removing
paragraphs (b) and (d).
[[Page 35259]]
Board of Governors of the Federal Reserve System
For the reasons set out in the joint preamble, the Board of
Governors of the Federal Reserve System amends 12 CFR part 217 as
follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
25. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
Subpart A--General Provisions
0
26. Effective October 1, 2019, Sec. 217.2 is amended by revsing the
definitions of ``corporate exposure'' and ``eligible guarantor'',
``International Lending Supervision Act'', ``investment in the capital
of an unconsolidated financial institution'', ``non-significant
investment in the capital of an unconsolidated financial institution'',
and ``significant investment in the capital of an unconsolidated
financial institution'' to read as follows:
Sec. 217.2 Definitions.
* * * * *
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multi-lateral development bank
(MDB), a depository institution, a foreign bank, a credit union, or a
public sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
(12) A policy loan; or
(13) A separate account.
* * * * *
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the
International Monetary Fund, the European Central Bank, the European
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank
(MDB), a depository institution, a bank holding company, a savings and
loan holding company, a credit union, a foreign bank, or a qualifying
central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter,
has issued and outstanding an unsecured debt security without credit
enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the
credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the
business of providing credit protection (such as a monoline bond
insurer or re-insurer).
* * * * *
International Lending Supervision Act means the International
Lending Supervision Act of 1983 (12 U.S.C. 3901 et seq.).
* * * * *
Investment in the capital of an unconsolidated financial
institution means a net long position calculated in accordance with
Sec. 217.22(h) in an instrument that is recognized as capital for
regulatory purposes by the primary supervisor of an unconsolidated
regulated financial institution or is an instrument that is part of the
GAAP equity of an unconsolidated unregulated financial institution,
including direct, indirect, and synthetic exposures to capital
instruments, excluding underwriting positions held by the Board-
regulated institution for five or fewer business days.
* * * * *
Non-significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
Board-regulated institution in the capital of an unconsolidated
financial institution where the advanced approaches Board-regulated
institution owns 10 percent or less of the issued and outstanding
common stock of the unconsolidated financial institution.
* * * * *
Significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
Board-regulated institution in the capital of an unconsolidated
financial institution where the advanced approaches Board-regulated
institution owns more than 10 percent of the issued and outstanding
common stock of the unconsolidated financial institution.
* * * * *
0
27. Effective October 1, 2019, Sec. 217.10 is amended by revising
paragraph (c)(4)(ii)(H) to read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(H) The credit equivalent amount of all off-balance sheet exposures
of the Board-regulated institution, excluding repo-style transactions,
repurchase or reverse repurchase or securities borrowing or lending
transactions that qualify for sales treatment under U.S. GAAP, and
derivative transactions, determined using the applicable credit
conversion factor under Sec. 217.33(b), provided, however, that the
minimum credit conversion factor that may be assigned to an off-balance
sheet exposure under this paragraph is 10 percent; and
* * * * *
0
28. Effective October 1, 2019, Sec. 217.11 is amended by revising
paragraphs (a)(2)(i) and (iv) and (a)(3)(i) and Table 1 to Sec. 217.11
to read as follows:
Sec. 217.11 Capital conservation buffer, countercyclical capital
buffer amount, and GSIB surcharge.
* * * * *
(a) * * *
(2) * * *
(i) Eligible retained income. 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.
* * * * *
(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.
* * * * *
(3) * * *
(i) A Board-regulated institution's capital conservation buffer is
equal to the lowest of the following ratios, calculated as of the last
day of the previous calendar quarter:
[[Page 35260]]
(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
* * * * *
Table 1 to Sec. 217.11--Calculation of Maximum Payout Amount
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer Maximum payout ratio
----------------------------------------------------------------------------------------------------------------
Greater than 2.5 percent plus 100 percent of the Board- No payout ratio limitation applies.
regulated institution's applicable countercyclical
capital buffer amount and 100 percent of the Board-
regulated institution's applicable GSIB surcharge.
Less than or equal to 2.5 percent plus 100 percent of 60 percent.
the Board-regulated institution's applicable
countercyclical capital buffer amount and 100 percent
of the Board-regulated institution's applicable GSIB
surcharge, and greater than 1.875 percent plus 75
percent of the Board-regulated institution's applicable
countercyclical capital buffer amount and 75 percent of
the Board-regulated institution's applicable GSIB
surcharge.
Less than or equal to 1.875 percent plus 75 percent of 40 percent.
the Board-regulated institution's applicable
countercyclical capital buffer amount and 75 percent of
the Board-regulated institution's applicable GSIB
surcharge, and greater than 1.25 percent plus 50
percent of the Board-regulated institution's applicable
countercyclical capital buffer amount and 50 percent of
the Board-regulated institution's applicable GSIB
surcharge.
Less than or equal to 1.25 percent plus 50 percent of 20 percent.
the Board-regulated institution's applicable
countercyclical capital buffer amount and 50 percent of
the Board-regulated institution's applicable GSIB
surcharge, and greater than 0.625 percent plus 25
percent of the Board-regulated institution's applicable
countercyclical capital buffer amount and 25 percent of
the Board-regulated institution's applicable GSIB
surcharge.
Less than or equal to 0.625 percent plus 25 percent of 0 percent.
the Board-regulated institution's applicable
countercyclical capital buffer amount and 25 percent of
the Board-regulated institution's applicable GSIB
surcharge.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
29. Effective October 1, 2019, Sec. 217.20 is amended by revising
paragraphs (b)(1)(iii), (b)(4), (c)(2), and (d)(2) and (5) and adding
paragraph (f) to read as follows:
Sec. 217.20 Capital components and eligibility criteria for
regulatory capital instruments.
* * * * *
(b) * * *
(1) * * *
(iii) The instrument has no maturity date, can only be redeemed via
discretionary repurchases with the prior approval of the Board to the
extent otherwise required by law or regulation, and does not contain
any term or feature that creates an incentive to redeem;
* * * * *
(4) Any common equity tier 1 minority interest, subject to the
limitations in Sec. 217.21.
* * * * *
(c) * * *
(2) Tier 1 minority interest, subject to the limitations in Sec.
217.21, that is not included in the Board-regulated institution's
common equity tier 1 capital.
* * * * *
(d) * * *
(2) Total capital minority interest, subject to the limitations set
forth in Sec. 217.21, that is not included in the Board-regulated
institution's tier 1 capital.
* * * * *
(5) For a Board-regulated institution that makes an AOCI opt-out
election (as defined in paragraph (b)(2) of Sec. 217.22), 45 percent
of pretax net unrealized gains on available-for-sale preferred stock
classified as an equity security under GAAP and available-for-sale
equity exposures.
* * * * *
(f) A Board-regulated institution may not repurchase or redeem any
common equity tier 1 capital, additional tier 1, or tier 2 capital
instrument without the prior approval of the Board to the extent such
prior approval is required by paragraph (b), (c), or (d) of this
section, as applicable.
0
30. Effective April 1, 2020, Sec. 217.21 is revised to reads as
follows:
Sec. 217.21 Minority interest.
(a)(1) Applicability. For purposes of Sec. 217.20, a Board-
regulated institution that is not an advanced approaches Board-
regulated institution is subject to the minority interest limitations
in this paragraph (a) if a consolidated subsidiary of the Board-
regulated institution has issued regulatory capital that is not owned
by the Board-regulated institution.
(2) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the Board-regulated institution. The amount of
common equity tier 1 minority interest that a Board-regulated
institution may include in common equity tier 1 capital must be no
greater than 10 percent of the sum of all common equity tier 1 capital
elements of the Board-regulated institution (not including the common
equity tier 1 minority interest itself), less any common equity tier 1
capital regulatory adjustments and deductions in accordance with Sec.
217.22 (a) and (b).
(3) Tier 1 minority interest includable in the tier 1 capital of
the Board-regulated institution. The amount of tier 1 minority interest
that a Board-regulated institution may include in tier 1 capital must
be no greater than 10 percent of the sum of all tier 1 capital elements
of the Board-regulated institution (not including the tier 1 minority
interest itself), less any tier 1 capital regulatory adjustments and
deductions in accordance with Sec. 217.22(a) and (b).
(4) Total capital minority interest includable in the total capital
of the Board-regulated institution. The amount of total capital
minority interest that a Board-regulated institution may include in
total capital must be no greater than 10 percent of the sum of all
total capital elements of the Board-regulated institution (not
including the total capital minority interest itself), less any total
capital regulatory adjustments and deductions in accordance with Sec.
217.22(a) and (b).
(b)(1) Applicability. For purposes of Sec. 217.20, an advanced
approaches Board-regulated institution is subject to the minority
interest limitations in this paragraph (b) if:
(i) A consolidated subsidiary of the advanced approaches Board-
regulated institution has issued regulatory capital that is not owned
by the Board-regulated institution; and
[[Page 35261]]
(ii) For each relevant regulatory capital ratio of the consolidated
subsidiary, the ratio exceeds the sum of the subsidiary's minimum
regulatory capital requirements plus its capital conservation buffer.
(2) Difference in capital adequacy standards at the subsidiary
level. For purposes of the minority interest calculations in this
section, if the consolidated subsidiary issuing the capital is not
subject to capital adequacy standards similar to those of the advanced
approaches Board-regulated institution, the advanced approaches Board-
regulated institution must assume that the capital adequacy standards
of the advanced approaches Board-regulated institution apply to the
subsidiary.
(3) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the Board-regulated institution. For each
consolidated subsidiary of an advanced approaches Board-regulated
institution, the amount of common equity tier 1 minority interest the
advanced approaches Board-regulated institution may include in common
equity tier 1 capital is equal to:
(i) The common equity tier 1 minority interest of the subsidiary;
minus
(ii) The percentage of the subsidiary's common equity tier 1
capital that is not owned by the advanced approaches Board-regulated
institution, multiplied by the difference between the common equity
tier 1 capital of the subsidiary and the lower of:
(A) The amount of common equity tier 1 capital the subsidiary must
hold, or would be required to hold pursuant this paragraph (b), to
avoid restrictions on distributions and discretionary bonus payments
under Sec. 217.11 or equivalent standards established by the
subsidiary's home country supervisor; or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches Board-regulated institution that relate to the subsidiary
multiplied by
(2) The common equity tier 1 capital ratio the subsidiary must
maintain to avoid restrictions on distributions and discretionary bonus
payments under Sec. 217.11 or equivalent standards established by the
subsidiary's home country supervisor.
(4) Tier 1 minority interest includable in the tier 1 capital of
the advanced approaches Board-regulated institution. For each
consolidated subsidiary of the advanced approaches Board-regulated
institution, the amount of tier 1 minority interest the advanced
approaches Board-regulated institution may include in tier 1 capital is
equal to:
(i) The tier 1 minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's tier 1 capital that is not
owned by the advanced approaches Board-regulated institution multiplied
by the difference between the tier 1 capital of the subsidiary and the
lower of:
(A) The amount of tier 1 capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 217.11 or equivalent standards established by the subsidiary's
home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches Board-regulated institution that relate to the subsidiary
multiplied by
(2) The tier 1 capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 217.11 or equivalent standards established by the subsidiary's
home country supervisor.
(5) Total capital minority interest includable in the total capital
of the Board-regulated institution. For each consolidated subsidiary of
the advanced approaches Board-regulated institution, the amount of
total capital minority interest the advanced approaches Board-regulated
institution may include in total capital is equal to:
(i) The total capital minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's total capital that is not
owned by the advanced approaches Board-regulated institution multiplied
by the difference between the total capital of the subsidiary and the
lower of:
(A) The amount of total capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 217.11 or equivalent standards established by the subsidiary's
home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches Board-regulated institution that relate to the subsidiary
multiplied by
(2) The total capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 217.11 or equivalent standards established by the subsidiary's
home country supervisor.
0
31. Effective April 1, 2020, Sec. 217.22 is amended by revising
paragraphs (a)(1)(i), (c), (d), (g), and (h) to read as follows:
Sec. 217.22 Regulatory capital adjustments and deductions.
(a) * * *
(1) * * *
(i) Goodwill, net of associated deferred tax liabilities (DTLs) in
accordance with paragraph (e) of this section; and
(ii) For an advanced approaches Board-regulated institution,
goodwill that is embedded in the valuation of a significant investment
in the capital of an unconsolidated financial institution in the form
of common stock (and that is reflected in the consolidated financial
statements of the advanced approaches Board-regulated institution), in
accordance with paragraph (d) of this section;
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments \23\--(1) Investment in the Board-regulated
institution's own capital instruments. A Board-regulated institution
must deduct an investment in the Board-regulated institution's own
capital instruments as follows:
---------------------------------------------------------------------------
\23\ The Board-regulated institution must calculate amounts
deducted under paragraphs (c) through (f) of this section after it
calculates the amount of ALLL or AACL, as applicable, includable in
tier 2 capital under Sec. 217.20(d)(3).
---------------------------------------------------------------------------
(i) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own common stock instruments from its
common equity tier 1 capital elements to the extent such instruments
are not excluded from regulatory capital under Sec. 217.20(b)(1);
(ii) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own additional tier 1 capital instruments
from its additional tier 1 capital elements; and
(iii) A Board-regulated institution must deduct an investment in
the Board-regulated institution's own tier 2 capital instruments from
its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
a Board-regulated institution that is not an advanced approaches Board-
regulated institution (as described in paragraph (c)(4) of this
section), non-
[[Page 35262]]
significant investments in the capital of unconsolidated financial
institutions for an advanced approaches Board-regulated institution (as
described in paragraph (c)(5) of this section), and non-common stock
significant investments in the capital of unconsolidated financial
institutions for an advanced approaches Board-regulated institution (as
described in paragraph (c)(6) of this section). Under the corresponding
deduction approach, a Board-regulated institution must make deductions
from the component of capital for which the underlying instrument would
qualify if it were issued by the Board-regulated institution itself, as
described in paragraphs (c)(2)(i) through (iii) of this section. If the
Board-regulated institution does not have a sufficient amount of a
specific component of capital to effect the required deduction, the
shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 217.20, the Board-regulated institution must
treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders; and
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 217.300(c)), the Board-regulated
institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. A Board-regulated institution must deduct investments in
the capital of other financial institutions it holds reciprocally,
where such reciprocal cross holdings result from a formal or informal
arrangement to swap, exchange, or otherwise intend to hold each other's
capital instruments, by applying the corresponding deduction approach.
(4) Investments in the capital of unconsolidated financial
institutions. A Board-regulated institution that is not an advanced
approaches Board-regulated institution must deduct its investments in
the capital of unconsolidated financial institutions (as defined in
Sec. 217.2) that exceed 25 percent of the sum of the Board-regulated
institution's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section
by applying the corresponding deduction approach.\24\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, a Board-regulated
institution that underwrites a failed underwriting, with the prior
written approval of the Board, for the period of time stipulated by the
Board, is not required to deduct an investment in the capital of an
unconsolidated financial institution pursuant to this paragraph (c) to
the extent the investment is related to the failed underwriting.\25\
---------------------------------------------------------------------------
\24\ With the prior written approval of the Board, for the
period of time stipulated by the Board, a Board-regulated
institution that is not an advanced approaches Board-regulated
institution is not required to deduct an investment in the capital
of an unconsolidated financial institution pursuant to this
paragraph if the financial institution is in distress and if such
investment is made for the purpose of providing financial support to
the financial institution, as determined by the Board.
\25\ Any investments in the capital of unconsolidated financial
institutions that do not exceed the 25 percent threshold for
investments in the capital of unconsolidated financial institutions
under this section must be assigned the appropriate risk weight
under subparts D or F of this part, as applicable.
---------------------------------------------------------------------------
(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches Board-regulated
institution must deduct its non-significant investments in the capital
of unconsolidated financial institutions (as defined in Sec. 217.2)
that, in the aggregate, exceed 10 percent of the sum of the advanced
approaches Board-regulated institution's common equity tier 1 capital
elements minus all deductions from and adjustments to common equity
tier 1 capital elements required under paragraphs (a) through (c)(3) of
this section (the 10 percent threshold for non-significant investments)
by applying the corresponding deduction approach.\26\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, an advanced approaches
Board-regulated institution that underwrites a failed underwriting,
with the prior written approval of the Board, for the period of time
stipulated by the Board, is not required to deduct a non-significant
investment in the capital of an unconsolidated financial institution
pursuant to this paragraph (c) to the extent the investment is related
to the failed underwriting.\27\
---------------------------------------------------------------------------
\26\ With the prior written approval of the Board, for the
period of time stipulated by the Board, an advanced approaches
Board-regulated institution is not required to deduct a non-
significant investment in the capital of an unconsolidated financial
institution pursuant to this paragraph if the financial institution
is in distress and if such investment is made for the purpose of
providing financial support to the financial institution, as
determined by the Board.
\27\ Any non-significant investments in the capital of
unconsolidated financial institutions that do not exceed the 10
percent threshold for non-significant investments under this section
must be assigned the appropriate risk weight under subparts D, E, or
F of this part, as applicable.
---------------------------------------------------------------------------
(ii) The amount to be deducted under this section from a specific
capital component is equal to:
(A) The advanced approaches Board-regulated institution's non-
significant investments in the capital of unconsolidated financial
institutions exceeding the 10 percent threshold for non-significant
investments, multiplied by
(B) The ratio of the advanced approaches Board-regulated
institution's non-significant investments in the capital of
unconsolidated financial institutions in the form of such capital
component to the advanced approaches Board-regulated institution's
total non-significant investments in unconsolidated financial
institutions.
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. An
advanced approaches Board-regulated institution must deduct its
significant investments
[[Page 35263]]
in the capital of unconsolidated financial institutions that are not in
the form of common stock by applying the corresponding deduction
approach.\28\ The deductions described in this section are net of
associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the Board, for the period
of time stipulated by the Board, an advanced approaches Board-regulated
institution that underwrites a failed underwriting is not required to
deduct a significant investment in the capital of an unconsolidated
financial institution pursuant to this paragraph (c) if such investment
is related to such failed underwriting.
---------------------------------------------------------------------------
\28\ With prior written approval of the Board, for the period of
time stipulated by the Board, an advanced approaches Board-regulated
institution is not required to deduct a significant investment in
the capital instrument of an unconsolidated financial institution in
distress which is not in the form of common stock pursuant to this
section if such investment is made for the purpose of providing
financial support to the financial institution as determined by the
Board.
---------------------------------------------------------------------------
(d) MSAs and certain DTAs subject to common equity tier 1 capital
deduction thresholds. (1) A Board-regulated institution that is not an
advanced approaches Board-regulated institution must make deductions
from regulatory capital as described in this paragraph (d)(1).
(i) The Board-regulated institution must deduct from common equity
tier 1 capital elements the amount of each of the items set forth in
this paragraph (d)(1) that, individually, exceeds 25 percent of the sum
of the Board-regulated institution's common equity tier 1 capital
elements, less adjustments to and deductions from common equity tier 1
capital required under paragraphs (a) through (c)(3) of this section
(the 25 percent common equity tier 1 capital deduction threshold).\29\
---------------------------------------------------------------------------
\29\ The amount of the items in paragraph (d)(1) of this section
that is not deducted from common equity tier 1 capital must be
included in the risk-weighted assets of the Board-regulated
institution and assigned a 250 percent risk weight.
---------------------------------------------------------------------------
(ii) The Board-regulated institution must deduct from common equity
tier 1 capital elements the amount of DTAs arising from temporary
differences that the Board-regulated institution could not realize
through net operating loss carrybacks, net of any related valuation
allowances and net of DTLs, in accordance with paragraph (e) of this
section. A Board-regulated institution is not required to deduct from
the sum of its common equity tier 1 capital elements DTAs (net of any
related valuation allowances and net of DTLs, in accordance with Sec.
217.22(e)) arising from timing differences that the Board-regulated
institution could realize through net operating loss carrybacks. The
Board-regulated institution must risk weight these assets at 100
percent. For a state member bank that is a member of a consolidated
group for tax purposes, the amount of DTAs that could be realized
through net operating loss carrybacks may not exceed the amount that
the state member bank could reasonably expect to have refunded by its
parent holding company.
(iii) The Board-regulated institution must deduct from common
equity tier 1 capital elements the amount of MSAs net of associated
DTLs, in accordance with paragraph (e) of this section.
(iv) For purposes of calculating the amount of DTAs subject to
deduction pursuant to paragraph (d)(1) of this section, a Board-
regulated institution may exclude DTAs and DTLs relating to adjustments
made to common equity tier 1 capital under paragraph (b) of this
section. A Board-regulated institution that elects to exclude DTAs
relating to adjustments under paragraph (b) of this section also must
exclude DTLs and must do so consistently in all future calculations. A
Board-regulated institution may change its exclusion preference only
after obtaining the prior approval of the Board.
(2) An advanced approaches Board-regulated institution must make
deductions from regulatory capital as described in this paragraph
(d)(2).
(i) An advanced approaches Board-regulated institution must deduct
from common equity tier 1 capital elements the amount of each of the
items set forth in this paragraph (d)(2) that, individually, exceeds 10
percent of the sum of the advanced approaches Board-regulated
institution's common equity tier 1 capital elements, less adjustments
to and deductions from common equity tier 1 capital required under
paragraphs (a) through (c) of this section (the 10 percent common
equity tier 1 capital deduction threshold).
(A) DTAs arising from temporary differences that the advanced
approaches Board-regulated institution could not realize through net
operating loss carrybacks, net of any related valuation allowances and
net of DTLs, in accordance with paragraph (e) of this section. An
advanced approaches Board-regulated institution is not required to
deduct from the sum of its common equity tier 1 capital elements DTAs
(net of any related valuation allowances and net of DTLs, in accordance
with Sec. 217.22(e)) arising from timing differences that the advanced
approaches Board-regulated institution could realize through net
operating loss carrybacks. The advanced approaches Board-regulated
institution must risk weight these assets at 100 percent. For a state
member bank that is a member of a consolidated group for tax purposes,
the amount of DTAs that could be realized through net operating loss
carrybacks may not exceed the amount that the state member bank could
reasonably expect to have refunded by its parent holding company.
(B) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(C) Significant investments in the capital of unconsolidated
financial institutions in the form of common stock, net of associated
DTLs in accordance with paragraph (e) of this section.\30\ Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock subject to the 10 percent common equity tier 1
capital deduction threshold may be reduced by any goodwill embedded in
the valuation of such investments deducted by the advanced approaches
Board-regulated institution pursuant to paragraph (a)(1) of this
section. In addition, with the prior written approval of the Board, for
the period of time stipulated by the Board, an advanced approaches
Board-regulated institution that underwrites a failed underwriting is
not required to deduct a significant investment in the capital of an
unconsolidated financial institution in the form of common stock
pursuant to this paragraph (d)(2) if such investment is related to such
failed underwriting.
---------------------------------------------------------------------------
\30\ With the prior written approval of the Board, for the
period of time stipulated by the Board, an advanced approaches
Board-regulated institution is not required to deduct a significant
investment in the capital instrument of an unconsolidated financial
institution in distress in the form of common stock pursuant to this
section if such investment is made for the purpose of providing
financial support to the financial institution as determined by the
Board.
---------------------------------------------------------------------------
(ii) An advanced approaches Board-regulated institution must deduct
from common equity tier 1 capital elements the items listed in
paragraph (d)(2)(i) of this section that are not deducted as a result
of the application of the 10 percent common equity tier 1 capital
deduction threshold, and that, in aggregate, exceed 17.65 percent of
the sum of the advanced approaches Board-regulated institution's common
equity tier 1 capital elements, minus adjustments to and deductions
from common equity tier 1 capital required under paragraphs (a) through
(c) of this section, minus the items listed in paragraph (d)(2)(i) of
this section (the 15 percent common equity tier 1 capital
[[Page 35264]]
deduction threshold). Any goodwill that has been deducted under
paragraph (a)(1) of this section can be excluded from the significant
investments in the capital of unconsolidated financial institutions in
the form of common stock.\31\
---------------------------------------------------------------------------
\31\ The amount of the items in paragraph (d)(2) of this section
that is not deducted from common equity tier 1 capital pursuant to
this section must be included in the risk-weighted assets of the
advanced approaches Board-regulated institution and assigned a 250
percent risk weight.
---------------------------------------------------------------------------
(iii) For purposes of calculating the amount of DTAs subject to the
10 and 15 percent common equity tier 1 capital deduction thresholds, an
advanced approaches Board-regulated institution may exclude DTAs and
DTLs relating to adjustments made to common equity tier 1 capital under
paragraph (b) of this section. An advanced approaches Board-regulated
institution that elects to exclude DTAs relating to adjustments under
paragraph (b) of this section also must exclude DTLs and must do so
consistently in all future calculations. An advanced approaches Board-
regulated institution may change its exclusion preference only after
obtaining the prior approval of the Board.
* * * * *
(g) Treatment of assets that are deducted. A Board-regulated
institution must exclude from standardized total risk-weighted assets
and, as applicable, advanced approaches total risk-weighted assets any
item that is required to be deducted from regulatory capital.
(h) Net long position. (1) For purposes of calculating an
investment in the Board-regulated institution's own capital instrument
and an investment in the capital of an unconsolidated financial
institution under this section, the net long position is the gross long
position in the underlying instrument determined in accordance with
paragraph (h)(2) of this section, as adjusted to recognize a short
position in the same instrument calculated in accordance with paragraph
(h)(3) of this section.
(2) Gross long position. The gross long position is determined as
follows:
(i) For an equity exposure that is held directly, the adjusted
carrying value as that term is defined in Sec. 217.51(b);
(ii) For an exposure that is held directly and is not an equity
exposure or a securitization exposure, the exposure amount as that term
is defined in Sec. 217.2;
(iii) For an indirect exposure, the Board-regulated institution's
carrying value of the investment in the investment fund, provided that,
alternatively:
(A) A Board-regulated institution may, with the prior approval of
the Board, use a conservative estimate of the amount of its investment
in the Board-regulated institution's own capital instruments or its
investment in the capital of an unconsolidated financial institution
held through a position in an index; or
(B) A Board-regulated institution may calculate the gross long
position for investments in the Board-regulated institution's own
capital instruments or investments in the capital of an unconsolidated
financial institution by multiplying the Board-regulated institution's
carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for
investments in the Board-regulated institution's own capital
instruments or investments in the capital of unconsolidated financial
institutions as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings of investments in the
Board-regulated institution's own capital instruments or investments in
the capital of unconsolidated financial institutions.
(iv) For a synthetic exposure, the amount of the Board-regulated
institution's loss on the exposure if the reference capital instrument
were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument, the following criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position has a residual maturity of at
least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the Board-regulated
institution's Call Report, for a state member bank, or FR Y-9C, for a
bank holding company or savings and loan holding company, as
applicable, if the Board-regulated institution has a contractual right
or obligation to sell the long position at a specific point in time and
the counterparty to the contract has an obligation to purchase the long
position if the Board-regulated institution exercises its right to
sell, this point in time may be treated as the maturity of the long
position such that the maturity of the long position and short position
are deemed to match for purposes of the maturity requirement, even if
the maturity of the short position is less than one year; and
(iii) For an investment in the Board-regulated institution's own
capital instrument under paragraph (c)(1) of this section or an
investment in the capital of an unconsolidated financial institution
under paragraphs (c) and (d) of this section:
(A) A Board-regulated institution may only net a short position
against a long position in an investment in the Board-regulated
institution's own capital instrument under paragraph (c) of this
section if the short position involves no counterparty credit risk.
(B) A gross long position in an investment in the Board-regulated
institution's own capital instrument or an investment in the capital of
an unconsolidated financial institution resulting from a position in an
index may be netted against a short position in the same index. Long
and short positions in the same index without maturity dates are
considered to have matching maturities.
(C) A short position in an index that is hedging a long cash or
synthetic position in an investment in the Board-regulated
institution's own capital instrument or an investment in the capital of
an unconsolidated financial institution can be decomposed to provide
recognition of the hedge. More specifically, the portion of the index
that is composed of the same underlying instrument that is being hedged
may be used to offset the long position if both the long position being
hedged and the short position in the index are reported as a trading
asset or trading liability (whether on- or off-balance sheet) on the
Board-regulated institution's Call Report, for a state member bank, or
FR Y-9C, for a bank holding company or savings and loan holding
company, as applicable, and the hedge is deemed effective by the Board-
regulated institution's internal control processes, which have not been
found to be inadequate by the Board.
0
32. Effective October 1, 2019, Sec. 217.32 is amended by revising
paragraphs (b), (d)(2), (d)(3)(ii), (k), and (l) to read as follows:
Sec. 217.32 General risk weights.
* * * * *
(b) Certain supranational entities and multilateral development
banks (MDBs). A Board-regulated institution must assign a zero percent
risk weight to an exposure to the Bank for International Settlements,
the European Central Bank, the European Commission, the International
Monetary Fund, the
[[Page 35265]]
European Stability Mechanism, the European Financial Stability
Facility, or an MDB.
* * * * *
(d) * * *
(2) Exposures to foreign banks. (i) Except as otherwise provided
under paragraphs (d)(2)(iii), (d)(2)(v), and (d)(3) of this section, a
Board-regulated institution must assign a risk weight to an exposure to
a foreign bank, in accordance with Table 2 to Sec. 217.32, based on
the CRC that corresponds to the foreign bank's home country or the OECD
membership status of the foreign bank's home country if there is no CRC
applicable to the foreign bank's home country.
Table 2 to Sec. 217.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 20
2..................................................... 50
3..................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 20
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(ii) A Board-regulated institution must assign a 20 percent risk
weight to an exposure to a foreign bank whose home country is a member
of the OECD and does not have a CRC.
(iii) A Board-regulated institution must assign a 20 percent risk-
weight to an exposure that is a self-liquidating, trade-related
contingent item that arises from the movement of goods and that has a
maturity of three months or less to a foreign bank whose home country
has a CRC of 0, 1, 2, or 3, or is an OECD member with no CRC.
(iv) A Board-regulated institution must assign a 100 percent risk
weight to an exposure to a foreign bank whose home country is not a
member of the OECD and does not have a CRC, with the exception of self-
liquidating, trade-related contingent items that arise from the
movement of goods, and that have a maturity of three months or less,
which may be assigned a 20 percent risk weight.
(v) A Board-regulated institution must assign a 150 percent risk
weight to an exposure to a foreign bank immediately upon determining
that an event of sovereign default has occurred in the bank's home
country, or if an event of sovereign default has occurred in the
foreign bank's home country during the previous five years.
(3) * * *
(ii) A significant investment in the capital of an unconsolidated
financial institution in the form of common stock pursuant to Sec.
217.22(d)(2)(i)(c);
* * * * *
(k) Past due exposures. Except for an exposure to a sovereign
entity or a residential mortgage exposure or a policy loan, if an
exposure is 90 days or more past due or on nonaccrual:
(1) A Board-regulated institution must assign a 150 percent risk
weight to the portion of the exposure that is not guaranteed or that is
unsecured;
(2) A Board-regulated institution may assign a risk weight to the
guaranteed portion of a past due exposure based on the risk weight that
applies under Sec. 217.36 if the guarantee or credit derivative meets
the requirements of that section; and
(3) A Board-regulated institution may assign a risk weight to the
collateralized portion of a past due exposure based on the risk weight
that applies under Sec. 217.37 if the collateral meets the
requirements of that section.
(l) Other assets. (1)(i) A bank holding company or savings and loan
holding company must assign a zero percent risk weight to cash owned
and held in all offices of subsidiary depository institutions or in
transit, and to gold bullion held in a subsidiary depository
institution's own vaults, or held in another depository institution's
vaults on an allocated basis, to the extent the gold bullion assets are
offset by gold bullion liabilities.
(ii) A state member bank must assign a zero percent risk weight to
cash owned and held in all offices of the state member bank or in
transit; to gold bullion held in the state member bank's own vaults or
held in another depository institution's vaults on an allocated basis,
to the extent the gold bullion assets are offset by gold bullion
liabilities; and to exposures that arise from the settlement of cash
transactions (such as equities, fixed income, spot foreign exchange and
spot commodities) with a central counterparty where there is no
assumption of ongoing counterparty credit risk by the central
counterparty after settlement of the trade and associated default fund
contributions.
(2) A Board-regulated institution must assign a 20 percent risk
weight to cash items in the process of collection.
(3) A Board-regulated institution must assign a 100 percent risk
weight to DTAs arising from temporary differences that the Board-
regulated institution could realize through net operating loss
carrybacks.
(4) A Board-regulated institution must assign a 250 percent risk
weight to the portion of each of the following items to the extent it
is not deducted from common equity tier 1 capital pursuant to Sec.
217.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the Board-
regulated institution could not realize through net operating loss
carrybacks.
(5) A Board-regulated institution must assign a 100 percent risk
weight to all assets not specifically assigned a different risk weight
under this subpart and that are not deducted from tier 1 or tier 2
capital pursuant to Sec. 217.22.
(6) Notwithstanding the requirements of this section, a state
member bank may assign an asset that is not included in one of the
categories provided in this section to the risk weight category
applicable under the capital rules applicable to bank holding companies
and savings and loan holding companies under this part, provided that
all of the following conditions apply:
(i) The Board-regulated institution is not authorized to hold the
asset under applicable law other than debt previously contracted or
similar authority; and
(ii) The risks associated with the asset are substantially similar
to the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this subpart.
* * * * *
0
33. Effective October 1, 2019, Sec. 217.34 is amended by revising
paragraph (c) to read as follows:
Sec. 217.34 OTC derivative contracts.
* * * * *
(c) Counterparty credit risk for OTC credit derivatives--(1)
Protection purchasers. A Board-regulated institution that purchases an
OTC credit derivative that is recognized under Sec. 217.36 as a credit
risk mitigant for an exposure that is not a covered position under
subpart F is not required to compute a separate counterparty credit
risk capital requirement under this subpart D provided that the Board-
regulated institution does so consistently for all such credit
derivatives. The Board-regulated institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A Board-regulated institution that is
the protection provider under an OTC credit derivative must treat the
OTC credit
[[Page 35266]]
derivative as an exposure to the underlying reference asset. The Board-
regulated institution is not required to compute a counterparty credit
risk capital requirement for the OTC credit derivative under this
subpart D, provided that this treatment is applied consistently for all
such OTC credit derivatives. The Board-regulated institution must
either include all or exclude all such OTC credit derivatives that are
subject to a qualifying master netting agreement from any measure used
to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (c)(2) apply to all relevant
counterparties for risk-based capital purposes unless the Board-
regulated institution is treating the OTC credit derivative as a
covered position under subpart F, in which case the Board-regulated
institution must compute a supplemental counterparty credit risk
capital requirement under this section.
* * * * *
0
34. Effective October 1, 2019, Sec. 217.35 is amended by revising
paragraphs (b)(3)(ii), (b)(4)(ii), (c)(3)(ii), and (c)(4)(ii) to read
as follows:
Sec. 217.35 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Board-regulated institution must apply the risk
weight appropriate for the CCP according to this subpart D.
(4) * * *
(ii) A clearing member client Board-regulated institution must
calculate a risk-weighted asset amount for any collateral provided to a
CCP, clearing member, or custodian in connection with a cleared
transaction in accordance with the requirements under this subpart D.
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Board-regulated institution must apply the risk weight
appropriate for the CCP according to this subpart D.
(4) * * *
(ii) A clearing member Board-regulated institution must calculate a
risk-weighted asset amount for any collateral provided to a CCP,
clearing member, or a custodian in connection with a cleared
transaction in accordance with requirements under this subpart D.
* * * * *
0
35. Effective October 1, 2019, Sec. 217.36 is amended by revising
paragraph (c) to read as follows:
Sec. 217.36 Guarantees and credit derivatives: substitution
treatment.
* * * * *
(c) Substitution approach--(1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, a Board-regulated institution
may recognize the guarantee or credit derivative in determining the
risk-weighted asset amount for the hedged exposure by substituting the
risk weight applicable to the guarantor or credit derivative protection
provider under this subpart D for the risk weight assigned to the
exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the exposure amount of the hedged exposure, the
Board-regulated institution must treat the hedged exposure as two
separate exposures (protected and unprotected) in order to recognize
the credit risk mitigation benefit of the guarantee or credit
derivative.
(i) The Board-regulated institution may calculate the risk-weighted
asset amount for the protected exposure under this subpart D, where the
applicable risk weight is the risk weight applicable to the guarantor
or credit derivative protection provider.
(ii) The Board-regulated institution must calculate the risk-
weighted asset amount for the unprotected exposure under this subpart
D, where the applicable risk weight is that of the unprotected portion
of the hedged exposure.
(iii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraphs (d), (e),
or (f) of this section.
* * * * *
0
36. Effective October 1, 2019, Sec. 217.37 is amended by revising
paragraph (b)(2)(i) to read as follows:
Sec. 217.37 Collateralized transactions.
* * * * *
(b) * * *
(2) * * *
(i) A Board-regulated institution may apply a risk weight to the
portion of an exposure that is secured by the fair value of financial
collateral (that meets the requirements of paragraph (b)(1) of this
section) based on the risk weight assigned to the collateral under this
subpart D. For repurchase agreements, reverse repurchase agreements,
and securities lending and borrowing transactions, the collateral is
the instruments, gold, and cash the Board-regulated institution has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the transaction. Except as provided in paragraph
(b)(3) of this section, the risk weight assigned to the collateralized
portion of the exposure may not be less than 20 percent.
* * * * *
0
37. Effective October 1, 2019, Sec. 217.38 is amended by revising
paragraph (e)(2) to read as follows:
Sec. 217.38 Unsettled transactions.
* * * * *
(e) * * *
(2) From the business day after the Board-regulated institution has
made its delivery until five business days after the counterparty
delivery is due, the Board-regulated institution must calculate the
risk-weighted asset amount for the transaction by treating the current
fair value of the deliverables owed to the Board-regulated institution
as an exposure to the counterparty and using the applicable
counterparty risk weight under this subpart D.
* * * * *
0
38. Effective October 1, 2019, Sec. 217.42 is amended by revising
paragraph (j)(2)(ii)(A) to read as follows:
Sec. 217.42 Risk-weighted assets for securitization exposures.
* * * * *
(j) * * *
(2) * * *
(ii) * * *
(A) If the Board-regulated institution purchases credit protection
from a counterparty that is not a securitization SPE, the Board-
regulated institution must determine the risk weight for the exposure
according to this subpart D.
* * * * *
0
39. Effective October 1, 2019, Sec. 217.52 is amended by revising
paragraphs (b)(1) and (4) to read as follows:
Sec. 217.52 Simple risk-weight approach (SRWA).
* * * * *
(b) * * *
(1) Zero percent risk weight equity exposures. An equity exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
the
[[Page 35267]]
European Stability Mechanism, the European Financial Stability
Facility, an MDB, and any other entity whose credit exposures receive a
zero percent risk weight under Sec. 217.32 may be assigned a zero
percent risk weight.
* * * * *
(4) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock that are not deducted from capital pursuant to
Sec. 217.22(d)(2) are assigned a 250 percent risk weight.
* * * * *
0
40. Effective October 1, 2019, Sec. 217.61 is revised to read as
follows:
Sec. 217.61 Purpose and scope.
Sections 217.61 through 217.63 of this subpart establish public
disclosure requirements related to the capital requirements described
in subpart B of this part for a Board-regulated institution with total
consolidated assets of $50 billion or more as reported on the Board-
regulated institution's most recent year-end Call Report, for a state
member bank, or FR Y-9C, for a bank holding company or savings and loan
holding company, as applicable that is not an advanced approaches
Board-regulated institution making public disclosures pursuant to Sec.
217.172. An advanced approaches Board-regulated institution that has
not received approval from the Board to exit parallel run pursuant to
Sec. 217.121(d) is subject to the disclosure requirements described in
Sec. Sec. 217.62 and 217.63. A Board-regulated institution with total
consolidated assets of $50 billion or more as reported on the Board-
regulated institution's most recent year-end Call Report, for a state
member bank, or FR Y-9C, for a bank holding company or savings and loan
holding company, as applicable, that is not an advanced approaches
Board-regulated institution making public disclosures subject to Sec.
217.172 must comply with Sec. 217.62 unless it is a consolidated
subsidiary of a bank holding company, savings and loan holding company,
or depository institution that is subject to the disclosure
requirements of Sec. 217.62 or a subsidiary of a non-U.S. banking
organization that is subject to comparable public disclosure
requirements in its home jurisdiction. For purposes of this section,
total consolidated assets are determined based on the average of the
Board-regulated institution's total consolidated assets in the four
most recent quarters as reported on the Call Report, for a state member
bank, or FR Y-9C, for a bank holding company or savings and loan
holding company, as applicable; or the average of the Board-regulated
institution's total consolidated assets in the most recent consecutive
quarters as reported quarterly on the Board-regulated institution's
Call Report, for a state member bank, or FR Y-9C, for a bank holding
company or savings and loan holding company, as applicable if the
Board-regulated institution has not filed such a report for each of the
most recent four quarters.
0
41. Effective October 1, 2019, Sec. 217.63 is amended by revising
Tables 3 and 8 to Sec. 217.63 to read as follows:
Sec. 217.63 Disclosures by Board-regulated institutions described in
Sec. 217.61.
* * * * *
Table 3 to Sec. 217.63--Capital Adequacy
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures............................... (a) A summary discussion of the Board-regulated
institution's approach to assessing the adequacy of its
capital to support current and future activities.
Quantitative disclosures.............................. (b) Risk-weighted assets for:
(1) Exposures to sovereign entities;
(2) Exposures to certain supranational entities and
MDBs;
(3) Exposures to depository institutions, foreign
banks, and credit unions;
(4) Exposures to PSEs;
(5) Corporate exposures;
(6) Residential mortgage exposures;
(7) Statutory multifamily mortgages and pre-sold
construction loans;
(8) HVCRE exposures;
(9) Past due loans;
(10) Other assets;
(11) Cleared transactions;
(12) Default fund contributions;
(13) Unsettled transactions;
(14) Securitization exposures; and
(15) Equity exposures.
(c) Standardized market risk-weighted assets as
calculated under subpart F of this part.
(d) Common equity tier 1, tier 1 and total risk-based
capital ratios:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
(e) Total standardized risk-weighted assets.
----------------------------------------------------------------------------------------------------------------
* * * * *
Table 8 to Sec. 217.63--Securitization
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures............................... (a) The general qualitative disclosure requirement with
respect to a securitization (including synthetic
securitizations), including a discussion of:
(1) The Board-regulated institution's objectives for
securitizing assets, including the extent to which
these activities transfer credit risk of the
underlying exposures away from the Board-regulated
institution to other entities and including the type
of risks assumed and retained with resecuritization
activity; \1\
(2) The nature of the risks (e.g., liquidity risk)
inherent in the securitized assets;
(3) The roles played by the Board-regulated
institution in the securitization process \2\ and an
indication of the extent of the Board-regulated
institution's involvement in each of them;
(4) The processes in place to monitor changes in the
credit and market risk of securitization exposures
including how those processes differ for
resecuritization exposures;
[[Page 35268]]
(5) The Board-regulated institution's policy for
mitigating the credit risk retained through
securitization and resecuritization exposures; and
(6) The risk-based capital approaches that the Board-
regulated institution follows for its securitization
exposures including the type of securitization
exposure to which each approach applies.
(b) A list of:
(1) The type of securitization SPEs that the Board-
regulated institution, as sponsor, uses to
securitize third-party exposures. The Board-
regulated institution must indicate whether it has
exposure to these SPEs, either on- or off-balance
sheet; and
(2) Affiliated entities:
(i) That the Board-regulated institution manages or
advises; and
` (ii) That invest either in the securitization
exposures that the Board-regulated institution has
securitized or in securitization SPEs that the
Board-regulated institution sponsors.\3\
(c) Summary of the Board-regulated institution's
accounting policies for securitization activities,
including:
(1) Whether the transactions are treated as sales or
financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions applied in valuing
retained or purchased interests;
(4) Changes in methods and key assumptions from the
previous period for valuing retained interests and
impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are
valued and whether they are recorded under subpart D
of this part; and
(7) Policies for recognizing liabilities on the
balance sheet for arrangements that could require
the Board-regulated institution to provide financial
support for securitized assets.
(d) An explanation of significant changes to any
quantitative information since the last reporting
period.
Quantitative Disclosures.............................. (e) The total outstanding exposures securitized by the
Board-regulated institution in securitizations that
meet the operational criteria provided in Sec. 217.41
(categorized into traditional and synthetic
securitizations), by exposure type, separately for
securitizations of third-party exposures for which the
bank acts only as sponsor.\4\
(f) For exposures securitized by the Board-regulated
institution in securitizations that meet the
operational criteria in Sec. 217.41:
(1) Amount of securitized assets that are impaired/
past due categorized by exposure type; \5\ and
(2) Losses recognized by the Board-regulated
institution during the current period categorized by
exposure type.\6\
(g) The total amount of outstanding exposures intended
to be securitized categorized by exposure type.
(h) Aggregate amount of:
(1) On-balance sheet securitization exposures
retained or purchased categorized by exposure type;
and
(2) Off-balance sheet securitization exposures
categorized by exposure type.
(i) (1) Aggregate amount of securitization exposures
retained or purchased and the associated capital
requirements for these exposures, categorized between
securitization and resecuritization exposures, further
categorized into a meaningful number of risk weight
bands and by risk-based capital approach (e.g., SSFA);
and
(2) Aggregate amount disclosed separately by type of
underlying exposure in the pool of any:
(i) After-tax gain-on-sale on a securitization that
has been deducted from common equity tier 1
capital; and
(ii) Credit-enhancing interest-only strip that is
assigned a 1,250 percent risk weight.
(j) Summary of current year's securitization activity,
including the amount of exposures securitized (by
exposure type), and recognized gain or loss on sale by
exposure type.
(k) Aggregate amount of resecuritization exposures
retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is
applied and those not applied; and
(2) Exposures to guarantors categorized according to
guarantor creditworthiness categories or guarantor
name.
----------------------------------------------------------------------------------------------------------------
\1\ The Board-regulated institution should describe the structure of resecuritizations in which it participates;
this description should be provided for the main categories of resecuritization products in which the Board-
regulated institution is active.
\2\ For example, these roles may include originator, investor, servicer, provider of credit enhancement,
sponsor, liquidity provider, or swap provider.
\3\ Such affiliated entities may include, for example, money market funds, to be listed individually, and
personal and private trusts, to be noted collectively.
\4\ ``Exposures securitized'' include underlying exposures originated by the bank, whether generated by them or
purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in
sponsored transactions. Securitization transactions (including underlying exposures originally on the bank's
balance sheet and underlying exposures acquired by the bank from third-party entities) in which the
originating bank does not retain any securitization exposure should be shown separately but need only be
reported for the year of inception. Banks are required to disclose exposures regardless of whether there is a
capital charge under this part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the bank's balance sheet) or credit-related
OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for
probable future financial support required of the bank with respect to securitized assets.
* * * * *
0
42. Effective October 1, 2019, Sec. 217.131 is amended by revising
paragraph (d)(2) to read as follows:
Sec. 217.131 Mechanics for calculating total wholesale and retail
risk-weighted assets.
* * * * *
(d) * * *
(2) Floor on PD assignment. The PD for each wholesale obligor or
retail segment may not be less than 0.03 percent, except for exposures
to or directly and unconditionally guaranteed by a sovereign entity,
the Bank for International Settlements, the International Monetary
Fund, the European Commission, the European Central Bank, the European
Stability
[[Page 35269]]
Mechanism, the European Financial Stability Facility, or a multilateral
development bank, to which the Board-regulated institution assigns a
rating grade associated with a PD of less than 0.03 percent.
* * * * *
0
43. Effective October 1, 2019, Sec. 217.133 is amended by revising
paragraphs (b)(3)(ii) and (c)(3)(ii) to read as follows:
Sec. 217.133 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Board-regulated institution must apply the risk
weight applicable to the CCP under subpart D of this part.
* * * * *
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Board-regulated institution must apply the risk weight
applicable to the CCP according to subpart D of this part.
* * * * *
0
44. Effective October 1, 2019, Sec. 217.152 is amended by revising
paragraphs (b)(5) and (6) to read as follows:
Sec. 217.152 Simple risk weight approach (SRWA).
* * * * *
(b) * * *
(5) 300 percent risk weight equity exposures. A publicly traded
equity exposure (other than an equity exposure described in paragraph
(b)(7) of this section and including the ineffective portion of a hedge
pair) is assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure
(other than an equity exposure described in paragraph (b)(7) of this
section) that is not publicly traded is assigned a 400 percent risk
weight.
* * * * *
0
45. Effective October 1, 2019, Sec. 217.202, paragraph (b) is amended
by revising the definition of ``Corporate debt position'' to read as
follows:
Sec. 217.202 Definitions.
* * * * *
(b) * * *
Corporate debt position means a debt position that is an exposure
to a company that is not a sovereign entity, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank,
a depository institution, a foreign bank, a credit union, a public
sector entity, a GSE, or a securitization.
* * * * *
0
46. Effective October 1, 2019, Sec. 217.210 is amended by revising
paragraphs (b)(2)(ii) and (b)(2)(vii)(A) to read as follows:
Sec. 217.210 Standardized measurement method for specific risk.
* * * * *
(b) * * *
(2) * * *
(ii) Certain supranational entity and multilateral development bank
debt positions. A Board-regulated institution may assign a 0.0 percent
specific risk-weighting factor to a debt position that is an exposure
to the Bank for International Settlements, the European Central Bank,
the European Commission, the International Monetary Fund, the European
Stability Mechanism, the European Financial Stability Facility, or an
MDB.
* * * * *
(vii) * * *
(A) General requirements. (1) A Board-regulated institution that is
not an advanced approaches Board-regulated institution or is a U.S.
intermediate holding company that is required to be established or
designated pursuant to 12 CFR 252.153 and that is not calculating risk-
weighted assets according to Subpart E must assign a specific risk-
weighting factor to a securitization position using either the
simplified supervisory formula approach (SSFA) in paragraph
(b)(2)(vii)(C) of this section (and Sec. 217.211) or assign a specific
risk-weighting factor of 100 percent to the position.
(2) A Board-regulated institution that is an advanced approaches
Board-regulated institution or is a U.S. intermediate holding company
that is required to be established or designated pursuant to 12 CFR
252.153 and that is calculating risk-weighted assets according to
Subpart E must calculate a specific risk add-on for a securitization
position in accordance with paragraph (b)(2)(vii)(B) of this section if
the Board-regulated institution and the securitization position each
qualifies to use the SFA in Sec. 217.143. A Board-regulated
institution that is an advanced approaches Board-regulated institution
or is a U.S. intermediate holding company that is required to be
established or designated pursuant to 12 CFR 252.153 and that is
calculating risk-weighted assets according to Subpart E with a
securitization position that does not qualify for the SFA under
paragraph (b)(2)(vii)(B) of this section may assign a specific risk-
weighting factor to the securitization position using the SSFA in
accordance with paragraph (b)(2)(vii)(C) of this section or assign a
specific risk-weighting factor of 100 percent to the position.
(3) A Board-regulated institution must treat a short securitization
position as if it is a long securitization position solely for
calculation purposes when using the SFA in paragraph (b)(2)(vii)(B) of
this section or the SSFA in paragraph (b)(2)(vii)(C) of this section.
* * * * *
0
47. Section 217.300 is amended:
0
a. Effective October 1, 2019, by revising paragraphs (c)(2) and (3);
and
0
b. Effective April 1, 2020, by removing paragraphs (b) and (d).
The revsions read as follows:
Sec. 217.300 Transitions.
(c) * * *
(2) Mergers and acquisitions. (i) A depository institution holding
company of $15 billion or more that acquires after December 31, 2013
either a depository institution holding company with total consolidated
assets of less than $15 billion as of December 31, 2009 (depository
institution holding company under $15 billion) or a depository
institution holding company that is a 2010 MHC, may include in
regulatory capital the non-qualifying capital instruments issued by the
acquired organization up to the applicable percentages set forth in
Table 8 to Sec. 217.300.
(ii) If a depository institution holding company under $15 billion
acquires after December 31, 2013 a depository institution holding
company under $15 billion or a 2010 MHC, and the resulting organization
has total consolidated assets of $15 billion or more as reported on the
resulting organization's FR Y-9C for the period in which the
transaction occurred, the resulting organization may include in
regulatory capital non-qualifying instruments of the resulting
organization up to the applicable percentages set forth in Table 8 to
Sec. 217.300.
[[Page 35270]]
Table 8 to Sec. 217.300
------------------------------------------------------------------------
Percentage of non-
qualifying capital
instruments includable
in additional tier 1 or
Transition period (calendar year) tier 2 capital for a
depository institution
holding company of $15
billion or more
------------------------------------------------------------------------
Calendar year 2014............................ 50
Calendar year 2015............................ 25
Calendar year 2016 and thereafter............. 0
------------------------------------------------------------------------
(3) Depository institution holding companies under $15 billion and
2010 MHCs. (i) Non-qualifying capital instruments issued by depository
institution holding companies under $15 billion and 2010 MHCs prior to
May 19, 2010, may be included in additional tier 1 or tier 2 capital if
the instrument was included in tier 1 or tier 2 capital, respectively,
as of January 1, 2014.
(ii) Non-qualifying capital instruments includable in tier 1
capital are subject to a limit of 25 percent of tier 1 capital
elements, excluding any non-qualifying capital instruments and after
applying all regulatory capital deductions and adjustments to tier 1
capital.
(iii) Non-qualifying capital instruments that are not included in
tier 1 as a result of the limitation in paragraph (c)(3)(ii) of this
section are includable in tier 2 capital.
* * * * *
12 CFR Part 324
FEDERAL DEPOSIT INSURANCE CORPORATION
For the reasons set out in the joint preamble, 12 CFR part 324 is
amended as follows.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
48. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
Subpart A--General Provisions
0
49. Effective October 1, 2019, Sec. 324.2 is amended by revising the
definitions of ``corporate exposure,'' ``eligible guarantor,''
``investment in the capital of an unconsolidated financial
institution,'' ``non-significant investment in the capital of an
unconsolidated financial institution,'' and ``significant investment in
the capital of an unconsolidated financial institution'' to read as
follows:
Sec. 324.2 Definitions.
* * * * *
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multi-lateral development bank
(MDB), a depository institution, a foreign bank, a credit union, or a
public sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure;
(11) An unsettled transaction;
(12) A policy loan; or
(13) A separate account.
* * * * *
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the
International Monetary Fund, the European Central Bank, the European
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank
(MDB), a depository institution, a bank holding company, a savings and
loan holding company, a credit union, a foreign bank, or a qualifying
central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter,
has issued and outstanding an unsecured debt security without credit
enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the
credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the
business of providing credit protection (such as a monoline bond
insurer or re-insurer).
* * * * *
Investment in the capital of an unconsolidated financial
institution means a net long position calculated in accordance with
Sec. 324.22(h) in an instrument that is recognized as capital for
regulatory purposes by the primary supervisor of an unconsolidated
regulated financial institution or is an instrument that is part of the
GAAP equity of an unconsolidated unregulated financial institution,
including direct, indirect, and synthetic exposures to capital
instruments, excluding underwriting positions held by the FDIC-
supervised institution for five or fewer business days.
* * * * *
Non-significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
FDIC-supervised institution in the capital of an unconsolidated
financial institution where the advanced approaches FDIC-supervised
institution owns 10 percent or less of the issued and outstanding
common stock of the unconsolidated financial institution.
* * * * *
Significant investment in the capital of an unconsolidated
financial institution means an investment by an advanced approaches
FDIC-supervised institution in the capital of an unconsolidated
financial institution where the advanced approaches FDIC-supervised
institution owns more than 10 percent of the issued and outstanding
common stock of the unconsolidated financial institution.
* * * * *
0
50. Effective October 1, 2019, Sec. 324.10 is amended by revising
paragraph (c)(4)(ii)(H) to read as follows:
Sec. 324.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(H) The credit equivalent amount of all off-balance sheet exposures
of the FDIC-supervised institution, excluding repo-style transactions,
repurchase or reverse repurchase or securities borrowing or lending
transactions that qualify for sales treatment under U.S. GAAP, and
derivative transactions, determined using the applicable credit
conversion factor under Sec. 324.33(b), provided, however, that the
minimum credit conversion factor that may be assigned to an off-balance
sheet exposure under this paragraph is 10 percent; and
* * * * *
0
51. Effective October 1, 2019, Sec. 324.11 is amended by revising
paragraphs (a)(2)(i) and (iv) and (a)(3)(i) and Table 1 to Sec. 324.11
to read as follows:
[[Page 35271]]
Sec. 324.11 Capital conservation buffer and countercyclical capital
buffer amount.
(a) * * *
(2) * * *
(i) Eligible retained income. The eligible retained income of an
FDIC-supervised institution is the FDIC-supervised institution's net
income, calculated in accordance with the instructions to the Call
Report, for the four calendar quarters preceding the current calendar
quarter, net of any distributions and associated tax effects not
already reflected in net income.
* * * * *
(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.
(3) Calculation of capital conservation buffer. (i) An FDIC-
supervised institution's capital conservation buffer is equal to the
lowest of the following ratios, calculated as of the last day of the
previous calendar quarter:
(A) The FDIC-supervised institution's common equity tier 1 capital
ratio minus the FDIC-supervisedsupervised institution's minimum common
equity tier 1 capital ratio requirement under Sec. 324.10;
(B) The FDIC-supervisedsupervised institution's tier 1 capital
ratio minus the FDIC-supervisedsupervised institution's minimum tier 1
capital ratio requirement under Sec. 324.10; and
(C) The FDIC-supervisedsupervised institution's total capital ratio
minus the FDIC-supervisedsupervised institution's minimum total capital
ratio requirement under Sec. 324.10; or
* * * * *
Table 1 to Sec. 324.11--Calculation of Maximum Payout Amount
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer Maximum payout ratio
----------------------------------------------------------------------------------------------------------------
Greater than 2.5 percent plus 100 percent of the FDIC- No payout ratio limitation applies.
supervised institution's applicable countercyclical
capital buffer amount.
Less than or equal to 2.5 percent plus 100 percent of 60 percent.
the FDIC-supervised institution's applicable
countercyclical capital buffer amount, and greater than
1.875 percent plus 75 percent of the FDIC-supervised
institution's applicable countercyclical capital buffer
amount.
Less than or equal to 1.875 percent plus 75 percent of 40 percent.
the FDIC-supervised institution's applicable
countercyclical capital buffer amount, and greater than
1.25 percent plus 50 percent of the FDIC-supervised
institution's applicable countercyclical capital buffer
amount.
Less than or equal to 1.25 percent plus 50 percent of 20 percent.
the FDIC-supervised institution's applicable
countercyclical capital buffer amount, and greater than
0.625 percent plus 25 percent of the FDIC-supervised
institution's applicable countercyclical capital buffer
amount.
Less than or equal to 0.625 percent plus 25 percent of 0 percent.
the FDIC-supervised institution's applicable
countercyclical capital buffer amount.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
52. Effective October 1, 2019, Sec. 324.20 is amended by revising
paragraphs (b)(4), (c)(1)(viii), (c)(2), and (d)(2) to read as follows:
Sec. 324.20 Capital components and eligibility criteria for
regulatory capital instruments.
* * * * *
(b) * * *
(4) Any common equity tier 1 minority interest, subject to the
limitations in Sec. 324.21.
* * * * *
(c) * * *
(1) * * *
(viii) Any cash dividend payments on the instrument are paid out of
the FDIC-supervised institution's net income or retained earnings. An
FDIC-supervised institution must obtain prior FDIC approval for any
dividend payment involving a reduction or retirement of capital stock
in accordance with 12 CFR 303.241.
* * * * *
(2) Tier 1 minority interest, subject to the limitations in Sec.
324.21, that is not included in the FDIC-supervised institution's
common equity tier 1 capital.
* * * * *
(d) * * *
(2) Total capital minority interest, subject to the limitations set
forth in Sec. 324.21, that is not included in the FDIC-supervised
institution's tier 1 capital.
* * * * *
0
53. Effective April 1, 2020, Sec. 324.21 is revised to read as
follows:
Sec. 324.21 Minority interest.
(a)(1) Applicability. For purposes of Sec. 324.20, an FDIC-
supervised institution that is not an advanced approaches FDIC-
supervised institution is subject to the minority interest limitations
in this paragraph (a) if a consolidated subsidiary of the FDIC-
supervised institution has issued regulatory capital that is not owned
by the FDIC-supervised institution.
(2) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the FDIC-supervised institution. The amount of
common equity tier 1 minority interest that an FDIC-supervised
institution may include in common equity tier 1 capital must be no
greater than 10 percent of the sum of all common equity tier 1 capital
elements of the FDIC-supervised institution (not including the common
equity tier 1 minority interest itself), less any common equity tier 1
capital regulatory adjustments and deductions in accordance with Sec.
324.22(a) and (b).
(3) Tier 1 minority interest includable in the tier 1 capital of
the FDIC-supervised institution. The amount of tier 1 minority interest
that an FDIC-supervised institution may include in tier 1 capital must
be no greater than 10 percent of the sum of all tier 1 capital elements
of the FDIC-supervised institution (not including the tier 1 minority
interest itself), less any tier 1 capital regulatory adjustments and
deductions in accordance with Sec. 324.22(a) and (b).
(4) Total capital minority interest includable in the total capital
of the FDIC-supervised institution. The amount of total capital
minority interest that an FDIC-supervised institution may include in
total capital must be no greater than 10 percent of the sum of all
total capital elements of the FDIC-supervised institution (not
including the total capital minority interest itself), less any total
capital regulatory adjustments and deductions in accordance with Sec.
324.22(a) and (b).
(b)(1) Applicability. For purposes of Sec. 324.20, an advanced
approaches FDIC-supervised institution is subject to the minority
interest limitations in this paragraph (b) if:
[[Page 35272]]
(i) A consolidated subsidiary of the advanced approaches FDIC-
supervised institution has issued regulatory capital that is not owned
by the FDIC-supervised institution; and
(ii) For each relevant regulatory capital ratio of the consolidated
subsidiary, the ratio exceeds the sum of the subsidiary's minimum
regulatory capital requirements plus its capital conservation buffer.
(2) Difference in capital adequacy standards at the subsidiary
level. For purposes of the minority interest calculations in this
section, if the consolidated subsidiary issuing the capital is not
subject to capital adequacy standards similar to those of the advanced
approaches FDIC-supervised institution, the advanced approaches FDIC-
supervised institution must assume that the capital adequacy standards
of the advanced approaches FDIC-supervised institution apply to the
subsidiary.
(3) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the FDIC-supervised institution. For each
consolidated subsidiary of an advanced approaches FDIC-supervised
institution, the amount of common equity tier 1 minority interest the
advanced approaches FDIC-supervised institution may include in common
equity tier 1 capital is equal to:
(i) The common equity tier 1 minority interest of the subsidiary;
minus
(ii) The percentage of the subsidiary's common equity tier 1
capital that is not owned by the advanced approaches FDIC-supervised
institution, multiplied by the difference between the common equity
tier 1 capital of the subsidiary and the lower of:
(A) The amount of common equity tier 1 capital the subsidiary must
hold, or would be required to hold pursuant to this paragraph (b), to
avoid restrictions on distributions and discretionary bonus payments
under Sec. 324.11 or equivalent standards established by the
subsidiary's home country supervisor; or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches FDIC-supervised institution that relate to the subsidiary
multiplied by
(2) The common equity tier 1 capital ratio the subsidiary must
maintain to avoid restrictions on distributions and discretionary bonus
payments under Sec. 324.11 or equivalent standards established by the
subsidiary's home country supervisor.
(4) Tier 1 minority interest includable in the tier 1 capital of
the advanced approaches FDIC-supervised institution. For each
consolidated subsidiary of the advanced approaches FDIC-supervised
institution, the amount of tier 1 minority interest the advanced
approaches FDIC-supervised institution may include in tier 1 capital is
equal to:
(i) The tier 1 minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's tier 1 capital that is not
owned by the advanced approaches FDIC-supervised institution multiplied
by the difference between the tier 1 capital of the subsidiary and the
lower of:
(A) The amount of tier 1 capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 324.11 or equivalent standards established by the subsidiary's
home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches FDIC-supervised institution that relate to the subsidiary
multiplied by
(2) The tier 1 capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 324.11 or equivalent standards established by the subsidiary's
home country supervisor.
(5) Total capital minority interest includable in the total capital
of the FDIC-supervised institution. For each consolidated subsidiary of
the advanced approaches FDIC-supervised institution, the amount of
total capital minority interest the advanced approaches FDIC-supervised
institution may include in total capital is equal to:
(i) The total capital minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary's total capital that is not
owned by the advanced approaches FDIC-supervised institution multiplied
by the difference between the total capital of the subsidiary and the
lower of:
(A) The amount of total capital the subsidiary must hold, or would
be required to hold pursuant to this paragraph (b), to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 324.11 or equivalent standards established by the subsidiary's
home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced
approaches FDIC-supervised institution that relate to the subsidiary
multiplied by
(2) The total capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 324.11 or equivalent standards established by the subsidiary's
home country supervisor.
0
54. Effective April 1, 2020, Sec. 324.22 is amended by revising
paragraphs (a)(1), (c), (d), (g), and (h) to read as follows:
Sec. 324.22 Regulatory capital adjustments and deductions.
(a) * * *
(1)(i) Goodwill, net of associated deferred tax liabilities (DTLs)
in accordance with paragraph (e) of this section; and
(ii) For an advanced approaches FDIC-supervised institution,
goodwill that is embedded in the valuation of a significant investment
in the capital of an unconsolidated financial institution in the form
of common stock (and that is reflected in the consolidated financial
statements of the advanced approaches FDIC-supervised institution), in
accordance with paragraph (d) of this section;
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments \23\--(1) Investment in the FDIC-supervised
institution's own capital instruments. An FDIC-supervised institution
must deduct an investment in the FDIC-supervised institution's own
capital instruments as follows:
---------------------------------------------------------------------------
\23\ The FDIC-supervised institution must calculate amounts
deducted under paragraphs (c) through (f) of this section after it
calculates the amount of ALLL or AACL, as applicable, includable in
tier 2 capital under Sec. 324.20(d)(3).
---------------------------------------------------------------------------
(i) An FDIC-supervised institution must deduct an investment in the
FDIC-supervised institution's own common stock instruments from its
common equity tier 1 capital elements to the extent such instruments
are not excluded from regulatory capital under Sec. 324.20(b)(1);
(ii) An FDIC-supervised institution must deduct an investment in
the FDIC-supervised institution's own additional tier 1 capital
instruments from its additional tier 1 capital elements; and
(iii) An FDIC-supervised institution must deduct an investment in
the FDIC-supervised institution's own tier 2 capital instruments from
its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section),
investments in the capital of unconsolidated financial institutions for
[[Page 35273]]
an FDIC-supervised institution that is not an advanced approaches FDIC-
supervised institution (as described in paragraph (c)(4) of this
section), non-significant investments in the capital of unconsolidated
financial institutions for an advanced approaches FDIC-supervised
institution (as described in paragraph (c)(5) of this section), and
non-common stock significant investments in the capital of
unconsolidated financial institutions for an advanced approaches FDIC-
supervised institution (as described in paragraph (c)(6) of this
section). Under the corresponding deduction approach, an FDIC-
supervised institution must make deductions from the component of
capital for which the underlying instrument would qualify if it were
issued by the FDIC-supervised institution itself, as described in
paragraphs (c)(2)(i) through (iii) of this section. If the FDIC-
supervised institution does not have a sufficient amount of a specific
component of capital to effect the required deduction, the shortfall
must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the FDIC-supervised institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 324.20, the FDIC-supervised institution must
treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders; and
(C) A tier 2 capital instrument if it is not included in GAAP
equity but considered regulatory capital by the primary supervisor of
the financial institution.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 324.300(c)), the FDIC-supervised
institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. An FDIC-supervised institution must deduct investments in
the capital of other financial institutions it holds reciprocally,
where such reciprocal cross holdings result from a formal or informal
arrangement to swap, exchange, or otherwise intend to hold each other's
capital instruments, by applying the corresponding deduction approach.
(4) Investments in the capital of unconsolidated financial
institutions. An FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must deduct its investments in
the capital of unconsolidated financial institutions (as defined in
Sec. 324.2) that exceed 25 percent of the sum of the FDIC-supervised
institution's common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital
elements required under paragraphs (a) through (c)(3) of this section
by applying the corresponding deduction approach.\24\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, an FDIC-supervised
institution that underwrites a failed underwriting, with the prior
written approval of the FDIC, for the period of time stipulated by the
FDIC, is not required to deduct an investment in the capital of an
unconsolidated financial institution pursuant to this paragraph (c) to
the extent the investment is related to the failed underwriting.\25\
---------------------------------------------------------------------------
\24\ With the prior written approval of the FDIC, for the period
of time stipulated by the FDIC, an FDIC-supervised institution that
is not an advanced approaches FDIC-supervised institution is not
required to deduct an investment in the capital of an unconsolidated
financial institution pursuant to this paragraph if the financial
institution is in distress and if such investment is made for the
purpose of providing financial support to the financial institution,
as determined by the FDIC.
\25\ Any investments in the capital of unconsolidated financial
institutions that do not exceed the 25 percent threshold for
investments in the capital of unconsolidated financial institutions
under this section must be assigned the appropriate risk weight
under subparts D or F of this part, as applicable.
---------------------------------------------------------------------------
(5) Non-significant investments in the capital of unconsolidated
financial institutions. (i) An advanced approaches FDIC-supervised
institution must deduct its non-significant investments in the capital
of unconsolidated financial institutions (as defined in Sec. 324.2)
that, in the aggregate, exceed 10 percent of the sum of the advanced
approaches FDIC-supervised institution's common equity tier 1 capital
elements minus all deductions from and adjustments to common equity
tier 1 capital elements required under paragraphs (a) through (c)(3) of
this section (the 10 percent threshold for non-significant investments)
by applying the corresponding deduction approach.\26\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, an advanced approaches
FDIC-supervised institution that underwrites a failed underwriting,
with the prior written approval of the FDIC, for the period of time
stipulated by the FDIC, is not required to deduct a non-significant
investment in the capital of an unconsolidated financial institution
pursuant to this paragraph (c) to the extent the investment is related
to the failed underwriting.\27\
---------------------------------------------------------------------------
\26\ With the prior written approval of the FDIC, for the period
of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution is not required to deduct a non-significant
investment in the capital of an unconsolidated financial institution
pursuant to this paragraph if the financial institution is in
distress and if such investment is made for the purpose of providing
financial support to the financial institution, as determined by the
FDIC.
\27\ Any non-significant investments in the capital of
unconsolidated financial institutions that do not exceed the 10
percent threshold for non-significant investments under this section
must be assigned the appropriate risk weight under subparts D, E, or
F of this part, as applicable.
---------------------------------------------------------------------------
(ii) The amount to be deducted under this section from a specific
capital component is equal to:
(A) The advanced approaches FDIC-supervised institution's non-
significant investments in the capital of unconsolidated financial
institutions exceeding the 10 percent threshold for non-significant
investments, multiplied by
(B) The ratio of the advanced approaches FDIC-supervised
institution's non-significant investments in the capital of
unconsolidated financial institutions in the form of such capital
component to the advanced approaches FDIC-supervised institution's
total non-significant investments in unconsolidated financial
institutions.
[[Page 35274]]
(6) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. An
advanced approaches FDIC-supervised institution must deduct its
significant investments in the capital of unconsolidated financial
institutions that are not in the form of common stock by applying the
corresponding deduction approach.\28\ The deductions described in this
section are net of associated DTLs in accordance with paragraph (e) of
this section. In addition, with the prior written approval of the FDIC,
for the period of time stipulated by the FDIC, an advanced approaches
FDIC-supervised institution that underwrites a failed underwriting is
not required to deduct a significant investment in the capital of an
unconsolidated financial institution pursuant to this paragraph (c) if
such investment is related to such failed underwriting.
---------------------------------------------------------------------------
\28\ With prior written approval of the FDIC, for the period of
time stipulated by the FDIC, an advanced approaches FDIC-supervised
institution is not required to deduct a significant investment in
the capital instrument of an unconsolidated financial institution in
distress which is not in the form of common stock pursuant to this
section if such investment is made for the purpose of providing
financial support to the financial institution as determined by the
FDIC.
---------------------------------------------------------------------------
(d) MSAs and certain DTAs subject to common equity tier 1 capital
deduction thresholds.
(1) An FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must make deductions from
regulatory capital as described in this paragraph (d)(1).
(i) The FDIC-supervised institution must deduct from common equity
tier 1 capital elements the amount of each of the items set forth in
this paragraph (d)(1) that, individually, exceeds 25 percent of the sum
of the FDIC-supervised institution's common equity tier 1 capital
elements, less adjustments to and deductions from common equity tier 1
capital required under paragraphs (a) through (c)(3) of this section
(the 25 percent common equity tier 1 capital deduction threshold).\29\
---------------------------------------------------------------------------
\29\ The amount of the items in paragraph (d)(1) of this section
that is not deducted from common equity tier 1 capital must be
included in the risk-weighted assets of the FDIC-supervised
institution and assigned a 250 percent risk weight.
---------------------------------------------------------------------------
(ii) The FDIC-supervised institution must deduct from common equity
tier 1 capital elements the amount of DTAs arising from temporary
differences that the FDIC-supervised institution could not realize
through net operating loss carrybacks, net of any related valuation
allowances and net of DTLs, in accordance with paragraph (e) of this
section. An FDIC-supervised institution is not required to deduct from
the sum of its common equity tier 1 capital elements DTAs (net of any
related valuation allowances and net of DTLs, in accordance with Sec.
324.22(e)) arising from timing differences that the FDIC-supervised
institution could realize through net operating loss carrybacks. The
FDIC-supervised institution must risk weight these assets at 100
percent. For an FDIC-supervised institution that is a member of a
consolidated group for tax purposes, the amount of DTAs that could be
realized through net operating loss carrybacks may not exceed the
amount that the FDIC-supervised institution could reasonably expect to
have refunded by its parent holding company.
(iii) The FDIC-supervised institution must deduct from common
equity tier 1 capital elements the amount of MSAs net of associated
DTLs, in accordance with paragraph (e) of this section.
(iv) For purposes of calculating the amount of DTAs subject to
deduction pursuant to paragraph (d)(1) of this section, an FDIC-
supervised institution may exclude DTAs and DTLs relating to
adjustments made to common equity tier 1 capital under paragraph (b) of
this section. An FDIC-supervised institution that elects to exclude
DTAs relating to adjustments under paragraph (b) of this section also
must exclude DTLs and must do so consistently in all future
calculations. An FDIC-supervised institution may change its exclusion
preference only after obtaining the prior approval of the FDIC.
(2) An advanced approaches FDIC-supervised institution must make
deductions from regulatory capital as described in this paragraph
(d)(2).
(i) An advanced approaches FDIC-supervised institution must deduct
from common equity tier 1 capital elements the amount of each of the
items set forth in this paragraph (d)(2) that, individually, exceeds 10
percent of the sum of the advanced approaches FDIC-supervised
institution's common equity tier 1 capital elements, less adjustments
to and deductions from common equity tier 1 capital required under
paragraphs (a) through (c) of this section (the 10 percent common
equity tier 1 capital deduction threshold).
(A) DTAs arising from temporary differences that the advanced
approaches FDIC-supervised institution could not realize through net
operating loss carrybacks, net of any related valuation allowances and
net of DTLs, in accordance with paragraph (e) of this section. An
advanced approaches FDIC-supervised institution is not required to
deduct from the sum of its common equity tier 1 capital elements DTAs
(net of any related valuation allowances and net of DTLs, in accordance
with Sec. 324.22(e)) arising from timing differences that the advanced
approaches FDIC-supervised institution could realize through net
operating loss carrybacks. The advanced approaches FDIC-supervised
institution must risk weight these assets at 100 percent. For an FDIC-
supervised institution that is a member of a consolidated group for tax
purposes, the amount of DTAs that could be realized through net
operating loss carrybacks may not exceed the amount that the FDIC-
supervised institution could reasonably expect to have refunded by its
parent holding company.
(B) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(C) Significant investments in the capital of unconsolidated
financial institutions in the form of common stock, net of associated
DTLs in accordance with paragraph (e) of this section.\30\ Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock subject to the 10 percent common equity tier 1
capital deduction threshold may be reduced by any goodwill embedded in
the valuation of such investments deducted by the advanced approaches
FDIC-supervised institution pursuant to paragraph (a)(1) of this
section. In addition, with the prior written approval of the FDIC, for
the period of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution that underwrites a failed underwriting is not
required to deduct a significant investment in the capital of an
unconsolidated financial institution in the form of common stock
pursuant to this paragraph (d)(2) if such investment is related to such
failed underwriting.
---------------------------------------------------------------------------
\30\ With the prior written approval of the FDIC, for the period
of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution is not required to deduct a significant
investment in the capital instrument of an unconsolidated financial
institution in distress in the form of common stock pursuant to this
section if such investment is made for the purpose of providing
financial support to the financial institution as determined by the
FDIC.
---------------------------------------------------------------------------
(ii) An advanced approaches FDIC-supervised institution must deduct
from common equity tier 1 capital elements the items listed in
paragraph (d)(2)(i) of this section that are not deducted as a result
of the application of the 10 percent common equity tier 1 capital
deduction threshold, and that, in aggregate, exceed 17.65 percent of
the sum of the advanced approaches FDIC-supervised institution's common
equity tier 1 capital elements, minus
[[Page 35275]]
adjustments to and deductions from common equity tier 1 capital
required under paragraphs (a) through (c) of this section, minus the
items listed in paragraph (d)(2)(i) of this section (the 15 percent
common equity tier 1 capital deduction threshold). Any goodwill that
has been deducted under paragraph (a)(1) of this section can be
excluded from the significant investments in the capital of
unconsolidated financial institutions in the form of common stock.\31\
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\31\ The amount of the items in paragraph (d)(2) of this section
that is not deducted from common equity tier 1 capital pursuant to
this section must be included in the risk-weighted assets of the
advanced approaches FDIC-supervised institution and assigned a 250
percent risk weight.
---------------------------------------------------------------------------
(iii) For purposes of calculating the amount of DTAs subject to the
10 and 15 percent common equity tier 1 capital deduction thresholds, an
advanced approaches FDIC-supervised institution may exclude DTAs and
DTLs relating to adjustments made to common equity tier 1 capital under
paragraph (b) of this section. An advanced approaches FDIC-supervised
institution that elects to exclude DTAs relating to adjustments under
paragraph (b) of this section also must exclude DTLs and must do so
consistently in all future calculations. An advanced approaches FDIC-
supervised institution may change its exclusion preference only after
obtaining the prior approval of the FDIC.
* * * * *
(g) Treatment of assets that are deducted. An FDIC-supervised
institution must exclude from standardized total risk-weighted assets
and, as applicable, advanced approaches total risk-weighted assets any
item that is required to be deducted from regulatory capital.
(h) Net long position. (1) For purposes of calculating an
investment in the FDIC-supervised institution's own capital instrument
and an investment in the capital of an unconsolidated financial
institution under this section, the net long position is the gross long
position in the underlying instrument determined in accordance with
paragraph (h)(2) of this section, as adjusted to recognize a short
position in the same instrument calculated in accordance with paragraph
(h)(3) of this section.
(2) Gross long position. The gross long position is determined as
follows:
(i) For an equity exposure that is held directly, the adjusted
carrying value as that term is defined in Sec. 324.51(b);
(ii) For an exposure that is held directly and is not an equity
exposure or a securitization exposure, the exposure amount as that term
is defined in Sec. 324.2;
(iii) For an indirect exposure, the FDIC-supervised institution's
carrying value of the investment in the investment fund, provided that,
alternatively:
(A) An FDIC-supervised institution may, with the prior approval of
the FDIC, use a conservative estimate of the amount of its investment
in the FDIC-supervised institution's own capital instruments or its
investment in the capital of an unconsolidated financial institution
held through a position in an index; or
(B) An FDIC-supervised institution may calculate the gross long
position for investments in the FDIC-supervised institution's own
capital instruments or investments in the capital of an unconsolidated
financial institution by multiplying the FDIC-supervised institution's
carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for
investments in the FDIC-supervised institution's own capital
instruments or investments in the capital of unconsolidated financial
institutions as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings of investments in the
FDIC-supervised institution's own capital instruments or investments in
the capital of unconsolidated financial institutions.
(iv) For a synthetic exposure, the amount of the FDIC-supervised
institution's loss on the exposure if the reference capital instrument
were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument, the following criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position has a residual maturity of at
least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the FDIC-supervised
institution's Call Report if the FDIC-supervised institution has a
contractual right or obligation to sell the long position at a specific
point in time and the counterparty to the contract has an obligation to
purchase the long position if the FDIC-supervised institution exercises
its right to sell, this point in time may be treated as the maturity of
the long position such that the maturity of the long position and short
position are deemed to match for purposes of the maturity requirement,
even if the maturity of the short position is less than one year; and
(iii) For an investment in the FDIC-supervised institution's own
capital instrument under paragraph (c)(1) of this section or an
investment in the capital of an unconsolidated financial institution
under paragraphs (c) and (d) of this section:
(A) An FDIC-supervised institution may only net a short position
against a long position in an investment in the FDIC-supervised
institution's own capital instrument under paragraph (c) of this
section if the short position involves no counterparty credit risk.
(B) A gross long position in an investment in the FDIC-supervised
institution's own capital instrument or an investment in the capital of
an unconsolidated financial institution resulting from a position in an
index may be netted against a short position in the same index. Long
and short positions in the same index without maturity dates are
considered to have matching maturities.
(C) A short position in an index that is hedging a long cash or
synthetic position in an investment in the FDIC-supervised
institution's own capital instrument or an investment in the capital of
an unconsolidated financial institution can be decomposed to provide
recognition of the hedge. More specifically, the portion of the index
that is composed of the same underlying instrument that is being hedged
may be used to offset the long position if both the long position being
hedged and the short position in the index are reported as a trading
asset or trading liability (whether on- or off-balance sheet) on the
FDIC-supervised institution's Call Report and the hedge is deemed
effective by the FDIC-supervised institution's internal control
processes, which have not been found to be inadequate by the FDIC.
0
55. Effective October 1, 2019, Sec. 324.32 is amended by revising
paragraphs (b), (d)(2), (d)(3)(ii), (k), and (l) to read as follows:
Sec. 324.32 General risk weights.
* * * * *
(b) Certain supranational entities and multilateral development
banks (MDBs). An FDIC-supervised institution must assign a zero percent
risk weight to an exposure to the Bank for International Settlements,
the European Central Bank, the European Commission, the International
Monetary Fund, the European Stability Mechanism, the
[[Page 35276]]
European Financial Stability Facility, or an MDB.
* * * * *
(d) * * *
(2) Exposures to foreign banks. (i) Except as otherwise provided
under paragraphs (d)(2)(iii), (d)(2)(v), and (d)(3) of this section, an
FDIC-supervised institution must assign a risk weight to an exposure to
a foreign bank, in accordance with Table 2 to Sec. 324.32, based on
the CRC that corresponds to the foreign bank's home country or the OECD
membership status of the foreign bank's home country if there is no CRC
applicable to the foreign bank's home country.
Table 2 to Sec. 324.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 20
2..................................................... 50
3..................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 20
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(ii) An FDIC-supervised institution must assign a 20 percent risk
weight to an exposure to a foreign bank whose home country is a member
of the OECD and does not have a CRC.
(iii) An FDIC-supervised institution must assign a 20 percent risk-
weight to an exposure that is a self-liquidating, trade-related
contingent item that arises from the movement of goods and that has a
maturity of three months or less to a foreign bank whose home country
has a CRC of 0, 1, 2, or 3, or is an OECD member with no CRC.
(iv) An FDIC-supervised institution must assign a 100 percent risk
weight to an exposure to a foreign bank whose home country is not a
member of the OECD and does not have a CRC, with the exception of self-
liquidating, trade-related contingent items that arise from the
movement of goods, and that have a maturity of three months or less,
which may be assigned a 20 percent risk weight.
(v) An FDIC-supervised institution must assign a 150 percent risk
weight to an exposure to a foreign bank immediately upon determining
that an event of sovereign default has occurred in the bank's home
country, or if an event of sovereign default has occurred in the
foreign bank's home country during the previous five years.
(3) * * *
(ii) A significant investment in the capital of an unconsolidated
financial institution in the form of common stock pursuant to Sec.
324.22(d)(2)(i)(c);
* * * * *
(k) Past due exposures. Except for an exposure to a sovereign
entity or a residential mortgage exposure or a policy loan, if an
exposure is 90 days or more past due or on nonaccrual:
(1) An FDIC-supervised institution must assign a 150 percent risk
weight to the portion of the exposure that is not guaranteed or that is
unsecured;
(2) An FDIC-supervised institution may assign a risk weight to the
guaranteed portion of a past due exposure based on the risk weight that
applies under Sec. 324.36 if the guarantee or credit derivative meets
the requirements of that section; and
(3) An FDIC-supervised institution may assign a risk weight to the
collateralized portion of a past due exposure based on the risk weight
that applies under Sec. 324.37 if the collateral meets the
requirements of that section.
(l) Other assets. (1) An FDIC-supervised institution must assign a
zero percent risk weight to cash owned and held in all offices of the
FDIC-supervised institution or in transit; to gold bullion held in the
FDIC-supervised institution's own vaults or held in another depository
institution's vaults on an allocated basis, to the extent the gold
bullion assets are offset by gold bullion liabilities; and to exposures
that arise from the settlement of cash transactions (such as equities,
fixed income, spot foreign exchange and spot commodities) with a
central counterparty where there is no assumption of ongoing
counterparty credit risk by the central counterparty after settlement
of the trade and associated default fund contributions.
(2) An FDIC-supervised institution must assign a 20 percent risk
weight to cash items in the process of collection.
(3) An FDIC-supervised institution must assign a 100 percent risk
weight to DTAs arising from temporary differences that the FDIC-
supervised institution could realize through net operating loss
carrybacks.
(4) An FDIC-supervised institution must assign a 250 percent risk
weight to the portion of each of the following items to the extent it
is not deducted from common equity tier 1 capital pursuant to Sec.
324.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the FDIC-
supervised institution could not realize through net operating loss
carrybacks.
(5) An FDIC-supervised institution must assign a 100 percent risk
weight to all assets not specifically assigned a different risk weight
under this subpart and that are not deducted from tier 1 or tier 2
capital pursuant to Sec. 324.22.
(6) Notwithstanding the requirements of this section, an FDIC-
supervised institution may assign an asset that is not included in one
of the categories provided in this section to the risk weight category
applicable under the capital rules applicable to bank holding companies
and savings and loan holding companies under 12 CFR part 217, provided
that all of the following conditions apply:
(i) The FDIC-supervised institution is not authorized to hold the
asset under applicable law other than debt previously contracted or
similar authority; and
(ii) The risks associated with the asset are substantially similar
to the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this subpart.
0
56. Effective October 1, 2019, Sec. 324.34 is amended by revising
paragraph (c) to read as follows:
Sec. 324.34 OTC derivative contracts.
* * * * *
(c) Counterparty credit risk for OTC credit derivatives--(1)
Protection purchasers. An FDIC-supervised institution that purchases an
OTC credit derivative that is recognized under Sec. 324.36 as a credit
risk mitigant for an exposure that is not a covered position under
subpart F is not required to compute a separate counterparty credit
risk capital requirement under this subpart D provided that the FDIC-
supervised institution does so consistently for all such credit
derivatives. The FDIC-supervised institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) An FDIC-supervised institution that
is the protection provider under an OTC credit derivative must treat
the OTC credit derivative as an exposure to the underlying reference
asset. The FDIC-supervised institution is not required to compute a
counterparty credit risk capital requirement for the OTC credit
derivative under this subpart D, provided that this treatment is
applied consistently for all such OTC credit derivatives. The FDIC-
supervised institution must either include all or exclude all such OTC
credit derivatives that are subject to a qualifying master netting
agreement from any measure
[[Page 35277]]
used to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (c)(2) apply to all relevant
counterparties for risk-based capital purposes unless the FDIC-
supervised institution is treating the OTC credit derivative as a
covered position under subpart F, in which case the FDIC-supervised
institution must compute a supplemental counterparty credit risk
capital requirement under this section.
* * * * *
0
57. Effective October 1, 2019, Sec. 324.35 is amended by revising
paragraph (b)(3)(ii), (b)(4)(ii), (c)(3)(ii), and (c)(4)(ii) to read as
follows:
Sec. 324.35 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client FDIC-supervised institution must apply the risk
weight appropriate for the CCP according to this subpart D.
(4) * * *
(ii) A clearing member client FDIC-supervised institution must
calculate a risk-weighted asset amount for any collateral provided to a
CCP, clearing member, or custodian in connection with a cleared
transaction in accordance with the requirements under this subpart D.
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member FDIC-supervised institution must apply the risk weight
appropriate for the CCP according to this subpart D.
(4) * * *
(ii) A clearing member FDIC-supervised institution must calculate a
risk-weighted asset amount for any collateral provided to a CCP,
clearing member, or a custodian in connection with a cleared
transaction in accordance with requirements under this subpart D.
* * * * *
0
58. Effective October 1, 2019, Sec. 324.36 is amended by revising
paragraph (c) to read as follows:
Sec. 324.36 Guarantees and credit derivatives: substitution
treatment.
* * * * *
(c) Substitution approach--(1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, an FDIC-supervised institution
may recognize the guarantee or credit derivative in determining the
risk-weighted asset amount for the hedged exposure by substituting the
risk weight applicable to the guarantor or credit derivative protection
provider under this subpart D for the risk weight assigned to the
exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the exposure amount of the hedged exposure, the
FDIC-supervised institution must treat the hedged exposure as two
separate exposures (protected and unprotected) in order to recognize
the credit risk mitigation benefit of the guarantee or credit
derivative.
(i) The FDIC-supervised institution may calculate the risk-weighted
asset amount for the protected exposure under this subpart D, where the
applicable risk weight is the risk weight applicable to the guarantor
or credit derivative protection provider.
(ii) The FDIC-supervised institution must calculate the risk-
weighted asset amount for the unprotected exposure under this subpart
D, where the applicable risk weight is that of the unprotected portion
of the hedged exposure.
(iii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraphs (d), (e),
or (f) of this section.
* * * * *
0
59. Effective October 1, 2019, Sec. 324.37 is amended by revising
paragraph (b)(2)(i) to read as follows:
Sec. 324.37 Collateralized transactions.
* * * * *
(b) * * *
(2) Risk weight substitution. (i) An FDIC-supervised institution
may apply a risk weight to the portion of an exposure that is secured
by the fair value of financial collateral (that meets the requirements
of paragraph (b)(1) of this section) based on the risk weight assigned
to the collateral under this subpart D. For repurchase agreements,
reverse repurchase agreements, and securities lending and borrowing
transactions, the collateral is the instruments, gold, and cash the
FDIC-supervised institution has borrowed, purchased subject to resale,
or taken as collateral from the counterparty under the transaction.
Except as provided in paragraph (b)(3) of this section, the risk weight
assigned to the collateralized portion of the exposure may not be less
than 20 percent.
* * * * *
0
60. Effective October 1, 2019, Sec. 324.38 is amended by revising
paragraph (e)(2) to read as follows:
Sec. 324.38 Unsettled transactions.
* * * * *
(e) * * *
(2) From the business day after the FDIC-supervised institution has
made its delivery until five business days after the counterparty
delivery is due, the FDIC-supervised institution must calculate the
risk-weighted asset amount for the transaction by treating the current
fair value of the deliverables owed to the FDIC-supervised institution
as an exposure to the counterparty and using the applicable
counterparty risk weight under this subpart D.
* * * * *
0
61. Effective October 1, 2019, Sec. 324.42 is amended by revising
paragraph (j)(2)(ii)(A) to read as follows:
Sec. 324.42 Risk-weighted assets for securitization exposures.
* * * * *
(j) * * *
(2) * * *
(ii) * * *
(A) If the FDIC-supervised institution purchases credit protection
from a counterparty that is not a securitization SPE, the FDIC-
supervised institution must determine the risk weight for the exposure
according to this subpart D.
* * * * *
0
62. Effective October 1, 2019, Sec. 324.52 is amended by revising
paragraphs (b)(1) and (4) to read as follows:
Sec. 324.52 Simple risk-weight approach (SRWA).
* * * * *
(b) * * *
(1) Zero percent risk weight equity exposures. An equity exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
the European Stability Mechanism, the European Financial Stability
Facility, an MDB, and any other entity whose credit exposures receive a
zero percent risk weight under Sec. 324.32 may be assigned a zero
percent risk weight.
* * * * *
(4) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions in
the form of common
[[Page 35278]]
stock that are not deducted from capital pursuant to Sec. 324.22(d)(2)
are assigned a 250 percent risk weight.
* * * * *
0
63. Effective October 1, 2019, Sec. 324.61 is revised to read as
follows:
Sec. 324.61 Purpose and scope.
Sections 324.61 through 324.63 of this subpart establish public
disclosure requirements related to the capital requirements described
in subpart B of this part for an FDIC-supervised institution with total
consolidated assets of $50 billion or more as reported on the FDIC-
supervised institution's most recent year-end Call Report that is not
an advanced approaches FDIC-supervised institution making public
disclosures pursuant to Sec. 324.172. An advanced approaches FDIC-
supervised institution that has not received approval from the FDIC to
exit parallel run pursuant to Sec. 324.121(d) is subject to the
disclosure requirements described in Sec. Sec. 324.62 and 324.63. An
FDIC-supervised institution with total consolidated assets of $50
billion or more as reported on the FDIC-supervised institution's most
recent year-end Call Report that is not an advanced approaches FDIC-
supervised institution making public disclosures subject to Sec.
324.172 must comply with Sec. 324.62 unless it is a consolidated
subsidiary of a bank holding company, savings and loan holding company,
or depository institution that is subject to the disclosure
requirements of Sec. 324.62 or a subsidiary of a non-U.S. banking
organization that is subject to comparable public disclosure
requirements in its home jurisdiction. For purposes of this section,
total consolidated assets are determined based on the average of the
FDIC-supervised institution's total consolidated assets in the four
most recent quarters as reported on the Call Report; or the average of
the FDIC-supervised institution's total consolidated assets in the most
recent consecutive quarters as reported quarterly on the FDIC-
supervised institution's Call Report if the FDIC-supervised institution
has not filed such a report for each of the most recent four quarters.
0
64. Effective October 1, 2019, Sec. 324.63 is amended by revising
Tables 3 and 8 to Sec. 324.63 to read as follows:
Sec. 324.63 Disclosures by FDIC-supervised institutions described in
Sec. 324.61.
* * * * *
Table 3 to Sec. 324.63--Capital Adequacy
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures............................... (a) A summary discussion of the FDIC-supervised
institution's approach to assessing the adequacy of its
capital to support current and future activities.
Quantitative disclosures.............................. (b) Risk-weighted assets for:
(1) Exposures to sovereign entities;
(2) Exposures to certain supranational entities and
MDBs;
(3) Exposures to depository institutions, foreign
banks, and credit unions;
(4) Exposures to PSEs;
(5) Corporate exposures;
(6) Residential mortgage exposures;
(7) Statutory multifamily mortgages and pre-sold
construction loans;
(8) HVCRE exposures;
(9) Past due loans;
(10) Other assets;
(11) Cleared transactions;
(12) Default fund contributions;
(13) Unsettled transactions;
(14) Securitization exposures; and
(15) Equity exposures.
(c) Standardized market risk-weighted assets as
calculated under subpart F of this part.
(d) Common equity tier 1, tier 1 and total risk-based
capital ratios:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
(e) Total standardized risk-weighted assets.
----------------------------------------------------------------------------------------------------------------
* * * * *
Table 8 to Sec. 324.63--Securitization
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures............................... (a) The general qualitative disclosure requirement with
respect to a securitization (including synthetic
securitizations), including a discussion of:
(1) The FDIC-supervised institution's objectives for
securitizing assets, including the extent to which
these activities transfer credit risk of the
underlying exposures away from the FDIC-supervised
institution to other entities and including the type
of risks assumed and retained with resecuritization
activity; \1\
(2) The nature of the risks (e.g. liquidity risk)
inherent in the securitized assets;
(3) The roles played by the FDIC-supervised
institution in the securitization process \2\ and an
indication of the extent of the FDIC-supervised
institution's involvement in each of them;
(4) The processes in place to monitor changes in the
credit and market risk of securitization exposures
including how those processes differ for
resecuritization exposures;
(5) The FDIC-supervised institution's policy for
mitigating the credit risk retained through
securitization and resecuritization exposures; and
(6) The risk-based capital approaches that the FDIC-
supervised institution follows for its
securitization exposures including the type of
securitization exposure to which each approach
applies.
(b) A list of:
(1) The type of securitization SPEs that the FDIC-
supervised institution, as sponsor, uses to
securitize third-party exposures. The FDIC-
supervised institution must indicate whether it has
exposure to these SPEs, either on- or off-balance
sheet; and
[[Page 35279]]
(2) Affiliated entities:
(i) That the FDIC-supervised institution manages or
advises; and
(ii) That invest either in the securitization
exposures that the FDIC-supervised institution has
securitized or in securitization SPEs that the
FDIC-supervised institution sponsors.\3\
(c) Summary of the FDIC-supervised institution's
accounting policies for securitization activities,
including:
(1) Whether the transactions are treated as sales or
financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions applied in valuing
retained or purchased interests;
(4) Changes in methods and key assumptions from the
previous period for valuing retained interests and
impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are
valued and whether they are recorded under subpart D
of this part; and
(7) Policies for recognizing liabilities on the
balance sheet for arrangements that could require
the FDIC-supervised institution to provide financial
support for securitized assets.
(d) An explanation of significant changes to any
quantitative information since the last reporting
period.
Quantitative Disclosures.............................. (e) The total outstanding exposures securitized by the
FDIC-supervised institution in securitizations that
meet the operational criteria provided in Sec. 324.41
(categorized into traditional and synthetic
securitizations), by exposure type, separately for
securitizations of third-party exposures for which the
bank acts only as sponsor.\4\
(f) For exposures securitized by the FDIC-supervised
institution in securitizations that meet the
operational criteria in Sec. 324.41:
(1) Amount of securitized assets that are impaired/
past due categorized by exposure type; \5\ and
(2) Losses recognized by the FDIC-supervised
institution during the current period categorized by
exposure type.\6\
(g) The total amount of outstanding exposures intended
to be securitized categorized by exposure type.
(h) Aggregate amount of:
(1) On-balance sheet securitization exposures
retained or purchased categorized by exposure type;
and
(2) Off-balance sheet securitization exposures
categorized by exposure type.
(i) (1) Aggregate amount of securitization exposures
retained or purchased and the associated capital
requirements for these exposures, categorized between
securitization and resecuritization exposures, further
categorized into a meaningful number of risk weight
bands and by risk-based capital approach (e.g., SSFA);
and
(2) Aggregate amount disclosed separately by type of
underlying exposure in the pool of any:
(i) After-tax gain-on-sale on a securitization that
has been deducted from common equity tier 1
capital; and
(ii) Credit-enhancing interest-only strip that is
assigned a 1,250 percent risk weight.
(j) Summary of current year's securitization activity,
including the amount of exposures securitized (by
exposure type), and recognized gain or loss on sale by
exposure type.
(k) Aggregate amount of resecuritization exposures
retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is
applied and those not applied; and
(2) Exposures to guarantors categorized according to
guarantor creditworthiness categories or guarantor
name.
----------------------------------------------------------------------------------------------------------------
\1\ The FDIC-supervised institution should describe the structure of resecuritizations in which it participates;
this description should be provided for the main categories of resecuritization products in which the FDIC-
supervised institution is active.
\2\ For example, these roles may include originator, investor, servicer, provider of credit enhancement,
sponsor, liquidity provider, or swap provider.
\3\ Such affiliated entities may include, for example, money market funds, to be listed individually, and
personal and private trusts, to be noted collectively.
\4\ ``Exposures securitized'' include underlying exposures originated by the FDIC-supervised institution,
whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-
party exposures included in sponsored transactions. Securitization transactions (including underlying
exposures originally on the FDIC-supervised institution's balance sheet and underlying exposures acquired by
the FDIC-supervised institution from third-party entities) in which the originating bank does not retain any
securitization exposure should be shown separately but need only be reported for the year of inception. FDIC-
supervised institutions are required to disclose exposures regardless of whether there is a capital charge
under this part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the FDIC-supervised institution's balance
sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as
recognition of liabilities for probable future financial support required of the FDIC-supervised institution
with respect to securitized assets.
* * * * *
0
65. Effective October 1, 2019, Sec. 324.131 is amended by revising
paragraph (d)(2) to read as follows:
Sec. 324.131 Mechanics for calculating total wholesale and retail
risk-weighted assets.
* * * * *
(d) * * *
(2) Floor on PD assignment. The PD for each wholesale obligor or
retail segment may not be less than 0.03 percent, except for exposures
to or directly and unconditionally guaranteed by a sovereign entity,
the Bank for International Settlements, the International Monetary
Fund, the European Commission, the European Central Bank, the European
Stability Mechanism, the European Financial Stability Facility, or a
multilateral development bank, to which the FDIC-supervised institution
assigns a rating grade associated with a PD of less than 0.03 percent.
* * * * *
0
66. Effective October 1, 2019, Sec. 324.133 is amended by revising
paragraphs (b)(3)(ii) and (c)(3)(ii) to read as follows:
Sec. 324.133 Cleared transactions.
* * * * *
(b) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client FDIC-supervised institution must apply the risk
weight
[[Page 35280]]
applicable to the CCP under subpart D of this part.
* * * * *
(c) * * *
(3) * * *
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member FDIC-supervised institution must apply the risk weight
applicable to the CCP according to subpart D of this part.
* * * * *
0
67. Effective October 1, 2019, Sec. 324.152 is amended by revising
paragraphs (b)(5) and (6) to read as follows:
Sec. 324.152 Simple risk weight approach (SRWA).
* * * * *
(b) * * *
(5) 300 percent risk weight equity exposures. A publicly traded
equity exposure (other than an equity exposure described in paragraph
(b)(7) of this section and including the ineffective portion of a hedge
pair) is assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure
(other than an equity exposure described in paragraph (b)(7) of this
section) that is not publicly traded is assigned a 400 percent risk
weight.
* * * * *
0
68. Effective October 1, 2019, Sec. 324.202 is amended by revising the
definition of ``Corporate debt position'' in paragraph (b) to read as
follows:
Sec. 324.202 Definitions.
* * * * *
(b) * * *
Corporate debt position means a debt position that is an exposure
to a company that is not a sovereign entity, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank,
a depository institution, a foreign bank, a credit union, a public
sector entity, a GSE, or a securitization.
* * * * *
0
69. Effective October 1, 2019, Sec. 324.210 is amended by revising
paragraph (b)(2)(ii) to read as follows:
Sec. 324.210 Standardized measurement method for specific risk.
* * * * *
(b) * * *
(2) * * *
(ii) Certain supranational entity and multilateral development bank
debt positions. An FDIC-supervised institution may assign a 0.0 percent
specific risk-weighting factor to a debt position that is an exposure
to the Bank for International Settlements, the European Central Bank,
the European Commission, the International Monetary Fund, the European
Stability Mechanism, the European Financial Stability Facility, or an
MDB.
* * * * *
Sec. 324.300 [Amended]
0
70. Effective April 1, 2020, Sec. 324.300 is amended by removing
paragraphs (b) and (d).
Dated: June 3, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 9, 2019.
Yao-Chin Chao,
Assistant Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on May 28, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-15131 Filed 7-19-19; 8:45 am]
BILLING CODE P