[Federal Register Volume 84, Number 212 (Friday, November 1, 2019)]
[Rules and Regulations]
[Pages 59032-59123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23662]
[[Page 59031]]
Vol. 84
Friday,
No. 212
November 1, 2019
Part IV
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Parts 217, 225, 238, et al.
Prudential Standards for Large Bank Holding Companies, Savings and
Loan Holding Companies, and Foreign Banking Organizations; Final Rule
Federal Register / Vol. 84 , No. 212 / Friday, November 1, 2019 /
Rules and Regulations
[[Page 59032]]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Parts 217, 225, 238, 242, and 252
[Regulations Q, Y, LL, PP, and YY; Docket No. R-1658]
RIN 7100-AF 45
Prudential Standards for Large Bank Holding Companies, Savings
and Loan Holding Companies, and Foreign Banking Organizations
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is adopting a final rule that establishes risk-based categories for
determining prudential standards for large U.S. banking organizations
and foreign banking organizations, consistent with section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended
by the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA), and with the Home Owners' Loan Act. The final rule amends
certain prudential standards, including standards relating to
liquidity, risk management, stress testing, and single-counterparty
credit limits, to reflect the risk profile of banking organizations
under each category; applies prudential standards to certain large
savings and loan holding companies using the same categories; makes
corresponding changes to reporting forms; and makes additional
modifications to the Board's company-run stress test and supervisory
stress test rules, consistent with section 401 of EGRRCPA. Separately,
the Office of the Comptroller of the Currency (OCC), the Board, and the
Federal Deposit Insurance Corporation (FDIC) are adopting a final rule
that revises the criteria for determining the applicability of
regulatory capital and standardized liquidity requirements for large
U.S. banking organizations and the U.S. intermediate holding companies
of foreign banking organizations, using a risk-based category framework
that is consistent with the framework described in this final rule. In
addition, the Board and the FDIC are separately adopting a final rule
that amends the resolution planning requirements under section 165(d)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act using
a risk-based category framework that is consistent with the framework
described in this final rule.
DATES: The final rule is effective December 31, 2019.
FOR FURTHER INFORMATION CONTACT: Constance M. Horsley, Deputy
Associate Director, (202) 452-5239; Elizabeth MacDonald, Manager, (202)
475-6216; Peter Goodrich, Lead Financial Institution Policy Analyst,
(202) 872-4997; Mark Handzlik, Lead Financial Institution Policy
Analyst, (202) 475-6636; Kevin Littler, Lead Financial Institution
Policy Analyst, (202) 475-6677; Althea Pieters, Lead Financial
Institution Policy Analyst, (202) 452-3397; Peter Stoffelen, Lead
Financial Institution Policy Analyst, (202) 912-4677; Hillel Kipnis,
Senior Financial Institution Policy Analyst II, (202) 452-2924; Matthew
McQueeney, Senior Financial Institution Policy Analyst II, (202) 452-
2942; Christopher Powell, Senior Financial Institution Policy Analyst
II, (202) 452-3442, Division of Supervision and Regulation; or Asad
Kudiya, Senior Counsel, (202) 475-6358; Jason Shafer, Senior Counsel
(202) 728-5811; Mary Watkins, Senior Attorney (202) 452-3722; Laura
Bain, Counsel, (202) 736-5546; Alyssa O'Connor, Attorney, (202) 452-
3886, Legal Division, Board of Governors of the Federal Reserve System,
20th and C Streets NW, Washington, DC 20551. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
III. Overview of the Notices of Proposed Rulemaking and General
Summary of Comments
IV. Overview of Final Rule
V. Tailoring Framework
A. Indicators-Based Approach and the Alternative Scoring
Methodology
B. Dodd-Frank Act Statutory Framework
C. Choice of Risk-Based Indicators
D. Application of Standards Based on the Proposed Risk-Based
Indicators
E. Calibration of Thresholds and Indexing
F. The Risk-Based Categories
G. Specific Aspects of the Foreign Bank Proposal--Treatment of
Inter-Affiliate Transactions
H. Determination of Applicable Category of Standards
VI. Prudential Standards for Large U.S. and Foreign Banking
Organizations
A. Category I Standards
B. Category II Standards
C. Category III Standards
D. Category IV Standards
VII. Single-Counterparty Credit Limits
VIII. Covered Savings and Loan Holding Companies
IX. Risk Management and Risk Committee Requirements
X. Enhanced Prudential Standards for Foreign Banking Organizations
With a Smaller U.S. Presence
XI. Technical Changes to the Regulatory Framework for Foreign
Banking Organizations and Domestic Banking Organizations
XII. Changes to Liquidity Buffer Requirements
XIII. Changes to Company-Run Stress Testing Requirements for State
Member Banks, Removal of the Adverse Scenario, and Other Technical
Changes Proposed in January 2019
A. Minimum Asset Threshold for State Member Banks
B. Frequency of Stress Testing for State Member Banks
C. Removal of ``Adverse'' Scenario
D. Review by Board of Directors
E. Scope of Applicability for Savings and Loan Holding Companies
XIV. Changes to Dodd-Frank Definitions
XV. Reporting Requirements
A. FR Y-14
B. FR Y-15
C. FR 2052a
D. Summary of Reporting Effective Dates
XVI. Impact Assessment
A. Liquidity
B. Stress Testing
C. Single-Counterparty Credit Limits
D. Covered Savings and Loan Holding Companies
XVII. Administrative Law Matters
A. Paperwork Reduction Act Analysis
B. Regulatory Flexibility Act Analysis
C. Riegle Community Development and Regulatory Improvement Act
of 1994
I. Introduction
In 2018 and 2019, the Board of Governors of the Federal Reserve
System (Board) sought comment on two separate proposals to revise the
framework for determining application of prudential standards to large
banking organizations. First, on October 31, 2018, the Board sought
comment on a proposal to revise the criteria for determining the
application of prudential standards for U.S. banking organizations with
$100 billion or more in total consolidated assets (domestic
proposal).\1\ Then, on April 8, 2019, the Board sought comment on a
proposal to revise the criteria for determining the application of
prudential standards for foreign banking organizations with total
consolidated assets of $100 billion or more (foreign bank proposal,
and, together with the domestic proposal, the proposals).\2\
---------------------------------------------------------------------------
\1\ See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm; Prudential Standards for Large Bank Holding
Companies and Savings and Loan Holding Companies, 83 FR 61408 (Nov.
29, 2018).
\2\ See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm; Prudential Standards for Large Foreign Banking
Organizations; Revisions to Proposed Prudential Standards for Large
Domestic Bank Holding Companies and Savings and Loan Holding
Companies, 84 FR 21988 (May 15, 2019). Foreign banking organization
means a foreign bank that operates a branch, agency, or commercial
lending company subsidiary in the United States; controls a bank in
the United States; or controls an Edge corporation acquired after
March 5, 1987; and any company of which the foreign bank is a
subsidiary. See 12 CFR 211.21(o); 12 CFR 252.2. An agency is place
of business of a foreign bank, located in any state, at which credit
balances are maintained, checks are paid, money is lent, or, to the
extent not prohibited by state or federal law, deposits are accepted
from a person or entity that is not a citizen or resident of the
United States. A branch is a place of business of a foreign bank,
located in any state, at which deposits are received and that is not
an agency. See 12 CFR 211.21(b) and (e).
---------------------------------------------------------------------------
[[Page 59033]]
The Board is finalizing the framework set forth under the
proposals, with certain adjustments.\3\ Specifically, the final rule
revises the thresholds for application of prudential standards to large
banking organizations and tailors the stringency of these standards
based on the risk profiles of these firms. For U.S. banking
organizations with $100 billion or more in total consolidated assets
and foreign banking organizations with $100 billion or more in combined
U.S. assets, the final rule establishes four categories of prudential
standards. The most stringent set of standards (Category I) applies to
U.S. global systemically important bank holding companies (U.S. GSIBs)
based on the methodology in the Board's GSIB surcharge rule.\4\ The
remaining categories of standards apply to U.S. and foreign banking
organizations based on indicators of a firm's size, cross-
jurisdictional activity, weighted short-term wholesale funding, nonbank
assets, and off-balance sheet exposure. The framework set forth in the
final rule will be used throughout the Board's prudential standards
framework for large banking organizations.
---------------------------------------------------------------------------
\3\ On January 8, 2019, the Board also issued a proposal that
would revise the stress testing requirements that were proposed in
the domestic proposal for certain savings and loan holding
companies. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190108a.htm; Regulations LL and YY; Amendments
to the Company-Run and Supervisory Stress Test Rules, 84 FR 4002
(Feb. 19, 2019). This final rule adopts those proposed changes, with
certain adjustments.
\4\ 12 CFR 217.403.
---------------------------------------------------------------------------
In connection with a proposal on which the Board sought comment in
January 2019, and consistent with EGRRCPA, this final rule also revises
the minimum asset threshold for state member banks to conduct stress
tests, revises the frequency by which state member banks would be
required to conduct stress tests, and removes the adverse scenario from
the list of required scenarios in the Board's stress test rules. This
final rule also makes conforming changes to the Board's Policy
Statement on the Scenario Design Framework for Stress Testing.\5\
---------------------------------------------------------------------------
\5\ See 12 CFR part 252, appendix A. The proposals would have
revised the scope of applicability of the capital plan rule to apply
to U.S. bank holding companies and U.S. intermediate holding
companies with $100 billion or more in assets. In addition, the
proposals would have revised the definition of large and noncomplex
bank holding company to mean banking organizations subject to
Category IV standards. The Board received a number of comments about
its capital requirements. While the Board intends separately to
propose modifications at a future date to capital planning
requirements to incorporate the proposed risk-based categories, the
final rule revises the scope of applicability of the Board's capital
plan rule to apply to U.S. bank holding companies and U.S.
intermediate holding companies with $100 billion or more in total
assets. This final rule does not revise the definition of large and
noncomplex bank holding company.
---------------------------------------------------------------------------
Concurrently with this final rule, the Board, with the Office of
the Comptroller of the Currency (OCC) and Federal Deposit Insurance
Corporation (FDIC) (together, the agencies), is separately finalizing
amendments to the agencies' regulatory capital rule and liquidity
coverage ratio (LCR) rule, to introduce the same risk-based categories
for tailoring standards (the interagency capital and liquidity final
rule). The Board and FDIC are also finalizing changes to the resolution
planning requirements (resolution plan final rule) that would adopt the
same risk-based category framework.
II. Background
The financial crisis revealed significant weaknesses in resiliency
and risk management in the financial sector, and demonstrated how the
failure or distress of large, leveraged, and interconnected financial
companies, including foreign banking organizations, could pose a threat
to U.S. financial stability. To address weaknesses in the banking
sector that were evident in the financial crisis, the Board
strengthened prudential standards for large U.S. and foreign banking
organizations. These enhanced standards included capital planning
requirements; supervisory and company-run stress testing; liquidity
risk management, stress testing, and buffer requirements; and single-
counterparty credit limits. The Board's enhanced standards also
implemented section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), which directed the Board to
establish enhanced prudential standards for bank holding companies and
foreign banking organizations with total consolidated assets of $50
billion or more.\6\
---------------------------------------------------------------------------
\6\ 12 U.S.C. 5365.
---------------------------------------------------------------------------
The Board has calibrated the stringency of requirements based on
the size and complexity of a banking organization. Regulatory capital
requirements, such as the GSIB capital surcharge, advanced approaches
capital requirements, enhanced supplementary leverage ratio standards
for U.S. GSIBs,\7\ as well as the requirements under the capital plan
rule,\8\ are examples of this tailoring.\9\ For foreign banking
organizations, the Board tailored enhanced standards based, in part, on
the size and complexity of a foreign banking organization's activities
in the United States. The standards applicable to foreign banking
organizations with a more limited U.S. presence largely rely on
compliance with comparable home-country standards applied at the
consolidated foreign parent level. In comparison, a foreign banking
organization with a significant U.S. presence is subject to enhanced
prudential standards and supervisory expectations that generally apply
to its combined U.S. operations.\10\
---------------------------------------------------------------------------
\7\ 12 CFR 217.11.
\8\ 12 CFR 225.8.
\9\ For example, prior to the adoption of this final rule,
heightened capital requirements and full LCR requirements applied to
firms with $250 billion or more in total consolidated assets or $10
billion or more in on-balance sheet foreign exposure, including the
requirement to calculate regulatory capital requirements using
internal models and meeting a minimum supplementary leverage ratio
requirement.
\10\ The combined U.S. operations of a foreign banking
organization include any U.S. subsidiaries (including any U.S.
intermediate holding company), U.S. branches, and U.S. agencies.
---------------------------------------------------------------------------
The Board regularly reviews its regulatory framework to update and
streamline regulatory requirements based on its experience implementing
the rules and consistent with the statutory provisions that motivated
the rules. These efforts include assessing the impact of regulations as
well as considering alternatives that achieve regulatory objectives
while improving the simplicity, transparency, and efficiency of the
regulatory regime. The final rule is the result of this practice and
reflects amendments to section 165 of the Dodd-Frank Act made by the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA).\11\
---------------------------------------------------------------------------
\11\ Public Law 115-174, 132 Stat. 1296 (2018).
---------------------------------------------------------------------------
Specifically, EGRRCPA amended section 165 of the Dodd-Frank Act by
raising the threshold for general application of enhanced prudential
standards. By taking into consideration a broader range of risk-based
indicators and establishing four categories of standards, the final
rule enhances the risk sensitivity and efficiency of the Board's
regulatory framework. This approach better aligns the prudential
standards applicable to large banking organizations with their risk
profiles, taking into account the size and complexity of these banking
organizations as well as their potential
[[Page 59034]]
to pose systemic risk. The final rule also maintains the fundamental
reforms of the post-crisis framework and supports large banking
organizations' resilience.
III. Overview of the Notices of Proposed Rulemaking and General Summary
of Comments
As noted above, the Board sought comment on two separate proposals
to establish a framework for determining the prudential standards that
would apply to large banking organizations. Specifically, the proposals
would have calibrated requirements for large banking organizations
using four risk-based categories. Category I would have been based on
the methodology in the Board's GSIB surcharge rule for identification
of U.S. GSIBs, while Categories II through IV would have been based on
measures of size and the levels of the following indicators: Cross-
jurisdictional activity, weighted short-term wholesale funding, nonbank
assets, and off-balance sheet exposure (together with size, the risk-
based indicators). The applicable standards would have included
supervisory and company-run stress testing; risk committee and risk
management requirements; liquidity risk management, stress testing, and
buffer requirements; and single-counterparty credit limits. Foreign
banking organizations with $100 billion or more in total consolidated
assets that do not meet the thresholds for application of Category II,
Category III, or Category IV standards due to their limited U.S.
presence would have been subject to requirements that largely defer to
compliance with similar home-country standards at the consolidated
level, with the exception of certain risk-management standards.
The proposals would have applied to U.S. banking organizations,
foreign banking organizations, and certain large savings and loan
holding companies using the same categories, with some differences
particular to foreign banking organizations. Specifically, while the
foreign bank proposal was largely consistent with the domestic
proposal, it would have included certain adjustments to reflect the
unique structures through which foreign banking organizations operate
in the United States. As Category I standards under the domestic
proposal would have applied only to U.S. GSIBs, foreign banking
organizations would have been subject to standards in Categories II,
III, or IV. The foreign bank proposal based the requirements of
Categories II, III, and IV on the risk profile of a foreign banking
organization's combined U.S. operations or U.S. intermediate holding
company, as measured by the level of the same risk-based indicators as
under the domestic proposal. However, in order to reflect the
structural differences between foreign banking organizations'
operations in the United States and domestic holding companies, the
foreign bank proposal would have adjusted the measurement of cross-
jurisdictional activity to exclude inter-affiliate liabilities and to
recognize collateral in calculating inter-affiliate claims.
A. General Summary of Comments
The Board received approximately 50 comments on the proposals from
U.S. and foreign banking organizations, public entities, public
interest groups, private individuals, and other interested parties.\12\
Many commenters supported the proposals as meaningfully tailoring
prudential standards. A number of commenters, however, expressed the
view that the proposed framework would not have sufficiently aligned
the Board's prudential standards with the risk profile of a firm. For
example, some commenters on the domestic proposal argued that banking
organizations with total consolidated assets of less than $250 billion
that do not meet a separate indicator of risk should not be subject to
any enhanced standards. Some commenters on both proposals argued that
proposed Category II standards were too stringent given the risks
indicated by a high level of cross-jurisdictional activity. By
contrast, other commenters argued that the proposals would weaken the
safety and soundness of large banking organizations and increase risks
to U.S. financial stability.
---------------------------------------------------------------------------
\12\ The Board received a number of comments that were not
specifically responsive to the proposals. In particular, commenters
recommended specific changes related to the Board's supervisory
stress test scenarios and stress capital buffer proposal. These
comments are not within the scope of this rulemaking, and therefore
are not discussed separately in this Supplementary Information.
---------------------------------------------------------------------------
In response to the foreign bank proposal, commenters generally
argued that the framework remained too stringent for the risks posed by
foreign banking organizations. These commenters also argued that the
risk-based indicators would disproportionately and unfairly result in
the application of more stringent requirements to foreign banking
organizations and, as a result, could disrupt the efficient functioning
of financial markets and have negative effects on the U.S. economy. A
number of these commenters argued that all risk-based indicators should
exclude transactions with affiliates. By contrast, other commenters
criticized the foreign bank proposal for reducing the stringency of
standards and argued that the proposal understated the financial
stability risks posed by foreign banking organizations.
While some commenters argued that the proposed changes went beyond
the changes mandated by EGRRCPA, other commenters argued that the
proposals did not fully implement EGRRCPA. In addition, several
commenters argued that the proposal exceeded the Board's authority
under section 165 of the Dodd-Frank Act, as amended by EGRRCPA, and
that enhanced standards should not be included in Category IV standards
or applied to savings and loan holding companies. Foreign banking
organization commenters also argued that the proposals did not
adequately take into consideration the principle of national treatment
and equality of competitive opportunity, or the extent to which a
foreign banking organization is subject on a consolidated basis to home
country standards that are comparable to those that are applied to the
firm in the United States. As discussed in this SUPPLEMENTARY
INFORMATION, the final rule largely adopts the proposals, with certain
adjustments in response to comments.
IV. Overview of Final Rule
The final rule establishes four categories to apply enhanced
standards based on indicators designed to measure the risk profile of a
banking organization.\13\ The prudential standards are applicable to
U.S. bank holding companies, certain savings and loan holding
companies, and foreign banking organizations. For U.S. banking
organizations and savings and loan holding companies that are not
substantially engaged in insurance underwriting or commercial
activities (covered savings and loan holding companies), these risk-
based indicators are measured at the level of the top-tier holding
company. For foreign banking organizations, these risk-based indicators
are generally measured at the level of such firms' combined U.S.
operations, except for supervisory and company-run stress testing
requirements and certain single-counterparty credit limits, which are
based on the risk profile of such firms' U.S. intermediate holding
companies. In addition, as discussed in the interagency capital and
liquidity final rule, regulatory capital and LCR requirements also are
based on the risk profile of such firms' U.S. intermediate holding
company.
---------------------------------------------------------------------------
\13\ The final rule also increases the threshold for general
application of enhanced prudential standards from $50 billion to
$100 billion in total consolidated assets.
---------------------------------------------------------------------------
[[Page 59035]]
Under the final rule, and unchanged from the domestic proposal, the
most stringent prudential standards apply to U.S. GSIBs under Category
I, as these banking organizations have the potential to pose the
greatest risks to U.S. financial stability. Category I includes
standards that reflect agreements reached by the Basel Committee on
Banking Supervision (BCBS).\14\ The existing post-financial crisis
framework for U.S. GSIBs has resulted in significant gains in
resiliency and risk management. The final rule accordingly maintains
the most stringent standards for these firms. For example, U.S. GSIBs
are subject to the GSIB capital surcharge and enhanced supplementary
leverage ratio standards under the agencies' regulatory capital rule.
U.S. GSIBs are also subject to the most stringent stress testing
requirements, including annual company-run and supervisory stress
testing requirements, as well as the most stringent liquidity
standards, including liquidity risk management, stress testing and
buffer requirements, as well as single-counterparty credit limits. U.S.
GSIBs also will remain subject to the most comprehensive reporting
requirements, including the FR Y-14 (capital assessments and stress
testing) and daily FR 2052a (complex institution liquidity monitoring
report) reporting requirements.
---------------------------------------------------------------------------
\14\ International standards reflect agreements reached by the
BCBS as implemented in the United States through notice and comment
rulemaking.
---------------------------------------------------------------------------
The second set of standards, Category II standards, apply to U.S.
banking organizations and foreign banking organizations that have $700
billion or more in total assets,\15\ or $75 billion or more in cross-
jurisdictional activity, and that do not meet the criteria for Category
I. As a result, these standards apply to banking organizations that are
very large or have significant international activity. In addition to
being subject to current enhanced risk-management requirements, banking
organizations subject to Category II standards are subject to annual
supervisory stress testing and annual company-run stress testing
requirements. These banking organizations also are subject to the FR Y-
14 and daily FR 2052a reporting requirements and the most stringent
liquidity risk management, stress testing, and buffer requirements.
Category II standards also include single-counterparty credit limits.
---------------------------------------------------------------------------
\15\ Category I-IV standards apply to U.S. banking organizations
with $100 billion or more in total consolidated assets and foreign
banking organizations with $100 billion or more in combined U.S
assets. As discussed above, the risk-based indicators are measured
at the level of the top-tier holding company for U.S. banking
organizations and at the level of combined U.S. operations or U.S.
intermediate holding company for foreign banking organizations.
Accordingly, for U.S. banking organizations, total assets means
total consolidated assets. For foreign banking organizations, total
assets means combined U.S. assets or total consolidated assets of
the U.S. intermediate holding company, as applicable. Foreign
banking organizations with $100 billion or more in total
consolidated assets but with combined U.S. assets of less than $100
billion are subject to less stringent standards than required under
Category I-IV. See section X of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
The third set of standards, Category III standards, apply to U.S.
banking organizations and foreign banking organizations that have $250
billion or more in total assets, or $75 billion or more in weighted
short-term wholesale funding, nonbank assets, or off-balance sheet
exposure, and that do not meet the criteria for Category I or II. In
addition to being subject to current enhanced risk management
requirements, a banking organization subject to Category III standards
is subject to annual supervisory stress testing. However, under
Category III, a banking organization is required to publicly disclose
company-run test results every other year, rather than on an annual
basis. These banking organizations are subject to the existing FR Y-14
reporting requirements and the most stringent liquidity risk
management, stress testing, and buffer requirements. Under Category III
standards, banking organizations are subject to daily or monthly FR
2052a reporting requirements, depending on their levels of weighted
short-term wholesale funding. Category III standards also include
single-counterparty credit limits.
The fourth category, Category IV standards, apply to U.S. banking
organizations and foreign banking organizations that have at least $100
billion in total assets and that do not meet the criteria for Category
I, II, or III, as applicable. Category IV standards align with the
scale and complexity of these banking organizations but are less
stringent than Category I, II, or III standards, which reflects the
lower risk profile of these banking organizations relative to other
banking organizations with $100 billion or more in total assets. For
example, a banking organization subject to Category IV standards is
subject to supervisory stress testing every other year, and is not
required to conduct and publicly report the results of a company-run
stress test. In addition, Category IV standards under the final rule
continue to include enhanced liquidity standards, including liquidity
risk management, stress testing and buffer requirements, but the final
rule reduces the required minimum frequency of liquidity stress tests
and granularity of certain liquidity risk-management requirements,
commensurate with these firms' size and risk profile.
Table I--Scoping Criteria for Categories of Prudential Standards
------------------------------------------------------------------------
U.S. banking Foreign banking
Category organizations [dagger] organizations [Dagger]
------------------------------------------------------------------------
I................... U.S. GSIBs.............. N/A.
rrrrrrrrrrrrrrrrrrrrr
II.................. $700 billion or more in total assets; or $75
billion or more in cross-jurisdictional activity;
do not meet the criteria for Category I.
rrrrrrrrrrrrrrrrrrrrr
III................. $250 billion or more in total assets; or $75
billion or more in weighted short-term wholesale
funding, nonbank assets, or off-balance sheet
exposure; do not meet the criteria for Category I
or II.
rrrrrrrrrrrrrrrrrrrrr
IV.................. $100 billion or more in total assets; do not meet
the criteria for Category I, II, or III.
------------------------------------------------------------------------
[dagger] For a U.S. banking organization, the applicable category of
prudential requirements is measured at the level of the top-tier
holding company.
[Dagger] For a foreign banking organization, the applicable category of
prudential requirements is measured at the level of the combined U.S.
operations or U.S. intermediate holding company of the foreign banking
organization, depending on the particular standard.
V. Tailoring Framework
This section describes the framework for determining the
application of prudential standards under this final rule, including a
discussion of comments received on the proposed framework. The final
rule largely establishes the framework set forth in the proposals and
introduces four
[[Page 59036]]
categories of prudential standards based on certain indicators of risk.
A. Indicators-Based Approach and the Alternative Scoring Methodology
The proposals would have established four categories of prudential
standards that would have applied to U.S banking organizations with
$100 billion or more in total consolidated assets and three categories
of prudential standards that would have applied to foreign banking
organizations with $100 billion or more in combined U.S. assets, based
on the risk profile of their U.S. operations. The proposals generally
would have relied on five risk-based indicators to determine a banking
organization's applicable category of standards: Size, cross-
jurisdictional activity, nonbank assets, off-balance sheet exposure,
and weighted short-term wholesale funding. The proposals also sought
comment on an alternative approach that would have used a single,
comprehensive score based on the GSIB identification methodology, which
is currently used to identify U.S. GSIBs and apply risk-based capital
surcharges to these banking organizations (scoring methodology).\16\
Under the alternative approach, a banking organization's size and score
from the scoring methodology would have been used to determine which
category of standards would apply to the banking organization.
---------------------------------------------------------------------------
\16\ For more discussion relating to the scoring methodology,
see the Board's final rule establishing the GSIB identification
methodology. See Regulatory Capital Rules: Implementation of Risk-
Based Capital Surcharges for Global Systemically Important Bank
Holding Companies, 80 FR 49082 (Aug. 14, 2015).
---------------------------------------------------------------------------
Most commenters preferred the proposed indicators-based approach to
the scoring methodology for determining the category of standards that
would apply to large banking organizations. These commenters stated
that the indicators-based approach would be more transparent, less
complex, and more appropriate for applying categories of standards to
banking organizations that are not U.S. GSIBs. Some commenters also
asserted that if the Board used the scoring methodology, the Board
should use only method 1. These commenters argued that method 2 would
be inappropriate for determining applicable prudential standards on the
basis that the denominators to method 2 are fixed, rather than being
updated annually. Commenters also asserted that method 2 was calibrated
specifically for U.S. GSIBs and, as a result, should not be used to
determine prudential standards for other banking organizations.
The final rule adopts the indicators-based approach for applying
Category II, III, or IV standards to a banking organization, as this
approach provides a simple framework that supports the objectives of
risk sensitivity and transparency. Many of the risk-based indicators
are used in the agencies' existing regulatory frameworks or are
reported by banking organizations. By using indicators that exist or
are reported by most banking organizations subject to the final rule,
the indicators-based approach limits additional reporting requirements.
The Board will continue to use the scoring methodology to apply
Category I standards to a U.S. GSIB and its depository institution
subsidiaries.\17\
---------------------------------------------------------------------------
\17\ See the interagency capital and liquidity final rule for
application of Category I liquidity and capital standards to
depository institution subsidiaries of U.S. GSIBs.
---------------------------------------------------------------------------
B. Dodd-Frank Act Statutory Framework
The Board received a number of comments discussing the scope of the
changes required by EGRRCPA and the Board's authority for implementing
certain parts of the proposal. Some commenters argued that EGRRCPA did
not require the Board to make any changes to prudential standards
applied to bank holding companies and foreign banking organizations
with $100 billion or more in total consolidated assets. Conversely,
other commenters argued that, in passing EGRRCPA, Congress intended for
banking organizations with less than $250 billion in total consolidated
assets to be exempt from most enhanced prudential standards under
section 165 of the Dodd-Frank Act. These commenters argued that the
proposal was not consistent with the revised criteria for applying
enhanced prudential standards to bank holding companies with between
$100 billion and $250 billion in total consolidated assets provided
under section 165(a)(2)(C) of the Dodd-Frank Act. Specifically,
commenters argued that EGRRCPA does not permit the Board to apply
enhanced prudential standards to a bank holding company with $100
billion or more in total consolidated assets if the bank holding
company does not meet a risk-based indicator other than size. Some
commenters urged the Board to apply enhanced prudential standards on a
case-by-case basis. Foreign banking organization commenters argued that
the proposals did not give adequate regard to the principle of national
treatment and equality of competitive opportunity. These commenters
also argued that the proposals did not appropriately account for home
country standards applied to the foreign parent or the capacity of the
foreign parent to serve as a source of strength during times of stress.
To provide greater recognition of home country standards and parental
support, foreign banking organization commenters asserted that
standards applied to their U.S. operations should be discounted
relative to the standards applied to U.S. banking organizations.
Section 401 of EGRRCPA amended section 165 of the Dodd-Frank Act by
generally raising the minimum asset threshold for application of
prudential standards under section 165 from $50 billion in total
consolidated assets to $250 billion in total consolidated assets.\18\
However, the Board is required to apply certain enhanced prudential
standards to bank holding companies with less than $250 billion in
total consolidated assets. Specifically, the Board must conduct
periodic supervisory stress tests of bank holding companies with total
consolidated assets equal to or greater than $100 billion and less than
$250 billion,\19\ and must require publicly traded bank holding
companies with $50 billion or more in total consolidated assets to
establish a risk committee.\20\ In addition, section 165(a)(2)(C) of
the Dodd-Frank Act authorizes the Board to apply enhanced prudential
standards to bank holding companies with $100 billion or more, but less
than $250 billion, in total consolidated assets, provided that the
Board (1) determines that application of the prudential standard is
appropriate to prevent or mitigate risks to the financial stability of
the United States, or to promote the safety and soundness of a bank
holding company or bank holding companies; and (2) takes into
consideration a bank holding company's or bank holding companies'
capital structure, riskiness, complexity, financial activities
(including financial activities of subsidiaries), size, and any other
risk-
[[Page 59037]]
related factors that the Board of Governors deems appropriate.\21\
Section 165(a)(2)(C) permits the Board to apply any enhanced prudential
standard or standards to an individual bank holding company and also
permits the Board to apply enhanced prudential standards to a class of
bank holding companies. Similarly, in tailoring the application of
enhanced prudential standards, section 165 provides the Board with
discretion in differentiating among companies on an individual basis or
by category.\22\ Finally, in applying section 165 to foreign banking
organizations, the Dodd-Frank Act directs the Board to give due regard
to the principle of national treatment and equality of competitive
opportunity, and to take into account the extent to which the foreign
banking organization is subject, on a consolidated basis, to home
country standards that are comparable to those applied to financial
companies in the United States.
---------------------------------------------------------------------------
\18\ A bank holding company designated as a GSIB under the
Board's GSIB surcharge rule is subject to section 165, regardless of
its size. See EGRRCPA 401(f). The term bank holding company as used
in section 165 of the Dodd-Frank Act includes a foreign bank or
company treated as a bank holding company for purposes of the Bank
Holding Company Act, pursuant to section 8(a) of the International
Banking Act of 1978. See 12 U.S.C. 3106(a); 12 U.S.C. 5311(a)(1).
See also EGRRCPA 401(g) (regarding the Board's authority to
establish enhanced prudential standards for foreign banking
organizations with total consolidated assets of $100 billion or
more).
\19\ EGRRCPA 401(e). Pursuant to section 165(i)(1), the Board
must conduct an annual stress test of bank holding companies
described in section 165(a), and nonbank financial companies
designated for supervision by the Board. 12 U.S.C. 5365(i)(1).
\20\ 12 U.S.C. 5365(h)(2)(A).
\21\ 12 U.S.C. 5365(a)(2)(C). Section 401(a) of EGRRCPA amended
section 165 of the Dodd-Frank Act to add section 165(a)(2)(C).
\22\ 12 U.S.C. 5365(a)(2)(A).
---------------------------------------------------------------------------
The framework for application of enhanced prudential standards
established in this final rule is consistent with section 165 of the
Dodd-Frank Act, as amended by EGRRCPA. The framework takes into
consideration banking organizations' risk profiles by applying
prudential standards based on a banking organization's size, cross-
jurisdictional activity, nonbank assets, off-balance sheet exposure,
and weighted short-term wholesale funding. By evaluating the degree of
each risk-based indicator's presence at various thresholds, the
framework takes into account concentrations in various types of risk.
As explained below, the risk-based indicators were selected to measure
risks to both financial stability and safety and soundness, including a
bank holding company or bank holding companies' capital structure,
riskiness, complexity, and financial activities. Size is specifically
mentioned in section 165(a)(2)(C)(ii). By establishing categories of
standards that increase in stringency based on risk, the framework
would ensure that the Board's prudential standards align with the risk
profile of large banking organizations, supporting financial stability
and promoting safety and soundness.
Category IV standards apply if a banking organization reaches an
asset size threshold ($100 billion or more, as identified in the
statute) but does not meet the thresholds for the other risk-based
indicators. Size, as discussed below in section V.C.1 of this
Supplementary Information, provides a measure of the extent to which
stress at a banking organization's operations could be disruptive to
U.S. markets and present significant risks to U.S. financial stability.
Size also provides a measure of other types of risk, including
managerial and operational complexity. The presence of one factor and
absence of other factors suggests that prudential standards should
apply to this group of banking organizations, but with reduced
stringency to account for these organizations' reduced risk profiles.
In addition, as discussed above, the Board must apply periodic
supervisory stress testing and risk-committee requirements to
institutions of this size.
Under the final rule, the standards applied to the U.S. operations
of foreign banking organizations are consistent with the standards
applicable to U.S. bank holding companies. The standards also take into
account the extent to which a foreign banking organization is subject,
on a consolidated basis, to home country standards that are comparable
to those applied to financial companies in the United States.
Specifically, the final rule would continue the Board's approach of
tailoring the application of prudential standards to foreign banking
organizations based on the foreign banking organization's U.S. risk
profile. For a foreign banking organization with a smaller U.S.
presence, the final rule would largely defer to the foreign banking
organization's compliance with home-country capital and liquidity
standards at the consolidated level, and impose certain risk-management
requirements that are specific to the U.S. operations of a foreign
banking organization. For foreign banking organizations with
significant U.S. operations, the final rule would apply a framework
that is consistent with the framework applied to U.S. banking
organizations. By using consistent indicators of risk, the final rule
facilitates a level playing field between foreign and U.S. banking
organizations operating in the United States, in furtherance of the
principle of national treatment and equality of competitive
opportunity. Differences in the measurement of risk-based indicators
and in the application of standards between foreign banking
organizations and U.S. banking organizations takes into account
structural differences in operation and organization of foreign banking
organizations, as well as the standards to which the foreign banking
organization on a consolidated basis may be subject. For example, the
cross-jurisdictional activity indicator excludes liabilities of the
combined U.S. operations, or U.S. intermediate holding company, to non-
U.S. affiliates, which recognizes the benefit of the foreign banking
organization providing support to its U.S. operations.
Commenters also raised questions over the Board's legal authority
to apply prudential standards to covered savings and loan holding
companies. These comments are addressed in Section VIII of this
Supplementary Information.
C. Choice of Risk-Based Indicators
To determine the applicability of the Category II, III, or IV
standards, the proposals considered a banking organization's level of
five risk-based indicators: Size, cross-jurisdictional activity,
weighted short-term wholesale funding, nonbank assets, and off-balance
sheet exposure.
The Board received a number of comments on the choice of risk-based
indicators and suggested modifications to the calculation of the
indicators. Several commenters expressed the general view that the
proposed risk-based indicators were poor measures of risk. A number of
these commenters also asserted that the Board did not provide
sufficient justification to support the proposed risk-based indicators,
and requested that the Board provide additional explanation regarding
its selection. Commenters also asserted that the framework should take
into consideration additional risk-mitigating characteristics when
measuring the proposed risk-based indicators. Several other commenters
argued that the proposals are too complex and at odds with the stated
objective of simplicity and burden reduction.
By considering the relative presence or absence of each risk-based
indicator, the proposals would have provided a basis for assessing a
banking organization's financial stability and safety and soundness
risks. The risk-based indicators generally track measures already used
in the Board's existing regulatory framework and that are already
publicly reported by affected banking organizations.\23\ Together with
fixed, uniform thresholds, use of the
[[Page 59038]]
indicators supports the Board's objectives of transparency and
efficiency, while providing for a framework that enhances the risk-
sensitivity of the Board's enhanced prudential standards in a manner
that continues to allow for comparability across banking organizations.
Risk-mitigating factors, such as a banking organization's high-quality
liquid assets and the presence of collateral to secure an exposure, are
incorporated into the enhanced standards to which the banking
organization is subject.
---------------------------------------------------------------------------
\23\ Bank holding companies, covered savings and loan holding
companies, and U.S. intermediate holding companies subject to this
final rule already report the information required to determine
size, weighted short-term wholesale funding, and off-balance sheet
exposure on the Banking Organization Systemic Risk Report (FR Y-15).
Such bank holding companies and covered savings and loan holding
companies also currently report the information needed to calculate
cross-jurisdictional activity on the FR Y-15. Nonbank assets are
reported on the FR Y-9 LP. This information is publicly available.
---------------------------------------------------------------------------
One commenter asserted that an analysis of the proposed risk-based
indicators based on a measure of the expected capital shortfall of a
banking organization in the event of a steep equity market decline
(SRISK) \24\ demonstrated that only the cross-jurisdictional activity
and weighted short-term wholesale funding indicators were positively
correlated with SRISK while the other indicators were not important
drivers of a banking organization's SRISK measures. Because SRISK is
conditioned on a steep decline in equity markets, it does not capture
the probability of a financial crisis or an idiosyncratic failure of a
large banking organization. In addition, SRISK does not directly
capture other important aspects of systemic risk, such as a banking
organization's interconnectedness with other financial market
participants. For these reasons, SRISK alone is not a sufficient means
of determining the risk-based indicators used in the tailoring
framework.
---------------------------------------------------------------------------
\24\ For the definition and measurement of SRISK, see Acharya,
V., Engle, R. and Richardson, M., 2012. Capital shortfall: A new
approach to ranking and regulating systemic risks. American Economic
Review, 102(3), pp.59-64, and see Brownlees, Christian, and Robert
F. Engle (2017). ``SRISK: A conditional capital shortfall measure of
systemic risk.'' The Review of Financial Studies 30.1 (2016): 48-79.
---------------------------------------------------------------------------
Accordingly and as discussed below, the Board is adopting the risk-
based indicators as proposed.
1. Size
The proposals would have considered size in tailoring the
application of enhanced standards to a domestic banking organization or
the U.S. operations of a foreign banking organization.
Some commenters argued that the proposals placed too much reliance
on size for determining the prudential standards applicable to large
banking organizations. These commenters generally criticized the size
indicator as not sufficiently risk sensitive and a poor measure of
systemic and safety and soundness risk, and suggested using risk-
weighted assets, as determined under the regulatory capital rule,
rather than total consolidated assets or combined U.S. assets, as
applicable. Several commenters argued that the proposals did not
adequately explain the relationship between size and safety and
soundness risk, particularly risks associated with operational or
control gaps.
Other commenters, however, supported the use of size as a measure
of financial stability and safety and soundness risk. These commenters
asserted that size serves as an indicator of credit provision that
could be disrupted in times of stress, as well as the difficulties
associated with the resolution of a large banking organization. These
commenters also recommended placing additional emphasis on size for
purposes of tailoring prudential standards, and expressed the view that
the size indicator is less susceptible to manipulation through
temporary adjustments at the end of a reporting period as compared to
the other risk-based indicators.
Section 165 of the Dodd-Frank Act, as amended by EGRRCPA,
establishes thresholds based on total consolidated assets.\25\ Size is
also among the factors that the Board must take into consideration in
differentiating among banking organizations under section 165.\26\ A
banking organization's size provides a measure of the extent to which
stress at its operations could be disruptive to U.S. markets and
present significant risks to U.S. financial stability. A larger banking
organization has a greater number of customers and counterparties that
may be exposed to a risk of loss or suffer a disruption in the
provision of services if the banking organization were to experience
distress. In addition, size is an indicator of the extent to which
asset fire sales by a banking organization could transmit distress to
other market participants, given that a larger banking organization has
more counterparties and more assets to sell. The failure of a large
banking organization in the United States also may give rise to
challenges that complicate the resolution process due to the size and
diversity of its customer base and the number of counterparties that
have exposure to the banking organization.
---------------------------------------------------------------------------
\25\ See generally 12 U.S.C. 5635 and EGRRCPA section 401.
\26\ EGRRCPA Sec. 401(a)(1)(B)(i) (codified at 12 U.S.C.
5365(a)(2)(A)). The Board has also previously used size as a simple
measure of a banking organization's potential systemic impact and
risk, and have differentiated the stringency of capital and
liquidity requirements based on total consolidated asset size. For
example, prior to the adoption of this final rule, advanced
approaches capital requirements, the supplementary leverage ratio,
and the LCR requirement generally applied to banking organizations
with total consolidated assets of $250 billion or more or total
consolidated on-balance sheet foreign exposure of $10 billion or
more.
---------------------------------------------------------------------------
The complexities associated with size also can give rise to
operational and control gaps that are a source of safety and soundness
risk and could result in financial losses to a banking organization and
adversely affect its customers. A larger banking organization operates
on a larger scale, has a broader geographic scope, and generally will
have more complex internal operations and business lines relative to a
smaller banking organization. Growth of a banking organization, whether
organic or through an acquisition, can require more robust risk
management and development of enhanced systems or controls; for
example, when managing the integration and maintenance of information
technology platforms.
Size also can be a proxy for other measures of complexity, such as
the amount of trading and available-for-sale securities, over-the-
counter derivatives, and Level 3 assets.\27\ Using Call Report data
from the first quarter of 2005 to the first quarter of 2018, the
correlation between a bank's total trading assets (a proxy of
complexity) and its total assets (a proxy of size) is over 90
percent.\28\ As was seen in the financial crisis, a more complex
institution can be more opaque to the markets and may have difficulty
managing its own risks, warranting stricter standards for both capital
and liquidity.
---------------------------------------------------------------------------
\27\ The FR Y-15 and the GSIB surcharge methodology include
three indicators of complexity that are used to determine a banking
organization's systemic importance for purposes of the GSIB
surcharge rule: Notional amount of OTC derivatives, Level 3 assets,
and trading and AFS securities. In the second quarter of 2019, the
average complexity score of a U.S. GSIB was 104.7, the average
complexity score of a banking organization with assets of greater
than $250 billion that is not a U.S. GSIB was 12.0, the average
complexity score of a banking organization with assets of more than
$100 billion but less than $250 billion was 3.5, and the average
complexity score of a banking organization with assets of $50
billion but less than $100 billion was 0.4.
\28\ See Amy G. Lorenc, and Jeffery Y. Zhang (2018) ``The
Differential Impact of Bank Size on Systemic Risk,'' Finance and
Economics Discussion Series 2018-066. Washington: Board of Governors
of the Federal Reserve System, available at: https://doi.org/10.17016/FEDS.2018.066.
---------------------------------------------------------------------------
Further, notwithstanding commenters' assertions that risk-weighted
assets more appropriately capture risk, an approach that relies on
risk-weighted assets as an indication of size would not align with the
full scope of risks intended to be measured by the size indicator.
Risk-weighted assets
[[Page 59039]]
serve as an indication of credit risk and are not designed to capture
the risks associated with managerial and operational complexity or the
potential for distress at a large banking organization to cause
widespread market disruptions.
Some commenters argued that the Board staff analysis cited in the
proposals does not demonstrate that size is a useful indicator for
determining the systemic importance of a banking organization.\29\
Specifically, one commenter asserted that the Board staff analysis (1)
uses a flawed measure of bank stress and (2) does not use robust
standard errors or sufficiently control for additional macroeconomic
factors that may contribute to a decline in economic activity. The
Board staff paper employs the natural logarithm of deposits at failed
banks as a proxy of bank stress. This choice was informed by Bernanke's
1983 article, which uses the level (namely, thousands of dollars) of
deposits at failed banks to proxy bank stress.\30\ The staff paper
makes modifications to this stress proxy in order to account for the
evolution of the banking sector over time. In contrast to Bernanke's
study of a three-year period during the Great Depression, Board staff's
analysis spans almost six decades. Expressing bank stress in levels
(namely, trillions of dollars) would not account for the structural
changes that have occurred in the banking sector and therefore would
place a disproportionately greater weight on the bank failures that
occurred during the 2008-2009 financial crisis. In addition to the
analysis conducted by Board staff, other research has found evidence of
a link between size and systemic risk.\31\
---------------------------------------------------------------------------
\29\ As described in the proposals, relative to a smaller
banking organization, the failure of a large banking organization is
more likely to have a destabilizing effect on the economy, even if
the two banking organizations are engaged in similar business lines.
Board staff estimated that stress at a single large banking
organization with an assumed $100 billion in deposits would result
in approximately a 107 percent decline in quarterly real U.S. GDP
growth, whereas stress among five smaller banking organizations--
each with an assumed $20 billion in deposits--would collectively
result in roughly a 22 percent decline in quarterly real U.S. GDP
growth. Both scenarios assume $100 billion in total deposits, but
the negative impact is significantly greater when the larger banking
organization fails. Id.
\30\ Bernanke, Ben S. 1983. ``Nonmonetary Effects of the
Financial Crisis in the Propagation of the Great Depression.'' The
American Economic Review Vol. 73, No. 3, pp. 257-276.
\31\ See Bremus, Buck, Russ and Schnitzer, Big Banks and
Macroeconomic Outcomes: Theory and Cross-Country Evidence of
Granularity, Journal of Money, Credit and Banking (July 2018).
Allen, Bali, and Tang construct a measure of systemic risk (CATFIN)
and demonstrate that the CATFIN of both large and small banking
organizations can forecast macroeconomic declines, and found that
the CATFIN of large banks can successfully forecast lower economic
activity sooner than that of small banks. See, Allen, Bali, and
Tang, Does Systemic Risk in the Financial Sector Predict Future
Economic Downturns?, Review of Financial Studies, Vol. 25, Issue 10
(2012). Adrian and Brunnermeier constructed a measurement of
systemic risk, designated CoVar, and show that firms with higher
leverage, more maturity mismatch, and larger size are associated
with larger systemic risk contributions. Specifically, the authors
find that if a bank is 10 percent larger than another bank, then the
size coefficient predicts that the larger bank's CoVaR per unit of
capital is 27 basis points higher than the smaller bank's CoVaR.
See, Adrian & Brunnermeir, CoVar, American Economic Review Journal,
Vol. 106 No. 7 (July 2016)
In the same vein, research conducted by the Bank for
International Settlements suggests that the ratio of one
institution's systemic importance to a smaller institution's
systemic importance is larger than the ratio of the respective
sizes. See Tarashev, Borio and Tsatsaronis, Attributing systemic
risk to individual institutions, BIS Working Paper No. 308 (2010).
Relatedly, D[aacute]vila and Walther (2017) show that large banks
take on more leverage relative to small banks in times of stress and
government bailouts. See D[aacute]vila & Walther, Does Size Matter?
Bailouts with Large and Small Banks, NBER Working Paper No. 24132
(2017).
---------------------------------------------------------------------------
For the reasons discussed above, the Board is adopting the proposed
measure of size for foreign and domestic banking organizations without
change. Size is a simple and transparent measure of systemic importance
and safety and soundness risk that can be readily understood and
measured by banking organizations and market participants.
2. Cross-Jurisdictional Activity
The proposals would have included a measure of cross-jurisdictional
activity as a risk-based indicator to determine the application of
Category II standards. For U.S. banking organizations, the domestic
proposal defined cross-jurisdictional activity as the sum of cross-
jurisdictional claims and liabilities. In recognition of the structural
differences between foreign and domestic banking organizations, the
foreign bank proposal would have adjusted the measurement of cross-
jurisdictional activity for foreign banking organizations to exclude
inter-affiliate liabilities and certain collateralized inter-affiliate
claims.\32\ Specifically, claims on affiliates \33\ would be reduced by
the value of any financial collateral in a manner consistent with the
Board's capital rule,\34\ which permits, for example, banking
organizations to recognize financial collateral when measuring the
exposure amount of repurchase agreements and securities borrowing and
securities lending transactions (together, repo-style
transactions).\35\ The foreign bank proposal sought comment on
alternative adjustments to the cross-jurisdictional activity indicator
for foreign banking organizations, and on other modifications to the
components of the indicator.
---------------------------------------------------------------------------
\32\ Specifically, the proposal would have excluded from the
cross-jurisdictional activity indicator all inter-affiliate claims
of a foreign banking organization secured by financial collateral,
in accordance with the capital rule. Financial collateral is defined
under the capital rule to mean collateral, (1) in the form of (i)
cash on deposit with the banking organization (including cash held
for the banking organization by a third-party custodian or trustee),
(ii) gold bullion, (iii) long-term debt securities that are not
resecuritization exposures and that are investment grade, (v) short-
term debt instruments that are not resecuritization exposures and
that are investment grade, (v) equity securities that are publicly
traded; (vi) convertible bonds that are publicly traded, or (vii)
money market fund shares and other mutual fund shares if a price for
the shares is publicly quoted daily; and (2) in which the banking
organization has a perfected, first-priority security interest or,
outside of the United States, the legal equivalent thereof (with the
exception of cash on deposit and notwithstanding the prior security
interest of any custodial agent). See 12 CFR 217.2.
\33\ For the combined U.S. operations, the measure of cross-
jurisdictional activity would exclude all claims between the foreign
banking organization's U.S. domiciled affiliates, branches, and
agencies to the extent such items are not already eliminated in
consolidation. For the U.S. intermediate holding company, the
measure of cross-jurisdictional activity would eliminate through
consolidation all intercompany claims within the U.S. intermediate
holding company.
\34\ See 12 CFR 217.37.
\35\ See the definition of repo-style transaction at 12 CFR
217.2.
---------------------------------------------------------------------------
Some commenters urged the Board to adopt the cross-jurisdictional
activity indicator as proposed. By contrast, a number of commenters
expressed concern regarding this aspect of the proposals. Several
commenters opposed the inclusion of cross-jurisdictional liabilities in
the cross-jurisdictional activity indicator. Some commenters argued
that cross-jurisdictional liabilities are not a meaningful indicator of
systemic risk as measured by SRISK.\36\ Other commenters asserted that
cross-jurisdictional liabilities can reflect sound risk management
practices on the basis that cross-jurisdictional liabilities can
indicate a diversity of funding sources and may be used to fund assets
in the same foreign jurisdiction as the liabilities. These commenters
suggested modifying the indicator to exclude the amount of any central
bank deposits, other high-quality liquid assets (HQLA), or assets that
receive a zero percent risk weight under the capital rule if those
assets are held in the same jurisdiction as a cross-jurisdictional
liability.
---------------------------------------------------------------------------
\36\ See, supra note 25.
---------------------------------------------------------------------------
A number of commenters suggested revisions to the cross-
jurisdictional activity indicator that would exclude specific types of
claims or liabilities. For example, some commenters asserted that the
measure of cross-jurisdictional
[[Page 59040]]
activity should exclude any claim secured by HQLA or highly liquid
assets \37\ based on the nature of the collateral. Another commenter
suggested excluding operating payables arising in the normal course of
business, such as merchant payables. Other commenters suggested that
the indicator exclude exposures to U.S. entities or projects that have
a foreign guarantee or foreign insurer, unless the U.S. direct
counterparty does not meet an appropriate measure of creditworthiness.
Some commenters stated that investments in co-issued collateralized
loan obligations should be excluded from the measure of cross-
jurisdictional activity.
---------------------------------------------------------------------------
\37\ See 12 CFR part 252.35(b)(3)(i) and 252.157(c)(7)(i).
---------------------------------------------------------------------------
Commenters also suggested specific modifications to exclude
exposures to certain types of counterparties. For example, several
commenters suggested excluding exposures to sovereign, supranational,
international, or regional organizations. Commenters asserted that
these exposures do not present the same interconnectivity concerns as
exposures with other types of counterparties and that claims on these
types of entities present little or no credit risk. Another commenter
suggested excluding transactions between a U.S. intermediate holding
company and any affiliated U.S. branches of its parent foreign banking
organization on the basis that the foreign bank proposal could
disadvantage foreign banking organizations relative to U.S. banking
organizations that eliminate such inter-affiliate transactions in
consolidation. Similarly, one commenter suggested excluding
transactions between a U.S. intermediate holding company and any U.S.
branch of a foreign banking organization, whether affiliated or not, on
the basis that such exposures are geographically domestic. Another
commenter argued that exposures denominated in a foreign banking
organization's home currency should be excluded. By contrast, one
commenter argued that cross-jurisdictional activity should be revised
to include derivatives, arguing that derivatives can be used as a
substitute for other cross-jurisdictional transactions and, as a
result, could be used to avoid the cross-jurisdictional activity
threshold.
A number of commenters provided other suggestions for modifying the
cross-jurisdictional activity indicator. In particular, some commenters
recommended that the cross-jurisdictional activity indicator permit
netting of claims and liabilities with a counterparty, with only the
net claim or liability counting towards cross-jurisdictional activity.
Several commenters suggested that the Board should consider excluding
assets or transactions that satisfy another regulatory requirement. For
example, these commenters argued that the Board should consider
excluding transactions resulting in the purchase of or receipt of HQLA.
Other commenters suggested modifications to the criteria for
determining when an exposure is considered cross-border. Specifically,
commenters requested modifications to the calculation of cross-
jurisdictional activity for claims supported by multiple guarantors or
a combination of guarantors and collateral, for example, by not
attributing the claim to the jurisdiction of the entity holding the
claim, or collateral that bears the highest rating for reporting on an
ultimate-risk basis. Commenters also requested that the Board presume
that an exposure created through negotiations with agents or asset
managers would generally create an exposure based in the jurisdiction
of the location of the agent or manager for their undisclosed
principal.
Foreign banking organization commenters generally supported the
approach taken in the foreign bank proposal with respect to the
treatment of inter-affiliate cross-jurisdictional liabilities, but
stated that such an approach would not adequately address the
differences between domestic and foreign banking organizations. These
commenters urged the Board to eliminate the cross-jurisdictional
activity indicator for foreign banking organizations or, alternatively,
to eliminate all inter-affiliate transactions from measurement of the
indicator.
Significant cross-border activity can indicate heightened
interconnectivity and operational complexity. Cross-jurisdictional
activity can add operational complexity in normal times and complicate
the ability of a banking organization to undergo an orderly resolution
in times of stress, generating both safety and soundness and financial
stability risks. In addition, cross-jurisdictional activity may present
increased challenges in resolution because there could be legal or
regulatory restrictions that prevent the transfer of financial
resources across borders where multiple jurisdictions and regulatory
authorities are involved. Banking organizations with significant cross-
jurisdictional activity may require more sophisticated risk management
to appropriately address the complexity of those operations and the
diversity of risks across all of the jurisdictions in which the banking
organization provides financial services. For example, banking
organizations with significant cross-border activities may require more
sophisticated risk management related to raising funds in foreign
financial markets, accessing international payment and settlement
systems, and obtaining contingent sources of liquidity. In addition,
the application of consistent prudential standards to banking
organizations with significant size or cross-jurisdictional activity
helps to promote competitive equity in the United States as well as
abroad.
Measuring cross-jurisdictional activity taking into account both
assets and liabilities--instead of just assets--provides a broader
gauge of the scale of cross-border operations and associated risks, as
it includes both borrowing and lending activities outside of the United
States.\38\ While both borrowing and lending outside the United States
may reflect prudent risk management, cross-jurisdictional activity of
$75 billion or more indicates a level of organizational complexity that
warrants more stringent prudential standards. With respect to
commenters' suggestion to exclude central bank deposits, HQLA, or
assets that receive a zero percent risk weight in the same jurisdiction
as a cross-jurisdictional liability, such an exclusion would assume
that all local liabilities are used to fund local claims. However,
because foreign affiliates rely on local funding to different extents,
such an exclusion could understate risk.\39\
---------------------------------------------------------------------------
\38\ The BCBS recently amended its measurement of cross-border
activity to more consistently reflect derivatives, and the Board
anticipates it will separately propose changes to the FR Y-15 in a
manner consistent with this change. Any related changes to the
proposed cross-jurisdictional activity indicator would be updated
through those separately proposed changes to the FR Y-15.
\39\ Based on data collected from the Country Exposure Report
(FFIEC 009), some affiliates of U.S. banking organizations relied
extensively (75 percent) on local funding, while others collected
almost no local funding. In particular, approximately 40 percent of
bank-affiliate locations had no local lending. See Nicola Cetorelli
& Linda Goldberg, ``Liquidity Management of U.S. Global Banks:
Internal Capital Markets In the Great Recession'' (Fed. Reserve Bank
of N.Y. Staff Report No. 511, 2012), available at http://www.newyorkfed.org/research/staff_reports/sr511.pdf.
---------------------------------------------------------------------------
The cross-jurisdictional activity indicator and threshold is
intended to identify banking organizations with significant cross-
border activities. Significant cross-border activities indicate a
complexity of operations, even if some of those activities are low
risk. Excluding additional types of claims or liabilities would reduce
the transparency and simplicity of the
[[Page 59041]]
tailoring framework. In addition, excluding certain types of assets
based on the credit risk presented by the counterparty would be
inconsistent with the purpose of the indicator as a measure of
operational complexity and risk. The measure of cross-jurisdictional
activity in the final rule therefore does not exclude specific types of
claims or liabilities, or claims and liabilities with specific types of
counterparties, other than the proposed treatment of inter-affiliate
liabilities and certain inter-affiliate claims.
The proposals requested comment on possible additional changes to
the components of the cross-jurisdictional activity indicator to
potentially provide more consistent treatment across repurchase
agreements and other securities financing transactions and with respect
to the recognition of collateral across types of transactions.
Commenters were generally supportive of these additional changes. The
proposals also requested comment on the most appropriate way in which
the proposed cross-jurisdictional activity indicator could account for
the risk of transactions with a delayed settlement date. Several
commenters argued that the indicator should exclude trade-date
receivables or permit the use settlement-date accounting in calculating
the cross-jurisdictional activity indicator. Commenters also supported
measuring securities lending agreements and repurchase agreements on an
ultimate-risk basis, rather than allocating these exposures based on
the residence of the counterparty.
The final rule adopts the cross-jurisdictional activity indicator
as proposed. Under the final rule, cross-jurisdictional activity is
measured based on the instructions to the FR Y-15 and, by reference, to
the FFIEC 009.\40\ The Board is considering whether additional
technical modifications and refinements to the cross-jurisdictional
indicator would be appropriate, including with respect to the treatment
of derivatives, and would seek comment on any changes to the indicator
through a separate notice. Specifically, cross-jurisdictional claims
are measured according to the instructions to the FFEIC 009. The
instructions to the FFIEC 009 currently do not permit risk transfer for
repurchase agreements and securities financing transactions and the
Board is not altering the measurement of repurchase agreements and
securities financing transactions under this final rule. This approach
maintains consistency between the FR Y-15 and FFIEC 009. In addition,
the cross-jurisdictional indicator maintains the use of trade-date
accounting for purposes of the final rule. The preference for trade-
date accounting is consistent with other reporting forms (e.g.,
Consolidated Financial Statements for Holding Companies (FR Y-9C)) and
with generally accepted accounting principles. With respect to netting,
the instructions to the FFIEC 009 permit netting in limited
circumstances. Allowing banking organizations to net all claims and
liabilities with a counterparty could significantly understate an
organization's level of international activity, even if such netting
might be appropriate from the perspective of managing risk.
---------------------------------------------------------------------------
\40\ Specifically, cross-jurisdictional claims are measured on
an ultimate-risk basis according to the instructions to the FFIEC
009. The instructions to the FFIEC 009 currently do not permit risk
transfer for repurchase agreements and securities financing
transactions. Foreign banking organizations must include in cross-
jurisdictional claims only the net exposure (i.e., net of collateral
value subject to haircuts) of all secured transactions with
affiliates to the extent that these claims are collateralized by
financial collateral or excluded in consolidation (see supra note
35).
---------------------------------------------------------------------------
As noted above, the risk-based indicators generally track measures
already used in the Board's existing regulatory framework and rely on
information that banking organizations covered by the final rule
already publicly report.\41\ The Board believes that the measure of
cross-jurisdictional activity as proposed (including the current
reported measurements of repurchase agreements and securities financing
transactions, trade date accounting items, and netting) along with the
associated $75 billion threshold, appropriately captures the risks that
warrant the application of Category II standards. The Board may
consider future changes regarding the measurement of cross-
jurisdictional activity indicator, and in doing so, would consider the
comments described above and the impact of any future changes on the
$75 billion threshold, and would draw from supervisory experience
following the implementation of the final rule. Any such changes would
be considered in the context of a separate rulemaking process.
---------------------------------------------------------------------------
\41\ See Form FR Y-15. This information is publicly available.
---------------------------------------------------------------------------
3. Nonbank Assets
The proposals would have considered the level of nonbank assets in
determining the applicable category of standards for foreign and
domestic banking organizations. The amount of a banking organization's
activities conducted through nonbank subsidiaries provides a measure of
the organization's business and operational complexity. Specifically,
banking organizations with significant activities in nonbank
subsidiaries are more likely to have complex corporate structures and
funding relationships. In addition, in certain cases nonbank
subsidiaries are subject to less prudential regulation than regulated
banking entities.
Under the proposals, nonbank assets would have been measured as the
average amount of assets in consolidated nonbank subsidiaries and
equity investments in unconsolidated nonbank subsidiaries.\42\ The
proposals would have excluded from this measure assets in a depository
institution subsidiary, including a national bank, state member bank,
state nonmember bank, federal savings association, federal savings
bank, or state savings association subsidiary. The proposals also would
have excluded assets of subsidiaries of these depository institutions,
as well as assets held in each Edge or Agreement Corporation that is
held through a bank subsidiary.\43\
---------------------------------------------------------------------------
\42\ For a foreign banking organization, nonbank assets would
have been measured as the average amount of assets in consolidated
U.S. nonbank subsidiaries and equity investments in unconsolidated
U.S. nonbank subsidiaries.
\43\ As noted above, the Parent Company Only Financial
Statements for Large Holding Companies (FR Y-9LP), Schedule PC-B,
line item 17 is used to determine nonbank assets. For purposes of
this item, nonbank companies exclude (i) all national banks, state
member banks, state nonmember insured banks (including insured
industrial banks), federal savings associations, federal savings
banks, and thrift institutions (collectively for purposes of this
item, ``depository institutions'') and (ii) except for an Edge or
Agreement Corporation designated as ``Nonbanking'' in the box on the
front page of the Consolidated Report of Condition and Income for
Edge and Agreement Corporations (FR 2886b), any subsidiary of a
depository institution (for purposes of this item, ``depository
institution subsidiary''). The revised FR Y-15 includes a line item
that would automatically populate this information. See Section XV
of this Supplementary Information.
---------------------------------------------------------------------------
A number of commenters argued that measuring nonbank assets based
on the location of the assets in a nonbank subsidiary provides a poor
measure of risk. Some commenters requested that the Board instead
consider whether the assets relate to bank-permissible activities.
Other commenters argued that activities conducted in nonbank
subsidiaries can present less risk than banking activities.
Specifically, some commenters argued that the proposed measure of
nonbank assets was over-inclusive on the basis that many of the assets
in nonbank subsidiaries would receive a zero percent risk weight under
the Board's capital rule. In support of this position, commenters noted
that retail brokerage firms often hold significant amounts of U.S.
treasury securities.
[[Page 59042]]
Other commenters argued that the measure of nonbank assets is
poorly developed and infrequently used and urged the Board to provide
additional support for the inclusion of the indicator in the proposed
framework. Specifically, commenters requested that the Board provide
additional justification for nonbank assets as an indicator of complex
corporate structures and funding relationships, as well as
interconnectedness. A number of commenters argued that, to the extent
the measure was intended to address risk in broker-dealer operations,
it was unnecessary in light of existing supervision and regulation of
broker-dealers and application of consolidated capital, stress testing,
and risk-management requirements to the parent banking organization.
A number of commenters argued that, if retained, the nonbank assets
indicator should be more risk-sensitive. Some commenters suggested
excluding assets related to bank-permissible activities as well as
certain types of nonbanking activities, such as retail brokerage
activity. The commenter argued that, at a minimum, the nonbank assets
indicator should exclude any nonbank subsidiary or asset that would be
permissible for a bank to own. Other commenters suggested risk-
weighting nonbank assets or deducting certain assets held by nonbank
subsidiaries, such as on-balance sheet items that are deducted from
regulatory capital under the capital rule (e.g., deferred tax assets
and goodwill).
Both the organizational structure of a banking organization and the
activities it conducts contribute to its complexity and risk profile.
Banking organizations with significant investments in nonbank
subsidiaries are more likely to have complex corporate structures,
inter-affiliate transactions, and funding relationships.\44\ A banking
organization's complexity is positively correlated with the impact of
the organization's failure or distress.\45\
---------------------------------------------------------------------------
\44\ See ``Evolution in Bank Complexity'', Nicola Cetorelli,
James McAndrews and James Traina, Federal Reserve Bank of New York
Economic Policy Review (December 2014) (discussing acquisitions of
nonbanking subsidiaries and cross-industry acquisitions as
contributing to growth in organization complexity), available at,
https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412cet2.pdf.
\45\ See 80 FR 49082 (August 14, 2015). See also BCBS, ``Global
systemically important banks: Updated assessment methodology and the
higher loss absorbency requirement'' (paragraph 25), available at
http://www.bis.org/publ/bcbs255.htm.
---------------------------------------------------------------------------
Market participants typically evaluate the financial condition of a
banking organization on a consolidated basis. Therefore, the distress
or failure of a nonbank subsidiary could be destabilizing to, and cause
counterparties and creditors to lose confidence in, the banking
organization as a whole. In addition, the distress or failure of
banking organizations with significant nonbank assets has coincided
with or increased the effects of significant disruptions to the
stability of the U.S. financial system.\46\
---------------------------------------------------------------------------
\46\ An example includes the near-failure of Wachovia
Corporation, a financial holding company with $162 billion in
nonbank assets as of September 30, 2008.
---------------------------------------------------------------------------
Nonbank activities also may involve a broader range of risks than
those associated with activities that are permissible for a depository
institution to conduct directly and can increase interconnectedness
with other financial firms, requiring sophisticated risk management and
governance, including capital planning, stress testing, and liquidity
risk management. For example, holding companies with significant
nonbank assets are generally engaged in financial intermediation of a
different nature (such as complex derivatives activities) than those
typically conducted through a depository institution. If not adequately
managed, the risks associated with nonbank activities could present
significant safety and soundness concerns and increase financial
stability risks. Nonbank assets also reflect the degree to which a
banking organization may be engaged in activities through legal
entities that are not subject to separate capital or liquidity
requirements or to the direct regulation and supervision applicable to
a regulated banking entity.
The nonbank assets indicator in the final rule provides a proxy for
operational complexity and nonbanking activities without requiring
banking organizations to track assets, income, or revenue based on
whether a depository institution has the legal authority to hold such
assets or conduct the related activities (legal authority). In
addition, a depository institution's legal authority depends on the
institution's charter and may be subject to additional interpretation
over time.\47\ A measure of nonbank assets based on legal authority
would be costly and complex for banking organizations to implement, as
they do not currently report this information based on legal authority.
Defining nonbank assets based on the type of entity that owns them,
rather than legal authority, reflects the risks associated with
organizational complexity and nonbanking activities without imposing
additional reporting burden as a result of implementing the final rule
or monitoring any future changes to legal authority. In addition, as
noted above, the nonbank assets indicator is designed, in part, to
identify activities that a banking organization conducts in
subsidiaries that may be subject to less prudential regulation, which
makes relevant whether the asset or activity is located in a bank or
nonbank subsidiary.
---------------------------------------------------------------------------
\47\ See, e.g., ``OCC Releases Updated List of Permissible
Activities for Nat'l Banks & Fed. Sav. Associations,'' OCC NR 17-121
(Oct. 13, 2017) (``The OCC may permit national banks and federal
savings associations to conduct additional activities in the
future''), available at https://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/pub-activities-permissible-for-nat-banks-fed-saving.pdf.
---------------------------------------------------------------------------
Commenters' suggested modifications to exclude certain types of
assets or entities, or to risk-weight nonbank assets, would not align
with the full scope of risks intended to be measured by the indicator,
including risks associated with operational and managerial complexity.
As noted in the discussion of size above, risk weights are primarily
designed to measure credit risk, and can underestimate operational and
other risks. Further, because nonbank entities are permitted to conduct
a wide range of complex activities, assets held by those entities,
including those that receive a zero percent risk weight, may be held in
connection with complex activities, such as certain prime brokerage or
other trading activities. Finally, as noted above, the nonbank assets
measure is a relatively simple and transparent measure of a banking
organization's nonbank activities, and exclusion of specific assets
based on risk could undermine the simplicity and transparency of the
indicator. For these reasons, the Board is finalizing the nonbank
assets indicator, including the measurement of the indicator, as
proposed.
4. Off-Balance Sheet Exposure
The proposals included off-balance sheet exposure as a risk-based
indicator to complement the measure of size. Under the proposals, off-
balance sheet exposure would have been measured as the difference
between total exposure, calculated in accordance with the instructions
to the FR Y-15 or equivalent reporting form, and total assets.\48\
Total exposure includes on-balance sheet assets plus certain off-
[[Page 59043]]
balance sheet exposures, including derivative exposures and
commitments.
---------------------------------------------------------------------------
\48\ Total exposure would be reported for domestic holding
companies on the FR Y-15, Schedule A, Line Item 5, and for foreign
banking organizations' U.S. intermediate holding companies and
combined U.S. operations on the FR Y-15, Schedule H, Line Item 5.
Total off-balance sheet exposure would be reported as Line Item M5
on Schedules A and H.
---------------------------------------------------------------------------
A number of commenters argued that the proposed measure of off-
balance sheet exposure was not sufficiently risk-sensitive.
Specifically, these commenters argued that the exposures captured by
the indicator were generally associated with low-risk activities or
assets, such as securities lending activities. In addition, the
commenters argued that the proposed measure could be harmful to
economic activity by discouraging corporate financing through
commitments and letters of credit. Commenters accordingly urged the
Board to modify the proposed approach to measuring the risk of off-
balance sheet exposures, for example, by using the combination of
credit-conversion factors and risk weights applied under the Board's
capital rule. Other commenters suggested that the Board exclude certain
types of exposures from the indicator, such as letters of credit.
Foreign banking organization commenters also argued that inter-
affiliate transactions should be excluded from the measure, including
any guarantee related to securities used to fund the foreign parent,
and guarantees used to facilitate clearing of swaps and futures for
affiliates that are not clearing members. With respect to guarantees
used to facilitate clearing, commenters argued that these exposures are
the result of mandatory clearing requirements and help support the
central clearing objectives of the Dodd-Frank Act. Commenters expressed
concern that including these exposures also could result in increased
concentration of clearing through U.S. GSIBs. For the same reasons,
commenters argued that potential future exposures associated with
derivatives cleared by an affiliate also should be excluded from the
measure of off-balance sheet exposure.
Off-balance sheet exposure complements the size indicator under the
tailoring framework by taking into account additional risks that are
not reflected in a banking organization's measure of on-balance sheet
assets. This indicator provides a measure of the extent to which
customers or counterparties may be exposed to a risk of loss or suffer
a disruption in the provision of services stemming from off-balance
sheet activities. In addition, off-balance sheet exposure can lead to
significant future draws on liquidity, particularly in times of stress.
For example, during stress conditions vulnerabilities at individual
banking organizations may be exacerbated by calls on commitments and
the need to post collateral on derivatives exposures. The nature of
these off-balance sheet risks for banking organizations of significant
size and complexity can also lead to financial stability risk, as they
can manifest rapidly and with less transparency and predictability to
other market participants relative to on-balance sheet exposures.
Excluding certain off-balance sheet exposures would be inconsistent
with the purpose of the indicator as a measure of the extent to which
customers or counterparties may be exposed to a risk of loss or suffer
a disruption in the provision of services. Commitments and letters of
credit, like extensions of credit through loans and other arrangements
included on a banking organization's balance sheet, help support
economic activity. Because corporations tend to increase their reliance
on committed credit lines during periods of stress in the financial
system, draws on these instruments can exacerbate the effects of stress
conditions on banking organizations by increasing their on-balance
sheet credit exposure.\49\ During the 2008-2009 financial crisis,
reliance on lines of credit was particularly pronounced among smaller
and non-investment grade corporations, suggesting that an increase in
these exposures may be associated with decreasing credit quality.\50\
---------------------------------------------------------------------------
\49\ During the financial crisis, increased reliance on credit
lines began as early as 2007, and increased after September 2008.
See Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan,
``Credit Line Use and Availability in the Financial Crisis: The
Importance of Hedging,'' available at: https://www.federalreserve.gov/pubs/feds/2012/201227/201227pap.pdf. Some
have found evidence that an increase in draws on credit lines may
have been motivated by concerns about the ability of financial
institutions to provide credit in the future. See Victoria Ivashina
& David Scharfstein, ``Bank Lending During the Financial Crisis of
2008,'' 97 J. Fin. Econ. 319-338 (2010). See also, William F.
Bassett, Simon Gilchrist, Gretchen C. Weinbach, and Egon Zakrajsek,
``Improving Our Ability to Monitor Bank Lending'' chapter on Risk
Topography: Systemic Risk and Macro Modeling (2014), Markus
Brunnermeier and Arvind Krishnamurthy, ed., pp. 149-161, available
at: http://www.nber.org/chapters/c12554.
\50\ Id.
---------------------------------------------------------------------------
Including guarantees to affiliates related to cleared derivative
transactions in off-balance sheet exposure also is consistent with the
overall purpose of the indicators. A clearing member that guarantees
the performance of a clearing member client to a central counterparty
is exposed to a risk of loss if the clearing member client were to fail
to perform its obligations under a derivative contract. By including
these exposures, the indicator identifies a source of
interconnectedness with other financial market participants. These
transactions can arise with respect not only to principal trades, but
also because a client wishes to face a particular part of the
organization, and thus excluding these guarantees could insufficiently
measure risk and interconnectedness.\51\
---------------------------------------------------------------------------
\51\ In order to facilitate clearing generally, the capital rule
more specifically addresses the counterparty credit risk associated
with transactions that facilitate client clearing, such as a shorter
margin period of risk, and provides incentives that are intended to
help promote the central clearing objectives of the Dodd-Frank Act.
See 12 CFR 217.35.
---------------------------------------------------------------------------
As described above, the tailoring framework's risk-based indicators
and uniform category thresholds balance risk-sensitivity with
simplicity and transparency. Excluding certain types of exposures would
not align with the full scope of risks intended to be measured by the
indicator. The final rule, therefore, adopts the off-balance sheet
exposure indicator as proposed.
5. Weighted Short-Term Wholesale Funding
The proposed weighted short-term wholesale funding indicator would
have measured the amount of a banking organization's short-term funding
obtained generally from wholesale counterparties. Reliance on short-
term, generally uninsured funding from more sophisticated
counterparties can make a banking organization more vulnerable to
large-scale funding runs, generating both safety and soundness and
financial stability risks. The proposals would have calculated this
indicator as the weighted-average amount of funding obtained from
wholesale counterparties, certain brokered deposits, and certain sweep
deposits with a remaining maturity of one year or less, in the same
manner as currently reported by holding companies on the FR Y-15.\52\
---------------------------------------------------------------------------
\52\ Average amounts over a 12 month period in each category of
short-term wholesale funding are weighted based on four residual
maturity buckets; the asset class of collateral, if any, securing
the funding; and liquidity characteristics of the counterparty.
Weightings reflect risk of runs and attendant fire sales. See 12 CFR
217.406 and 80 FR 49082 (August 14, 2015).
---------------------------------------------------------------------------
A number of commenters expressed concern regarding the use of the
weighted short-term wholesale funding indicator in the tailoring
framework. Several commenters argued that this indicator fails to take
into account the extent to which the risk of short-term wholesale
funding has been mitigated through existing regulatory requirements,
such as the Board's enhanced prudential standards rule and, for foreign
banking organizations, standardized liquidity requirements applicable
to foreign banking organizations at the global consolidated level.
Other commenters argued that the indicator is a poor measure of risk
more
[[Page 59044]]
broadly because it fails to consider the maturity of assets funded by
short-term wholesale funding. Commenters argued that focusing on
liabilities and failing to recognize the types of assets funded by the
short-term funding would disproportionately affect foreign banking
organizations' capital market activities and ability to compete in the
United States.
The weighted short-term wholesale funding indicator is designed to
serve as a broad measure of the risks associated with elevated, ongoing
reliance on funding sources that are typically less stable than funding
of a longer term or funding such as fully insured retail deposits,
long-term debt, and equity. For example, a banking organization's
weighted short-term wholesale funding level serves as an indication of
the likelihood of funding disruptions in firm-specific or market-wide
stress conditions. These funding disruptions may give rise to urgent
liquidity needs and unexpected losses, which warrant heightened
application of liquidity and regulatory capital requirements. A measure
of funding dependency that reflects the various types or maturities of
assets supported by short-term wholesale funding sources, as suggested
by commenters, would add complexity to the indicator. For example,
because a banking organization's funding is fungible, monitoring the
relationship between specific liabilities and assets with various
maturities is complex and imprecise. The LCR rule and the proposed net
stable funding ratio (NSFR) rule therefore include methodologies for
reflecting asset maturity in regulatory requirements that address the
associated risks.\53\
---------------------------------------------------------------------------
\53\ For example, the LCR rule includes cash inflows from
certain maturing assets and the proposed NSFR rule would use the
maturity profile of a banking organization's assets to determine its
required stable funding amount.
---------------------------------------------------------------------------
Commenters suggested revisions to the weighted short-term wholesale
funding indicator that would align with the treatment of certain assets
and liabilities under the LCR rule. For example, some commenters
recommended that the Board more closely align the indicator's
measurement of weighted short-term wholesale funding with the outflow
rates applied in the LCR rule, such as by excluding from the indicator
funding that receives a zero percent outflow in the LCR rule or
reducing the weights for secured funding to match the LCR rule's
outflow treatment. Similarly, commenters suggested that the Board
provide a lower weighting for brokered and sweep deposits from
affiliates, consistent with the lower outflow rates assigned to these
deposits in the LCR rule. Specifically, commenters argued that the
weighted short-term wholesale funding indicator inappropriately applies
the same 25 percent weight to sweep deposits sourced by both affiliates
and non-affiliates alike and treats certain non-brokered sweep deposits
in a manner inconsistent with the LCR rule.
The Board notes that when it established the weights applied in
calculating and reporting short-term wholesale funding for purposes of
the GSIB surcharge rule, the Board took into account the treatment of
certain liabilities in the LCR rule, including comments received in
connection with that rulemaking, and fire sale risks in key short-term
wholesale funding markets. At that time, the Board noted that the LCR
rule does not fully address the systemic risks of certain types and
maturities of funding.\54\ The Board continues to believe the current
scope of the weighted short-term wholesale funding indicator, and the
weights applied in the indicator, are appropriately calibrated for
assessing the risk to broader financial stability as a result of a
banking organization's reliance on short-term wholesale funding. The
final rule treats brokered deposits as short-term wholesale funding
because they are generally considered less stable than standard retail
deposits. In order to preserve the relative simplicity of the short-
term wholesale funding metric, the final rule does not distinguish
between different types of brokered deposits and sweep deposits.
Accordingly, all retail deposits identified as brokered deposits and
brokered sweep deposits under the LCR rule are reported on the FR Y-15
as retail brokered deposits and sweeps for purpose of the weighted
short-term wholesale funding indicator.
---------------------------------------------------------------------------
\54\ For example, the LCR rule generally does not address
maturities beyond 30 calendar days and offsets outflows from certain
short-term funding transactions with inflows from certain short-term
claims, which may not fully address the risk of asset fire sales.
---------------------------------------------------------------------------
Commenters also suggested other specific revisions to the
calculation of the weighted short-term wholesale funding indicator.
Some commenters argued that the weighted short-term wholesale funding
indicator should look to the original maturity of the funding
relationship--instead of the remaining maturity--and exclude long-term
debt that is maturing within the next year. Commenters also urged the
Board to recognize certain offsets to reduce the amount of short-term
wholesale funding included in the indicator. For example, a number of
commenters suggested that the amount of short-term wholesale funding
should be reduced by the amounts of HQLA held by the banking
organization, cash deposited at the Federal Reserve by the banking
organization, or any high-quality collateral used for secured funding.
Commenters argued that this approach would better reflect the banking
organization's liquidity risk because it would take into account assets
that could be used to meet cash outflows as well as collateral that
typically maintains its value and therefore would not contribute to
asset fire sales. Commenters also argued that the measure of weighted
short-term wholesale funding should exclude funding that the commenters
viewed as stable, such as credit lines from Federal Home Loan Banks and
Federal Reserve Banks, savings and checking accounts of wholesale
customers, and brokered sweep deposits received from an affiliate.
The Board believes that the remaining maturity of a funding
relationship, instead of original maturity as suggested by commenters,
provides a more accurate measure of the banking organization's ongoing
exposure to rollover risk. As discussed above, because a banking
organization's inability to rollover funding may generate safety and
soundness and financial stability risks, the Board believes that using
remaining maturity is more appropriate given the purposes of the
weighted short-term wholesale funding indicator. Further, the weighted
short-term wholesale funding indicator takes into account the quality
of collateral used in funding transactions by assigning different
weights to average amounts of secured funding depending on its
collateral. These weights reflect the liquidity characteristics of the
collateral and the extent to which the quality of such assets may
mitigate fire sale risk. Revising the weighted short-term wholesale
funding indicator to permit certain assets to offset liabilities
because the assets may be used to address cash outflows, as suggested
by commenters, could understate financial stability and safety and
soundness risks because such an approach assumes those assets are
available to offset funding needs in stress conditions. Further, the
indicator measures average short-term funding dependency over the prior
12 months, and a banking organization's current holdings of liquid
assets may not address the financial stability and safety and soundness
risks associated with its ongoing funding structure. Similarly,
excluding a banking organization's general reliance
[[Page 59045]]
on certain types of short-term funding from the indicator may result in
an underestimation of a banking organization's potential to contribute
to systemic risk because such funding may be unavailable for use in a
time of stress. Thus, the final rule does not exclude short-term
borrowing from the Federal Home Loan Banks, which may be secured by a
broad range of collateral, and the final rule treats such short-term
borrowing the same as borrowing from other wholesale counterparties in
order to identify risk. More generally, incorporating commenters'
recommended exclusions and offsets would reduce the transparency of the
weighted short-term wholesale funding indicator, contrary to the
Board's intention to provide a simplified measure to identify banking
organizations with heightened risks. For these reasons, the final rule
adopts the weighted short-term wholesale funding indicator without
change.
Commenters also provided suggestions to reduce or eliminate inter-
affiliate transactions from the measure of weighted short-term
wholesale funding. Specifically, commenters provided suggestions to
weight inter-affiliate transactions or net transactions with
affiliates.
Including funding from affiliated sources provides an appropriate
measure of the risks associated with a banking organization's general
reliance on short-term wholesale funding. Banking organizations that
generally rely on funding with a shorter contractual maturity from
financial sector affiliates may present higher risks relative to those
that generally rely on funding with a longer contractual term from
outside of the financial sector. While funding relationships with
affiliates may provide a banking organization with additional
flexibility in the normal course of business, ongoing reliance on
contractually short-term funding from affiliates may present risks that
are similar to funding from nonaffiliated sources.
For the reasons discussed above, the final rule adopts the weighted
short-term wholesale funding indicator as proposed.
D. Application of Standards Based on the Proposed Risk-Based Indicators
The proposed risk-based indicators would have determined the
application of enhanced standards under Categories II, III, and IV. By
taking into consideration the relative presence or absence of each
risk-based indicator, the proposals would have provided a basis for
assessing a banking organization's financial stability and safety and
soundness risks for purposes of determining the applicability and
stringency of these requirements.
Commenters criticized the methods by which the proposed risk-based
indicators would determine the category of standards applicable to a
banking organization. Certain commenters expressed concern that a
banking organization could become subject to Category II or III
standards without first being subject to Category IV standards, due to
the disjunctive use of the size and other risk-based indicators under
the proposals. One commenter suggested that the Board should instead
apply a category of standards based on a weighted average of the risk-
based indicators. Another commenter suggested that application of
Category II standards should be based on other risk factors that they
asserted are more relevant to the determination of whether a banking
organization has a risk profile that would warrant Category II
standards. Several commenters suggested that the application of
standardized liquidity requirements should be based only on the levels
of the weighted short-term wholesale funding indicator, and not based
on the levels of any other risk-based indicator. One commenter
criticized the proposals for not providing sufficient justification for
the number of categories.
Because each indicator serves as a proxy for various types of risk,
a high level in a single indicator warrants the application of more
stringent standards to mitigate those risks and support the overall
purposes of each category. The Board therefore does not believe using a
weighted average of a banking organization's levels in the risk-based
indicators, or the methods that would require a banking organization to
exceed multiple risk-based indicators, is appropriate to determine the
applicable category of standards. The final rule therefore adopts the
use of the risk-based indicators, generally as proposed.
Certain commenters suggested that the Board reduce requirements
under the foreign bank proposal to account for the application of
standards at the foreign banking organization parent. The final rule
takes into account the standards that already apply to the foreign
banking organization parent. Specifically, the final rule tailors the
application of enhanced standards based, in part, on the size and
complexity of a foreign banking organization's activities in the United
States. The standards applicable to foreign banking organizations with
a more limited U.S. presence largely rely on compliance with comparable
home-country standards applied at the consolidated foreign parent
level. In this way, the final rule helps to mitigate the risk such
banking organizations present to safety and soundness and U.S.
financial stability, consistent with the overall objectives of the
tailoring framework. Requiring foreign banking organizations to
maintain financial resources in the jurisdictions in which they operate
subsidiaries also reflects existing agreements reached by the BCBS and
international regulatory practice.
E. Calibration of Thresholds and Indexing
The proposals would have employed fixed nominal thresholds to
assign the categories of standards that apply to banking organizations.
In particular, the proposals included total asset thresholds of $100
billion, $250 billion, and $700 billion, along with $75 billion
thresholds for each of the other risk-based indicators. The foreign
bank proposal also included a $50 billion weighted short-term wholesale
funding threshold for U.S. and foreign banking organizations subject to
Category IV standards.
Some commenters expressed concerns regarding the use of $75 billion
thresholds for cross-jurisdictional activity, weighted short-term
wholesale funding, nonbank assets, and off-balance sheet exposure. In
particular, these commenters stated that the $75 billion thresholds
were poorly justified and requested additional information as to why
the Board chose these thresholds. A number of these commenters also
supported the use of a higher threshold for these indicators. Other
commenters urged the Board to retain the discretion to adjust the
thresholds on a case-by-case basis, such as in the case of a temporary
excess driven by customer transactions or for certain transactions that
would result in a sudden change in categorization.
The $75 billion thresholds are based on the degree of concentration
of a particular risk-based indicator for each banking organization
relative to total assets. That is, a threshold of $75 billion
represents at least 30 percent and as much as 75 percent of total
assets for banking organizations with between $100 billion and $250
billion in total assets.\55\ Thus, for banking organizations
[[Page 59046]]
that do not meet the size threshold for Category III standards, other
risks represented by the risk-based indicators would be substantial,
while banking organizations with $75 billion in cross-jurisdictional
activity have a substantial international footprint. In addition,
setting the thresholds at $75 billion ensures that banking
organizations that account for the vast majority of the total amount of
each risk-based indicator among banking organizations with $100 billion
or more in total assets are subject to prudential standards that
account for the associated risks of these risk-based indicators, which
facilitates consistent treatment of these risks across banking
organizations. The use of a single threshold also supports the overall
simplicity of the framework. Moreover, a framework that permits the
Board to adjust thresholds on a temporary basis would not support the
objectives of predictability and transparency.
---------------------------------------------------------------------------
\55\ The $100 billion and $250 billion size thresholds are
consistent with those set forth in section 165 of the Dodd-Frank
Act, as amended by section 401 of EGRRCPA. Section 165 of the Dodd-
Frank Act requires the application of enhanced prudential standards
to bank holding companies and foreign banking organizations with
$250 billion or more in total consolidated assets. Section 165
authorizes the Board to apply enhanced prudential standards to such
banking organizations with assets between $100 billion and $250
billion, taking into consideration the firm's capital structure,
riskiness, complexity, financial activities (including those of
subsidiaries), size, and any other risk-related factors the Board
deems appropriate. 12 U.S.C. 5365.
---------------------------------------------------------------------------
One commenter stated that the Board should not use the $700 billion
size threshold as the basis for applying Category II standards, arguing
that the Board had not provided sufficient justification for that
threshold. However, as noted in the proposals, historical examples
suggest that the distress or failure of a banking organization of this
size would have systemic impacts. For example, during the financial
crisis significant losses at Wachovia Corporation, which had $780
billion in total assets at the time of being acquired in distress, had
a destabilizing effect on the financial system. The $700 billion size
threshold under Category II addresses the substantial risks that can
arise from the activities and potential distress of very large banking
organizations that are not U.S. GSIBs. Commenters did not request
additional explanation regarding the $100 billion and $250 billion
total asset thresholds. As noted above, these size thresholds are
consistent with those set forth in section 165 of the Dodd-Frank Act,
as amended by section 401 of EGRRCPA.
Several commenters requested that the Board index certain of the
proposed thresholds based on changes in various measures, such as
growth in domestic banking assets, inflation, gross domestic product
growth or other measures of economic growth, or share of the indicator
held by the banking organization in comparison to the amount of the
indicator held in the financial system. These commenters requested that
the thresholds be automatically adjusted on an annual basis based on
changes in the relevant index, by operation of a provision in the rule.
Other commenters expressed concern that indexing can have pro-cyclical
effects.
As commenters noted, the $100 billion and $250 billion size
thresholds prescribed in the Dodd-Frank Act, as amended by EGRRCPA, are
fixed by statute.\56\ Indexing the other thresholds would add
complexity, a degree of uncertainty, and potential discontinuity to the
framework. The Board acknowledges the thresholds should be reevaluated
over time to ensure they appropriately reflect growth on a
macroeconomic and industry-wide basis, as well as to continue to
support the objectives of this rule. The Board plans to accomplish this
by periodically reviewing the thresholds and proposing changes through
the notice and comment process, rather than including an automatic
adjustment of thresholds based on indexing.
---------------------------------------------------------------------------
\56\ Section 165 of the Dodd-Frank Act does provide the Board
with discretion to establish a minimum asset threshold above the
statutory thresholds for some, but not all, enhanced prudential
standards. However, the Board may only utilize this discretion
pursuant to a recommendation by the Financial Stability Oversight
Council in accordance with section 115 of the Dodd-Frank Act. This
authority is not available for stress testing and risk committee
requirements. 12 U.S.C. 5365(a)(2)(B).
---------------------------------------------------------------------------
F. The Risk-Based Categories
1. Category I
Under the proposals, Category I standards would have applied to
U.S. GSIBs, which are banking organizations that have a U.S. GSIB score
of 130 or more under the scoring methodology.\57\ Category I standards
would have included the most stringent standards relative to those
imposed under the other categories to reflect the heightened risks that
banking organizations subject to Category I standards pose to U.S.
financial stability. The requirements applicable to U.S. GSIBs would
have largely remained unchanged from existing requirements.
---------------------------------------------------------------------------
\57\ As noted above, the foreign bank proposal would not have
applied Category I standards to the U.S. operations of foreign
banking organizations because the Board's GSIB surcharge rule would
not identify a foreign banking organization or a U.S. intermediate
holding company as a U.S. GSIB. The foreign bank proposal sought
comment on the advantages and disadvantages of applying standards
that are more stringent than Category II standards to the U.S.
operations of foreign banking organizations with a comparable risk
profile to U.S. GSIBs. Several commenters expressed general
opposition to such an approach.
---------------------------------------------------------------------------
The Board did not receive comments regarding the criteria for
application of Category I standards to U.S. GSIBs. Several commenters
expressed concern regarding applying more stringent standards than
Category II standards to foreign banking organizations, even if the
risk profile of a foreign banking organization's U.S. operations were
comparable to a U.S. GSIB. The final rule adopts the scoping criteria
for Category I, and the prudential standards that apply under this
category, as proposed.\58\ U.S. GSIBs have the potential to pose the
greatest risks to U.S. financial stability due to their systemic risk
profile and, accordingly, should be subject to the most stringent
prudential standards. The treatment for U.S. GSIBs aligns with
international efforts to address the financial stability risks posed by
the largest, most interconnected financial institutions. In 2011, the
BCBS adopted a framework to identify global systemically important
banking organizations and assess their systemic importance.\59\ This
framework generally applies to the global consolidated parent
organization, and does not apply separately to subsidiaries and
operations in host jurisdictions. Consistent with this approach, the
U.S. operations of foreign banking organizations are not subject to
Category I standards under the final rule. The Board will continue to
monitor the systemic risk profiles of foreign banking organization's
U.S. operations, and consider whether application of more stringent
requirements is appropriate to address any increases in their size,
complexity or overall systemic risk profile.
---------------------------------------------------------------------------
\58\ Under the final rule, a U.S. banking organization that
meets the criteria for Categories I, II, or III standards is
required to calculate its method 1 GSIB score annually.
\59\ See BCBS, ``Global systemically important banks: Assessment
methodology and the additional loss absorbency requirement''
(November 4, 2011).
---------------------------------------------------------------------------
2. Category II
The proposals would have applied Category II standards to banking
organizations with $700 billion in total assets or $100 billion or more
in total assets and $75 billion or more in cross-jurisdictional
activity. The proposals also sought comment on whether Category II
standards should apply based on a banking organization's weighted
short-term wholesale funding, nonbank assets, and off-balance sheet
exposure, using a higher threshold than the $75 billion threshold that
would have applied for Category III standards.
Some commenters argued that cross-jurisdictional activity should be
an indicator for Category III standards rather than Category II
standards. Another commenter expressed concern
[[Page 59047]]
with expanding the criteria for Category II standards to include any of
the other risk-based indicators used for purposes of Category III
standards. Some commenters also argued that the proposed Category II
standards were too stringent relative to the risks indicated by a high
level of cross-jurisdictional activity or very large size. Other
commenters argued that application of Category II standards to foreign
banking organizations was unnecessary because these banking
organizations are already subject to BCBS-based standards on a global,
consolidated basis by their home-country regulators. Another commenter
requested that the Board provide greater differentiation between
Category I and Category II standards.
As discussed above, banking organizations that engage in
significant cross-jurisdictional activity present complexities that
support the application of more stringent standards relative to those
that would apply under Category III. In addition, application of
consistent prudential standards across jurisdictions to banking
organizations with significant size or cross-jurisdictional activity
helps to promote competitive equity among U.S. banking organizations
and their foreign peers, while applying standards that appropriately
reflect the risk profiles of banking organizations that meet the
thresholds for Category III standards. As noted above, this approach is
consistent with international regulatory practice.
Accordingly, and consistent with the proposal, the final rule
applies Category II standards to banking organizations with $700
billion in total consolidated assets or cross-jurisdictional activity
of $75 billion or more.
3. Category III
Under the proposals, Category III standards would have applied to
banking organizations that are not subject to Category I or II
standards and that have total assets of $250 billion or more. They also
would have applied to banking organizations with $100 billion or more
in total assets and $75 billion or more in nonbank assets, weighted
short-term wholesale funding, or off-balance-sheet exposure.
A number of commenters supported the proposed scoping criteria for
Category III, as well as the standards that would have applied under
this category. Several other commenters requested certain changes to
the specific thresholds and indicators used to determine which banking
organizations would have been subject to Category III standards, as
well as the prudential standards that would have applied under this
category. Comments regarding the prudential standards that would have
applied under Category III are discussed in section VI.C of this
Supplementary Information.
The final rule generally adopts the scoping criteria for Category
III, and the prudential standards that apply under this Category, as
proposed.
4. Category IV
Under the proposals, Category IV standards would have applied to
banking organizations with $100 billion or more in total assets that do
not meet the thresholds for any other category. A number of commenters
argued that no heightened prudential standards should apply to banking
organizations that meet the criteria for Category IV because such
banking organizations are not as large or complex as banking
organizations that would be subject to more stringent categories of
standards under the proposals. Alternatively, these commenters
suggested that the threshold for application of Category IV standards
should be raised from $100 billion to $250 billion in total assets.\60\
In contrast, one commenter argued that the Board should not reduce the
requirements applicable to banking organizations that would be subject
to Category IV until current requirements have been in effect for a
full business cycle.
---------------------------------------------------------------------------
\60\ Commenters also argued that the Board had not sufficiently
justified the application of enhanced prudential standards to firms
subject to Category IV standards. These comments are addressed in
section VI.D. of this Supplementary Information.
---------------------------------------------------------------------------
The final rule includes Category IV because banking organizations
subject to this category of standards generally have greater scale and
operational and managerial complexity relative to smaller banking
organizations and, as a result, present heightened safety and soundness
risks. In addition, the failure of one or more banking organizations
subject to Category IV standards could have a more significant negative
effect on economic growth and employment relative to the failure or
distress of smaller banking organizations.\61\ The final rule generally
adopts the scoping criteria for Category IV, and the prudential
standards that apply under this Category, as proposed.
---------------------------------------------------------------------------
\61\ See section V.C.1. of this Supplementary Information.
---------------------------------------------------------------------------
G. Specific Aspects of the Foreign Bank Proposal--Treatment of Inter-
Affiliate Transactions
Except for cross-jurisdictional activity, which would have excluded
liabilities to and certain collateralized claims on non-U.S.
affiliates, the proposed risk-based indicators would have included
transactions between a foreign banking organization's combined U.S.
operations and non-U.S. affiliates.\62\ Similarly, and as noted above,
except for cross-jurisdictional activity, a U.S. intermediate holding
company would have included transactions with affiliates outside the
U.S. intermediate holding company when reporting its risk-based
indicators.
---------------------------------------------------------------------------
\62\ See supra note 34.
---------------------------------------------------------------------------
Most commenters on the foreign bank proposal supported the proposed
exclusion of certain inter-affiliate transactions in the cross-
jurisdictional activity indicator, and argued further that all risk-
based indicators should exclude transactions with affiliates. These
commenters asserted that including inter-affiliate transactions
disadvantaged foreign banking organizations relative to U.S. peers and
argued that the rationale for excluding certain inter-affiliate claims
from the cross-jurisdictional activity measure applied equally to all
other risk-based indicators. A number of commenters argued that
including inter-affiliate transactions would overstate the risks to a
foreign banking organization's U.S. operations or U.S. intermediate
holding company because inter-affiliate transactions may be used to
manage risks of the foreign banking organization's global operations.
Similarly, some commenters asserted that the inclusion of inter-
affiliate transactions was inconsistent with risks that the risk-based
indicators are intended to capture. Other commenters argued that any
risks associated with inter-affiliate transactions were appropriately
managed through the supervisory process and existing regulatory
requirements, and expressed concern that including inter-affiliate
transactions could encourage ring fencing in other jurisdictions. Some
commenters suggested that, if the Board does not exclude inter-
affiliate transactions entirely, the Board should weight inter-
affiliate transactions at no more than 50 percent. By contrast, one
commenter argued that inter-affiliate transactions should be included
in the risk-based indicators, arguing that the purpose of the Board's
U.S. intermediate holding company framework is that resources located
outside the organization may not be reliably available during periods
of financial stress.
Tailoring standards based on the risk profile of the U.S.
intermediate holding company or combined U.S. operations of a foreign
banking organization, as applicable, requires measurement of risk-based
indicators at a sub-
[[Page 59048]]
consolidated level rather than at the global parent. As a result,
calculation of the risk-based indicators must distinguish between such
a banking organization's U.S. operations or U.S. intermediate holding
company, as applicable, and affiliates outside of the United States,
including by providing a treatment for inter-affiliate transactions
that would otherwise be eliminated in consolidation at the global
parent. Including inter-affiliate transactions in the calculation of
risk-based indicators would mirror, as closely as possible, the risk
profile of a U.S. intermediate holding company or combined U.S.
operations if each were consolidated in the United States.
Including inter-affiliate transactions in the calculation of risk-
based indicators is consistent with the Board's approach to measuring
and applying standards at a sub-consolidated level in other contexts.
For example, existing thresholds and requirements in the Board's
Regulation YY are based on measures of a foreign banking organization's
size in the United States that includes inter-affiliate
transactions.\63\ Similarly, the total consolidated assets of a U.S.
intermediate holding company or depository institution include
transactions with affiliates outside of the U.S. intermediate holding
company.\64\ Capital and liquidity requirements applied to U.S.
intermediate holding companies and insured depository institutions
generally do not distinguish between exposures with affiliates and
third parties. For example, the LCR rule assigns outflow rates to
funding according to the characteristics of the source of funding, but
generally does not distinguish between funding provided by an affiliate
or third party.\65\ Excluding inter-affiliate transactions from off-
balance sheet exposure, size, and weighted short-term wholesale funding
indicators would be inconsistent with the treatment of these exposures
under the capital and liquidity rules.
---------------------------------------------------------------------------
\63\ See 12 CFR 252.2 and 252.150 (definition of ``Average
combined U.S. assets).''
\64\ See Call Report instructions, FR Y-9C.
\65\ For example, the LCR rule differentiates between unsecured
wholesale funding provided by financial sector entities and by non-
financial sector entities, but does not differentiate between
financial sector entities that are affiliates and those that are not
affiliates. 12 CFR 249.32(h). The LCR rule differentiates between
affiliates and third parties under limited circumstances. See, e.g.,
12 CFR 249.32(g)(7).
---------------------------------------------------------------------------
In some cases, the exclusion of inter-affiliate transactions would
not align with the full scope of risks intended to be measured by an
indicator. Inter-affiliate positions can represent sources of risk--for
example, claims on the resources of a foreign banking organization's
U.S. operations.\66\ As another example, short-term wholesale funding
provided to a U.S. intermediate holding company by its parent foreign
bank represents funding that the parent could withdraw quickly, which
could leave fewer assets available for U.S. counterparties of the U.S.
intermediate holding company.\67\ By including inter-affiliate
transactions in weighted short-term wholesale funding while excluding
these positions from cross-jurisdictional liabilities, the framework
provides a more risk-sensitive measure of funding risk from foreign
affiliates as it takes into consideration the maturity and other risk
characteristics of the funding for purposes of the weighted short-term
wholesale funding measure. Additionally, because long-term affiliate
funding (such as instruments used to meet total loss absorbing capacity
requirements) would not be captured in weighted short-term wholesale
funding, the indicator is designed to avoid discouraging a foreign
parent from providing support to its U.S. operations.
---------------------------------------------------------------------------
\66\ Domestic banking organizations are required to establish
and maintain procedures for monitoring risks associated with funding
needs across significant legal entities, currencies, and business
lines. See, e.g., 12 CFR 252.34(h)(2).
\67\ See e.g., Robert H. Gertner, David S. Scharfstein & Jeremy
C. Stein, ``Internal Versus External Capital Markets,'' 109 Q.J.
ECON. 1211 (1994) (discussing allocation of resources within a
consolidated organization through internal capital markets); Nicola
Cetorelli & Linda S. Goldberg, ``Global Banks and International
Shock Transmission: Evidence from the Crisis,'' 59 IMF ECON. REV. 41
(2011) (discussing the role of internal capital markets as a
mechanism for transmission of stress in the financial system);
Nicola Cetorelli & Linda Goldberg, ``Liquidity Management of U.S.
Global Banks: Internal Capital Markets in the Great Recession''
(Fed. Reserve Bank of N. Y. Staff Report No. 511, 2012), available
at: http://www.newyorkfed.org/research/staff_reports/sr511.pdf
(finding that foreign affiliates were both recipients and providers
of funds to the parent between March 2006 and December 2010). See
also, Ralph de Haas and Iman Van Lelyvelt, ``Internal Capital
Markets and Lending by Multinational Bank Subsidiaries (2008)
(discussing substitution effect in lending across several countries
as a parent bank expand its business in those countries where
economic conditions improve and decrease its activities where
economic circumstance worsen), available at: https://www.ebrd.com/downloads/research/economics/workingpapers/wp0105.pdf.
---------------------------------------------------------------------------
Similarly, with respect to off-balance sheet exposure, an exclusion
for inter-affiliate transactions would not account for the risks
associated with any funding commitments provided by the U.S. operations
of a foreign banking organization to non-U.S. affiliates. Accordingly,
the Board believes it would be inappropriate to exclude inter-affiliate
transactions from the measure of off-balance sheet exposure.
For purposes of the nonbank assets indicator, the proposals would
have treated inter-affiliate transactions similarly for foreign and
domestic banking organizations. For foreign banking organizations, the
proposals would have measured nonbank assets as the sum of assets in
consolidated U.S. nonbank subsidiaries together with investments in
unconsolidated U.S. nonbank companies that are controlled by the
foreign banking organization.\68\ Both foreign and domestic banking
organizations would have included in nonbank assets inter-affiliate
transactions between the nonbank company and other parts of the
organization.\69\
---------------------------------------------------------------------------
\68\ See FR Y-9LP, Schedule PC-B, line item 17.
\69\ See FR Y-9 LP Instructions for Preparation of Parent
Company Only Financial Statements for Large Holding Companies
(September 2018).
---------------------------------------------------------------------------
Accordingly, for purposes of the risk-based indicators, the final
rule adopts the treatment of inter-affiliate transactions as proposed.
H. Determination of Applicable Category of Standards
Under the proposals, a banking organization would have determined
its category of standards based on the average levels of each indicator
at the banking organization, reported over the preceding four calendar
quarters. If the banking organization had not reported risk-based
indicator levels for each of the preceding four calendar quarters, the
category would have been based on the risk-based indicator level for
the quarter, or average levels over the quarters, that the banking
organization has reported.
For a change to a more stringent category (for example, from
Category IV to Category III), the change would have been based on an
increase in the average value of its indicators over the prior four
quarters of a calendar year. In contrast, for a banking organization to
change to a less stringent category (for example, Category II to
Category III), the banking organization would have been required to
report risk-based indicator levels below any applicable threshold for
the more stringent category in each of the four preceding calendar
quarters. Changes in a banking organization's requirements that result
from a change in category generally would have taken effect on the
first day of the second quarter following the change in the banking
organization's category.
The Board received several comments on the process for determining
the applicable category of standards under the proposal and on the
amount of time provided to comply with the
[[Page 59049]]
requirements of a new category. In particular, several commenters
suggested providing banking organizations with at least 18 months to
comply with a more stringent category of standards. Several commenters
recommended that the Board retain discretion to address a temporary
increase in an activity, such as to help a banking organization avoid a
sudden change in the categorization of applicable standards. These
commenters suggested that any adjustments of thresholds could consider
both qualitative information and supervisory judgment. Commenters also
requested that the Board clarify the calculation of certain indicators;
for example, by providing references to specific line items in the
relevant reporting forms. One commenter also suggested that the Board
revise the reporting forms used to report risk-based indicator levels
so that they apply to a depository institution that is not part of a
bank or savings and loan holding company structure.
The final rule maintains the process for determining the category
of standards applicable to a banking organization as proposed. To move
into a category of standards or to determine the category of standards
that would apply for the first time, a banking organization would rely
on an average of the previous four quarters or, if the banking
organization has not reported in each of the prior four quarters, the
category would be based on the risk-based indicator level for the
quarter, or average levels over the quarter or quarters, that the
banking organization has reported. Use of a four-quarter average would
capture significant changes in a banking organization's risk profile,
rather than temporary fluctuations, while maintaining incentives for a
banking organization to reduce its risk profile relative to a longer
period of measurement.
To move to a less stringent category of standards, a banking
organization must report risk-based indicator levels below any
applicable threshold for the more stringent category in each of the
four preceding calendar quarters. This approach is consistent with the
existing applicability and cessation requirements of the Board's
enhanced prudential standards rule.\70\ In addition, the final rule
would adopt the transition for compliance with a new category of
standards as proposed. Specifically, a banking organization that
changes from one category of applicable standards to another category
must generally comply with the new requirements no later than on the
first day of the second quarter following the change in category.
---------------------------------------------------------------------------
\70\ See, e.g., 12 CFR 252.43.
---------------------------------------------------------------------------
The final rule does not provide for discretionary adjustments of
thresholds on a case-by-case basis, because such an approach would
diminish the transparency and predictability of the framework and could
reduce incentives for banking organizations to engage in long-term
management of their risks.\71\
---------------------------------------------------------------------------
\71\ The Board retains the general authority under its enhanced
prudential standards, capital, and liquidity rules to increase or
adjust requirements as necessary on a case-by-case basis. See 12 CFR
217.1(d); 249.2; 252.3.
---------------------------------------------------------------------------
Each risk-based indicator will generally be calculated in
accordance with the instructions to the FR Y-15, FR Y-9LP, Capital and
Asset Report for Foreign Banking Organizations (FR Y-7Q), or FR Y-9C,
as applicable. The risk-based indicators must be reported for the
banking organization on a quarterly basis.\72\ U.S. banking
organizations currently report the information necessary to determine
their applicable category of standards based on a four-quarter average.
In response to concerns raised by commenters, the Board also is
revising its reporting forms to specify the line items used in
determining the risk-based indicators. Section XV of this Supplementary
Information discusses changes to reporting requirements, and identifies
the specific line items that will be used to calculate risk-based
indicators.\73\ With respect to the commenters' concern regarding the
applicability of these reporting forms to depository institutions that
are not part of a bank or savings and loan holding company structure,
the Board notes that no such depository institution would be subject to
the final rule based on first quarter 2019 data. The Board will monitor
the implementation of the final rule and make any such adjustments to
reporting forms, as needed, to require such a depository institution to
report risk-based indicator levels.
---------------------------------------------------------------------------
\72\ A foreign banking organization must also report risk-based
indicators as with respect to the organization's combined U.S.
operations as applicable under the final rule.
\73\ Although U.S. intermediate holding companies currently
report the FR Y-15, the revised form would reflect the cross-
jurisdictional activity indicator adopted in the final rule.
---------------------------------------------------------------------------
Some commenters asserted that banking organizations could adjust
their exposures to avoid thresholds, including by making temporary
adjustments to lower risk-based indicator levels reported. The Board
will continue to monitor risk-based indicator amounts reported and
information collected through supervisory processes to ensure that the
risk-based indicators are reflective of a banking organization's
overall risk profile, and would consider changes to reporting forms, as
needed. In particular, the Board will monitor weighted short-term
wholesale funding levels reported at quarter-end, relative to levels
observed during the reporting period.
VI. Prudential Standards for Large U.S. and Foreign Banking
Organizations
A. Category I Standards
U.S. GSIBs are subject to the most stringent prudential standards
relative to other firms, which reflects and helps to mitigate the
heightened risks these firms pose to U.S. financial stability.
The domestic proposal would have required that U.S. GSIBs remain
subject to the most stringent stress testing requirements, such as an
annual supervisory stress testing, FR Y-14 reporting requirements, and
a requirement to conduct company-run stress tests on an annual basis.
Consistent with changes made by EGRRCPA, the proposal would have
removed the mid-cycle company-run stress test requirement for all bank
holding companies, including U.S. GSIBs.\74\ The proposal would have
maintained the requirement for a U.S. GSIB to conduct an annual
company-run stress test.
---------------------------------------------------------------------------
\74\ Section 401 of EGRRCPA amended section 165(i) of the Dodd-
Frank Act to require company-run stress tests to be conducted
periodically rather than on a semi-annual basis. Certain commenters
requested that the Board remove the mid-cycle company-run stress
test requirement for the 2019 stress test cycle. Because the final
rule is effective after October 5, 2019, which was the due date for
mid-cycle company-run stress tests, the removal of this requirement
will take effect for the 2020 stress test cycle.
---------------------------------------------------------------------------
While many commenters supported a reduction in the frequency of
company-run stress testing, some commenters expressed the view that
this aspect of the proposal could weaken a tool that is intended to
enhance the safety and soundness of banking organizations. These
commenters argued that the Board should postpone removing the mid-cycle
company-run stress test until the efficacy of this requirement has been
evaluated over a full business cycle.
Relative to the annual company-run stress test, the mid-cycle
company-run stress test has provided only modest risk management
benefits and limited incremental information to market participants. To
provide additional flexibility to respond to changes in the risk
profile of a banking organization or in times of stress, it is
important for the Board to have the ability to adjust the frequency of
the company-run stress test requirement. Accordingly, and in
[[Page 59050]]
response to commenters, the final rule eliminates the mid-cycle stress
testing requirement for all bank holding companies but provides the
Board authority to adjust the required frequency at which a banking
organization, including a U.S. GSIB, must conduct a stress test based
on its financial condition, size, complexity, risk profile, scope of
operations, or activities, or risks to the U.S. economy. The final rule
therefore provides flexibility to the Board to require more frequent
company-run stress testing as needed, while minimizing the burden
associated with an ongoing semi-annual requirement.
Some commenters also requested that the Board eliminate its ability
to object to a firm's capital plan on the basis of qualitative
deficiencies (qualitative objection) for all banking organizations.\75\
This comment was addressed after the domestic proposal was issued in a
separate rulemaking. In March 2019, the Board eliminated the
qualitative objection for most firms, including firms that are subject
to Category I standards under this final rule.\76\ In recognition of
the progress that firms have made in their risk management and capital
planning practices, their significantly strengthened capital positions,
and changes to the Board's supervisory processes, the Board expressed
its belief that it is appropriate to transition away from the
qualitative objection under the capital plan rule. Because the
qualitative objection has led to improvements in firms' capital
planning, however, the Board decided to temporarily retain the
qualitative objection for firms that recently became subject to the
Federal Reserve's qualitative assessment, including certain U.S.
intermediate holding companies. In doing so, the capital plan rule
provides additional time for those firms to improve their capital
planning practices before the qualitative objection is removed. While
the qualitative objection no longer applies to certain banking
organizations, all banking organizations continue to be subject to
robust supervisory assessments of their capital planning practices.
---------------------------------------------------------------------------
\75\ The qualitative assessment evaluates the strength of a
company's capital planning process, including the extent to which
the analysis underlying a company's capital plan comprehensively
captures and addresses potential risks stemming from company-wide
activities, as well as the reasonableness of a company's capital
plan and the assumptions and analysis underlying the plan.
\76\ 84 FR 8953 (March 13, 2019). Specifically, a firm that
participates in four assessments and successfully passes the
qualitative evaluation in the fourth year is no longer subject to a
potential qualitative objection.
---------------------------------------------------------------------------
The proposal also would have required U.S. GSIBs to remain subject
to the most stringent liquidity standards, including the liquidity risk
management, monthly internal liquidity stress testing, and liquidity
buffer requirements under the enhanced prudential standards rule. The
proposal also would have required U.S. GSIBs to report certain
liquidity data for each business day under the FR 2052a. The Board did
not receive comments on the continued application of these enhanced
liquidity standards to U.S. GSIBs and is finalizing liquidity
requirements for U.S. GSIBs as proposed.
B. Category II Standards
The proposals would have required banking organizations subject to
Category II standards to remain subject to the most stringent stress
testing requirements, including annual supervisory stress testing, FR
Y-14 reporting requirements, and a requirement to conduct company-run
stress tests on an annual basis. As noted above, the failure or
distress of a U.S. banking organization or the U.S. operations of a
foreign banking organization that is subject to Category II standards
could impose significant costs on the U.S. financial system and
economy, although these banking organizations generally do not present
the same degree of systemic risk as U.S. GSIBs. Sophisticated stress
testing helps to address the risks presented by the size and cross-
jurisdictional activity of such banking organizations.\77\
---------------------------------------------------------------------------
\77\ See section V.C of this Supplementary Information.
---------------------------------------------------------------------------
The Board did not receive any comments related to capital planning
and stress testing for firms subject to Category II standards, other
than those discussed for Category I. The Board is finalizing the
removal of the mid-cycle stress test for firms subject to Category II
standards and adjusting the frequency of stress testing requirements,
as discussed above. The Board is not finalizing changes to the capital
plan rule to amend the definition of large and noncomplex bank holding
company at this time, however. The Board intends to consider such
changes in conjunction with other changes to the capital plan rule as
part of a future capital plan proposal.
With respect to liquidity, the proposals would have maintained the
existing liquidity risk management, monthly internal liquidity stress
testing, and liquidity buffer requirements under the enhanced
prudential standards rule for banking organizations that would have
been subject to Category II standards. The liquidity risk management
requirements under the Board's enhanced prudential standards rule
reflect important elements of liquidity risk management in normal and
stressed conditions, such as cash flow projections and contingency
funding plan requirements. Similarly, internal liquidity stress testing
and buffer requirements require a banking organization to project its
liquidity needs based on its own idiosyncratic risk profile and to hold
a liquidity buffer sufficient to cover those needs. A banking
organization subject to Category II standards under the proposals would
have been required to conduct internal liquidity stress tests on a
monthly basis. A U.S. banking organization would have conducted such
stress tests at the top-tier consolidated level, whereas a foreign
banking organization would have been required to conduct internal
liquidity stress tests separately for each of its U.S. intermediate
holding company, if applicable, its collective U.S. branches and
agencies, and its combined U.S. operations. The proposals would have
also required a top-tier U.S. depository institution holding company or
foreign banking organization subject to Category II standards to report
FR 2052a liquidity data for each business day.
Category II liquidity standards are appropriate for banking
organizations of a very large size or with significant cross-
jurisdictional activity. Such banking organizations may have greater
liquidity risk and face heightened challenges for liquidity risk
management compared to an organization that is smaller or has less of a
global reach. In addition, a very large banking organization that
becomes subject to funding disruptions may need to engage in asset fire
sales to meet its liquidity needs and has the potential to transmit
distress to the financial sector on a broader scale because of the
greater volume of assets it could sell in a short period of time.
Similarly, a banking organization with significant cross-jurisdictional
activity may have greater challenges in the monitoring and management
of its liquidity risk across jurisdictions and may be exposed to a
greater diversity of liquidity risks as a result of its more global
operations.
The Board received comments related to the frequency and submission
timing of FR 2052a reporting for banking organizations subject to
Category II standards. These comments are discussed below in section XV
of this Supplementary Information. Otherwise,
[[Page 59051]]
commenters did not provide views on liquidity requirements applicable
under Category II. The Board is adopting Category II liquidity
standards as proposed.
C. Category III Standards
For banking organizations subject to Category III standards, the
proposals would have removed the mid-cycle company-run stress testing
requirement and changed the frequency of the required public disclosure
for company-run stress test results to every other year rather than
annually. The proposals would have maintained all other stress testing
requirements for banking organizations subject to Category III
standards. These standards would have included the requirements for an
annual capital plan submission and annual supervisory stress testing. A
firm subject to Category III standards would also be required to
conduct an internal stress test, and report the results on the FR Y-
14A, in connection with its annual capital plan submission.
A number of commenters requested that the Board clarify the
relationship between the capital plan rule and the stress testing rules
and minimize the imposition of any additional requirements or
processes. Specifically, commenters requested that the Board clarify
expectations for internal stress testing conducted in years during
which a company-run stress test would not be required. These commenters
requested that internal stress tests be aligned with the analysis
required under the capital plan rule by, for example, relying on the
capital action assumptions in the Board's stress testing rules. In
addition, some of these commenters suggested that the Board reduce
burden by limiting the number of scenarios required. Alternatively,
some commenters requested that the Board reduce the frequency of the
stress testing cycle--including capital plan submissions--to every
other year for banking organizations subject to Category III standards.
The final rule retains the frequency of supervisory stress testing
and FR Y-14 reporting requirements as proposed. These requirements help
to ensure that a banking organization subject to Category III standards
maintains sufficient capital to absorb unexpected losses and continue
to serve as a financial intermediary under stress. Additionally, all
large banking organizations should maintain a sound capital planning
process on an ongoing basis, including in years during which a company-
run stress test is not required.\78\ As noted in the proposals, the
Board will consider any other changes to the capital plan rule as part
of a separate capital plan proposal. Reporting requirements are
discussed in more detail in section XV of this Supplementary
Information.
---------------------------------------------------------------------------
\78\ See SR letters 15-18 and 15-19.
---------------------------------------------------------------------------
Other commenters requested that the Board retain the requirement
for banking organizations to publicly disclose the results of their
stress tests on an annual basis. The Board will continue to publish its
annual supervisory stress test results for firms subject to Category
III standards and thus the reduced frequency to every other year of
firm's required public disclosure should only modestly limit the amount
of information that is publicly available. Accordingly, the final rule
adopts the stress testing disclosure requirements for banking
organizations subject to Category III standards without change.
The proposals would have applied the existing liquidity risk
management, monthly internal liquidity stress testing, and liquidity
buffer requirements under the enhanced prudential standards rule to
banking organizations subject to Category III standards. Additionally,
the proposals would have required a top-tier U.S. depository
institution holding company or foreign banking organization subject to
Category III standards to report daily or monthly FR 2052a liquidity
data, depending on the weighted short-term wholesale funding level of
the domestic holding company or the foreign banking organization's
combined U.S. operations. Specifically, to provide greater insight into
banking organizations with heightened liquidity risk, the Board
proposed that a top-tier U.S. holding company with $75 billion or more
in weighted short-term wholesale funding, or a foreign banking
organization with U.S. operations having at least that amount of
weighted short-term wholesale funding, be required to submit FR 2052a
data for each business day.
The Board did not receive comments on the application of liquidity
stress testing and buffer requirements to banking organizations subject
to Category III standards. With respect to liquidity risk management
requirements, some commenters requested that the rule permit a banking
organization's board of directors to delegate certain oversight and
approval functions to a risk committee with primary responsibility for
overseeing liquidity risks, including approval of liquidity policies
and review of quarterly risk reports. These commenters also requested
elimination of the requirement for a banking organization's board or
risk committee to review or approve certain operational documents, such
as cash flow projection methodologies and liquidity risk procedures,
arguing that these responsibilities are more appropriate for senior
management than the board or a committee of the board.
The Board has long taken the view that the board of directors
should have responsibility for oversight of liquidity risk management
because the directors have ultimate responsibility for the strategic
direction of the banking organization, and thus its liquidity profile.
Certain risk management responsibilities, however, are assigned to
senior management. As such, the final rule maintains the requirement
for the board of directors to approve and periodically review the
liquidity risk management strategies and policies and review quarterly
risk reports. In addition, the final rule continues to state that the
liquidity risk management requirements for certain operational
documents such as cash flow projection methodologies require submission
to the risk committee, rather than the board of directors, for
approval.\79\ The final rule adopts Category III liquidity risk-
management standards as proposed, including monthly liquidity stress
testing and liquidity buffer maintenance requirements.
---------------------------------------------------------------------------
\79\ See 12 CFR 252.34(e)(3).
---------------------------------------------------------------------------
Additionally, as discussed in section XV of this Supplementary
Information, the Board received certain comments related to the
frequency and timeliness of FR 2052a reporting for banking
organizations subject to Category III standards. As discussed in that
section, the Board is finalizing FR 2052a reporting requirements for
banking organizations subject to Category III standards generally as
proposed, with minor changes to submission timing.
D. Category IV Standards
The proposal would have applied revised stress testing requirements
to banking organizations subject to Category IV standards to align with
the risk profile of these firms. Specifically, the proposal would have
revised the frequency of supervisory stress testing to every other year
and eliminated the requirement for firms subject to Category IV
standards to conduct and publicly disclose the results of a company-run
stress test. Firms subject to Category IV standards also would be
subject to FR Y-14 reporting requirements. Relative to current
requirements under the enhanced
[[Page 59052]]
prudential standards rule, the proposed Category IV standards would
have maintained core elements of existing standards but tailored these
requirements to reflect these banking organizations' lower risk profile
and lesser degree of complexity relative to other large banking
organizations.
Many commenters supported the reduced frequency of supervisory
stress tests as a form of burden reduction. However, some commenters
opposed this change and expressed concern that it would allow banking
organizations subject to Category IV standards to take on additional
risk during off-cycle years, and limit the public and market's ability
to assess systemic risk. Other commenters also argued that stress
testing requirements are not justified for banking organizations
subject to Category IV standards in view of the significant costs and
burden associated with such requirements. Some commenters requested
that the Board provide additional information on the impact of reducing
the frequency of supervisory stress testing for banking organizations
subject to Category IV standards.
Supervisory stress testing on a two-year cycle is consistent with
section 401(e) of EGRRCPA, and takes into account the risk profile of
these banking organizations relative to those that are larger and more
complex. Maintaining FR Y-14 reporting requirements for firms subject
to Category IV standards will provide the Board with the data it needs
to conduct supervisory stress testing and inform ongoing supervision of
these firms. The Federal Reserve will continue to supervise banking
organizations subject to Category IV standards on an ongoing basis,
including evaluation of the capital adequacy and capital planning
processes during off-cycle years. In addition, the final rule provides
the Board with authority to adjust the frequency of stress testing
requirements based on the risk profile of a banking organization or
other factors. Accordingly, the final rule adopts the revisions to the
frequency of supervisory stress testing requirements for firms subject
to Category IV standards as proposed. Reporting requirements are
discussed in more detail in section XV below.
Similar to the comments discussed above, several commenters
requested that the Board clarify the relationship between the capital
plan rule and the stress testing rules for banking organizations
subject to Category IV standards. In particular, commenters requested
that the Board clarify what information would be required in a capital
plan and related reporting forms submitted by a banking organization
subject to Category IV standards, given that these banking
organizations would not be subject to company-run stress testing
requirements. Other commenters requested that any forward-looking
analysis required for banking organizations subject to Category IV
standards be limited and not require hypothetical stress scenarios. The
Board plans to propose changes to the capital plan rule as part of a
separate proposal, including providing firms subject to Category IV
standards additional flexibility to develop their annual capital plans.
Under the proposals, Category IV standards would have included
liquidity risk management, stress testing, and buffer requirements.
Banking organizations subject to Category IV standards also would have
been required to report FR 2052a liquidity data on a monthly basis.
While the proposals would have retained core liquidity requirements
under Category IV standards, certain liquidity risk management and
liquidity stress testing requirements would have been further tailored
to more appropriately reflect the risk profiles of banking
organizations subject to this category of standards.
As a class, banking organizations that would have been subject to
Category IV standards tend to have more stable funding profiles, as
measured by their generally lower level of weighted short-term
wholesale funding, and lesser degrees of liquidity risk and operational
complexity associated with size, cross-jurisdictional activity, nonbank
assets, and off-balance sheet exposure. Accordingly, the proposals
would have reduced the frequency of required internal liquidity stress
testing to at least quarterly, rather than monthly. The proposals would
not have changed other aspects of the liquidity buffer requirements for
banking organizations subject to Category IV standards.
The proposals would have modified certain liquidity risk-management
requirements under the enhanced prudential standards rule for banking
organizations subject to Category IV standards. First, the proposals
would have required such banking organizations to calculate collateral
positions on a monthly basis, rather than a weekly basis. Second, the
proposals would have further tailored the requirement under the
enhanced prudential standards rule for certain bank holding companies
to establish risk limits to monitor sources of liquidity risk.\80\
Third, Category IV standards would have specified fewer required
elements of monitoring intraday liquidity risk exposures.\81\ Such
changes would have reflected the generally more stable funding profiles
and lower degrees of intraday risk and operational complexity of these
banking organizations relative to those that are larger and more
complex. Under the proposals, banking organizations subject to Category
IV standards also would have been required to report FR 2052a liquidity
data on a monthly basis.
---------------------------------------------------------------------------
\80\ 12 CFR 252.34(g).
\81\ See 12 CFR 252.34(h)(3).
---------------------------------------------------------------------------
Some commenters objected to the liquidity risk-management standards
proposed for banking organizations subject to Category IV standards, on
the basis that any reduction in such requirements could increase safety
and soundness and financial stability risks. Other commenters supported
this aspect of the proposals, and asserted that it would distinguish
more effectively between banking organizations in this category and
those that are larger and more complex.
Banking organizations subject to Category IV standards generally
are less prone to funding disruptions, even under stress conditions.
Monthly FR 2052a information, which is discussed in more detail in
section XV below, together with information obtained through the
supervisory process, allows the Board to monitor the liquidity risk
profiles of these banking organizations. Accordingly, the final rule
adopts the proposed Category IV liquidity standards without change.
VII. Single-Counterparty Credit Limits
In 2018, the Board adopted a final rule to apply single-
counterparty credit limits to large U.S. and foreign banking
organizations (single-counterparty credit limits rule). The single-
counterparty credit limits rule limits the aggregate net credit
exposure of a U.S. GSIB and any bank holding company with total
consolidated assets of $250 billion or more to a single counterparty.
The credit exposure limits are tailored to the size and systemic
footprint of the firm. Single-counterparty credit limit requirements
also apply to a foreign banking organization with $250 billion or more
in total consolidated assets with respect to its combined U.S.
operations, and separately to any subsidiary U.S. intermediate holding
company of such a firm.\82\ A foreign banking organization may comply
with single-counterparty credit limits applicable to its combined U.S.
operations by certifying that it
[[Page 59053]]
meets, on a consolidated basis, standards established by its home
country supervisor that are consistent with the BCBS large exposure
standard.\83\
---------------------------------------------------------------------------
\82\ 12 CFR 252.170(a).
\83\ 12 CFR 252.172(d). See also BCBS, Supervisory Framework for
Measuring and Controlling Large Exposures (April 2014). The large
exposures standard establishes an international single-counterparty
credit limit framework for internationally active banks.
---------------------------------------------------------------------------
The domestic proposal would have modified the thresholds for
application of the single-counterparty credit limit rule to apply
single-counterparty credit limits to all U.S. bank holding companies
that would be subject to Category II or Category III standards. This
change would have aligned the thresholds for application of single-
counterparty credit limits requirements with the proposed thresholds
for other prudential standards. Similarly, the foreign bank proposal
would have revised the single-counterparty credit limit requirements to
align with the proposed thresholds for other enhanced prudential
standards applied to the U.S. operations of foreign banking
organizations. Under the proposal, single-counterparty credit limits
would have applied to foreign banking organizations subject to Category
II or Category III standards or to a foreign banking organization with
$250 billion or more in total consolidated assets. The proposal would
have preserved the ability of a foreign banking organization to comply
with the single-counterparty credit limits by certifying to the Board
that it meets comparable home-country standards that apply on a
consolidated basis. The proposal also would have applied single-
counterparty credit limits separately to a U.S. intermediate holding
company subsidiary of a foreign banking organization subject to
Category II or Category III standards, based on the risk profile of the
foreign banking organization's combined U.S. operations. Under the
proposal, the requirements previously applicable to U.S. intermediate
holding companies with $250 billion or more in assets would have
applied to all U.S. intermediate holding companies subject to single-
counterparty credit limits--specifically, the aggregate net credit
exposure limit of 25 percent of tier 1 capital, the treatment regarding
exposures to special purpose vehicles (SPVs) and the application of the
economic interdependence and control relationship tests, as well as the
required frequency of compliance. The proposal also would have
eliminated the distinction under the single-counterparty credit limits
rule for ``major'' U.S. intermediate holding companies, and subjected
all U.S. intermediate holding companies subject to the single-
counterparty credit limits rule to the same aggregate net credit
exposure limit. The proposal would not have applied single-counterparty
credit limits to U.S. intermediate holding companies under Category IV.
Many commenters supported the proposed exclusion of U.S.
intermediate holding company subsidiaries of foreign banking
organizations subject to Category IV standards from single-counterparty
credit limits.\84\ Some commenters asserted that single-counterparty
credit limits for a U.S. intermediate holding company should be
determined based on the risk profile of the U.S. intermediate holding
company rather than on the risk profile of the combined U.S. operations
of its parent foreign banking organization. While some commenters
supported the proposal's expansion of single-counterparty credit limit
requirements for U.S. intermediate holding companies with less than
$250 billion in assets under Categories II and III, others argued that
this approach was unnecessary. Some commenters also requested an
extended compliance period for the treatment of exposures to SPVs and
application of the economic interdependence and control test. The
commenters also argued that the Board should give the single-
counterparty credit limits rule the opportunity to take effect before
considering further changes.
---------------------------------------------------------------------------
\84\ Some commenters' suggested modifications to the single-
counterparty credit limit rule that are beyond the scope of changes
in this rulemaking. Therefore, these changes are not discussed
separately in this Supplementary Information.
---------------------------------------------------------------------------
Single-counterparty credit limits support safety and soundness and
are designed to reduce transmission of distress, particularly for
larger, riskier, and interconnected banking organizations. The risks
indicated by size, cross-jurisdictional activity, off-balance sheet
exposure, and weighted short-term wholesale funding and that result in
the application of Category II and Category III standards evidence
vulnerability to safety and soundness and financial stability risks,
which may be exacerbated if a banking organization has outsized credit
exposure to a single counterparty. Therefore, the final rule adopts the
single-counterparty credit limits proposed for U.S. banking
organizations without change. The Board is, however, revising the
proposed single-counterparty credit limit requirements for U.S.
intermediate holding companies so that the application of such
requirements are based on the risk profile of the U.S. intermediate
holding company rather than on the risk profile of the combined U.S.
operations of its parent foreign banking organization. This revision
would improve the focus and efficiency of single-counterparty credit
limits relative to the proposal, because single-counterparty credit
limits that apply to a U.S. intermediate holding company will be based
on the U.S. intermediate holding company's own risk profile. As a
result, only U.S. intermediate holding companies subject to Category II
or III standards are separately subject to the single-counterparty
credit limits rule. These U.S. intermediate holding companies are
subject to a single net aggregate credit exposure limit of 25 percent
of tier 1 capital. In addition, these firms are subject to the
treatment for exposures to SPVs, the economic interdependence and
control tests, and the daily compliance requirement that was previously
only applicable to U.S. intermediate holding companies with $250
billion or more in assets. The final rule would provide U.S.
intermediate holding companies with less than $250 billion in assets
that are subject to Category II or III standards an additional
transition time, until January 1, 2021, to come into compliance with
more stringent requirements.
VIII. Covered Savings and Loan Holding Companies
The proposal would have subjected covered savings and loan holding
companies to supervisory and company-run stress testing requirements;
risk-management and risk-committee requirements; liquidity risk
management, stress testing, and buffer requirements; and single-
counterparty credit limits, pursuant to section 10(g) of the Home
Owners' Loan Act (HOLA).\85\ These requirements would have been applied
to covered savings and loan holding companies in the same manner as a
similarly situated bank holding company.\86\ As described in the
reporting section, section XV, the proposal would have expanded the
scope of applicability of the FR Y-14 reporting requirements to apply
to covered savings and loan holding companies with total consolidated
assets of $100 billion or more. The proposal also noted that the Board
planned to seek comment on the application of capital planning
requirements to covered savings and
[[Page 59054]]
loan holding companies that would be consistent with the capital
planning requirements for large bank holding companies as part of a
separate proposal.
---------------------------------------------------------------------------
\85\ 12 U.S.C. 1467a(g).
\86\ A covered savings and loan holding company would not be
subject to Category I standards as the definition of ``global
systemically important BHC'' under the GSIB surcharge rule does not
include savings and loan holding companies. See 12 CFR 217.2.
---------------------------------------------------------------------------
Some commenters argued that the Board lacks the authority to apply
prudential standards to savings and loan holding companies that are not
designated by the Financial Stability Oversight Council (FSOC) as
systemically important nonbank financial companies under section 113 of
the Dodd-Frank Act.\87\ These commenters argued that the Board may only
apply the proposed prudential standards to covered savings and loan
holding companies that have been designated by the FSOC for supervision
by the Board and not based on the general grant of authority in section
10(g) of the HOLA.\88\ Commenters argued that application of prudential
standards to covered savings and loan holding companies pursuant to
section 10(g) of HOLA implied that these prudential standards could be
applied to banking organizations regardless of size, an inference that
commenters asserted would be contrary to the congressional intent of
the Dodd-Frank Act and EGRRCPA.
---------------------------------------------------------------------------
\87\ 12 U.S.C. 5323.
\88\ Specifically, commenters argued that relying on the general
authority of section 10(g) of HOLA to apply prudential standards to
covered savings and loan holding companies would be inconsistent
with a canon of statutory construction that specific statutory
language ordinarily prevail over conflicting general language.
---------------------------------------------------------------------------
Section 10(g) of HOLA authorizes the Board to issue such
regulations and orders, including regulations relating to capital
requirements, as the Board deems necessary or appropriate to administer
and carry out the purposes of section 10 of HOLA. As the primary
federal regulator and supervisor of savings and loan holding companies,
one of the Board's objectives is to ensure that savings and loan
holding companies operate in a safe-and-sound manner and in compliance
with applicable law. Like bank holding companies, savings and loan
holding companies must serve as a source of strength to their
subsidiary savings associations and may not conduct operations in an
unsafe and unsound manner.
Section 165 of the Dodd-Frank Act directs the Board to establish
specific enhanced prudential standards for large bank holding companies
and companies designated by FSOC in order to prevent or mitigate risks
to the financial stability of the United States.\89\ Section 165 does
not prohibit the application of standards to savings and loan holding
companies and bank holding companies pursuant to other statutory
authorities.\90\
---------------------------------------------------------------------------
\89\ 12 U.S.C. 5365(a)(1).
\90\ See EGRRCPA 401(b).
---------------------------------------------------------------------------
One commenter supported the proposal's application of prudential
standards to covered savings and loan holding companies, asserting that
covered savings and loan holding companies have similar risk profiles
as bank holding companies and therefore should not be treated
differently under the Board's regulatory framework. Another commenter
asserted that certain of the risk-based indicators were not reflective
of risks to safety and soundness for savings and loan holding companies
and should be modified. Similarly, this commenter also argued that
covered savings and loan holding companies were less risky and less
complex than bank holding companies of the same size and should be
subject to streamlined capital planning requirements and supervisory
expectations. The commenter also opposed the application of single-
counterparty credit limits to covered savings and loan holding
companies on the basis that the application of these standards would be
inconsistent with the qualified thrift lender test, described below.
This commenter argued that, if applied, the limits should be modified
to exclude mortgage-backed securities of U.S. government-sponsored
enterprises.
Large covered savings and loan holding companies engage in many of
the same activities and face similar risks as large bank holding
companies. By definition, covered savings and loan holding companies
are substantially engaged in banking and financial activities,
including deposit taking, lending, and broker-dealer activities.\91\
Large covered savings and loan holding companies engage in credit card
and margin lending and certain complex nonbanking activities that pose
higher levels of risk. Large covered savings and loan holding companies
can also rely on high levels of short-term wholesale funding, which may
require sophisticated capital, liquidity, and risk management
processes. Similar to large bank holding companies, large covered
savings and loan holding companies also conduct business across a large
geographic footprint, which in times of stress could present certain
operational risks and complexities. As discussed above in section V,
the risk-based indicators identify risks to safety and soundness in
addition to risks to financial stability. The category framework would
align requirements with the risk profile of a banking organization,
including by identifying risks that warrant more sophisticated capital
planning, more frequent company-run stress testing, and greater
supervisory oversight through supervisory stress testing, to further
the safety and soundness of these banking organizations. By
strengthening the risk-management, capital, and liquidity requirements
commensurate with these risks, the final rule would improve the
resiliency and promote the safe and sound operations of covered savings
and loan holding companies. Accordingly, the Board is adopting the
application of prudential standards to covered savings and loan holding
companies as proposed.
---------------------------------------------------------------------------
\91\ A covered savings and loan holding company must have less
than 25 percent of its total consolidated assets in insurance
underwriting subsidiaries (other than assets associated with
insurance underwriting for credit), must not have a top-tier holding
company that is an insurance underwriting company, and must derive a
majority of its assets or revenues from activities that are
financial in nature under section 4(k) of the Bank Holding Company
Act. 12 CFR 217.2.
---------------------------------------------------------------------------
These standards include supervisory stress testing and, for
Categories II and III, company-run stress testing requirements.\92\
Stress testing requirements provide a means to better understand the
financial condition of the banking organization and risks within the
banking organization that may pose a threat to safety and soundness. To
implement the supervisory stress testing requirements, the Board is
requiring covered savings and loan holding companies to report the FR
Y-14 reports in the same manner as a bank holding company.\93\ The
final rule does not establish capital planning requirements for covered
savings and loan holding companies. The Board intends to propose to
apply those requirements to covered savings and loan holding companies
as part of a separate proposal that would be issued for public notice
and comment.
---------------------------------------------------------------------------
\92\ Company-run stress test requirements are discussed further
in section XIII. of this SUPPLEMENTARY INFORMATION.
\93\ Covered savings and loan holding companies with total
consolidated assets of $100 or more are required to report the FR Y-
14M and all schedules of the FR Y-14Q except for Schedules C--
Regulatory Capital Instruments and Schedule D--Regulatory Capital
Transitions. These firms also are required to report the FR Y-14A
Schedule E--Operational Risk. Covered savings and loan holding
companies subject to Category II or III standards are required to
submit the FR Y-14A Schedule A--Summary and Schedule F--Business
Plan Changes in connection with the company-run stress test
requirement.
---------------------------------------------------------------------------
The final rule also would apply liquidity risk management, stress
testing and buffer requirements to covered savings and loan holding
companies. Specifically, a covered savings and loan holding company is
required to conduct internal stress tests at least monthly (or
[[Page 59055]]
quarterly, for a firm that is subject to Category IV standards) to
measure its potential liquidity needs across overnight, 30-day, 90-day,
and 1-year planning horizons during times of instability in the
financial markets. In addition, the covered savings and loan holding
company is required to hold highly liquid assets sufficient to meet the
projected 30-day net stress cash-flow need under internal stress
scenarios. A covered savings and loan holding company is also required
to meet specified corporate governance requirements around liquidity
risk management, to produce cash flow projections over various time
horizons, to establish internal limits on certain liquidity metrics,
and to maintain a contingency funding plan that identifies potential
sources of liquidity strain and alternative sources of funding when
usual sources of liquidity are unavailable. These liquidity risk
management, liquidity stress testing, and buffer requirements help to
ensure that covered savings and loan holding companies have effective
governance and risk-management processes to determine the amount of
liquidity to cover risks and exposures, and sufficient liquidity to
support their activities through a range of conditions.
The final rule applies single-counterparty credit limits to covered
savings and loan holding companies that are subject to Category II or
III standards as proposed. Application of single-counterparty credit
limits to covered savings and loan holding companies would reduce the
likelihood that distress at another firm would be transmitted to the
savings and loan holding company.
The single-counterparty credit limits exempt transactions with
government-sponsored entities (GSEs), such as the Federal National
Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage
Corp. (Freddie Mac), from limits on credit exposure, so long as the GSE
remains under U.S. government conservatorship.\94\ As commenters
observed, if the GSEs exit conservatorship, the single-counterparty
credit limits would limit a banking organization from holding mortgage-
backed securities of U.S. GSEs (Agency MBS) in excess of 25 percent of
tier 1 capital.\95\ The qualified thrift lender test (QTL test)
requires a savings association to either be a domestic building
association or have qualified thrift investments exceeding 65 percent
of its portfolio assets.\96\ The QTL test permits Agency MBS to be used
to satisfy the QTL test without limit.\97\ While the GSEs are under
U.S. government conservatorship, the single-counterparty credit limits
would not affect the ability of a banking organization, including a
savings association, to hold Agency MBS.
---------------------------------------------------------------------------
\94\ The Board's single-counterparty credit limits exclude any
direct claim on, and the portion of a claim that is directly and
fully guaranteed as to principal and interest by, the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation, only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency. 12 CFR 252.77.
Agency MBS also are considered eligible collateral while the GSEs
remain in conservatorship. 12 CFR 252.71.
\95\ 12 CFR 252.177(a)(1); 12 CFR 238.150.
\96\ 12 U.S.C. 1467a(m)(3)(C).
\97\ 12 U.S.C. 1467a(m)(4)(C)(ii)(III).
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac have been operating under the
conservatorship of the Federal Housing Finance Agency since 2008 and,
concurrent with being placed in conservatorship, received capital
support from the United States Department of the Treasury.\98\ The
timing and terms of Fannie Mae and Freddie Mac exiting conservatorship
are uncertain. In addition, other aspects of the Board's regulatory
framework could be affected by a change to the conservatorship status
of Fannie Mae or Freddie Mac. The Board will continue to monitor and
take into consideration any future changes to the conservatorship
status of the GSEs, including the extent and type of support received
by the GSEs. As appropriate, the Board will consider changes to the
application of single-counterparty credit limits to covered savings and
loan holding companies and other banking organizations, as well as to
other aspects of the Board's regulatory framework.
---------------------------------------------------------------------------
\98\ See 79 FR 77602 (December 24, 2014).
---------------------------------------------------------------------------
Finally, one commenter urged the Board to provide covered savings
and loan holding companies extended transition periods to come into
compliance with the new requirements, if adopted. The final rule would
provide covered savings and loan holding companies a transition period
to come into compliance with the new prudential standards.
Specifically, a covered savings and loan holding company will be
required to comply with risk-management and risk-committee requirements
as well as the liquidity risk-management, stress testing, and buffer
requirements on the first day of the fifth quarter following the
effective date of the final rule. A covered savings and loan holding
company will be required to comply with single-counterparty credit
limits and stress testing requirements on the first day of the ninth
quarter following the effective date of the final rule. Transition
periods for reporting requirements are discussed in section XV of this
SUPPLEMENTARY INFORMATION.
IX. Risk Management and Risk Committee Requirements
Section 165(h) of the Dodd-Frank Act requires certain publicly
traded bank holding companies to establish a risk committee that is
``responsible for the oversight of the enterprise-wide risk management
practices'' and meets other statutory requirements.\99\ EGRRCPA raised
the threshold for mandatory application of the risk-committee
requirement from publicly traded bank holding companies with $10
billion or more in total consolidated assets to publicly traded bank
holding companies with $50 billion or more in total consolidated
assets. However, the Board has discretion to apply risk-committee
requirements to publicly traded bank holding companies with under $50
billion in total consolidated assets if the Board determines doing so
would be necessary or appropriate to promote sound risk-management
practices.
---------------------------------------------------------------------------
\99\ 12 U.S.C. 5363(h).
---------------------------------------------------------------------------
The proposal would have raised the threshold for application of
risk-committee requirements consistent with the changes made by
EGRRCPA. Under the proposal, a publicly traded or privately held U.S.
bank holding company with total consolidated assets of $50 billion or
more would have been required to maintain a risk committee. The
proposal would have applied the same risk-committee requirements to
covered savings and loan holding companies with $50 billion or more in
total consolidated assets as would have applied to a U.S. bank holding
company of the same size.
Under the enhanced prudential standards rule, as adopted, all
foreign banking organizations with total consolidated assets of $50
billion or more, and publicly traded foreign banking organizations with
$10 billion or more in total consolidated assets, were required to
maintain a risk committee that met specified requirements. These
requirements varied based on a foreign banking organization's total
consolidated assets and combined U.S. assets. Publicly traded foreign
banking organizations with at least $10 billion but less than $50
billion in total consolidated assets, as well as foreign banking
organizations with total consolidated assets of $50 billion or more but
less than $50 billion in combined U.S. assets, were required to
annually certify to the Board that they maintain a qualifying committee
that oversees the risk management practices
[[Page 59056]]
of the combined U.S. operations of the foreign banking organization. In
contrast, foreign banking organizations with total consolidated assets
of $50 billion or more and $50 billion or more in combined U.S. assets
were subject to more detailed risk-committee and risk-management
requirements, including the requirement to appoint a U.S. chief risk
officer.
Consistent with EGRRCPA, the proposal would have raised the total
consolidated asset threshold for application of the risk-committee
requirements to foreign banking organizations but would not have
changed the substance of the risk-committee requirements for these
firms.
One commenter argued for additional flexibility in meeting certain
requirements for certain foreign banking organizations that do not have
a U.S. intermediate holding company. Specifically, the commenter
requested that the Board modify the U.S. chief risk officer requirement
so that foreign banking organizations without a U.S. intermediate
holding company could be allowed to identify a senior officer to serve
as the point of contact responsible for the U.S. risk management
structure.
The Board is finalizing the risk-committee requirements as
proposed. Sound enterprise-wide risk management supports safe and sound
operations of banking organizations and reduces the likelihood of their
material distress or failure, and thus also promotes financial
stability. The final rule applies risk-committee requirements to a
publicly traded or privately held bank holding company or covered
savings and loan holding company with total consolidated assets of $50
billion or more. These standards enhance safety and soundness and help
to ensure independent risk management, which is appropriate for firms
of this size, including both privately held as well as publicly traded
banking organizations. Applying the same minimum standards to covered
savings and loan holding companies accordingly furthers their safety
and soundness by addressing concerns that apply equally across large
depository institution holding companies.
Taking into consideration varying structures of their U.S.
operations, the proposed risk-management requirements are important to
ensure safety and soundness of the U.S. operations of a foreign banking
organization as well. Under the final rule, foreign banking
organizations with $50 billion or more but less than $100 billion in
total consolidated assets, as well as foreign banking organizations
with total consolidated assets of $100 billion or more but less than
$50 billion in combined U.S. assets, are required to maintain a risk
committee and make an annual certification to that effect.
Additionally, foreign banking organizations with total consolidated
assets of $100 billion or more and $50 billion or more in combined U.S.
assets are required to comply with the more detailed risk-committee and
risk-management requirements under the enhanced prudential standards
rule, which include the chief risk officer requirement. The final rule
eliminates the risk-committee requirements that apply to foreign
banking organizations with less than $50 billion in total consolidated
assets. For banking organizations with less than $50 billion in total
consolidated assets, the Board proposes to review the risk-management
practices of such firms through existing supervisory processes and
expects that all firms establish risk-management processes and
procedures commensurate with their risks.
X. Enhanced Prudential Standards for Foreign Banking Organizations With
a Smaller U.S. Presence
The Board's regulatory framework tailors the application of
enhanced prudential standards to foreign banking organizations based on
the size and complexity of the organization's U.S. operations. In
particular, subparts L and M of the enhanced prudential standards rule,
as adopted, established company-run stress testing and risk-management
and risk-committee requirements for foreign banking organizations with
at least $10 billion but less than $50 billion in total consolidated
assets, the latter of which is described above. Additionally, subpart
N, as adopted, established risk-based and leverage capital, risk-
management and risk-committee, liquidity risk management, and capital
stress testing requirements for foreign banking organizations with at
least $50 billion in total consolidated assets but less than $50
billion in combined U.S. assets.\100\ These provisions largely required
the foreign banking organization to comply with home-country capital
and liquidity standards at the consolidated level, and imposed certain
risk-management requirements that are specific to the U.S. operations
of a foreign banking organization.
---------------------------------------------------------------------------
\100\ 79 FR 17240 (March 27, 2014).
---------------------------------------------------------------------------
The proposal would have maintained this approach for foreign
banking organizations with a limited U.S. presence; however, it would
have also implemented targeted changes to reduce the stringency of
certain requirements applicable to these firms. It also would have
maintained certain risk-management and capital requirements for a U.S.
intermediate holding company of a foreign banking organization that
does not meet the thresholds under the proposal for the application of
Category II, III, or IV standards.
A. Enhanced Prudential Standards for Foreign Banking Organizations With
Less Than $50 Billion in Total Consolidated Assets
The proposal would have eliminated risk-committee and risk-
management requirements for foreign banking organizations with less
than $50 billion in total consolidated assets, as described above.
In addition, consistent with EGRRCPA, the proposal would have
eliminated subpart L of the Board's enhanced prudential standards rule,
which currently prescribes company-run stress testing requirements for
foreign banking organizations with more than $10 billion but less than
$50 billion in total consolidated assets.\101\ As a result, foreign
banking organizations with less than $50 billion in total consolidated
assets would no longer be required to be subject to a home-country
capital stress testing regime, or if the foreign banking organization
was not subject to qualifying home country standards, additional stress
testing requirements in subpart L.\102\
---------------------------------------------------------------------------
\101\ Subpart L, as adopted, also applied to foreign savings and
loan holding companies with more than $10 billion in total
consolidated assets. See 12 CFR 252.120 et seq.
\102\ For foreign savings and loan holding companies, the
proposal would have applied company-run stress testing requirements
to foreign savings and loan holding companies with more than $250
billion in total consolidated assets. These requirements would have
been the same as those that were established under subpart L of the
enhanced prudential standards rule. See id. Raising the asset size
threshold for application of company-run stress testing requirements
for foreign savings and loan holding companies to more than $250
billion in total consolidated assets would be consistent with
section 165(i)(2) of the Dodd-Frank Act, as amended by EGRRCPA.
Under this final rule, company-run stress test requirements for
foreign savings and loan holding companies would be in the new
subpart R of Regulation LL.
---------------------------------------------------------------------------
EGRRCPA raised the threshold for mandatory application of company-
run stress testing requirements from financial companies with more than
$10 billion in total consolidated assets to financial companies with
more than $250 billion in total consolidated assets. Commenters were
generally supportive of the Board's proposed changes to raise the
thresholds for application of standards consistent with EGRRCPA.
Accordingly, the Board is finalizing
[[Page 59057]]
changes to the thresholds for application of the company-run stress
testing, risk-committee and risk-management requirements as proposed.
B. Enhanced Prudential Standards for Foreign Banking Organizations With
$100 Billion or More in Total Consolidated Assets but Less Than $100
Billion in Combined U.S. Assets
Subpart N of the enhanced prudential standards rule, as adopted,
established risk-based and leverage capital, liquidity risk management,
and capital stress testing requirements for foreign banking
organizations with $50 billion or more in total consolidated assets but
less than $50 billion in combined U.S. assets. These standards largely
required compliance with home-country standards.
Under the proposed rule, the requirements under subpart N would
have continued to largely defer to home-country standards and remain
generally unchanged from the requirements that apply currently to a
foreign banking organization with a limited U.S presence, including
liquidity risk management requirements, risk-based and leverage capital
requirements, and capital stress testing requirements. However,
consistent with the proposed changes to the frequency of stress testing
for smaller and less complex domestic holding companies, the proposal
would have required foreign banking organizations with total
consolidated assets of less than $250 billion that do not meet the
criteria for application of Category II, III, or IV standards to be
subject to a home-country supervisory stress test on a biennial basis,
rather than annually.
As discussed above, risk-committee requirements in subpart N would
have been further differentiated based on combined U.S. assets. Under
the proposal, foreign banking organizations with $100 billion or more
in total consolidated assets but less than $50 billion in combined U.S.
assets would have been required to certify on an annual basis that they
maintain a qualifying risk committee that oversees the risk management
policies of the combined U.S. operations of the foreign banking
organization. In contrast, foreign banking organizations with $100
billion or more in total consolidated assets, and at least $50 billion
but less than $100 billion in combined U.S. assets would have been
subject to more detailed risk-committee and risk-management
requirements, which include the chief risk officer requirement. These
more detailed risk-committee requirements would be the same
requirements that previously applied to foreign banking organizations
with $100 billion or more in combined U.S. assets.
The Board did not propose to revise the $50 billion U.S. non-branch
asset threshold for the U.S. intermediate holding company formation
requirement. Because a foreign banking organization with less than $100
billion in combined U.S. assets may have or could be required to form a
U.S. intermediate holding company, the proposal would have established
an intermediate holding company requirement for these foreign banking
organizations in subpart N (subpart N intermediate holding company).
Under the proposal, a subpart N intermediate holding company would not
have been subject to Category II, III, or IV capital standards, but
would have remained subject to the risk-based and leverage capital
requirements that apply to a U.S. bank holding company of a similar
size and risk profile under the Board's capital rule.\103\ Similarly, a
subpart N intermediate holding company would have been required to
comply with risk-management and risk-committee requirements. As under
the current rule, under the proposal the risk committee of the U.S.
intermediate holding company would have also been able to serve as the
U.S. risk committee for the foreign banking organization's combined
U.S. operations.
---------------------------------------------------------------------------
\103\ 12 CFR part 217. As discussed in the interagency foreign
banking organization capital and liquidity proposal, such a U.S.
intermediate holding company would be subject to the generally
applicable risk-based and leverage capital requirements.
---------------------------------------------------------------------------
Some commenters objected to the U.S. intermediate holding company
requirement entirely. These commenters also argued that, if the
requirement is retained, the threshold should be increased to $100
billion or more, arguing that a $100 billion threshold would be more
consistent with section 401 of EGRRCPA and principle of national
treatment and competitive equality.
A number of commenters argued that the U.S. intermediate holding
company requirement and the standards applied to U.S. intermediate
holding companies discouraged growth through subsidiaries rather than
branches (non-branch assets). Instead, commenters argued that growth in
non-branch assets should be encouraged on the basis that it improved a
foreign banking organization's liquidity risk profile in the United
States. These commenters argued that disincentives to form an U.S.
intermediate holding company were particularly pronounced if the
standards that are applied to the U.S. intermediate holding company are
calibrated based on the risk profile of the foreign banking
organization's combined U.S. operations. Some commenters supported the
proposed application of fewer enhanced prudential standards to subpart
N intermediate holding companies. Other commenters argued that a
subpart N intermediate holding company should be subject to risk
management standards only.
The Board did not propose to amend the threshold for formation of
the U.S. intermediate holding company requirement. The U.S.
intermediate holding company requirement has resulted in substantial
gains in the resilience and safety and soundness of foreign banking
organizations' U.S. operations. EGRRCPA raised the thresholds for
application of section 165 of the Dodd-Frank Act, but did not affect
the $50 billion threshold for application of the U.S. intermediate
holding company requirement.\104\
---------------------------------------------------------------------------
\104\ See also EGRRCPA 401(g) (discussing the Board's authority
to apply enhanced prudential standards to foreign banking
organizations with more than $100 billion in total consolidated
assets.
---------------------------------------------------------------------------
The final rule would adopt the subpart N intermediate holding
company requirements as proposed. By applying risk management and
standardized capital requirements to subpart N intermediate holding
companies, the enhanced prudential standards rule would treat a subpart
N intermediate holding company similarly to a domestic banking
organization of the same size. As some commenters observed, a subpart N
intermediate holding company would be subject to fewer and less
stringent requirements than a U.S. intermediate holding company of a
foreign banking organization subject to subpart O of the Board's
enhanced prudential standards rule (subpart O intermediate holding
company). Specifically, a subpart N intermediate holding company is not
subject to liquidity risk management, liquidity stress testing and
buffer requirements. In addition, as discussed above, the application
of capital, liquidity and single-counterparty credit limits to a
subpart O intermediate holding company would be based on the risk
profile of the subpart O intermediate holding company. By establishing
two tiers of U.S. intermediate holding company and tailoring the
standards applicable to each type of U.S. intermediate holding company,
this approach would significantly reduce cliff-effects in the standards
applied to U.S. intermediate holding companies and reduce
[[Page 59058]]
disincentives to growth in branch assets relative to non-branch assets.
XI. Technical Changes to the Regulatory Framework for Foreign Banking
Organizations and Domestic Banking Organizations
The proposal would have made several technical changes and
clarifying revisions to the Board's enhanced prudential standards rule.
In addition to any defined terms described previously in this
SUPPLEMENTARY INFORMATION, the proposal would have added defined terms
for foreign banking organizations with combined U.S. operations subject
to Category II, III, or IV standards, defined as ``Category II foreign
banking organization,'' ``Category III foreign banking organization,''
or ``Category IV foreign banking organization,'' respectively.
Similarly, the proposal would have added defined terms for ``Category
II U.S. intermediate holding company,'' ``Category III U.S.
intermediate holding company,'' and ``Category IV U.S. intermediate
holding company.'' The addition of these terms would facilitate the
requirements for application of enhanced prudential standards under the
category framework. The final rule uses the Board's GSIB surcharge
methodology to identify a U.S. GSIB and refers to these banking
organizations as global systemically important bank holding companies,
consistent with the term used elsewhere in the Board's regulations. The
final rule adopts these changes as proposed, consistent with the
adoption of the category framework in this final rule.
In addition, the final rule further streamlines the Board's
enhanced prudential standards rule by locating certain definitions
common to all subparts into a common definitions section.\105\ In
addition, the proposal would have made revisions to streamline the
process for forming a U.S. intermediate holding company and for
requesting an alternative organizational structure. The Board did not
receive any comments on these aspects of the proposal and is adopting
these changes as proposed.
---------------------------------------------------------------------------
\105\ See 12 CFR 252.2.
---------------------------------------------------------------------------
Specifically, the final rule eliminates the requirement to submit
an implementation plan for formation of a U.S. intermediate holding
company. The implementation plan requirement was intended to facilitate
initial compliance with the U.S. intermediate holding company
requirement. To assess compliance with the U.S. intermediate holding
company requirement under the proposal, information would have been
requested through the supervisory process. Such information could
include information on the U.S. subsidiaries of the foreign banking
organization that would be transferred, a projected timeline for the
structural reorganization, and a discussion of the firm's plan to
comply with the enhanced prudential standards that would be applicable
to the U.S. intermediate holding company.
In addition, the Board is making conforming amendments to the
process for requesting an alternative organizational structure for a
U.S. intermediate holding company, as well as clarifying that a foreign
banking organization may submit a request for an alternative
organizational structure in the context of a reorganization,
anticipated acquisition, or prior to formation of a U.S. intermediate
holding company. In light of the requests received under this section
following the initial compliance with the U.S. intermediate holding
company requirement, the final rule shortens the time period for action
by the Board from 180 days to 90 days. This process applies to both
subpart N and subpart O intermediate holding companies.
As discussed above in sections VI and VII of this Supplementary
Information, capital, liquidity and single-counterparty credit limits
would apply to a U.S. intermediate holding company based on its risk
profile. Subpart O of the enhanced prudential standards rule currently
provides that a foreign banking organization that forms two or more
U.S. intermediate holding companies would meet any threshold governing
applicability of particular requirements by aggregating the total
consolidated assets of all such U.S. intermediate holding companies.
The final rule retains this aggregation requirement, but amends the
requirement to consider the risk-based indicators discussed above.
In addition, the final rule provides a reservation of authority to
permit a foreign banking organization to comply with the requirements
of the enhanced prudential standards rule through a subsidiary foreign
bank or company of the foreign banking organization. In making this
determination, the Board would take into consideration the ownership
structure of the foreign banking organization, including whether the
foreign banking organization is owned or controlled by a foreign
government; (2) whether the action would be consistent with the
purposes of the enhanced prudential standards rule; and (3) any other
factors that the Board determines are relevant. For example, if a top-
tier foreign banking organization is a sovereign wealth fund that
controls a U.S. bank holding company, with prior approval of the Board,
the U.S. bank holding company could comply with the requirements
established under the enhanced prudential standards rule instead of the
sovereign wealth fund, provided that doing so would not raise
significant supervisory or policy issues and would be consistent with
the purposes the enhanced prudential standards rule. The reservation of
authority is intended to provide additional flexibility to address
certain foreign banking organization structures the Board has
encountered following the initial implementation of the rule, as well
as to provide clarity and reduce burden for these institutions.
Finally, the proposal would have eliminated transition and initial
applicability provisions that were relevant only for purposes of the
initial adoption and implementation of the enhanced prudential
standards rule. For example, the proposal would have removed paragraph
(a)(2) of Sec. 252.14 of part 252, which provides the required timing
of the stress tests for each stress test cycle prior to October 1,
2014. The Board did not receive comments on these aspects of the
proposals and is adopting them without change.
XII. Changes to Liquidity Buffer Requirements
Banking organizations subject to the Board's enhanced prudential
standards rule are required to maintain liquidity buffers composed of
unencumbered highly liquid assets sufficient to cover projected net
stressed cash-flow needs determined under firm-conducted stress
scenarios over specified planning horizons.\106\ At the time of the
proposals, the rule stated that cash and securities issued or
guaranteed by the U.S. government or a U.S. government-sponsored
enterprise are highly liquid assets.\107\ In addition, the rule
required
[[Page 59059]]
banking organizations to demonstrate to the satisfaction of the Board
that any other asset meets specific liquidity criteria in order to use
it to meet the rule's liquidity buffer requirements.\108\
---------------------------------------------------------------------------
\106\ A bank holding company subject to the enhanced prudential
standards rule must maintain a liquidity buffer sufficient to meet
its projected net stressed cash-flow needs over a 30-day planning
horizon. Similarly, a foreign banking organization subject to the
enhanced prudential standards rule must maintain a liquidity buffer
for a U.S. intermediate holding company, if any, sufficient to meet
its projected net stressed cash-flow needs over a 30-day planning
horizon. Separately, such a foreign banking organization must
maintain a liquidity buffer for its collective U.S. branches and
agencies sufficient to meet their net stressed cash-flow need over
the first 14 days of a stress test with a 30-day planning horizon.
See 12 CFR 252.35(b)(1) and 252.157(c)(2)-(3).
\107\ 12 CFR 252.35(b)(3)(i)(A)-(B) and 12 CFR
252.157(c)(7)(i)(A)-(B). The foreign bank proposal requested comment
on whether it would be appropriate to limit ``cash'' in the enhanced
prudential standards rule to Reserve Bank balances and foreign
withdrawable reserves. The Board received a comment recommending
that the Board not limit ``cash'' for purposes of the definition of
highly liquid asset. The Board is not revising the term ``cash'' as
part of this final rule.
\108\ 12 CFR 252.35(b)(3)(i)(C) and 12 CFR 252.157(c)(7)(i)(C).
---------------------------------------------------------------------------
The criteria for highly liquid assets set forth in the enhanced
prudential standards rule are substantially similar to the qualifying
criteria for HQLA under the LCR rule, which requires banking
organizations covered by that rule to maintain an amount of HQLA
sufficient to meet net stressed outflows over a 30-day period of
stress.\109\ Under the LCR rule, HQLA includes asset classes that are
expected to be easily and immediately convertible into cash with little
or no expected loss of value during a period of stress. Certain of the
asset classes are also subject to additional, asset-specific
requirements. In the preamble to the enhanced prudential standards
rule, which was adopted prior to finalization of the LCR rule, the
Board indicated that assets that would qualify as HQLA under the then-
proposed LCR rule would be liquid under most scenarios, but a banking
organization would still be required to demonstrate to the Board that
the asset meets the criteria for highly liquid assets set forth in the
enhanced prudential standards rule.
---------------------------------------------------------------------------
\109\ 12 CFR part 249.
---------------------------------------------------------------------------
The foreign bank proposal sought comment on whether to more closely
align the assets that qualify as highly liquid assets in the enhanced
prudential standards rule with HQLA under the LCR rule. Specifically,
the foreign bank proposal asked how, if at all, should the Board adjust
the current definition of highly liquid assets in 12 CFR 252.35(b)(3)
and 252.157(c)(7) of the enhanced prudential standards rule to improve
alignment with the definition of HQLA. The foreign bank proposal also
sought comment on whether the Board should incorporate other HQLA
requirements in the enhanced prudential standards rule for highly
liquid assets, such as the LCR rule's Level 2A and Level 2B liquid
asset haircuts, the 40 percent composition limit on the total amount of
Level 2 liquid assets, as well as the operational requirements set
forth in 12 CFR 249.22.
Commenters generally supported aligning the definition of highly
liquid assets with HQLA. However, commenters did not support including
in the enhanced prudential standards rule the haircuts and composition
limits under the LCR rule. These commenters argued that firms should
instead continue to evaluate all market and credit risk characteristics
of assets eligible for inclusion as highly liquid assets, and apply
market and credit risk haircuts consistent with the design of their
internal liquidity stress test scenarios. Commenters also did not
support adding the operational requirements for eligible HQLA under the
LCR rule to the requirements for highly liquid assets under the
enhanced prudential standards rule, arguing that firms should be able
to apply independent judgement in assessing operational or other risks
in the context of highly liquid assets.
Due to the similarity in asset qualification requirements under the
two rules, the Board is amending the definition of highly liquid assets
under the enhanced prudential standards rule to include all assets that
would qualify as HQLA under LCR rule. The asset must satisfy all the
qualifying criteria for HQLA, including, where appropriate, that the
asset is liquid and readily marketable as defined in the LCR rule and
meets the additional asset-specific criteria under the LCR rule.\110\
In addition, the Board is amending the definition of highly liquid
assets to include requirements that the banking organization subject to
the rule demonstrate each asset is under the control of the management
function that is charged with managing liquidity risk (liquidity
management function) and demonstrate the capability to monetize the
highly liquid assets. For banking organizations that are subject to the
LCR rule, the liquidity management function that controls the highly
liquid assets is intended to be the same function that controls
eligible HQLA. For a foreign banking organization, the appropriate
management function is the one that is charged with managing liquidity
risk for its combined U.S. operations.
---------------------------------------------------------------------------
\110\ See 12 CFR 249.20.
---------------------------------------------------------------------------
The Board is retaining, without change, the provision that permits
other assets to qualify as highly liquid assets if the banking
organization demonstrates to the satisfaction of the Board that these
assets meet the criteria for highly liquid assets (Section C
assets).\111\ The Board is clarifying that the banking organization
cannot include Section C assets in its buffer until it has received
approval from the Board.
---------------------------------------------------------------------------
\111\ See 12 CFR 252.35(d)(b)(i)(C) and 12 CFR
252.157(c)(7)(i)(C). The requirements for a Section C asset include
that the bank holding company or foreign banking organization
demonstrate to the satisfaction of the Board that the asset: (1) Has
low credit risk and low market risk; (2) is traded in an active
secondary two-way market that has committed market makers and
independent bona fide offers to buy and sell so that a price
reasonably related to the last sales price or current bona fide
competitive bid and offer quotations can be determined within one
day and settled at that price within a reasonable time period
conforming with trade custom; and (3) is a type of asset that
investors historically have purchased in periods of financial market
distress during which market liquidity has been impaired.
---------------------------------------------------------------------------
As a result of the expansion of the definition of highly liquid
assets to include HQLA, the Board expects other assets will qualify as
highly liquid assets only in narrow circumstances. However, the Board
is retaining this provision to provide a banking organization the
opportunity to determine and demonstrate to the Board that other assets
meet the criteria for highly liquid assets.\112\ For example, it may be
possible for a banking organization to demonstrate that an asset that
is eligible as HQLA under another jurisdiction's LCR rule meets the
requirements for Section C assets. The Board is not changing the
definition of highly liquid assets or other asset requirements under
the rule to include the haircuts or quantitative limits that exist in
the LCR rule. The Board believes that the requirements in the enhanced
prudential standards rule that banking organizations discount the fair
market value of the asset to reflect any credit risk and market price
volatility of the asset serve to address similar concerns as the LCR
rule's haircuts while permitting a banking organization to perform its
own assessment of potential stress. In addition, the enhanced
prudential standard rule's diversification requirement that a liquidity
buffer not contain significant concentrations of highly liquid assets
by issuer, business sector, region, or other factor related to the
banking organization's risk address similar risks as the LCR rule's
quantitative limits to the composition of the HQLA amount, and permit a
banking organization to consider its idiosyncratic risk profile and
market conditions. Consistent with the LCR rule's composition limits on
Level 2 and Level 2B liquid assets, the Board believes overreliance on
Level 2 liquid assets that are generally not immediately convertible to
cash and subject to greater price volatility, present safety and
soundness concerns and increase the risks a banking organization would
not be able to meet its obligations during a period of stress. The
Board is clarifying that the diversification requirements in the
enhanced prudential standards rule are
[[Page 59060]]
intended to prevent such overreliance.\113\
---------------------------------------------------------------------------
\112\ Id.
\113\ See 12 CFR 238.124(b)(3)(v) (covered savings and loan
holding companies), 12 CFR 252.35(b)(3)(v) and 12 CFR
252.157(c)(7)(v). As discussed in Section VIII of this Supplementary
Information, this final rule adopts the same liquidity risk
management, stress testing and buffer requirements for covered
savings and loan holding companies.
---------------------------------------------------------------------------
Although commenters requested that the definition of highly liquid
assets or other asset requirements not include the operational
requirements for eligible HQLA prescribed in the LCR rule, the Board
believes demonstrating the liquidity buffer is under the control of the
liquidity management function and demonstrating the capability to
monetize the liquidity buffer are fundamental risk management processes
that ensure the liquidity buffer is available during times of stress.
Specifically, these requirements are intended to ensure a banking
organization can monetize highly liquid assets during the relevant
stress scenario and have the proceeds available to the liquidity
management function without conflicting with another business or risk
management strategy, sending a negative signal to market participants,
or adversely affecting its reputation or franchise. However, to address
commenters' concern that banking organizations be allowed to apply
independent judgement in assessing operational and other risks in the
context of highly liquid assets, the Board is not incorporating the LCR
rule's more prescriptive requirements for demonstrating the operational
capability to control and monetize assets. The Board believes it is
appropriate to allow for a greater range of risk management practices
to demonstrate control or monetization capabilities for a firm's highly
liquid asset buffer, consistent with the goal that the internal
liquidity stress test be tailored to a firm's risk profile, size, and
complexity. The Board is clarifying, however, that a banking
organization's approach to demonstrating control and monetization
capabilities under the LCR rule would also meet the requirements of the
amended definition.
XIII. Changes to Company-Run Stress Testing Requirements for State
Member Banks, Removal of the Adverse Scenario, and Other Technical
Changes Proposed in January 2019
In January 2019, the Board requested comment on a proposed rule
that would amend the Board's stress testing rules, consistent with
section 401 of EGRRCPA (stress testing proposal).\114\ Prior to the
passage of EGRRCPA, section 165(i) of the Dodd-Frank Act \115\ required
each state member bank with total consolidated assets of more than $10
billion to conduct annual stress tests. In addition, section 165
required the Board to issue regulations that establish methodologies
for conducting stress tests, which were required to include at least
three different stress-testing scenarios: ``baseline,'' ``adverse,''
and ``severely adverse.'' \116\
---------------------------------------------------------------------------
\114\ 84 FR 4002 (February 14, 2019).
\115\ Public Law 111-203, 124 Stat. 1376 (2010).
\116\ 12 U.S.C. 5365(i)(2)(C).
---------------------------------------------------------------------------
Section 401 of EGRRCPA amended certain aspects of the stress
testing requirements applicable to state member banks under section
165(i) of the Dodd-Frank Act.\117\ Specifically, 18 months after the
date of enactment, section 401 of EGRRCPA raises the minimum asset
threshold for application of the stress testing requirement from more
than $10 billion to more than $250 billion in total consolidated
assets; revises the requirement for state member banks to conduct
stress tests ``annually,'' and instead requires them to conduct stress
tests ``periodically.'' In addition, EGRRCPA amended section 165(i) to
no longer require the Board's supervisory stress test and firms'
company-run stress tests to include an ``adverse'' scenario, thus
reducing the number of required stress test scenarios from three to
two.
---------------------------------------------------------------------------
\117\ Public Law 115-174, 132 Stat. 1296-1368 (2018).
---------------------------------------------------------------------------
The stress testing proposal would have raised the minimum asset
threshold for state member banks to conduct stress tests from more than
$10 billion to more than $250 billion, and revised the frequency with
which state member banks with assets greater than $250 billion would
have been required to conduct stress tests. In addition, the stress
testing proposal would have removed the adverse scenario from the list
of required scenarios in the Board's stress testing rules and the
Board's Policy Statement on the Scenario Design Framework for Stress
Testing. As discussed below, the Board received two comments on the
stress testing proposal and is adopting the proposal without change.
In preparing the stress testing proposal and this aspect of the
final rule, the Board coordinated closely with the FDIC and the OCC to
help to ensure that the company-run stress testing requirements are
consistent and comparable across depository institutions and depository
institution holding companies, and to address any burden that may be
associated with having multiple entities within one organizational
structure complying with different stress testing requirements.
A. Minimum Asset Threshold for State Member Banks
As described above, section 401 of EGRRCPA amends section 165 of
the Dodd-Frank Act by raising the minimum asset threshold for state
member banks required to conduct company-run stress tests from more
than $10 billion to more than $250 billion. Consistent with EGRRCPA,
the proposal would have raised this threshold such that only state
member banks with total consolidated assets greater than $250 billion
would be required to conduct stress tests. The Board did not receive
comments on this aspect of the proposal and is finalizing it without
change.
B. Frequency of Stress Testing for State Member Banks
Section 401 of EGRRCPA revised the requirement under section 165 of
the Dodd-Frank Act for state member banks to conduct stress tests,
changing the required frequency from ``annual'' to ``periodic.'' Under
the stress testing proposal, state member banks with total consolidated
assets of more than $250 billion generally would have no longer been
required to conduct stress tests annually; rather, they would be
required to conduct stress tests once every other year. As an exception
to the two-year cycle, state member banks that are subsidiaries of
banking organizations subject to Category I or Category II standards
would have been required to conduct a stress test on an annual basis.
The proposed frequency was intended to provide the Board and the state
member bank with information necessary to satisfy the purposes of
stress testing, including: Assisting in an overall assessment of the
state member bank's capital adequacy, identifying downside risks and
the potential impact of adverse conditions on the state member bank's
capital adequacy, and determining whether additional analytical
techniques and exercises are appropriate for the state member bank to
employ in identifying, measuring, and monitoring risks to the soundness
of the state member bank.
One commenter asserted that the Board should not reduce the
frequency of stress testing for any covered banks. Based on the Board's
experience overseeing and reviewing the results of company-run stress
testing since 2012, the Board believes that a two-year stress testing
cycle generally would be appropriate for certain state member banks.
Specifically, the state member banks that would be subject to a two-
[[Page 59061]]
year stress testing cycle under the proposal would not be the
subsidiaries of larger, more complex firms, which can present greater
risk and therefore merit closer monitoring. State member banks that are
subsidiaries of larger, more complex firms would continue to be
required to conduct stress tests on an annual basis. Accordingly, the
final rule retains the frequency of company-run stress test
requirements for state member banks set forth in the stress testing
proposal without change. In addition, and as discussed above, the final
rule provides the Board with the authority to adjust the required
frequency for a holding company or state member bank subject to the
Board's stress testing rules based on the company's financial
condition, size, complexity, risk profile, scope of operations,
activities, or risks to the U.S. economy. The final rule therefore
provides flexibility to the Board to require more frequent company-run
stress testing at the state member bank or holding company level, which
would take into account the risk profile of the subsidiary state member
bank, as needed.
Under the stress testing proposal, all state member banks that
would conduct stress tests every other year would have been required to
conduct stress tests in the same even numbered year (i.e., the
reporting years for these state member banks would be synchronized). By
requiring these state member banks to conduct their stress tests in the
same year, the proposal would continue to allow the Board to make
comparisons across state member banks for supervisory purposes and
assess macroeconomic trends and risks to the banking industry. The
Board did not receive comments on this aspect of the stress testing
proposal and is adopting it without change.
Under the stress testing proposal, a state member bank that was
subject to a two-year stress test cycle would have become subject to an
annual stress test if, for example, the parent bank holding company of
the bank becomes a firm subject to Category I or II standards. The
proposal would not have established a transition period in these cases.
Accordingly, a state member bank that becomes subject to an annual
stress test requirement would have been required to begin stress
testing on an annual basis as of the next year. The Board did not
receive comments on this aspect of the proposal and is adopting it
without change.
C. Removal of ``Adverse'' Scenario
As adopted, the Board's stress testing requirements--which are
applicable to state member banks, savings and loan holding companies,
bank holding companies, U.S. intermediate holding companies of foreign
banking organizations, and any nonbank financial company supervised by
the Board--required the inclusion of an ``adverse'' scenario in the
stress test. Section 401 of EGRRCPA amends section 165(i) of the Dodd-
Frank Act to no longer require the Board to include an ``adverse''
scenario in the company-run stress test or its supervisory stress
tests, reducing the number of required stress test scenarios from three
to two. The stress testing proposal would have removed the ``adverse''
scenario from the list of required scenarios in the Board's stress
testing rules. In addition, the proposal would have made conforming
changes to the Board's Policy Statement on the Scenario Design
Framework for Stress Testing to reflect the removal of the adverse
scenario.
The ``baseline'' scenario represents a set of conditions that
affect the U.S. economy or the financial condition of the banking
organization, and that reflect the consensus views of the economic and
financial outlook, and the ``severely adverse'' scenario is a more
severe set of conditions and the most stringent of the scenarios.
Because the ``baseline'' and ``severely adverse'' scenarios are
designed to cover a full range of expected and stressful conditions,
the ``adverse'' scenario has provided limited incremental information
to the Board and market participants. Accordingly, the stress testing
proposal would have maintained the requirement for a banking
organization to conduct company-run stress tests under both a
``baseline'' and ``severely adverse'' scenario. In addition, the
proposal would have redefined the ``severely adverse'' scenario to mean
a set of conditions that affect the U.S. economy or the financial
condition of a banking organization that overall are significantly more
severe than those associated with the baseline scenario and may include
trading or other additional components.
One commenter requested that the Board immediately eliminate
certain stress testing requirements that would no longer be in effect
upon finalization of the proposal or that are not appropriate for any
firm of any size. Specifically, the commenter asserted that the Board
should immediately eliminate the ``adverse'' scenario from the
scenarios required for purposes of the Board's 2019 stress test cycle.
Because the final rule is effective after the October 5, 2019, due date
for mid-cycle company-run stress tests, and there is no additional
requirement that necessitates use of the ``adverse'' scenarios for the
2019 stress test cycle, the removal of this requirement will take
effect for the 2020 stress test cycle.
D. Review by Board of Directors
The enhanced prudential standards rule, as adopted, required the
board of directors of a banking organization to ``review and approve
the policies and procedures of the stress testing processes as
frequently as economic conditions or the condition of the company may
warrant, but no less than annually.'' \118\ The domestic proposal would
have established similar requirements for covered savings and loan
holding companies. The stress testing proposal would have revised the
frequency of these requirements for banking organizations from
``annual'' to ``no less than each year a stress test is conducted'' in
order to make review by the board of directors consistent with the
supervised firm's stress testing cycle. The Board did not receive
comments on this aspect of the proposal and is adopting it without
change.
---------------------------------------------------------------------------
\118\ See 77 FR 62396 (October 12, 2012); 77 FR 62378 (October
12, 2012).
---------------------------------------------------------------------------
E. Scope of Applicability for Savings and Loan Holding Companies
The stress testing proposal would have revised the company-run
stress testing requirements for covered savings and loan holding
companies included in the domestic proposal. As part of the domestic
proposal, the Board generally proposed to apply prudential standards to
certain covered savings and loan holding companies using the standards
for determining prudential standards for large bank holding companies.
Section 165(i)(2) of the Dodd-Frank Act, as amended by EGRRCPA,
requires all financial companies that have total consolidated assets of
more than $250 billion to conduct periodic stress tests. Consistent
with EGRRCPA, the Board proposed to revise the scope of applicability
of the company-run stress testing requirements included in the domestic
proposal to include all savings and loan holding companies that meet
the criteria for Category II or Category III standards. The proposal
also would have amended the proposed company-run stress test
requirements to maintain the existing transition provision that
provides that a savings and loan holding company would not be required
to conduct its first stress test until after it is subject to minimum
capital requirements. The Board did not receive comments on this aspect
of the proposal and adopting it generally as proposed. The final rule
applies company-run
[[Page 59062]]
stress testing requirements to covered savings and loan holding
companies subject to Category II or III standards, consistent with the
requirements that apply to similarly-situated bank holding companies.
In addition, the final rule applies company-run stress test
requirements to all other savings and loan holding companies with total
consolidated assets of $250 billion or more, consistent with the Dodd-
Frank Act, as amended by EGRRCPA. A savings and loan holding company is
required to comply with company-run stress testing requirements after
it is subject to minimum regulatory capital requirements. Covered
savings and loan holding companies are subject to minimum regulatory
capital requirements through the Board's capital rule.\119\
---------------------------------------------------------------------------
\119\ 12 CFR 217.
---------------------------------------------------------------------------
XIV. Changes to Dodd-Frank Definitions
The proposal would have made changes to the Board's implementation
of certain definitions in the Dodd-Frank Act. Specifically, the Dodd-
Frank Act directed the Board to define the terms ``significant bank
holding company'' and ``significant nonbank financial company,'' terms
that are used in the credit exposure reports provision in section
165(d)(2).\120\ The terms ``significant nonbank financial company'' and
``significant bank holding company'' are also used in section 113 of
the Dodd-Frank Act, which specifies that FSOC must consider the extent
and nature of a nonbank company's transactions and relationships with
other ``significant nonbank financial companies'' and ``significant
bank holding companies,'' among other factors, in determining whether
to designate a nonbank financial company for supervision by the
Board.\121\ The Board previously defined ``significant bank holding
company'' and ``significant nonbank financial company'' using $50
billion minimum asset thresholds to conform with section 165.\122\ In
light of EGRRCPA's amendments, the Board proposed to amend these
definitions to include minimum asset thresholds of $100 billion, and
make other conforming edits in the Board's regulation on definitions in
Title I of the Dodd-Frank Act.\123\ The Board did not receive any
comments on this aspect of the proposal and is finalizing it as
proposed.
---------------------------------------------------------------------------
\120\ 12 U.S.C. 5311(a)(7); 5365(d)(2). EGRRCPA changed credit
exposure reports from a mandatory to discretionary prudential
standard under section 165.
\121\ See 12 U.S.C. 5323.
\122\ 12 CFR 242.4.
\123\ 12 CFR part 242.
---------------------------------------------------------------------------
XV. Reporting Requirements
In the proposals, the Board proposed changes to the FR Y-14, FR Y-
15, FR 2052a, FR Y-9C, FR Y-9LP, FR Y-7, and FR Y-7Q report forms. The
Board received comments on changes to the FR Y-14, FR Y-15, and FR
2052a, which are discussed below. The Board did not receive comments on
its proposed changes to the FR Y-9C, FR Y-9LP, FR Y-7 and FR Y-7Q, and
is finalizing those changes as proposed.
Some commenters requested that the Board clearly identify in the
preamble to the final rule the specific line items and forms that would
be used to determine a banking organization's size and other risk-based
indicators. Table II below indicates the line items that measure risk-
based indicators under the final rule:
Table II--Line Items for Risk-Based Indicators
----------------------------------------------------------------------------------------------------------------
Reporting unit
--------------------------------------------------------------------------
U.S. intermediate
holding companies of Combined U.S.
U.S. holding companies foreign banking operations of foreign
organizations banking organizations
----------------------------------------------------------------------------------------------------------------
Size................................. FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H,
Line Item M4. Line Item M4, Column A. Line Item M4, Column
B.
Cross-jurisdictional activity........ FR Y-15, Schedule E, FR Y-15, Schedule L, FR Y-15, Schedule L,
Line Item 5. Line Item 4, Column A. Line Item 4, Column B.
Nonbank assets....................... FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H,
Line Item M6. Line Item M6, Column A. Line Item M6, Column
B.
Short-term wholesale funding......... FR Y-15, Schedule G, FR Y-15, Schedule N, FR Y-15, Schedule N,
Line Item 6. Line Item 6, Column A. Line Item 6, Column B.
Off-balance sheet exposure........... FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H,
Line Item M5. Line Item M5, Column A. Line Item M5, Column
B.
----------------------------------------------------------------------------------------------------------------
The proposal would have added two line items to Schedule A and
Schedule H of the FR Y-15 to clarify the calculation of risk-based
indicators: Line Item M4 would calculate total assets and Line Item M5
would calculate total off-balance sheet exposure. The Board did not
receive specific comments on these line items and is adopting them as
proposed.\124\ To further clarify the line items for calculating risk-
based indicators, the Board has added Line Item 5, Cross-jurisdictional
activity, to Schedule E of the FR Y-15. The Board has also added Line
Item M6, Total non-bank assets, on Schedule A and Schedule H of the FR
Y-15.
---------------------------------------------------------------------------
\124\ Comments regarding the composition of the risk-based
indicators are discussed in section V of this Supplementary
Information.
---------------------------------------------------------------------------
The Board received a number of general comments on compliance
periods. Various commenters requested that the Board provide banking
organizations subject to new or heightened reporting requirements under
the proposals with extended compliance periods for such requirements.
The Board is providing a phase-in time for banking organizations to
prepare for new reporting requirements, as applicable. The compliance
and transition periods for each form are discussed below.
The Board also received comments that were outside the scope of the
proposals, such as suggested changes to forms that the Board did not
propose to modify through these proposals. Some commenters requested
tailoring of the proposed FR 2590, which relates to compliance with the
single-counterparty credit limits rule. Proposed changes to the
proposed FR 2590 will be addressed in a separate Board action.
Commenters also requested a change to the FFIEC forms. The agencies are
reviewing interagency forms and intend to propose changes to them to
conform to EGRRCPA and this final rule.
[[Page 59063]]
A. FR Y-14
Consistent with EGRRCPA's changes and the Board's July 2018
statement relating to EGRRCPA,\125\ the proposals would have revised
the FR Y-14 series of reports (FR Y-14A, Y-14Q, and Y-14M) so that
domestic bank holding companies and U.S. intermediate holding companies
with less than $100 billion in total consolidated assets would no
longer be required to submit the forms. Under the proposals, domestic
bank holding companies and U.S. intermediate holding companies with
$100 billion or more in total consolidated assets would continue to
submit the FR Y-14 reports.
---------------------------------------------------------------------------
\125\ See Board statement regarding the impact of the Economic
Growth, Regulatory Relief, and Consumer Protection Act, July 6,
2018, available at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180706b.htm.
---------------------------------------------------------------------------
The proposal also would have required all covered savings and loan
holding companies with $100 billion or more in total consolidated
assets to complete elements of the FR Y-14 series of reports that are
used in conducting supervisory stress tests: (1) The FR Y-14M; (2) all
schedules of the FR Y-14-Q except for Schedule C--Regulatory Capital
Instruments and Schedule D--Regulatory Capital Transitions; and (3)
Schedule E--Operational Risk of the FR Y-14A. The proposal would have
required covered savings and loan holding companies subject to Category
II or III standards to report the Form FR Y-14A Schedule A--Summary and
Schedule F--Business Plan Changes with respect to company run stress
testing.
Commenters argued that the Board should adjust various FR Y-14
reporting requirements for banking organizations subject to the
proposals. Commenters generally requested that the FR Y-14 be amended
to provide reductions in burden for banking organizations, particularly
those subject to Category III or IV standards. Some commenters asked
the Board to revise the FR Y- 14M and Y-14A for banking organizations
subject to Category IV standards, by reducing the frequency of the Y-
14M from monthly to quarterly and altering or eliminating certain Y-14A
schedules and worksheets. These commenters also asked the Board to
review the relevance of information requested on the Y-14Q for banking
organizations subject to Category IV standards. Other commenters
suggested that certain Y-14A sub-schedules should not be required for
banking organizations subject to Category III standards. Some
commenters requested that the Board simplify the Y-14A Summary schedule
for all banking organizations.
The final rule adopts the changes to the FR Y-14 largely as
proposed. The final rule maintains the existing FR Y-14 substantive
reporting requirements in order to provide the Board with the data it
needs to conduct supervisory stress testing and inform the Board's
ongoing monitoring and supervision of bank holding companies, covered
savings and loan holding companies, and U.S. intermediate holding
companies. However, as discussed in the proposals, the Board intends to
provide greater flexibility to banking organizations subject to
Category IV standards in developing their annual capital plans and
consider further changes to the FR Y-14 forms as part of a separate
proposal. The Board has also revised the FR Y-14 instructions to remove
references to the adverse scenario, consistent with the changes in this
final rule.
The final rule does not finalize certain definitional changes to
the FR Y-14 series of reports, however. The proposal would have made
changes to the definitions of ``large and complex'' and ``large and
noncomplex'' bank holding company to align with proposed changes in
section 225.8(d)(9). The Board is not finalizing these changes as part
of this final rule, and instead intends to consider these changes in
conjunction with other changes to the capital plan rule as part of a
separate capital plan proposal.
Commenters also requested that the Board provide an initial
transition period for covered savings and loan holding companies to
submit their first FR Y-14 reports. The final rule provides covered
savings and loan holding companies with an extended amount of time to
file their first reports. Table III details the submission date
requirements for covered savings and loan holding companies with $100
billion or more in total consolidated assets that will be submitting FR
Y-14 reports under the final rule for the first time:
Table III--First Submission Dates of FR Y-14 for Covered Savings and
Loan Holding Companies
------------------------------------------------------------------------
First as-of First submission
Form date dates
------------------------------------------------------------------------
FR Y-14A.......................... 12/31/2021 April 5, 2022.
FR Y-14Q.......................... 6/30/2020 90 days after
quarter end for
first two quarterly
submissions; 65
days after quarter
end for the third
and fourth
quarterly
submissions.
FR Y-14M.......................... 6/30/2020 For the first three
monthly
submissions, 90
days after the
month-end as-of
date.
------------------------------------------------------------------------
B. FR Y-15
The proposals would have modified the reporting panel and
substantive requirements of the FR Y-15. First, the domestic proposal
would have no longer required U.S. bank holding companies and covered
savings and loan holding companies with $50 billion or more, but less
than $100 billion, in total consolidated assets to file the FR Y-15.
The foreign bank proposal would have further revised the reporting
panels and scope of the FR Y-15. Currently, U.S. intermediate holding
companies with $50 billion or more in total consolidated assets report
the FR Y-15. Under the foreign bank proposal, foreign banking
organizations with $100 billion or more in combined U.S. assets, rather
than U.S. intermediate holding companies, would have been required to
submit the FR Y-15 with respect to their combined U.S. operations.
Specifically, the proposal would have required a foreign banking
organization to report information described in the FR Y-15 separately
for its (i) U.S. branch and agency network, if any; (ii) U.S.
intermediate holding company, if any; and (iii) combined U.S.
operations.
Some commenters supported the changes to the FR Y-15's scope and
reporting panel in the proposals. Commenters noted that the Board does
not currently compile systemic risk data on foreign banking
organizations that includes information on branch networks. These
commenters argued that incorporating combined U.S. operations into the
FR Y-15 would provide more complete information on a foreign banking
organization's
[[Page 59064]]
financial profile, and that such a revision was overdue. However, other
commenters opposed the changes. These commenters argued that the
proposed reporting based on the combined U.S. operations was
unjustified, and would require significant modifications to foreign
banking organizations' existing reporting systems at a substantial
cost. Some commenters also argued that the proposed FR Y-15 changes
would disproportionately burden foreign banking organizations compared
to domestic banking organizations, and therefore were inconsistent with
the principle of national treatment.
To address these concerns, commenters suggested alternatives to the
proposal. Some commenters stated that the FR Y-15 should not include
any reporting on a combined U.S. operations basis. In particular,
commenters argued that the Board should implement a tailoring framework
that does not measure risk-based indicators across a foreign banking
organization's combined U.S. operations, and eliminate FR Y-15
reporting on a combined U.S. operations basis. Other commenters
suggested that a foreign banking organization should only be required
to report information on its combined U.S. operations that is necessary
for calculating the risk-based indicators. Commenters also recommended
that the Board allow banking organizations to file a modified FR Y-15
with an option to prepare top-line items and not require more nuanced
risk-based indicator calculations with respect to a particular
indicator if a banking organization is well below the threshold for the
risk-based indicator based on the top-line item. Another commenter also
requested removal of the requirement to calculate risk-weighted assets
at the combined U.S. operations level.
As commenters acknowledged, the proposal would have required
foreign banking organizations to calculate size, cross-jurisdictional
activity, nonbank assets, off-balance sheet exposure, and weighted
short-term wholesale funding for their combined U.S. operations in
order to determine the category of standards that would apply to a
foreign banking organization at the level of its combined U.S.
operations.\126\ Most of these indicators are already reported by U.S.
bank holding companies, covered savings and loan holding companies, and
U.S. intermediate holding companies. Requiring a foreign banking
organization to report this information for its combined U.S.
operations supports tailoring prudential standards based on the risk-
profile of foreign banking organization's U.S. operations. This
approach also establishes a central location for information on the
risk-based indicators to help support the transparency of the
framework.
---------------------------------------------------------------------------
\126\ Standards that apply to the combined U.S. operations of a
foreign banking organization include liquidity stress tests, risk
management, and buffer requirements under the enhanced prudential
standards rule; resolution planning requirements; and the reporting
frequency of the FR 2052a.
---------------------------------------------------------------------------
The purpose and use of the FR Y-15 is broader than compliance with
the tailoring framework, however. The FR Y-15 requests granular data on
an institution's funding, structure, and activities that is consistent
and comparable among institutions, and is often unavailable from other
sources. The Board uses this information to monitor the systemic risk
profile of banking organizations, as well as for other purposes.\127\
Information on the combined U.S. operations of foreign banking
organizations from the FR Y-15 will enhance the Board's ability to
monitor and supervise the U.S. footprint of large foreign banking
organizations and compare the risk profiles of large banking
organizations. Having this data reported on the FR Y-15 also ensures
that information on the combined U.S. operations of foreign banking
organizations is available to the public, and thus can be used by the
market to evaluate the systemic importance of domestic banking
organizations and the U.S. operations of foreign banking organizations.
---------------------------------------------------------------------------
\127\ For example, the FR Y-15 is used to facilitate the
implementation of GSIB capital surcharges, identify other
institutions which may present significant systemic risk, and
analyze the systemic risk implications of proposed mergers and
acquisitions.
---------------------------------------------------------------------------
Accordingly, the final rule requires foreign banking organizations
to report the FR Y-15 at the U.S. intermediate holding company and
combined U.S. operations levels largely as proposed. The FR Y-15 as
finalized is consistent with the principle of national treatment
because it requires similarly-situated domestic holding companies and
foreign banking organizations to report similar data on their U.S.
footprint, taking into account the unique structures of foreign banking
organizations. In response to comments, and because the Board is not
applying categories of standards to the U.S. operations of foreign
banking organizations based only on the risk profile of their U.S.
branch and agency networks, the Board will not require foreign banking
organizations to provide standalone data on their U.S. branches and
agencies on the FR Y-15. Accordingly, the Board is modifying the
proposal by eliminating the U.S. branch and agency column on the FR Y-
15, and instead will only require foreign banking organizations to
complete the FR Y-15 in two columns for purposes of the final rule:
Column A, U.S. intermediate holding companies, if any; and Column B,
combined U.S. operations. Foreign banking organizations also will not
be required to calculate average risk-weighted assets for their
combined U.S. operations in Column B on Schedule N, line item 7.
Because branches and agencies are not subject to capital requirements,
this information would provide limited supervisory benefit and could be
burdensome to compile and calculate.
Commenters requested a number of specific line item changes and
instruction clarifications for completing the FR Y-15. These commenters
requested more clarity in the General Instructions on the rule of
consolidation for foreign banking organizations and foreign affiliate
netting. The final form includes revised language in the General
Instructions and certain schedules that is intended to further clarify
and address questions regarding consolidation rules and netting. The
Board also intends to continue to review the FR Y-15 instructions in
light of the changes in this final rule and, if necessary, further
refine the form and instructions to provide additional clarity on how
to report line items for the combined U.S. operations of foreign
banking organizations. Commenters requested that the Board permit
foreign banking organizations to report size as a spot, rather than
average measure, on proposed Schedule H of the FR Y-15 unless the
foreign banking organization's U.S. intermediate holding company is
subject to the supplementary leverage ratio. Averages provide a more
reliable and risk-sensitive estimate of the banking organization's size
over the period, and as such, the Board is finalizing the calculation
of total exposure on Schedule H as proposed.
Commenters raised a number of issues and questions regarding
proposed Schedule L--FBO Cross-Jurisdictional Activity Indicators. For
purposes of reporting cross-jurisdictional activity, the proposal would
have required a foreign banking organization to report assets and
liabilities of the combined U.S. operations, U.S. intermediate holding
company, and U.S. branch and agency network, excluding cross-
jurisdictional liabilities to non-U.S. affiliates and cross-
jurisdictional claims on non-U.S. affiliates to the extent that these
claims are secured by eligible financial collateral. To effectuate this
[[Page 59065]]
change, the proposal would have amended the FR Y-15 by adding new line
items to proposed Schedule L and changed the accompanying FR Y-15
instructions. Comments related to the substance of the cross-
jurisdictional indicator are discussed in section V. The Board is
finalizing Schedule L substantively as proposed, with some technical
edits to language to provide further clarity on how to report line
items for a foreign banking organization's combined U.S. operations.
One commenter recommended expanding line item 4 on Schedule E--
Cross-Jurisdictional Activity Indicators to separately identify
deposits; trading liabilities; borrowings (including short-term
borrowings, long-term debt, federal funds purchased, and repurchase
agreements); accounts payable; and other liabilities. The commenter
argued that such additional specificity would provide the Board and the
public with additional insight into the nature of an institution's
cross-jurisdictional liabilities without increasing reporting burden.
The Board finds that line item 4 is reported with sufficient
granularity to understand the risk profile of the banking organizations
and is adopting it as proposed.
Commenters expressed concern about the amount of time required to
establish systems necessary to collect information from combined U.S.
operations of a foreign banking organization as well as with the
accuracy and integrity of the data collected. Commenters also requested
at minimum, a 12-month phase-in period to accommodate the expanded
scope of the FR Y-15 reporting requirements, and that the first two
quarterly FR Y-15 filings be prepared on a ``best efforts'' basis. To
allow firms to develop reporting and data systems, the final rule
provides a phase-in period to meet the expanded reporting requirements
in the FR Y-15. Under the phase-in period, banking organizations will
be required to report the first combined U.S. operations data on the FR
Y-15 with an as-of date of June 30, 2020, and submit the data to the
Board no later than August 19, 2020.
Under the foreign bank proposal, Schedule N--FBO Short-Term
Wholesale Funding Indicator of the FR Y-15 would have required foreign
banking organizations that report the FR 2052a daily to report the
average weighted short-term wholesale funding values using daily data,
and all other foreign banking organizations to report average values
using monthly data. Some commenters requested that weighted short-term
wholesale funding in Schedule N be reported using monthly data for all
foreign banking organizations. An average of day-end data points is a
more accurate representation of a banking organization's ongoing
reliance on wholesale funding. Accordingly, for foreign banking
organizations that have sufficient liquidity risks that would require
FR 2052a daily reporting, the final rule requires these banking
organizations to report Schedule N on the FR Y-15 using daily data. For
firms not subject to FR 2052a daily reporting, the Board is finalizing
the rule for calculating weighted short-term wholesale funding as
proposed.
The Board continues to evaluate whether the benefits of a more
frequent average would be justified for these firms, particularly for
firms that report the LCR on a daily basis, and may propose adjustments
to the calculation frequency. Furthermore, the Board intends to monitor
a firm's weighted short-term wholesale funding position at month-end
relative to its position throughout the month through the supervisory
process, and continues to have the authority to apply additional
prudential standards based on the risk profile of a firm, including its
liquidity risk profile.\128\
---------------------------------------------------------------------------
\128\ See 12 CFR 217.1(d); 12 CFR 249.2(a); 12 CFR 252.3(a).
---------------------------------------------------------------------------
C. FR 2052a
The proposals would have modified the current reporting frequency
and granularity of the FR 2052a to align with the proposed tailoring
framework. Specifically, the proposals would have required U.S. bank
holding companies and covered savings and loan holding companies, each
with $100 billion or more in total consolidated assets, or foreign
banking organizations with combined U.S. assets of $100 billion or
more, to report FR 2052a data each business day if they were (i)
subject to Category I or II standards, as applicable, or (ii) subject
to Category III standards and had $75 billion or more in weighted
short-term wholesale funding (for foreign banking organizations, this
would be measured at the level of the combined U.S. operations). All
other domestic holding companies and foreign banking organizations
would have been required to report the FR 2052a on a monthly basis.
These changes would have increased the frequency of reporting for
domestic banking organizations subject to Category II standards with
less than $700 billion in total consolidated assets, and domestic
banking organizations subject to Category III standards with $75
billion or more in weighted short-term wholesale funding; both groups
of banking organizations currently report the FR 2052a monthly.
Similarly, the frequency of reporting would have changed for some
foreign banking organizations. The proposals also would have simplified
the FR 2052a reporting thresholds by eliminating the current criteria
used to identify daily filers of the FR 2052a--for domestic holding
companies, those firms with $700 billion or more in total assets or $10
trillion or more in assets under custody, and for foreign banking
organizations, those firms included in the Large Institution
Supervision Coordinating Committee portfolio--and replacing these
criteria with the category framework.
A number of commenters requested that the Board reduce or eliminate
proposed FR 2052a reporting requirements. Commenters requested that the
Board modify the proposed FR 2052a reporting frequencies so that
banking organizations subject to Category II and Category III standards
would be subject to monthly or quarterly, rather than daily, reporting.
Similarly, commenters argued that the Board should not expand the scope
of daily FR 2052a reporting beyond its current reach, and that no
banking organization should be subject to more frequent FR 2052a
reporting under the proposals. Some commenters suggested that the
requirement to report FR 2052a data each business day should not be
based on the $75 billion weighted short-term wholesale funding
threshold, but instead on a higher short-term wholesale funding
threshold, such as $100 billion or $125 billion. Commenters on the
foreign proposal noted that certain foreign banking organizations would
move from monthly to daily FR 2052a reporting under the proposal and
argued that this was unjustified, as well as inconsistent with the
principle of national treatment.
The Board is finalizing the FR 2052a generally as proposed, with
certain modifications as discussed below. Daily FR 2052a reporting is
appropriate for institutions subject to Category II standards or
Category III standards with $75 billion or more in weighted short-term
wholesale funding. The Board uses liquidity data provided through FR
2052a reporting to monitor and assess the liquidity risks and
resiliency of large banking organizations on an ongoing basis. The
frequency and timeliness with which data is provided to supervisors
should be commensurate with the scale and dynamic nature of a banking
organization's liquidity risk. Liquidity stresses can materialize
rapidly for banking organizations of all
[[Page 59066]]
sizes, but banking organizations with significant size and cross-
jurisdictional activity in the United States may be more likely to face
stress suddenly due to the scale of their funding and their operational
complexity. Moreover, greater reliance on short-term wholesale funding
may indicate heightened rollover risk and greater volatility in the
funding profile of a banking organization or its U.S. operations.
Banking organizations subject to Category II standards or Category III
standards with $75 billion or more in weighted short-term wholesale
funding have liquidity risk profiles that present higher risk to both
financial stability and safety and soundness. Therefore, supervisory
monitoring through daily FR 2052a reporting is critical to ensure these
banking organizations are maintaining appropriate levels of liquidity
and supervisors have a detailed understanding of their funding sources.
The Board is thus finalizing the FR 2052a criteria and reporting
frequency as proposed for banking organizations subject to Category II
or III standards.
Some commenters on the domestic proposal argued that banking
organizations that engage in activities that present lower liquidity
risk, such as custodial activities, should not be required to submit
the FR 2052a daily. Liquidity stresses may arise from a broad range of
sources and markets, and can be impactful for banking organizations
that have a range of business models. Accordingly, the Board is not
providing different FR 2052a reporting requirements for institutions
that engage in custodial activities.
A number of commenters argued that banking organizations subject to
Category IV standards should be subject to quarterly reporting to align
with the institutions' liquidity stress testing requirements. Other
commenters requested that the Board eliminate FR 2052a reporting for
banking organizations subject to Category IV standards, or instead
require these institutions to report on an alternative form, such as
the previously-used FR 2052b. If banking organizations subject to
Category IV standards report the FR 2052a but are not subject to an LCR
requirement under the final rule, commenters requested that the Board
clarify and confirm that FR 2052a reporting will not implicitly bind
these firms to the LCR rule.
The Board uses FR 2052a information to analyze systemic and
idiosyncratic liquidity risk and to inform supervisory processes. As a
class, banking organizations that are subject to Category IV standards
tend to have more stable funding profiles, as measured by their
generally lower level of weighted short-term wholesale funding, and
lesser degrees of liquidity risk and operational complexity associated
with size, cross-jurisdictional activity, nonbank assets, and off-
balance sheet exposure compared to institutions subject to Categories
I, II, or III standards. For this reason, the Board previously tailored
data elements in the FR 2052a report based on the risk profiles for
firms, and currently requires most banking organizations that would be
subject to Category IV standards under the final rule to report the FR
2052a monthly rather than daily. The size of institutions subject to
Category IV standards indicates that such institutions still present
heightened liquidity risk relative to smaller banking organizations,
however, and should continue to provide the information on the FR 2052a
to ensure sufficient supervisory monitoring.
Similarly, because of their potential liquidity risks, banking
organizations that would be subject to Category IV standards would
still be required to develop comprehensive liquidity stress tests and
short term daily cash flow projections under the enhanced prudential
standards rule. The FR 2052b, which was discontinued in 2017, did not
capture cash flow projections but collected information covering broad
funding classifications by product, outstanding balance, and purpose,
each segmented by maturity date. FR 2052a reporting aligns with the
cash flows projection expectations and is substantially similar to the
management information system a banking organization is required to
develop to meet liquidity stress test requirements. The FR 2052a thus
is a more comprehensive reporting form that is more appropriate for
firms subject to the tailoring framework.
Accordingly, the Board is finalizing the FR 2052a largely as
proposed, and requiring institutions subject to Category IV standards
to report the form on a monthly basis. As discussed above, the purpose
of FR 2052a reporting is broader than compliance with the LCR rule. In
particular, the FR 2052a report collects data elements that enable the
Federal Reserve to assess the cash flow profile of reporting firms. As
a result, the Board notes that FR 2052a reporting will not be used to
implicitly bind firms to an LCR rule.
Some commenters requested that banking organizations that would
have been subject to monthly FR 2052a reporting be required to submit
the form ten days after the as-of date (T+10) rather than two days
after the as-of date (T+2). Under the proposals, top-tier U.S.
depository institution holding companies and foreign banking
organizations subject to either (1) Category III standards with less
than $75 billion in weighted short-term wholesale funding or (2)
Category IV standards with $50 billion or more in weighted short-term
wholesale funding would have filed the FR 2052a monthly on a T+2 basis;
all other monthly filers would have filed on a T+10 basis. Some
commenters noted that, based on estimated categories included in the
proposal, more foreign banking organizations would be required to file
on a T+2 basis when compared to domestic banking organizations. Under
the interagency capital and liquidity final rule, all banking
organizations subject to Category III standards continue to be required
to compute the LCR each business day. For banking organizations subject
to Category III standards that file the FR 2052a monthly, a T+2
submission is not expected to create significant additional burden and
the final rule will continue to require submission on a T+2 basis for
these firms. However, for all banking organizations subject to Category
IV standards that are subject to FR 2052a reporting on a monthly basis,
the Board will require these firms to submit data on a T+10 basis,
regardless of their level of weighted short-term wholesale funding.
Based on the lower liquidity risk profile of Category IV banking
organizations, the benefits of T+2 reporting for these firms would not
outweigh the burden for these institutions.
Commenters requested clarification that foreign banking
organizations may use the FR 2052a to calculate both the LCR and
proposed NSFR. Appendix VI within the FR 2052a instructions was
developed to assist reporting firms subject to the LCR rule in mapping
the provisions of the LCR rule to the unique data identifiers reported
on FR 2052a. This mapping document is neither part of the LCR rule nor
a component of the FR 2052a report, and therefore may be used at firms'
discretion. Finally, the FR 2052a includes a number of additional
technical edits to the form and appendices to conform to the
substantive changes in this final rule.
D. Summary of Reporting Effective Dates
The following chart summarizes when banking organizations will be
required to first determine their category under this final rule, as
well as when amended reporting forms and new reporting requirements
will take effect. As
[[Page 59067]]
reflected on the chart, U.S. bank holding companies, covered U.S.
savings and loan holding companies, and U.S. intermediate holding
companies should determine the category of standards that apply to them
on the effective date of this final rule, using data from the FR Y-15
and FR Y-9LP reports as-of the quarter end dates for the previous four
quarters. Foreign banking organizations will not be required to comply
with the amended Schedule L of the FR Y-15 with respect to their U.S.
intermediate holding companies until as-of June 30, 2020. Until that
time, U.S. intermediate holding companies should determine their
category under the tailoring framework consistent with the cross-
jurisdictional activity schedule on the FR Y-15 that previously applied
to U.S. intermediate holding companies provided that, when a foreign
banking organization reports on the amended Schedule L with respect to
its U.S. intermediate holding company, the U.S. intermediate holding
company's measure of cross-jurisdictional activity will be based on the
amount reported on the amended Schedule L and will not be averaged with
amounts of cross-jurisdictional activity previously reported by the
U.S. intermediate holding company.
In contrast, foreign banking organizations will not be required to
determine the category of standards applied to their combined U.S.
operations until the submission date of the FR Y-15 following the June
30, 2020 as-of date. Accordingly, a foreign banking organization would
be required to comply with the category of standards applied to its
combined U.S. operations beginning on October 1, 2020. This delay is to
account for foreign banking organizations filing the FR Y-15 on behalf
of their combined U.S. operations for the first time as-of June 30,
2020.
---------------------------------------------------------------------------
\129\ A bank holding company should determine its initial
category based on averages using the bank holding company's four
most recent FR Y-15 and FR Y-9LP filings.
\130\ A covered savings and loan holding company should
determine its initial category based on averages using the covered
savings and loan holding company's four most recent FR Y-15 and FR
Y-9LP filings.
\131\ A U.S. intermediate holding company should determine its
initial category based on averages using the U.S. intermediate
holding company's four most recent FR Y-15 and FR Y-9LP filings.
When a foreign banking organization reports on the amended Schedule
L with respect to its U.S. intermediate holding company, the U.S.
intermediate holding company's measure of cross-jurisdictional
activity will be based on the amount reported on the amended
Schedule L and will not be averaged with amounts of cross-
jurisdictional activity previously reported by the U.S. intermediate
holding company.
\132\ As-of this date, top-tier foreign banking organizations
will report the FR Y-15 on behalf of their U.S. intermediate holding
company and combined U.S. operations.
\133\ Until this date, a foreign banking organization should
report the FR 2052a with the frequency and as-of date (Day T) as the
foreign banking organization was required to report on September 1,
2019.
\134\ Top-tier foreign banking organizations currently, and will
continue to, report the FR Y-7Q.
\135\ Top-tier foreign banking organizations currently, and will
continue to, report the FR Y-7. The FR Y-7 is due annually at the
end of a foreign banking organization's fiscal year.
Table IV--Timeline for Initial Categorizations and Reporting Under the Final Rule
----------------------------------------------------------------------------------------------------------------
Reporting unit
-------------------------------------------------------------------------------
Combined U.S.
U.S. bank holding Covered U.S. U.S. intermediate operations of
companies savings and loan holding companies foreign banking
holding companies organizations
----------------------------------------------------------------------------------------------------------------
Date for first categorization Effective date of Effective date of Effective date of Submission date of
under 12 CFR 252.5 or 12 CFR final rule\129\. final rule\130\. final rule\131\. FR Y-15 as-of
238.10. June 30, 2020.
---------------------------------------
First as-of date for amended FR June 30, 2020..... June 30, 2020..... June 30, 2020.\132\
Y-15.
---------------------------------------
First as-of date for amended FR June 30, 2020..... June 30, 2020..... October 1, 2020.\133\
2052a.
---------------------------------------
First as-of date for amended FR Next report after December 31, 2021. Next report after N/A.
Y-14A. effective date of effective date of
final rule. final rule.
First as-of date for amended FR Next report after June 30, 2020..... Next report after N/A.
Y-14Q. effective date of effective date of
final rule. final rule.
First as-of date for amended FR Next report after June 30, 2020..... Next report after N/A.
Y-14M. effective date of effective date of
final rule. final rule.
First as-of date for amended FR Next report after Next report after Next report after N/A.
Y-9C. effective date of effective date of effective date of
final rule. final rule. final rule.
First as-of date for amended FR Next report after Next report after Next report after N/A.
Y-9LP. effective date of effective date of effective date of
final rule. final rule. final rule.
---------------------------------------
First as-of date for amended FR N/A............... N/A............... Next report after effective date of
Y-7Q. final rule.\134\
---------------------------------------
First as-of date for amended FR N/A............... N/A............... Next report after effective date of
Y-7. final rule (fiscal year-end
2020).\135\
----------------------------------------------------------------------------------------------------------------
XVI. Impact Assessment
In general, U.S. banking organizations with less than $100 billion
in total consolidated assets and U.S. intermediate holding companies
with less than $100 billion in total consolidated assets would have
significantly reduced compliance costs, as under the final rule these
firms are no longer subject to the enhanced prudential standards rule
or the capital plan rule, and are no longer required to file FR Y-14,
FR Y-15, or FR 2052a reports.\136\ While these banking organizations
are no longer subject to internal liquidity stress testing and buffer
requirements, these firms currently hold highly liquid assets well in
excess of their current liquidity buffer requirements.
---------------------------------------------------------------------------
\136\ However, bank holding companies have not been complying
with these requirements since July 6, 2018, when the Board issued a
statement noting that it would no longer enforce these regulations
or reporting requirements with respect to these firms. See Board
statement regarding the impact of the Economic Growth, Regulatory
Relief, and Consumer Protection Act, July 6, 2018, available at,
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706b1.pdf.
---------------------------------------------------------------------------
[[Page 59068]]
For U.S. banking organizations with $100 billion or more in total
consolidated assets and foreign banking organizations with $100 billion
or more in combined U.S. assets, the Board expects the adjustments to
the enhanced prudential standards under this final rule to reduce
aggregate compliance costs with minimal effects on the safety and
soundness of these firms and U.S. financial stability. With respect to
reporting, foreign banking organizations will experience an increase in
compliance costs as a result of having to report the information
required under Form FR Y-15 at the level of their combined U.S.
operations, and certain banking organizations with weighted short-term
wholesale funding of $75 billion or more that previously filed the FR
2052a on a monthly basis may experience an increase in compliance costs
due to the increase in reporting frequency of the FR 2052a to daily.
The interagency capital and liquidity final rule provides additional
impact information.
A. Liquidity
The changes to liquidity requirements are expected to reduce
compliance costs for banking organizations subject to Category IV
standards by reducing the required frequency of internal liquidity
stress tests from monthly to quarterly, and tailoring the liquidity
risk management requirements to the risk profiles of these firms. The
Board does not expect these changes to materially affect the liquidity
buffer levels held by these banking organizations or their exposure to
liquidity risk.
B. Stress Testing
First, while the Board expects the changes to stress testing
requirements to have no material impact on the capital levels of U.S.
banking organizations and U.S. intermediate holding companies with $100
billion or more in total consolidated assets, the final rule will
reduce compliance costs for those firms subject to Category III or IV
capital standards. These firms were previously required to conduct
company-run stress tests on a semi-annual basis. For U.S. banking
organizations and U.S. intermediate holding companies subject to
Category III standards, the final rule reduces this frequency to every
other year. For U.S. banking organizations and U.S. intermediate
holding companies subject to Category IV standards, the final rule
removes the company-run stress test requirement altogether.\137\ In
addition, under the final rule, the Board will conduct supervisory
stress tests of U.S. banking organizations and U.S. intermediate
holding companies subject to Category IV standards on a two-year,
rather than annual, cycle.
---------------------------------------------------------------------------
\137\ Although the final rule would not modify the requirement
for a U.S. banking organization or intermediate holding company
subject to Category IV standards to conduct an internal capital
stress test as part of its annual capital plan submission, the Board
intends to propose changes in the future capital plan proposal to
align with the proposed removal of company-run stress testing
requirements for these firms. See section IV.D of this Supplementary
Information.
---------------------------------------------------------------------------
C. Single-Counterparty Credit Limits
The changes to the single-counterparty credit limits framework
under the final rule are not expected to increase risks to safety and
soundness or U.S. financial stability. The final rule removes U.S.
intermediate holding companies subject to Category IV standards from
the applicability of single-counterparty credit limits. While these
firms would recognize reductions in compliance costs associated with
these requirements, they typically do not present the risks that are
intended to be addressed by the single-counterparty credit limits
framework. In addition, the final rule removes the single-counterparty
credit limits applicable to major U.S. intermediate holding companies;
however, there currently are no U.S. intermediate holding companies
that meet or exceed the asset size threshold for these requirements.
The final rule will increase the costs of compliance for U.S.
intermediate holding companies with less than $250 billion in total
consolidated assets and that are subject to Category II or Category III
standards, by extending the applicability of certain provisions under
the single-counterparty credit limits framework to these firms.
Specifically, as of January 1, 2021, U.S. intermediate holding
companies with less than $250 billion in total consolidated assets that
subject to Category II or Category III standards will be subject to a
net credit exposure limit equal to 25 percent of tier 1 capital, the
treatment for investments in and exposures to certain special purpose
entities and the economic interdependence and control relationship
tests for purposes of aggregating exposures to connected
counterparties.
D. Covered Savings and Loan Holding Companies
For covered savings and loan holding companies, the final rule
increases compliance costs while reducing risks to the safety and
soundness of these firms. The Board expects the new requirements for
covered savings and loan holding companies to meaningfully improve the
risk management capabilities of these firms and their resiliency to
stress, which furthers their safety and soundness.
A covered savings and loan holding company that is subject to
Category II or III standards is required to conduct company-run stress
tests, which would be a new requirement. In connection with the
application of supervisory and company-run capital stress testing
requirements, covered savings and loan holding companies with total
consolidated assets of $100 billion or more must report the FR Y-14
reports. In addition, the final rule requires a covered savings and
loan holding company with total consolidated assets of $100 billion or
more to conduct internal liquidity stress testing and maintain a
liquidity buffer. While covered savings and loan holding companies will
incur costs for conducting internal liquidity stress testing, this
requirement will serve to improve the capability of these firms to
understand, manage, and plan for liquidity risk exposures across a
range of conditions. Depending on its liquidity buffer requirement, a
covered savings and loan holding company may need to increase the
amount of liquid assets it holds or otherwise adjust its risk profile
to reduce estimated net stressed cash-flow needs. Because covered
savings and loan holding companies are already subject to the LCR rule,
which also requires a firm to maintain a minimum amount of liquid
assets to meet net outflows under a stress scenario, covered savings
and loan holding companies generally will need to hold only an
incremental amount--if any--above the levels already required to comply
with the LCR rule.
XVII. Administrative Law Matters
A. Paperwork Reduction Act Analysis
Certain provisions of the final rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3501-3521). The Board may not conduct or sponsor, and
a respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The Board
[[Page 59069]]
reviewed the final rule under the authority delegated to the Board by
OMB. The Board did not receive any specific comments on the PRA.
The final rule contains reporting requirements subject to the PRA.
To implement these requirements, the Board is revising the (1) Complex
Institution Liquidity Monitoring Report (FR 2052a; OMB No. 7100-0361),
(2) Annual Report of Foreign Banking Organizations (FR Y-7; OMB No.
7100-0297), (3) Capital and Asset Report for Foreign Banking
Organizations (FR Y-7Q; OMB No. 7100-0125), (4) Consolidated Financial
Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128), (5)
Capital Assessments and Stress Testing (FR Y-14A/Q/M; OMB No. 7100-
0341), and (6) Systemic Risk Report (FR Y-15; OMB No. 7100-0352).
The final rule also contains reporting and recordkeeping
requirements subject to the PRA. To implement these requirements, the
Board is revising the reporting and recordkeeping requirements
associated with Regulations Y, LL and YY: (7) Reporting and
Recordkeeping Requirements Associated with Regulation Y (Capital Plans)
(FR Y-13; OMB No. 7100-0342), (8) Reporting Requirements Associated
with Regulation LL (FR LL; OMB No. 7100-NEW), and (9) Reporting,
Recordkeeping, and Disclosure Requirements Associated with Regulation
YY (FR YY; OMB No. 7100-0350). Foreign banking organizations do not yet
report all of the data for the measure of cross-jurisdictional activity
and, accordingly, the burden estimates rely on firm categorizations
using best available data.
Adopted Revision, With Extension, of the Following Information
Collections
(1) Report title: Complex Institution Liquidity Monitoring Report.
Agency form number: FR 2052a.
OMB control number: 7100-0361.
Effective Date: June 30, 2020 (October 1, 2020 for foreign banking
organizations with U.S. assets).
Frequency: Monthly, each business day (daily).
Affected Public: Businesses or other for-profit.
Respondents: U.S. bank holding companies, U.S. savings and loan
holding companies, and foreign banking organizations.
Estimated number of respondents: Monthly: 26; Daily: 16.
Estimated average hours per response: Monthly: 120; Daily: 220.
Estimated annual burden hours: 917,440.
General description of report: The FR 2052a is used to monitor the
overall liquidity profile of institutions supervised by the Board.
These data provide detailed information on the liquidity risks within
different business lines (e.g., financing of securities positions,
prime brokerage activities). In particular, these data serve as part of
the Board's supervisory surveillance program in its liquidity risk
management area and provide timely information on firm-specific
liquidity risks during periods of stress. Analyses of systemic and
idiosyncratic liquidity risk issues are used to inform the Board's
supervisory processes, including the preparation of analytical reports
that detail funding vulnerabilities.
Legal authorization and confidentiality: The FR 2052a is authorized
pursuant to section 5 of the Bank Holding Company Act (12 U.S.C. 1844),
section 8 of the International Banking Act (12 U.S.C. 3106), section 10
of the Home Owners' Loan Act (HOLA) (12 U.S.C. 1467a), and section 165
of the Dodd-Frank Act (12 U.S.C. 5365) and is mandatory. Section 5(c)
of the Bank Holding Company Act authorizes the Board to require bank
holding companies (BHCs) to submit reports to the Board regarding their
financial condition. Section 8(a) of the International Banking Act
subjects foreign banking organizations to the provisions of the Bank
Holding Company Act. Section 10(b)(2) of HOLA authorizes the Board to
require savings and loan holding companies (SLHCs) to file reports with
the Board concerning their operations. Section 165 of the Dodd-Frank
Act requires the Board to establish prudential standards, including
liquidity requirements, for certain BHCs and foreign banking
organizations.
Financial institution information required by the FR 2052a is
collected as part of the Board's supervisory process. Therefore, such
information is entitled to confidential treatment under exemption 8 of
the Freedom of Information Act (FOIA) (5 U.S.C. 552(b)(8)). In
addition, the institution information provided by each respondent would
not be otherwise available to the public and its disclosure could cause
substantial competitive harm. Accordingly, it is entitled to
confidential treatment under the authority of exemption 4 of the FOIA
(5 U.S.C. 552(b)(4), which protects from disclosure trade secrets and
commercial or financial information.
Current Actions: To implement the reporting requirements of the
final rule, the Board is modifying the current FR 2052a reporting
frequency. The Board revised the FR 2052a (1) so that BHCs and SLHCs
with less than $100 billion in total consolidated assets would no
longer have to report, (2) BHCs or SLHCs subject to Category II
standards ($700 billion or more in total consolidated assets or $75
billion or more in cross jurisdictional activity) would have to report
FR 2052a daily, and (3) BHCs or SLHCs subject to Category III standards
with $75 billion or more in weighted short-term wholesale funding would
have to report FR 2052a daily, rather than monthly. Consistent with
EGRRCPA's changes, the revisions would remove foreign banking
organizations with less than $100 billion in combined U.S. assets from
the scope of FR 2052a reporting requirements. Additionally, the final
rule would require foreign banking organizations with combined U.S.
assets of $100 billion or more to report the FR 2052a on a daily basis
if they are (1) subject to Category II standards or (2) are subject to
Category III standards and have $75 billion or more in weighted short-
term wholesale funding. All other foreign banking organizations with
combined U.S. assets of $100 billion or more would be subject to
monthly filing requirements. The Board estimates that the revisions to
the FR 2052a would decrease the respondent count by 6. Specifically,
the Board estimates that the number of monthly filers would decrease
from 36 to 26, but the number of daily filers would increase from 12 to
16. The Board estimates that revisions to the FR 2052a would increase
the estimated annual burden by 205,600 hours. The final reporting forms
and instructions are available on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(2) Report title: Annual Report of Holding Companies; Annual Report
of Foreign Banking Organizations; Report of Changes in Organizational
Structure; Supplement to the Report of Changes in Organizational
Structure.
Agency form number: FR Y-6; FR Y-7; FR Y-10; FR Y-10E.
OMB control number: 7100-0297.
Effective Date: For the amended FR Y-7, the next report after
effective date of final rule (fiscal year-end 2020).
Frequency: Annual and event-generated.
Affected Public: Businesses or other for-profit.
Respondents: Bank holding companies (BHCs), savings and loan
holding companies (SLHCs), securities holding companies (SHCs), and
intermediate holding companies (IHCs) (collectively, holding companies
(HCs)),
[[Page 59070]]
foreign banking organizations (FBOs), state member banks (SMBs)
unaffiliated with a BHC, Edge Act and agreement corporations, and
nationally chartered banks that are not controlled by a BHC (with
regard to their foreign investments only).
Estimated number of respondents: FR Y-6: 4,044; FR Y-7: 256; FR Y-
10: 4,232; FR Y-10E: 4,232.
Estimated average hours per response: FR Y-6: 5.5; FR Y-7: 4.5; FR
Y-10: 2.5; FR Y-10E: 0.5.
Estimated annual burden hours: FR Y-6: 22,242; FR Y-7: 1,152; FR Y-
10: 43,233; FR Y-10E: 2,116.
General description of report: The FR Y-6 is an annual information
collection submitted by top-tier domestic HCs and FBOs that are non-
qualifying. It collects financial data, an organization chart,
verification of domestic branch data, and information about
shareholders. The Federal Reserve uses the data to monitor HC
operations and determine HC compliance with the provisions of the BHC
Act, Regulation Y (12 CFR part 225), the Home Owners' Loan Act (HOLA),
Regulation LL (12 CFR part 238), and Regulation YY (12 CFR part 252).
The FR Y-7 is an annual information collection submitted by FBOs
that are qualifying to update their financial and organizational
information with the Federal Reserve. The FR Y-7 collects financial,
organizational, shareholder, and managerial information. The Federal
Reserve uses the information to assess an FBO's ability to be a
continuing source of strength to its U.S. operations and to determine
compliance with U.S. laws and regulations.
The FR Y-10 is an event-generated information collection submitted
by FBOs; top-tier HCs; securities holding companies as authorized under
Section 618 of the Dodd-Frank Act (12 U.S.C. 1850a(c)(1)); state member
banks unaffiliated with a BHC; Edge and agreement corporations that are
not controlled by a member bank, a domestic BHC, or an FBO; and
nationally chartered banks that are not controlled by a BHC (with
regard to their foreign investments only) to capture changes in their
regulated investments and activities. The Federal Reserve uses the data
to monitor structure information on subsidiaries and regulated
investments of these entities engaged in banking and nonbanking
activities.
The FR Y-10E is an event-driven supplement that may be used to
collect additional structural information deemed to be critical and
needed in an expedited manner.
Legal authorization and confidentiality: These information
collections are mandatory as follows:
FR Y-6: Section 5(c)(1)(A) of the Bank Holding Company Act (BHC
Act) (12 U.S.C. 1844(c)(1)(A)); sections 8(a) and 13(a) of the
International Banking Act (IBA) (12 U.S.C. 3106(a) and 3108(a));
sections 11(a)(1), 25, and 25A of the Federal Reserve Act (FRA) (12
U.S.C. 248(a)(1), 602, and 611a); and sections 113, 165, 312, 618, and
809 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) (12 U.S.C. 5361, 5365, 5412, 1850a(c)(1), and
5468(b)(1)).
FR Y-7: Sections 8(a) and 13(a) of the IBA (12 U.S.C. 3106(a) and
3108(a)); sections 113, 165, 312, 618, and 809 of the Dodd-Frank Act
(12 U.S.C. 5361, 5365, 5412, 1850a(c)(1), and 5468(b)(1)).
FR Y-10 and FR Y-10E: Sections 4(k) and 5(c)(1)(A) of the BHC Act
(12 U.S.C. 1843(k), and 1844(c)(1)(A)); section 8(a) of the IBA (12
U.S.C. 3106(a)); sections 11(a)(1), 25(7), and 25A of the FRA (12
U.S.C. 248(a)(1), 321, 601, 602, 611a, 615, and 625); sections 113,
165, 312, 618, and 809 of the Dodd-Frank Act (12 U.S.C. 5361, 5365,
5412, 1850a(c)(1), and 5468(b)(1)); and section 10(c)(2)(H) of the Home
Owners' Loan Act (HOLA) (12 U.S.C. 1467a(c)(2)(H)).
Except as discussed below, the data collected in the FR Y-6, FR Y-
7, FR Y-10, and FR Y-10E are generally not considered confidential.
With regard to information that a banking organization may deem
confidential, the institution may request confidential treatment of
such information under one or more of the exemptions in the Freedom of
Information Act (FOIA) (5 U.S.C. 552). The most likely case for
confidential treatment will be based on FOIA exemption 4, which permits
an agency to exempt from disclosure ``trade secrets and commercial or
financial information obtained from a person and privileged and
confidential'' (5 U.S.C. 552(b)(4)). To the extent an institution can
establish the potential for substantial competitive harm, such
information would be protected from disclosure under the standards set
forth in National Parks & Conservation Association v. Morton, 498 F.2d
765 (D.C. Cir. 1974). In particular, the disclosure of the responses to
the certification questions on the FR Y-7 may interfere with home
country regulators' administration, execution, and disclosure of their
stress test regime and its results, and may cause substantial
competitive harm to the FBO providing the information, and thus this
information may be protected from disclosure under FOIA exemption 4.
Exemption 6 of FOIA might also apply with regard to the respondents'
submission of non-public personal information of owners, shareholders,
directors, officers and employees of respondents. Exemption 6 covers
``personnel and medical files and similar files the disclosure of which
would constitute a clearly unwarranted invasion of personal privacy''
(5 U.S.C. 552(b)(6)). All requests for confidential treatment would
need to be reviewed on a case-by-case basis and in response to a
specific request for disclosure.
Current Actions: The Board revised item 5 on the FR Y-7, Regulation
YY Compliance for the Foreign Banking Organization (FBO), to align the
reporting form with the applicability thresholds set forth in the final
rules and other regulatory changes that are consistent with the Board's
July 2018 statement concerning EGRRCPA. The Board estimates that
revisions to the FR Y-7 would not impact the respondent count, but the
estimated average hours per response would decrease from 6 hours to 4.5
hours. The Board estimates that revisions to the FR Y-7 would decrease
the estimated annual burden by 384 hours. The final reporting forms and
instructions are available on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(3) Report title: Financial Statements of U.S. Nonbank Subsidiaries
Held by Foreign Banking Organizations, Abbreviated Financial Statements
of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations, and
Capital and Asset Report for Foreign Banking Organizations.
Agency form number: FR Y-7N, FR Y-7NS, and FR Y-7Q.
OMB control number: 7100-0125.
Effective Date: For the amended FR Y-7Q, the next report after
effective date of final rule.
Frequency: Quarterly and annually.
Affected Public: Businesses or other for-profit.
Respondents: Foreign banking organizations (FBOs).
Estimated number of respondents: FR Y-7N (quarterly): 35; FR Y-7N
(annual): 19; FR Y-7NS: 22; FR Y-7Q (quarterly): 130; FR Y-7Q (annual):
29.
Estimated average hours per response: FR Y-7N (quarterly): 7.6; FR
Y-7N (annual): 7.6; FR Y-7NS: 1; FR Y-7Q (quarterly): 2.25; FR Y-7Q
(annual): 1.5.
Estimated annual burden hours: FR Y-7N (quarterly): 1,064; FR Y-7N
(annual): 144; FR Y-7NS: 22; FR Y-7Q (quarterly): 1,170; FR Y-7Q
(annual): 44.
General description of report: The FR Y-7N and the FR Y-7NS are
used to assess an FBO's ability to be a continuing source of strength
to its U.S.
[[Page 59071]]
operations and to determine compliance with U.S. laws and regulations.
FBOs file the FR Y-7N quarterly or annually or the FR Y-7NS annually
predominantly based on asset size thresholds. The FR Y-7Q is used to
assess consolidated regulatory capital and asset information from all
FBOs. The FR Y-7Q is filed quarterly by FBOs that have effectively
elected to become or be treated as a U.S. financial holding company
(FHC) and by FBOs that have total consolidated assets of $50 billion or
more, regardless of FHC status. All other FBOs file the FR Y-7Q
annually.
Legal authorization and confidentiality: With respect to FBOs and
their subsidiary IHCs, section 5(c) of the BHC Act, in conjunction with
section 8 of the International Banking Act (12 U.S.C. 3106), authorizes
the board to require FBOs and any subsidiary thereof to file the FR Y-
7N reports, and the FR Y-7Q.
Information collected in these reports generally is not considered
confidential. However, because the information is collected as part of
the Board's supervisory process, certain information may be afforded
confidential treatment pursuant to exemption 8 of FOIA (5 U.S.C.
552(b)(8)). Individual respondents may request that certain data be
afforded confidential treatment pursuant to exemption 4 of the FOIA if
the data has not previously been publically disclosed and the release
of the data would likely cause substantial harm to the competitive
position of the respondent (5 U.S.C. 552(b)(4)). Additionally,
individual respondents may request that personally identifiable
information be afforded confidential treatment pursuant to exemption 6
of the FOIA if the release of the information would constitute a
clearly unwarranted invasion of personal privacy (5 U.S.C. 552(b)(6)).
The applicability of FOIA exemptions 4 and 6 would be determined on a
case-by-case basis.
Current Actions: The final rule would amend the FR Y-7Q to align
with revisions to the enhanced prudential standards rule. Previously,
top-tier foreign banking organizations with $50 billion or more in
total consolidated assets were required to report Part 1B--Capital and
Asset Information for Top-tier Foreign Banking Organizations with
Consolidated Assets of $50 billion or more. The final rule would now
require top-tier foreign banking organizations that are subject to
either sections 252.143 or 252.154 of the enhanced prudential standards
rule to report Part 1B. The Board estimates that revisions to the FR Y-
7Q would not impact the respondent count, but the estimated average
hours per response would decrease from 3 hours to 2.25 hours for
quarterly filers. The Board estimates that revisions to the FR Y-7Q
would decrease the estimated annual burden by 390 hours. The final
reporting forms and instructions are available on the Board's public
website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(4) Report title: Consolidated Financial Statements for Holding
Companies.
Agency form number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR
Y-9CS.
OMB control number: 7100-0128.
Effective Date: For amended FR Y-9C and FR Y-9LP, next report after
effective date of final rule.
Frequency: Quarterly, semiannually, and annually.
Affected Public: Businesses or other for-profit.
Respondents: Bank holding companies (BHCs), savings and loan
holding companies (SLHCs), securities holding companies (SHCs), and
U.S. Intermediate Holding Companies (IHCs) (collectively, holding
companies (HCs)).
Estimated number of respondents: FR Y-9C (non-advanced approaches
holding companies): 344; FR Y-9C (advanced approached holding
companies): 19; FR Y-9LP: 434; FR Y-9SP: 3,960; FR Y-9ES: 83; FR Y-9CS:
236.
Estimated average hours per response: FR Y-9C (non-advanced
approaches holding companies): 46.34; FR Y-9C (advanced approached
holding companies): 47.59; FR Y-9LP: 5.27; FR Y-9SP: 5.40; FR Y-9ES:
0.50; FR Y-9CS: 0.50.
Estimated annual burden hours: FR Y-9C (non advanced approaches
holding companies): 63,764; FR Y-9C (advanced approached holding
companies): 3,617; FR Y-9LP: 9,149; FR Y-9SP: 42,768; FR Y-9ES: 42; FR
Y-9CS: 472.
General description of report: The FR Y-9 family of reporting forms
continues to be the primary source of financial data on HCs on which
examiners rely between on-site inspections. Financial data from these
reporting forms is used to detect emerging financial problems, review
performance, conduct pre-inspection analysis, monitor and evaluate
capital adequacy, evaluate HC mergers and acquisitions, and analyze an
HC's overall financial condition to ensure the safety and soundness of
its operations. The FR Y-9C, FR Y-9LP, and FR Y-9SP serve as
standardized financial statements for the consolidated holding company.
The Board requires HCs to provide standardized financial statements to
fulfill the Board's statutory obligation to supervise these
organizations. The FR Y-9ES is a financial statement for HCs that are
Employee Stock Ownership Plans. The Board uses the FR Y-9CS (a free-
form supplement) to collect additional information deemed to be
critical and needed in an expedited manner. HCs file the FR Y-9C on a
quarterly basis, the FR Y-9LP quarterly, the FR Y-9SP semiannually, the
FR Y-9ES annually, and the FR Y-9CS on a schedule that is determined
when this supplement is used.
Legal authorization and confidentiality: The FR Y-9 family of
reports is authorized by section 5(c) of the Bank Holding Company Act
(12 U.S.C. 1844(c)), section 10(b) of the Home Owners' Loan Act (12
U.S.C. 1467a(b)), section 618 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 1850a(c)(1)), and
section 165 of the Dodd-Frank Act (12 U.S.C. 5365). The obligation of
covered institutions to report this information is mandatory.
With respect to FR Y-9LP, FR Y-9SP, FR Y-ES, and FR Y-9CS, the
information collected would generally not be accorded confidential
treatment. If confidential treatment is requested by a respondent, the
Board will review the request to determine if confidential treatment is
appropriate.
With respect to FR Y-9C, Schedule HI's item 7(g) ``FDIC deposit
insurance assessments,'' Schedule HC-P's item 7(a) ``Representation and
warranty reserves for 1-4 family residential mortgage loans sold to
U.S. government agencies and government sponsored agencies,'' and
Schedule HC-P's item 7(b) ``Representation and warranty reserves for 1-
4 family residential mortgage loans sold to other parties'' are
considered confidential. Such treatment is appropriate because the data
is not publicly available and the public release of this data is likely
to impair the Board's ability to collect necessary information in the
future and could cause substantial harm to the competitive position of
the respondent. Thus, this information may be kept confidential under
exemptions (b)(4) of the Freedom of Information Act, which exempts from
disclosure ``trade secrets and commercial or financial information
obtained from a person and privileged or confidential'' (5 U.S.C.
552(b)(4)), and (b)(8) of the Freedom of Information Act, which exempts
from disclosure information related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or
[[Page 59072]]
supervision of financial institutions (5 U.S.C. 552(b)(8)).
Current Actions: To implement the reporting requirements of the
final rule, the Board is amending the FR Y-9C to clarify requirements
for holding companies subject to Category III capital standards. The
final rule amends those instructions to further clarify that the
supplementary leverage ratio and countercyclical buffer also apply to
Category III bank holding companies, Category III savings and loan
holding companies, and Category III U.S. intermediate holding
companies. The FR Y-9LP is revised to require covered savings and loan
holding companies with total consolidated assets of $100 billion or
more to report total nonbank assets on Schedule PC-B, in order to
determine whether the firm would be subject to Category III standards.
The Board estimates that revisions to the FR Y-9C would increase the
non AA HCs respondent count by 11 and decrease the AA HCs respondent
count by 11. The Board estimates that revisions to the FR Y-9 would
decrease the estimated annual burden by 55 hours. The final reporting
forms and instructions are available on the Board's public website at
https://www.federalreserve.gov/apps/reportforms/review.aspx.
(5) Report title: Capital Assessments and Stress Testing.
Agency form number: FR Y-14A/Q/M.
OMB control number: 7100-0341.
Effective Date: For U.S. bank holding companies and U.S.
intermediate holding companies, the next reports (FR Y-14A, Q, and M)
after the effective date of final rule. For U.S. covered savings and
loan holding companies June 30, 2020 (FR Y-14Q and FR Y-14M), and
December 31, 2021 (FR Y-14A).
Frequency: Annually, semiannually, quarterly, and monthly.
Affected Public: Businesses or other for-profit.
Respondents: The respondent panel consists of any top-tier bank
holding company (BHC) that has $100 billion or more in total
consolidated assets, as determined based on (1) the average of the
firm's total consolidated assets in the four most recent quarters as
reported quarterly on the firm's FR Y-9C or (2) the average of the
firm's total consolidated assets in the most recent consecutive
quarters as reported quarterly on the firm's FR Y-9Cs, if the firm has
not filed an FR Y-9C for each of the most recent four quarters. The
respondent panel also consists of any U.S. intermediate holding company
(IHC). Reporting is required as of the first day of the quarter
immediately following the quarter in which the respondent meets this
asset threshold, unless otherwise directed by the Board.
Estimated number of respondents: 38.
Estimated average hours per response: FR Y-14A: Summary, 887; Macro
Scenario, 31; Operational Risk, 18; Regulatory Capital Instruments, 21;
Business Plan Changes, 16; and Adjusted Capital Plan Submission, 100.
FR Y-14Q: Retail, 15; Securities, 13; PPNR, 711; Wholesale, 151;
Trading, 1,926; Regulatory Capital Transitions, 23; Regulatory Capital
Instruments, 54; Operational Risk, 50; MSR Valuation, 23; Supplemental,
4; Retail FVO/HFS, 15; Counterparty, 514; and Balances, 16. FR Y-14M:
1st Lien Mortgage, 516; Home Equity, 516; and Credit Card, 512. FR Y-
14: Implementation, 7,200; Ongoing Automation Revisions, 480. FR Y-14
Attestation--Implementation, 4,800; Attestation On-going Audit and
Review, 2,560.
Estimated annual burden hours: FR Y-14A: Summary, 67,412; Macro
Scenario, 2,232; Operational Risk, 684; Regulatory Capital Instruments,
756; Business Plan Changes, 608; and Adjusted Capital Plan Submission,
500. FR Y-14Q: Retail, 2,280; Securities, 1,976; Pre-Provision Net
Revenue (PPNR), 108,072; Wholesale, 22,952; Trading, 92,448; Regulatory
Capital Transitions, 3,212; Regulatory Capital Instruments, 7,776;
Operational risk, 7,600; Mortgage Servicing Rights (MSR) Valuation,
1,564; Supplemental, 608; Retail Fair Value Option/Held for Sale
(Retail FVO/HFS), 1,620; Counterparty, 24,672; and Balances, 2,432. FR
Y-14M: 1st Lien Mortgage, 222,912; Home Equity, 185,760; and Credit
Card, 98,304. FR Y-14: Implementation, 14,400 and On-going Automation
Revisions, 18,240. FR Y-14 Attestation On-going Audit and Review,
33,280.
General description of report: These collections of information are
applicable to top-tier BHCs with total consolidated assets of $100
billion or more and U.S. IHCs. This family of information collections
is composed of the following three reports:
1. The FR Y-14A collects quantitative projections of balance sheet,
income, losses, and capital across a range of macroeconomic scenarios
and qualitative information on methodologies used to develop internal
projections of capital across scenarios either annually or semi-
annually.
2. The quarterly FR Y-14Q collects granular data on various asset
classes, including loans, securities, and trading assets, and PPNR for
the reporting period.
3. The monthly FR Y-14M is comprised of three retail portfolio- and
loan-level schedules, and one detailed address-matching schedule to
supplement two of the portfolio and loan-level schedules.
The data collected through the FR Y-14A/Q/M reports provide the
Board with the information and perspective needed to help ensure that
large firms have strong, firm-wide risk measurement and management
processes supporting their internal assessments of capital adequacy and
that their capital resources are sufficient given their business focus,
activities, and resulting risk exposures. The annual CCAR exercise
complements other Board supervisory efforts aimed at enhancing the
continued viability of large firms, including continuous monitoring of
firms' planning and management of liquidity and funding resources, as
well as regular assessments of credit, market and operational risks,
and associated risk management practices. Information gathered in this
data collection is also used in the supervision and regulation of these
financial institutions. To fully evaluate the data submissions, the
Board may conduct follow-up discussions with, or request responses to
follow up questions from, respondents. Respondent firms are currently
required to complete and submit up to 18 filings each year: Two semi-
annual FR Y-14A filings, four quarterly FR Y-14Q filings, and 12
monthly FR Y-14M filings. Compliance with the information collection is
mandatory.
Legal authorization and confidentiality: The Board has the
authority to require BHCs to file the FR Y-14A/Q/M reports pursuant to
section 5 of the Bank Holding Company Act (BHC Act) (12 U.S.C. 1844),
and to require the U.S. IHCs of FBOs to file the FR Y-14 A/Q/M reports
pursuant to section 5 of the BHC Act, in conjunction with section 8 of
the International Banking Act (12 U.S.C. 3106). The Board has authority
to require SLHCs to file the FR Y-14A/Q/M reports pursuant to section
10 of HOLA (12 U.S.C. 1467a).
The information collected in these reports is collected as part of
the Board's supervisory process, and therefore is afforded confidential
treatment pursuant to exemption 8 of the Freedom of Information Act
(FOIA) (5 U.S.C. 552(b)(8)). In addition, individual respondents may
request that certain data be afforded confidential treatment pursuant
to exemption 4 of FOIA if the data has not previously been publicly
disclosed and the release of the data would likely cause substantial
harm to
[[Page 59073]]
the competitive position of the respondent (5 U.S.C. 552(b)(4)).
Determinations of confidentiality based on exemption 4 of FOIA would be
made on a case-by-case basis.
Current Actions: To implement the reporting requirements of the
final rule, the Board revised the FR Y-14 so that (1) BHCs with less
than $100 billion in total consolidated assets would no longer have to
report and (2) covered SLHCs with $100 billion or more in total
consolidated assets are included in the reporting panel for certain FR
Y-14 schedules. The Board revised the FR Y-14 threshold for U.S.
intermediate holding companies that would be required to submit these
forms, by increasing it to apply only U.S. intermediate holding
companies with $100 billion or more in total consolidated assets. U.S.
intermediate holding companies below this size threshold would no
longer be required to submit these forms. The Board has also made
certain revisions to the FR Y-14 forms to eliminate references to the
adverse scenario, consistent with other changes in this final rule. The
Board estimates that revisions to the FR Y-14 would increase the
reporting panel by 2 respondents. The Board estimates that revisions to
the FR Y-14 would increase the estimated annual burden by 64,016 hours.
The final reporting forms and instructions are available on the Board's
public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(6) Report title: Systemic Risk Report.
Agency form number: FR Y-15.
OMB control number: 7100-0352.
Effective Date: June 30, 2020.
Frequency: Quarterly.
Affected Public: Businesses or other for-profit.
Respondents: U.S. bank holding companies (BHCs) and covered savings
and loan holding companies (SLHCs) with $100 billion or more in total
consolidated assets, foreign banking organizations with $100 billion or
more in combined U.S. assets, and any BHC designated as a global
systemically important bank holding company (GSIB) that does not
otherwise meet the consolidated assets threshold for BHCs.
Estimated number of respondents: 43.
Estimated average hours per response: 403.
Estimated annual burden hours: 69,316.
General description of report: The FR Y-15 quarterly report
collects systemic risk data from U.S. bank holding companies (BHCs),
and covered savings and loan holding companies (SLHCs) with total
consolidated assets of $100 billion or more, any BHC identified as a
global systemically important banking organization (GSIB) based on its
method 1 score calculated as of December 31 of the previous calendar
year, and foreign banking organizations with $100 billion or more in
combined U.S. assets. The Board uses the FR Y-15 data to monitor, on an
ongoing basis, the systemic risk profile of subject institutions. In
addition, the FR Y-15 is used to (1) facilitate the implementation of
the GSIB surcharge rule, (2) identify other institutions that may
present significant systemic risk, and (3) analyze the systemic risk
implications of proposed mergers and acquisitions.
Legal authorization and confidentiality: The mandatory FR Y-15 is
authorized by sections 163 and 165 of the Dodd-Frank Act (12 U.S.C.
5463 and 5365), the International Banking Act (12 U.S.C. 3106 and
3108), the Bank Holding Company Act (12 U.S.C. 1844), and HOLA (12
U.S.C. 1467a).
Most of the data collected on the FR Y-15 is made public unless a
specific request for confidentiality is submitted by the reporting
entity, either on the FR Y-15 or on the form from which the data item
is obtained. Such information will be accorded confidential treatment
under exemption 4 of the Freedom of Information Act (FOIA) (5 U.S.C.
552(b)(4)) if the submitter substantiates its assertion that disclosure
would likely cause substantial competitive harm. In addition, items 1
through 4 of Schedules G and N of the FR Y-15, which contain granular
information regarding the reporting entity's short-term funding, will
be accorded confidential treatment under exemption 4 for observation
dates that occur prior to the liquidity coverage ratio disclosure
standard being implemented. To the extent confidential data collected
under the FR Y-15 will be used for supervisory purposes, it may be
exempt from disclosure under Exemption 8 of FOIA (5 U.S.C. 552(b)(8)).
Current Actions: Consistent with the final rule, the FR Y-15 has
been amended to require U.S. bank holding companies and U.S. covered
savings and loan holding companies with $100 billion or more in total
consolidated assets to file the form, as well as foreign banking
organizations with $100 billion or more in combined U.S. assets. These
foreign banking organizations will file all schedules of the FR Y-15 on
behalf of their U.S. intermediate holding companies (Column A) and
combined U.S. operations (Column B). The final form includes others
edits described further in the SUPPLEMENTARY INFORMATION sections.
The Board estimates that the changes to the FR Y-15 would increase
the respondent count by 6 respondents. The Board also estimates that
the revisions to the FR Y-15 would increase the estimated average hours
per response by 2 hours and would increase the estimated annual burden
by 9,968 hours. The final reporting forms and instructions are
available on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
(7) Report title: Reporting and Recordkeeping Requirements
Associated with Regulation Y (Capital Plans).
Agency form number: FR Y-13.
OMB control number: 7100-0342.
Effective Date: Effective date of final rule.
Frequency: Annually.
Affected Public: Businesses or other for-profit.
Respondents: BHCs and IHCs.
Estimated number of respondents: 34.
Estimated average hours per response: Annual capital planning
reporting (225.8(e)(1)(ii)), 80 hours; data collections reporting
(225.8(e)(3)), 1,005 hours; data collections reporting (225.8(e)(4)),
100 hours; review of capital plans by the Federal Reserve reporting
(225.8(f)(3)(i)), 16 hours; prior approval request requirements
reporting (225.8(g)(1), (3), & (4)), 100 hours; prior approval request
requirements exceptions (225.8(g)(3)(iii)(A)), 16 hours; prior approval
request requirements reports (225.8(g)(6)), 16 hours; annual capital
planning recordkeeping (225.8(e)(1)(i)), 8,920 hours; annual capital
planning recordkeeping (225.8(e)(1)(iii)), 100 hours.
Estimated annual burden hours: Annual capital planning reporting
(225.8(e)(1)(ii)), 2,720 hours; data collections reporting
(225.8(e)(3)), 25,125 hours; data collections reporting (225.8(e)(4)),
1,000 hours; review of capital plans by the Federal Reserve reporting
(225.8(f)(3)(i)), 32 hours; prior approval request requirements
reporting (225.8(g)(1), (3), & (4)), 2,300 hours; prior approval
request requirements exceptions (225.8(g)(3)(iii)(A)), 32 hours; prior
approval request requirements reports (225.8(g)(6)), 32 hours; annual
capital planning recordkeeping (225.8(e)(1)(i)), 303,280 hours; annual
capital planning recordkeeping (225.8(e)(1)(iii)), 3,400 hours.
General description of report: Regulation Y (12 CFR part 225)
requires large bank holding companies (BHCs) to submit capital plans to
the Federal Reserve on an annual basis and to require such BHCs to
request prior approval from the Federal Reserve
[[Page 59074]]
under certain circumstances before making a capital distribution.
Current Actions: The final rule raises the threshold for
application of Sec. 225.8 from bank holding companies with $50 billion
or more in total consolidated assets to bank holding companies with
$100 billion or more in total consolidated assets. This change would
reduce the panels for various provisions in Sec. 225.8. The Board
estimates that the revisions to the FR Y-13 would decrease the
estimated annual burden by 28,115 hours.
(8) Report title: Reporting and Disclosure Requirements Associated
with Regulation LL.
Agency Form Number: FR LL.
OMB control number: 7100-NEW.
Effective Date: Effective date of final rule.
Frequency: Biennial.
Affected Public: Businesses or other for-profit.
Respondents: Savings and loan holding companies.
Estimated number of respondents: 1.\138\
---------------------------------------------------------------------------
\138\ Currently, there are no foreign savings and loan holding
companies in existence. For PRA purposes, ``1'' is used as a
placeholder.
---------------------------------------------------------------------------
Estimated average hours per response: Reporting section
238.162b1ii, 80; Disclosure section 238.146 (initial setup), 150;
Disclosure section 238.146, 60.
Estimated annual burden hours: Reporting section 238.162b1ii, 40;
Disclosure section 238.146 (initial setup), 75; Disclosure section
238.146, 30.
Description of the Information Collection: Section
252.122(b)(1)(iii) of the Board's Regulation YY currently requires,
unless the Board otherwise determines in writing, a foreign savings and
loan holding company with more than $10 billion in total consolidated
assets that does not meet applicable home-country stress testing
standards to report on an annual basis a summary of the results of the
stress test to the Board.
Legal authorization and confidentiality: This information
collection is authorized by section 10 of the Home Owners' Loan Act
(HOLA) and section 165(i)(2) of the Dodd-Frank Act. The obligation of
covered institutions to report this information is mandatory. This
information would be disclosed publicly and, as a result, no issue of
confidentiality is raised.
Current Actions: The Board is moving the requirement for foreign
savings and loan holding companies currently in Sec.
252.122(b)(1)(iii) of Regulation YY into Sec. 238.162(b)(1)(ii) of
Regulation LL. In doing so, the Board is amending the frequency of the
reporting requirement in proposed Sec. 238.162(b)(1)(ii) from annual
to at least biennial. The Board is also raising the threshold for
applicability of section 238.162 from more than $10 billion in total
consolidated assets to more than $250 billion in total consolidated
assets.
(9) Report title: Reporting, Recordkeeping, and Disclosure
Requirements Associated with Regulation YY (Enhanced Prudential
Standards).
Agency Form Number: FR YY.
OMB Control Number: 7100-0350.
Effective Date: Effective date of final rule.
Frequency: Annual, semiannual, quarterly.
Affected Public: Businesses or other for-profit.
Respondents: State member banks, U.S. bank holding companies,
nonbank financial companies, foreign banking organizations, U.S.
intermediate holding companies, foreign saving and loan holding
companies, and foreign nonbank financial companies supervised by the
Board.
Estimated number of respondents: 23 U.S. bank holding companies
with total consolidated assets of $100 billion or more, 4 U.S. bank
holding companies with total consolidated assets of $50 billion or more
but less than $100 billion, 1 state member bank with total consolidated
assets over $250 billion, 11 U.S. intermediate holding companies with
$100 billion or more in total assets, 23 foreign banking organizations
with total consolidated assets of more than $50 billion but less than
$100 billion; 23 foreign banking organizations with total consolidated
assets of $100 billion or more but combined U.S. operations of at least
$50 billion but less than $100 billion; 17 foreign banking
organizations with total consolidated assets of $100 billion or more
and combined U.S. operations of $100 billion or more.
Current estimated annual burden: 41,619 hours.
Proposed revisions estimated annual burden: (13,868) hours.
Total estimated annual burden: 27,751 hours.
General description of report: Section 165 of the Dodd-Frank Act,
as amended by EGRRCPA, requires the Board to implement enhanced
prudential standards for bank holding companies and foreign banking
organizations with total consolidated assets of $250 billion or more,
and provides the Board with discretion to apply enhanced prudential
standards to certain bank holding companies and foreign banking
organizations with $100 billion or more, but less than $250 billion, in
total consolidated assets. The enhanced prudential standards include
risk-based and leverage capital requirements, liquidity standards,
requirements for overall risk management (including establishing a risk
committee), stress test requirements, and debt-to-equity limits for
companies that the Financial Stability Oversight Council has determined
pose a grave threat to financial stability.
Current Actions: As described in this SUPPLEMENTARY INFORMATION,
the Board is amending reporting, recordkeeping and disclosure
requirements in Regulation YY to generally raise the thresholds for
application of these requirements to state member banks, U.S. bank
holding companies, U.S. intermediate holding companies, and foreign
banking organizations, consistent with EGRRCPA's changes to section 165
of the Dodd-Frank.
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
describing the impact of the proposed rule on small entities.\139\
However, a final regulatory flexibility analysis is not required if the
agency certifies that the final rule will not have a significant
economic impact on a substantial number of small entities. The Small
Business Administration (SBA) has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million that are independently owned and operated or owned by a holding
company with less than or equal to $600 million in total assets.\140\
For the reasons described below and under section 605(b) of the RFA,
the Board certifies that the final rule will not have a significant
economic impact on a substantial number of small entities. As of June
30, 2019, there were 2,976 bank holding companies, 133 savings and loan
holding companies, and 537 state member banks that would fit the SBA's
current definition of ``small entity'' for purposes of the RFA.
---------------------------------------------------------------------------
\139\ 5 U.S.C. 601 et seq.
\140\ See 13 CFR 121.201. Effective August 19, 2019, the Small
Business Administration revised the size standards for banking
organizations to $600 million in assets from $550 million in assets.
See 84 FR 34261 (July 18, 2019). Consistent with the General
Principles of Affiliation in 13 CFR 121.103, the Board counts the
assets of all domestic and foreign affiliates when determining if
the Board should classify a Board-supervised institution as a small
entity.
---------------------------------------------------------------------------
[[Page 59075]]
The Board is finalizing amendments to Regulations Q,\141\ Y,\142\
LL,\143\ PP,\144\ and YY \145\ that would affect the regulatory
requirements that apply to state member banks, U.S. bank holding
companies, U.S. covered savings and loan holding companies, U.S.
intermediate holding companies, foreign banking organizations, and
foreign savings and loan holding companies with $10 billion or more in
total consolidated assets. These changes are consistent with EGRRCPA,
which amended section 165 of the Dodd-Frank Act. The reasons and
justification for the final rule are described above in more detail in
this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
\141\ 12 CFR part 217.
\142\ 12 CFR part 225.
\143\ 12 CFR part 238.
\144\ 12 CFR part 242.
\145\ 12 CFR part 252.
---------------------------------------------------------------------------
The assets of institutions subject to this final rule substantially
exceed the $600 million asset threshold under which a banking
organization is considered a ``small entity'' under SBA regulations.
Because the final rule is not likely to apply to any depository
institution or company with assets of $600 million or less, it is not
expected to apply to any small entity for purposes of the RFA. The
Board does not believe that the final rule duplicates, overlaps, or
conflicts with any other Federal rules. In light of the foregoing, the
Board certifies that the final rule will not have a significant
economic impact on a substantial number of small entities supervised.
C. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\146\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each Federal banking agency
must consider, consistent with principle of safety and soundness and
the public interest, any administrative burdens that such regulations
would place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\147\
---------------------------------------------------------------------------
\146\ 12 U.S.C. 4802(a).
\147\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
The final rule imposes no additional reporting, disclosure, or
other requirements on insured depository institutions, including small
depository institutions, nor on the customers of depository
institutions. The final rule would raise the minimum asset threshold
for state member banks that would be required to conduct a stress test
from $10 billion to $250 billion, would revise the frequency with which
state member banks with assets greater than $250 billion would be
required to conduct stress tests, and would reduce the number of
required stress test scenarios from three to two. The requirement to
conduct, report, and publish a company-run stress testing is a
previously existing requirement imposed by section 165 of the Dodd-
Frank Act. Accordingly, the RCDRIA does not apply to the final rule.
List of Subjects
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Risk, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Capital
planning, Holding companies, Reporting and recordkeeping requirements,
Securities, Stress testing.
12 CFR Part 238
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Reporting and recordkeeping requirements, Securities.
12 CFR Part 242
Administrative practice and procedure, Holding companies, Nonbank
financial companies.
12 CFR Part 252
Administrative practice and procedure, Banks, Banking, Capital
planning, Federal Reserve System, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing.
Authority and Issuance
For the reasons stated in the SUPPLEMENTARY INFORMATION, chapter II
of title 12 of the Code of Federal Regulations is amended as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
1. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
Subpart H--Risk-Based Capital Surcharge for Global Systemically
Important Bank Holding Companies
0
2. In Sec. 217.400:
0
a. Revise paragraphs (b)(1), (b)(2 introductory text, and (b)(2)(i);
and
0
b. Remove paragraph (b)(3).
The revisions read as follows:
Sec. 217.400 Purpose and applicability.
* * * * *
(b) * * *
(1) General. This subpart applies to a bank holding company that:
(i) Is an advanced approaches Board-regulated institution or a
Category III Board-regulated institution;
(ii) Is not a consolidated subsidiary of a bank holding company;
and
(iii) Is not a consolidated subsidiary of a foreign banking
organization.
(2) Effective date of calculation and surcharge requirements. (i) A
bank holding company identified in Sec. 217.400(b)(1) is subject to
Sec. 217.402 of this part and must determine whether it qualifies as a
global systemically important BHC by December 31 of the year
immediately following the year in which the bank holding company
becomes an advanced approaches Board-regulated institution or a
Category III Board-regulated institution; and
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
3. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
Subpart A--General Provisions
0
4. In Sec. 225.8, revise paragraphs (b)(1)(i), (b)(2) and (3), and (c)
to read as follows:
[[Page 59076]]
Sec. 225.8 Capital planning.
* * * * *
(b) * * *
(1) * * *
(i) Any top-tier bank holding company domiciled in the United
States with average total consolidated assets of $100 billion or more
($100 billion asset threshold);
* * * * *
(2) Average total consolidated assets. For purposes of this
section, average total consolidated assets means the average of the
total consolidated assets as reported by a bank holding company on its
Consolidated Financial Statements for Holding Companies (FR Y-9C) for
the four most recent consecutive quarters. If the bank holding company
has not filed the FR Y-9C for each of the four most recent consecutive
quarters, average total consolidated assets means the average of the
company's total consolidated assets, as reported on the company's FR Y-
9C, for the most recent quarter or consecutive quarters, as applicable.
Average total consolidated assets are measured on the as-of date of the
most recent FR Y-9C used in the calculation of the average.
(3) Ongoing applicability. A bank holding company (including any
successor bank holding company) that is subject to any requirement in
this section shall remain subject to such requirements unless and until
its total consolidated assets fall below $100 billion for each of four
consecutive quarters, as reported on the FR Y-9C and effective on the
as-of date of the fourth consecutive FR Y-9C.
* * * * *
(c) Transition periods for certain bank holding companies. (1) A
bank holding company that meets the $100 billion asset threshold (as
measured under paragraph (b) of this section) on or before September 30
of a calendar year must comply with the requirements of this section
beginning on January 1 of the next calendar year, unless that time is
extended by the Board in writing.
(2) A bank holding company that meets the $100 billion asset
threshold after September 30 of a calendar year must comply with the
requirements of this section beginning on January 1 of the second
calendar year after the bank holding company meets the $100 billion
asset threshold, unless that time is extended by the Board in writing.
(3) The Board or the appropriate Reserve Bank with the concurrence
of the Board, may require a bank holding company described in paragraph
(c)(1) or (2) of this section to comply with any or all of the
requirements in paragraph (e)(1), (e)(3), (f), or (g) of this section
if the Board or appropriate Reserve Bank with concurrence of the Board,
determines that the requirement is appropriate on a different date
based on the company's risk profile, scope of operation, or financial
condition and provides prior notice to the company of the
determination.
* * * * *
PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
0
5. The authority citation for part 238 is revised to read as follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463,
1464, 1467, 1467a, 1468, 5365; 1813, 1817, 1829e, 1831i, 1972, 15
U.S.C. 78 l.
Subpart A--General Provisions
0
6. In Sec. 238.2, add paragraphs (v) through (ss) to read as follows:
Sec. 238.2 Definitions.
* * * * *
(v) Applicable accounting standards means GAAP, international
financial reporting standards, or such other accounting standards that
a company uses in the ordinary course of its business in preparing its
consolidated financial statements.
(w) Average cross-jurisdictional activity means the average of
cross-jurisdictional activity for the four most recent calendar
quarters or, if the banking organization has not reported cross-
jurisdictional activity for each of the four most recent calendar
quarters, the cross-jurisdictional activity for the most recent
calendar quarter or average of the most recent calendar quarters, as
applicable.
(x) Average off-balance sheet exposure means the average of off-
balance sheet exposure for the four most recent calendar quarters or,
if the banking organization has not reported total exposure and total
consolidated assets for each of the four most recent calendar quarters,
the off-balance sheet exposure for the most recent calendar quarter or
average of the most recent quarters, as applicable.
(y) Average total consolidated assets means the average of total
consolidated assets for the four most recent calendar quarters or, if
the banking organization has not reported total consolidated assets for
each of the four most recent calendar quarters, the total consolidated
assets for the most recent calendar quarter or average of the most
recent calendar quarters, as applicable.
(z) Average total nonbank assets means the average of total nonbank
assets for the four most recent calendar quarters or, if the banking
organization has not reported total nonbank assets for each of the four
most recent calendar quarters, the total nonbank assets for the most
recent calendar quarter or average of the most recent calendar
quarters, as applicable.
(aa) Average weighted short-term wholesale funding means the
average of weighted short-term wholesale funding for each of the four
most recent calendar quarters or, if the banking organization has not
reported weighted short-term wholesale funding for each of the four
most recent calendar quarters, the weighted short-term wholesale
funding for the most recent quarter or average of the most recent
calendar quarters, as applicable.
(bb) Banking organization. Banking organization means a covered
savings and loan holding company that is:
(1) Incorporated in or organized under the laws of the United
States or any State; and
(2) Not a consolidated subsidiary of a covered savings and loan
holding company that is incorporated in or organized under the laws of
the United States or any State.
(cc) Category II savings and loan holding company means a covered
savings and loan holding company identified as a Category II banking
organization pursuant to Sec. 238.10.
(dd) Category III savings and loan holding company means a covered
savings and loan holding company identified as a Category III banking
organization pursuant to Sec. 238.10.
(ee) Category IV savings and loan holding company means a covered
savings and loan holding company identified as a Category IV banking
organization pursuant to Sec. 238.10.
(ff) Covered savings and loan holding company means a savings and
loan holding company other than:
(1) A top-tier savings and loan holding company that is:
(i) A grandfathered unitary savings and loan holding company as
defined in section 10(c)(9)(C) of the Home Owners' Loan Act (12 U.S.C.
1461 et seq.); and
(ii) As of June 30 of the previous calendar year, derived 50
percent or more of its total consolidated assets or 50 percent of its
total revenues on an enterprise-wide basis (as calculated under GAAP)
from activities that are not financial in nature under section 4(k) of
the Bank Holding Company Act (12 U.S.C. 1843(k));
(2) A top-tier depository institution holding company that is an
insurance underwriting company; or
(3)(i) A top-tier depository institution holding company that, as
of June 30 of
[[Page 59077]]
the previous calendar year, held 25 percent or more of its total
consolidated assets in subsidiaries that are insurance underwriting
companies (other than assets associated with insurance for credit
risk); and
(ii) For purposes of paragraph (ff)(3)(i) of this section, the
company must calculate its total consolidated assets in accordance with
GAAP, or if the company does not calculate its total consolidated
assets under GAAP for any regulatory purpose (including compliance with
applicable securities laws), the company may estimate its total
consolidated assets, subject to review and adjustment by the Board of
Governors of the Federal Reserve System.
(gg) Cross-jurisdictional activity. The cross-jurisdictional
activity of a banking organization is equal to the cross-jurisdictional
activity of the banking organization as reported on the FR Y-15.
(hh) Foreign banking organization has the same meaning as in Sec.
211.21(o) of this chapter.
(ii) FR Y-9C means the Consolidated Financial Statements for
Holding Companies reporting form.
(jj) FR Y-9LP means the Parent Company Only Financial Statements of
Large Holding Companies.
(kk) FR Y-15 means the Systemic Risk Report.
(ll) GAAP means generally accepted accounting principles as used in
the United States.
(mm) Off-balance sheet exposure. The off-balance sheet exposure of
a banking organization is equal to:
(1) The total exposure of the banking organization, as reported by
the banking organization on the FR Y-15; minus
(2) The total consolidated assets of the banking organization for
the same calendar quarter.
(nn) State means any state, commonwealth, territory, or possession
of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, American
Samoa, Guam, or the United States Virgin Islands.
(oo) Total consolidated assets. Total consolidated assets of a
banking organization are equal to its total consolidated assets
calculated based on the average of the balances as of the close of
business for each day for the calendar quarter or an average of the
balances as of the close of business on each Wednesday during the
calendar quarter, as reported on the FR Y-9C.
(pp) Total nonbank assets. Total nonbank assets of a banking
organization is equal to the total nonbank assets of such banking
organization, as reported on the FR Y-9LP.
(qq) U.S. government agency means an agency or instrumentality of
the United States whose obligations are fully and explicitly guaranteed
as to the timely payment of principal and interest by the full faith
and credit of the United States.
(rr) U.S. government-sponsored enterprise means an entity
originally established or chartered by the U.S. government to serve
public purposes specified by the U.S. Congress, but whose obligations
are not explicitly guaranteed by the full faith and credit of the
United States.
(ss) Weighted short-term wholesale funding is equal to the weighted
short-term wholesale funding of a banking organization, as reported on
the FR Y-15.
0
7. Add Sec. 238.10 to subpart A to read as follows:
Sec. 238.10 Categorization of banking organizations.
(a) General. A banking organization with average total consolidated
assets of $100 billion or more must determine its category among the
three categories described in paragraphs (b) through (d) of this
section at least quarterly.
(b) Category II. (1) A banking organization is a Category II
banking organization if the banking organization has:
(i) $700 billion or more in average total consolidated assets; or
(ii)(A) $75 billion or more in average cross-jurisdictional
activity; and
(B) $100 billion or more in average total consolidated assets.
(2) After meeting the criteria in paragraph (b)(1) of this section,
a banking organization continues to be a Category II banking
organization until the banking organization has:
(i)(A) Less than $700 billion in total consolidated assets for each
of the four most recent calendar quarters; and
(B) Less than $75 billion in cross-jurisdictional activity for each
of the four most recent calendar quarters; or
(ii) Less than $100 billion in total consolidated assets for each
of the four most recent calendar quarters.
(c) Category III. (1) A banking organization is a Category III
banking organization if the banking organization:
(i) Has:
(A) $250 billion or more in average total consolidated assets; or
(B) $100 billion or more in average total consolidated assets and
at least:
(1) $75 billion in average total nonbank assets;
(2) $75 billion in average weighted short-term wholesale funding;
or
(3) $75 billion in average off-balance sheet exposure; and
(ii) Is not a Category II banking organization.
(2) After meeting the criteria in paragraph (c)(1) of this section,
a banking organization continues to be a Category III banking
organization until the banking organization:
(i) Has:
(A) Less than $250 billion in total consolidated assets for each of
the four most recent calendar quarters;
(B) Less than $75 billion in total nonbank assets for each of the
four most recent calendar quarters;
(C) Less than $75 billion in weighted short-term wholesale funding
for each of the four most recent calendar quarters; and
(D) Less than $75 billion in off-balance sheet exposure for each of
the four most recent calendar quarters; or
(ii) Has less than $100 billion in total consolidated assets for
each of the four most recent calendar quarters; or
(iii) Meets the criteria in paragraph (b)(1) of this section to be
a Category II banking organization.
(d) Category IV. (1) A banking organization with average total
consolidated assets of $100 billion or more is a Category IV banking
organization if the banking organization:
(i) Is not a Category II banking organization; and
(ii) Is not a Category III banking organization.
(2) After meeting the criteria in paragraph (d)(1) of this section,
a banking organization continues to be a Category IV banking
organization until the banking organization:
(i) Has less than $100 billion in total consolidated assets for
each of the four most recent calendar quarters;
(ii) Meets the criteria in paragraph (b)(1) of this section to be a
Category II banking organization; or
(iii) Meets the criteria in paragraph (c)(1) of this section to be
a Category III banking organization.
0
8. Add subpart M, consisting of Sec. Sec. 238.118 and 238.119, to read
as follows:
Subpart M--Risk Committee Requirement for Covered Savings and Loan
Holding Companies With Total Consolidated Assets of $50 Billion or
More and Less Than $100 Billion
Sec. 238.118 Applicability.
(a) General applicability. A covered savings and loan bank holding
company must comply with the risk-committee requirements set forth in
this subpart beginning on the first day of the ninth quarter following
the date on which its
[[Page 59078]]
average total consolidated assets equal or exceed $50 billion.
(b) Cessation of requirements. A covered savings and loan holding
company will remain subject to the requirements of this subpart until
the earlier of the date on which:
(1) Its total consolidated assets are below $50 billion for each of
four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart N of this
part.
Sec. 238.119 Risk committee requirement for covered savings and loan
holding companies with total consolidated assets of $50 billion or
more.
(a) Risk committee--(1) General. A covered savings and loan holding
company subject to this subpart must maintain a risk committee that
approves and periodically reviews the risk-management policies of the
covered savings and loan holding company's global operations and
oversees the operation of the company's global risk-management
framework.
(2) Risk-management framework. The covered savings and loan holding
company's global risk-management framework must be commensurate with
its structure, risk profile, complexity, activities, and size and must
include:
(i) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control infrastructure
for its global operations; and
(ii) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and
risk-management deficiencies, including regarding emerging risks, and
ensuring effective and timely implementation of actions to address
emerging risks and risk-management deficiencies for its global
operations;
(B) Processes and systems for establishing managerial and employee
responsibility for risk management;
(C) Processes and systems for ensuring the independence of the
risk-management function; and
(D) Processes and systems to integrate risk management and
associated controls with management goals and its compensation
structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the covered
savings and loan holding company's board of directors;
(ii) Be an independent committee of the board of directors that
has, as its sole and exclusive function, responsibility for the risk-
management policies of the covered savings and loan holding company's
global operations and oversight of the operation of the company's
global risk-management framework;
(iii) Report directly to the covered savings and loan holding
company's board of directors;
(iv) Receive and review regular reports on a not less than a
quarterly basis from the covered savings and loan holding company's
chief risk officer provided pursuant to paragraph (b)(3)(ii) of this
section; and
(v) Meet at least quarterly, or more frequently as needed, and
fully document and maintain records of its proceedings, including risk-
management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the covered savings and loan
holding company and has not been an officer or employee of the covered
savings and loan holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in Sec.
238.31(b)(3), of a person who is, or has been within the last three
years, an executive officer of the covered savings and loan holding
company, as defined in Sec. 215.2(e)(1) of this chapter; and
(C)(1) Is an independent director under Item 407 of the Securities
and Exchange Commission's Regulation S-K (17 CFR 229.407(a)), if the
covered savings and loan holding company has an outstanding class of
securities traded on an exchange registered with the U.S. Securities
and Exchange Commission as a national securities exchange under section
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national
securities exchange); or
(2) Would qualify as an independent director under the listing
standards of a national securities exchange, as demonstrated to the
satisfaction of the Board, if the covered savings and loan holding
company does not have an outstanding class of securities traded on a
national securities exchange.
(b) Chief risk officer--(1) General. A covered savings and loan
holding company subject to this subpart must appoint a chief risk
officer with experience in identifying, assessing, and managing risk
exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for
overseeing:
(A) The establishment of risk limits on an enterprise-wide basis
and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies
and procedures set forth in paragraph (a)(2)(i) of this section and the
development and implementation of the processes and systems set forth
in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters
of the company's risk control framework, and monitoring and testing of
the company's risk controls.
(ii) The chief risk officer is responsible for reporting risk-
management deficiencies and emerging risks to the risk committee and
resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The covered savings and
loan holding company must ensure that the compensation and other
incentives provided to the chief risk officer are consistent with
providing an objective assessment of the risks taken by the company;
and
(ii) The chief risk officer must report directly to both the risk
committee and chief executive officer of the company.
0
9. Add subpart N to read as follows:
Subpart N--Risk Committee, Liquidity Risk Management, and Liquidity
Buffer Requirements for Covered Savings and Loan Holding Companies
With Total Consolidated Assets of $100 Billion or More
Sec.
238.120 Scope.
238.121 Applicability.
238.122 Risk-management and risk committee requirements.
238.123 Liquidity risk-management requirements.
Sec. 238.120 Scope.
This subpart applies to covered savings and loan holding companies
with average total consolidated assets of $100 billion or more.
Sec. 238.121 Applicability.
(a) Applicability--(1) Initial applicability. A covered savings and
loan holding company must comply with the risk-management and risk-
committee requirements set forth in Sec. 238.122 and the liquidity
risk-management and liquidity stress test requirements set forth in
Sec. Sec. 238.123 and 238.124 no later than the first day of the fifth
quarter following the date on
[[Page 59079]]
which its average total consolidated assets equal or exceed $100
billion.
(2) Changes in requirements following a change in category. A
covered savings and loan holding company with average total
consolidated assets of $100 billion or more that changes from one
category of covered savings and loan holding company described in Sec.
238.10(b) through (d) to another such category must comply with the
requirements applicable to the new category no later than on the first
day of the second calendar quarter following the change in the covered
savings and loan holding company's category.
(b) Cessation of requirements. A covered savings and loan holding
company is subject to the risk-management and risk committee
requirements set forth in Sec. 238.122 and the liquidity risk-
management and liquidity stress test requirements set forth in
Sec. Sec. 238.123 and 238.124 until its total consolidated assets are
below $100 billion for each of four consecutive calendar quarters.
Sec. 238.122 Risk-management and risk committee requirements.
(a) Risk committee--(1) General. A covered savings and loan holding
subject to this subpart must maintain a risk committee that approves
and periodically reviews the risk-management policies of the covered
savings and loan holding company's global operations and oversees the
operation of the covered savings and loan holding company's global
risk-management framework. The risk committee's responsibilities
include liquidity risk-management as set forth in Sec. 238.123(b).
(2) Risk-management framework. The covered savings and loan holding
company's global risk-management framework must be commensurate with
its structure, risk profile, complexity, activities, and size and must
include:
(i) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control infrastructure
for its global operations; and
(ii) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and
risk-management deficiencies, including regarding emerging risks, and
ensuring effective and timely implementation of actions to address
emerging risks and risk-management deficiencies for its global
operations;
(B) Processes and systems for establishing managerial and employee
responsibility for risk management;
(C) Processes and systems for ensuring the independence of the
risk-management function; and
(D) Processes and systems to integrate risk management and
associated controls with management goals and its compensation
structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the covered
savings and loan holding company's board of directors;
(ii) Be an independent committee of the board of directors that
has, as its sole and exclusive function, responsibility for the risk-
management policies of the covered savings and loan holding company's
global operations and oversight of the operation of the covered savings
and loan holding company's global risk-management framework;
(iii) Report directly to the covered savings and loan holding
company's board of directors;
(iv) Receive and review regular reports on not less than a
quarterly basis from the covered savings and loan holding company's
chief risk officer provided pursuant to paragraph (b)(3)(ii) of this
section; and
(v) Meet at least quarterly, or more frequently as needed, and
fully document and maintain records of its proceedings, including risk-
management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the covered savings and loan
holding company and has not been an officer or employee of the covered
savings and loan holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in Sec.
238.31(b)(3), of a person who is, or has been within the last three
years, an executive officer of the covered savings and loan holding
company, as defined in Sec. 215.2(e)(1) of this chapter; and
(C)(1) Is an independent director under Item 407 of the Securities
and Exchange Commission's Regulation S-K (17 CFR 229.407(a)), if the
covered savings and loan holding company has an outstanding class of
securities traded on an exchange registered with the U.S. Securities
and Exchange Commission as a national securities exchange under section
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national
securities exchange); or
(2) Would qualify as an independent director under the listing
standards of a national securities exchange, as demonstrated to the
satisfaction of the Board, if the covered savings and loan holding
company does not have an outstanding class of securities traded on a
national securities exchange.
(b) Chief risk officer--(1) General. A covered savings and loan
holding company subject to this subpart must appoint a chief risk
officer with experience in identifying, assessing, and managing risk
exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for
overseeing:
(A) The establishment of risk limits on an enterprise-wide basis
and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies
and procedures set forth in paragraph (a)(2)(i) of this section and the
development and implementation of the processes and systems set forth
in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters
of the company's risk control framework, and monitoring and testing of
the company's risk controls.
(ii) The chief risk officer is responsible for reporting risk-
management deficiencies and emerging risks to the risk committee and
resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The covered savings and
loan holding company must ensure that the compensation and other
incentives provided to the chief risk officer are consistent with
providing an objective assessment of the risks taken by the covered
savings and loan holding company; and
(ii) The chief risk officer must report directly to both the risk
committee and chief executive officer of the company.
Sec. 238.123 Liquidity risk-management requirements.
(a) Responsibilities of the board of directors--(1) Liquidity risk
tolerance. The board of directors of a covered savings and loan holding
company subject to this subpart must:
(i) Approve the acceptable level of liquidity risk that the covered
savings and loan holding company may assume in connection with its
operating strategies (liquidity risk tolerance) at least annually,
taking into account the
[[Page 59080]]
covered savings and loan holding company's capital structure, risk
profile, complexity, activities, and size; and
(ii) Receive and review at least semi-annually information provided
by senior management to determine whether the covered savings and loan
holding company is operating in accordance with its established
liquidity risk tolerance.
(2) Liquidity risk-management strategies, policies, and procedures.
The board of directors must approve and periodically review the
liquidity risk-management strategies, policies, and procedures
established by senior management pursuant to paragraph (c)(1) of this
section.
(b) Responsibilities of the risk committee. The risk committee (or
a designated subcommittee of such committee composed of members of the
board of directors) must approve the contingency funding plan described
in paragraph (f) of this section at least annually, and must approve
any material revisions to the plan prior to the implementation of such
revisions.
(c) Responsibilities of senior management--(1) Liquidity risk. (i)
Senior management of a covered savings and loan holding company subject
to this subpart must establish and implement strategies, policies, and
procedures designed to effectively manage the risk that the covered
savings and loan holding company's financial condition or safety and
soundness would be adversely affected by its inability or the market's
perception of its inability to meet its cash and collateral obligations
(liquidity risk). The board of directors must approve the strategies,
policies, and procedures pursuant to paragraph (a)(2) of this section.
(ii) Senior management must oversee the development and
implementation of liquidity risk measurement and reporting systems,
including those required by this section and Sec. 238.124.
(iii) Senior management must determine at least quarterly whether
the covered savings and loan holding company is operating in accordance
with such policies and procedures and whether the covered savings and
loan holding company is in compliance with this section and Sec.
238.124 (or more often, if changes in market conditions or the
liquidity position, risk profile, or financial condition warrant), and
establish procedures regarding the preparation of such information.
(2) Liquidity risk tolerance. Senior management must report to the
board of directors or the risk committee regarding the covered savings
and loan holding company's liquidity risk profile and liquidity risk
tolerance at least quarterly (or more often, if changes in market
conditions or the liquidity position, risk profile, or financial
condition of the company warrant).
(3) Business lines or products. (i) Senior management must approve
new products and business lines and evaluate the liquidity costs,
benefits, and risks of each new business line and each new product that
could have a significant effect on the company's liquidity risk
profile. The approval is required before the company implements the
business line or offers the product. In determining whether to approve
the new business line or product, senior management must consider
whether the liquidity risk of the new business line or product (under
both current and stressed conditions) is within the company's
established liquidity risk tolerance.
(ii) Senior management must review at least annually significant
business lines and products to determine whether any line or product
creates or has created any unanticipated liquidity risk, and to
determine whether the liquidity risk of each strategy or product is
within the company's established liquidity risk tolerance.
(4) Cash-flow projections. Senior management must review the cash-
flow projections produced under paragraph (e) of this section at least
quarterly (or more often, if changes in market conditions or the
liquidity position, risk profile, or financial condition of the covered
savings and loan holding company warrant) to ensure that the liquidity
risk is within the established liquidity risk tolerance.
(5) Liquidity risk limits. Senior management must establish
liquidity risk limits as set forth in paragraph (g) of this section and
review the company's compliance with those limits at least quarterly
(or more often, if changes in market conditions or the liquidity
position, risk profile, or financial condition of the company warrant).
(6) Liquidity stress testing. Senior management must:
(i) Approve the liquidity stress testing practices, methodologies,
and assumptions required in Sec. 238.124(a) at least quarterly, and
whenever the covered savings and loan holding company materially
revises its liquidity stress testing practices, methodologies or
assumptions;
(ii) Review the liquidity stress testing results produced under
Sec. 238.124(a) at least quarterly;
(iii) Review the independent review of the liquidity stress tests
under Sec. 238.123(d) periodically; and
(iv) Approve the size and composition of the liquidity buffer
established under Sec. 238.124(b) at least quarterly.
(d) Independent review function. (1) A covered savings and loan
holding company subject to this subpart must establish and maintain a
review function that is independent of management functions that
execute funding to evaluate its liquidity risk management.
(2) The independent review function must:
(i) Regularly, but no less frequently than annually, review and
evaluate the adequacy and effectiveness of the company's liquidity risk
management processes, including its liquidity stress test processes and
assumptions;
(ii) Assess whether the company's liquidity risk-management
function complies with applicable laws and regulations, and sound
business practices; and
(iii) Report material liquidity risk management issues to the board
of directors or the risk committee in writing for corrective action, to
the extent permitted by applicable law.
(e) Cash-flow projections. (1) A covered savings and loan holding
company subject to this subpart must produce comprehensive cash-flow
projections that project cash flows arising from assets, liabilities,
and off-balance sheet exposures over, at a minimum, short- and long-
term time horizons. The covered savings and loan holding company must
update short-term cash-flow projections daily and must update longer-
term cash-flow projections at least monthly.
(2) The covered savings and loan holding company must establish a
methodology for making cash-flow projections that results in
projections that:
(i) Include cash flows arising from contractual maturities,
intercompany transactions, new business, funding renewals, customer
options, and other potential events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior
of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete and cumulative cash flow
mismatches over these time periods; and
(iv) Include sufficient detail to reflect the capital structure,
risk profile, complexity, currency exposure, activities, and size of
the covered savings and loan holding company and include analyses by
business line, currency, or legal entity as appropriate.
(3) The covered savings and loan holding company must adequately
[[Page 59081]]
document its methodology for making cash flow projections and the
included assumptions and submit such documentation to the risk
committee.
(f) Contingency funding plan--(1) General. A covered savings and
loan holding company subject to this subpart must establish and
maintain a contingency funding plan that sets out the company's
strategies for addressing liquidity needs during liquidity stress
events. The contingency funding plan must be commensurate with the
company's capital structure, risk profile, complexity, activities,
size, and established liquidity risk tolerance. The company must update
the contingency funding plan at least annually, and when changes to
market and idiosyncratic conditions warrant.
(2) Components of the contingency funding plan--(i) Quantitative
assessment. The contingency funding plan must:
(A) Identify liquidity stress events that could have a significant
impact on the covered savings and loan holding company's liquidity;
(B) Assess the level and nature of the impact on the covered
savings and loan holding company's liquidity that may occur during
identified liquidity stress events;
(C) Identify the circumstances in which the covered savings and
loan holding company would implement its action plan described in
paragraph (f)(2)(ii)(A) of this section, which circumstances must
include failure to meet any minimum liquidity requirement imposed by
the Board;
(D) Assess available funding sources and needs during the
identified liquidity stress events;
(E) Identify alternative funding sources that may be used during
the identified liquidity stress events; and
(F) Incorporate information generated by the liquidity stress
testing required under Sec. 238.124(a).
(ii) Liquidity event management process. The contingency funding
plan must include an event management process that sets out the covered
savings and loan holding company's procedures for managing liquidity
during identified liquidity stress events. The liquidity event
management process must:
(A) Include an action plan that clearly describes the strategies
the company will use to respond to liquidity shortfalls for identified
liquidity stress events, including the methods that the company will
use to access alternative funding sources;
(B) Identify a liquidity stress event management team that would
execute the action plan described in paragraph (f)(2)(ii)(A) of this
section;
(C) Specify the process, responsibilities, and triggers for
invoking the contingency funding plan, describe the decision-making
process during the identified liquidity stress events, and describe the
process for executing contingency measures identified in the action
plan; and
(D) Provide a mechanism that ensures effective reporting and
communication within the covered savings and loan holding company and
with outside parties, including the Board and other relevant
supervisors, counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan must include
procedures for monitoring emerging liquidity stress events. The
procedures must identify early warning indicators that are tailored to
the company's capital structure, risk profile, complexity, activities,
and size.
(iv) Testing. The covered savings and loan holding company must
periodically test:
(A) The components of the contingency funding plan to assess the
plan's reliability during liquidity stress events;
(B) The operational elements of the contingency funding plan,
including operational simulations to test communications, coordination,
and decision-making by relevant management; and
(C) The methods the covered savings and loan holding company will
use to access alternative funding sources to determine whether these
funding sources will be readily available when needed.
(g) Liquidity risk limits--(1) General. A covered savings and loan
holding company subject to this subpart must monitor sources of
liquidity risk and establish limits on liquidity risk that are
consistent with the company's established liquidity risk tolerance and
that reflect the company's capital structure, risk profile, complexity,
activities, and size.
(2) Liquidity risk limits established by a Category II savings and
loan holding company, or Category III savings and loan holding company.
If the covered savings and loan holding company is a Category II
savings and loan holding company or Category III savings and loan
holding company, liquidity risk limits established under paragraph
(g)(1) of this section by must include limits on:
(i) Concentrations in sources of funding by instrument type, single
counterparty, counterparty type, secured and unsecured funding, and as
applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time
horizons; and
(iii) Off-balance sheet exposures and other exposures that could
create funding needs during liquidity stress events.
(h) Collateral, legal entity, and intraday liquidity risk
monitoring. A covered savings and loan holding company subject to this
subpart must establish and maintain procedures for monitoring liquidity
risk as set forth in this paragraph.
(1) Collateral. The covered savings and loan holding company must
establish and maintain policies and procedures to monitor assets that
have been, or are available to be, pledged as collateral in connection
with transactions to which it or its affiliates are counterparties.
These policies and procedures must provide that the covered savings and
loan holding company:
(i) Calculates all of its collateral positions according to the
frequency specified in paragraphs (h)(1)(i)(A) and (B) of this section
or as directed by the Board, specifying the value of pledged assets
relative to the amount of security required under the relevant
contracts and the value of unencumbered assets available to be pledged:
(A) If the covered savings and loan holding company is not a
Category IV savings and loan holding company, on at least a weekly
basis;
(B) If the covered savings and loan holding company is a Category
IV savings and loan holding company, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be
pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the covered savings and loan holding
company's funding patterns, such as shifts between intraday, overnight,
and term pledging of collateral; and
(iv) Tracks operational and timing requirements associated with
accessing collateral at its physical location (for example, the
custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies and business lines. The covered
savings and loan holding company must establish and maintain procedures
for monitoring and controlling liquidity risk exposures and funding
needs within and across significant legal entities, currencies, and
business lines, taking into account legal and regulatory restrictions
on the transfer of liquidity between legal entities.
[[Page 59082]]
(3) Intraday exposures. The covered savings and loan holding
company must establish and maintain procedures for monitoring intraday
liquidity risk exposures that are consistent with the covered savings
and loan holding company's capital structure, risk profile, complexity,
activities, and size. If the covered savings and loan holding company
is a Category II savings and loan holding company or a Category III
savings and loan holding company, these procedures must address how the
management of the covered savings and loan holding company will:
(i) Monitor and measure expected daily gross liquidity inflows and
outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the
covered savings and loan holding company can meet these obligations as
expected and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to customers where necessary;
and
(v) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the covered savings and loan
holding company's overall liquidity needs.
Sec. 238.124 Liquidity stress testing and buffer requirements.
(a) Liquidity stress testing requirement--(1) General. A covered
savings and loan holding company subject to this subpart must conduct
stress tests to assess the potential impact of the liquidity stress
scenarios set forth in paragraph (a)(3) of this section on its cash
flows, liquidity position, profitability, and solvency, taking into
account its current liquidity condition, risks, exposures, strategies,
and activities.
(i) The covered savings and loan holding company must take into
consideration its balance sheet exposures, off-balance sheet exposures,
size, risk profile, complexity, business lines, organizational
structure, and other characteristics of the covered savings and loan
holding company that affect its liquidity risk profile in conducting
its stress test.
(ii) In conducting a liquidity stress test using the scenarios
described in paragraphs (a)(3)(i) and (ii) of this section, the covered
savings and loan holding company must address the potential direct
adverse impact of associated market disruptions on the covered savings
and loan holding company and incorporate the potential actions of other
market participants experiencing liquidity stresses under the market
disruptions that would adversely affect the covered savings and loan
holding company.
(2) Frequency. The covered savings and loan holding company must
perform the liquidity stress tests required under paragraph (a)(1) of
this section according to the frequency specified in paragraph
(a)(2)(i) or (ii) of this section or as directed by the Board:
(i) If the covered savings and loan holding company is not a
Category IV savings and loan holding company, at least monthly; or
(ii) If the covered savings and loan holding company is a Category
IV savings and loan holding company, at least quarterly.
(3) Stress scenarios. (i) Each stress test conducted under
paragraph (a)(1) of this section must include, at a minimum:
(A) A scenario reflecting adverse market conditions;
(B) A scenario reflecting an idiosyncratic stress event for the
covered savings and loan holding company; and
(C) A scenario reflecting combined market and idiosyncratic
stresses.
(ii) The covered savings and loan holding company must incorporate
additional liquidity stress scenarios into its liquidity stress test,
as appropriate, based on its financial condition, size, complexity,
risk profile, scope of operations, or activities. The Board may require
the covered savings and loan holding company to vary the underlying
assumptions and stress scenarios.
(4) Planning horizon. Each stress test conducted under paragraph
(a)(1) of this section must include an overnight planning horizon, a
30-day planning horizon, a 90-day planning horizon, a one-year planning
horizon, and any other planning horizons that are relevant to the
covered savings and loan holding company's liquidity risk profile. For
purposes of this section, a ``planning horizon'' is the period over
which the relevant stressed projections extend. The covered savings and
loan holding company must use the results of the stress test over the
30-day planning horizon to calculate the size of the liquidity buffer
under paragraph (b) of this section.
(5) Requirements for assets used as cash-flow sources in a stress
test. (i) To the extent an asset is used as a cash flow source to
offset projected funding needs during the planning horizon in a
liquidity stress test, the fair market value of the asset must be
discounted to reflect any credit risk and market volatility of the
asset.
(ii) Assets used as cash-flow sources during a planning horizon
must be diversified by collateral, counterparty, borrowing capacity,
and other factors associated with the liquidity risk of the assets.
(iii) A line of credit does not qualify as a cash flow source for
purposes of a stress test with a planning horizon of 30 days or less. A
line of credit may qualify as a cash flow source for purposes of a
stress test with a planning horizon that exceeds 30 days.
(6) Tailoring. Stress testing must be tailored to, and provide
sufficient detail to reflect, a covered savings and loan holding
company's capital structure, risk profile, complexity, activities, and
size.
(7) Governance--(i) Policies and procedures. A covered savings and
loan holding company subject to this subpart must establish and
maintain policies and procedures governing its liquidity stress testing
practices, methodologies, and assumptions that provide for the
incorporation of the results of liquidity stress tests in future stress
testing and for the enhancement of stress testing practices over time.
(ii) Controls and oversight. A covered savings and loan holding
subject to this subpart must establish and maintain a system of
controls and oversight that is designed to ensure that its liquidity
stress testing processes are effective in meeting the requirements of
this section. The controls and oversight must ensure that each
liquidity stress test appropriately incorporates conservative
assumptions with respect to the stress scenario in paragraph (a)(3) of
this section and other elements of the stress test process, taking into
consideration the covered savings and loan holding company's capital
structure, risk profile, complexity, activities, size, business lines,
legal entity or jurisdiction, and other relevant factors. The
assumptions must be approved by the chief risk officer and be subject
to the independent review under Sec. 238.123(d).
(iii) Management information systems. The covered savings and loan
holding company must maintain management information systems and data
processes sufficient to enable it to effectively and reliably collect,
sort, and aggregate data and other information related to liquidity
stress testing.
(8) Notice and response. If the Board determines that a covered
savings and loan holding company must conduct liquidity stress tests
according to a frequency other than the frequency provided in
paragraphs (a)(2)(i) and (ii) of this section, the Board will notify
the covered savings and loan holding company before the change in
frequency takes effect, and describe the basis for its determination.
Within 14 calendar days of receipt of a notification under
[[Page 59083]]
this paragraph, the covered savings and loan holding company may
request in writing that the Board reconsider the requirement. The Board
will respond in writing to the company's request for reconsideration
prior to requiring that the company conduct liquidity stress tests
according to a frequency other than the frequency provided in
paragraphs (a)(2)(i) and (ii) of this section.
(b) Liquidity buffer requirement. (1) A covered savings and loan
holding company subject to this subpart must maintain a liquidity
buffer that is sufficient to meet the projected net stressed cash-flow
need over the 30-day planning horizon of a liquidity stress test
conducted in accordance with paragraph (a) of this section under each
scenario set forth in paragraph (a)(3)(i) through (ii) of this section.
(2) Net stressed cash-flow need. The net stressed cash-flow need
for a covered savings and loan holding company is the difference
between the amount of its cash-flow need and the amount of its cash
flow sources over the 30-day planning horizon.
(3) Asset requirements. The liquidity buffer must consist of highly
liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii)
of this section:
(i) Highly liquid asset. A highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as
defined in 12 CFR 249.20; or
(C) Any other asset that the covered savings and loan holding
company demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has
committed market makers and independent bona fide offers to buy and
sell so that a price reasonably related to the last sales price or
current bona fide competitive bid and offer quotations can be
determined within one day and settled at that price within a reasonable
time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased
in periods of financial market distress during which market liquidity
has been impaired.
(ii) Unencumbered. An asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual, or other
restrictions on the ability of such company promptly to liquidate, sell
or transfer the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to
any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored
enterprise, to the extent potential credit secured by the asset is not
currently extended by such central bank or U.S. government-sponsored
enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In
calculating the amount of a highly liquid asset included in the
liquidity buffer, the covered savings and loan holding company must
discount the fair market value of the asset to reflect any credit risk
and market price volatility of the asset.
(iv) Operational requirements. With respect to the liquidity
buffer, the bank holding company must:
(A) Establish and implement policies and procedures that require
highly liquid assets comprising the liquidity buffer to be under the
control of the management function in the covered savings and loan
holding company that is charged with managing liquidity risk; and
(B) Demonstrate the capability to monetize a highly liquid asset
under each scenario required under Sec. 238.124(a)(3).
(v) Diversification. The liquidity buffer must not contain
significant concentrations of highly liquid assets by issuer, business
sector, region, or other factor related to the covered savings and loan
holding company's risk, except with respect to cash and securities
issued or guaranteed by the United States, a U.S. government agency, or
a U.S. government-sponsored enterprise.
0
10. Add subpart O to read as follows:
Subpart O--Supervisory Stress Test Requirements for Covered Savings
and Loan Holding Companies
Sec.
238.130 Definitions.
238.131 Applicability.
238.132 Analysis conducted by the Board.
238.133 Data and information required to be submitted in support of
the Board's analyses.
238.134 Review of the Board's analysis; publication of summary
results.
238.135 Corporate use of stress test results.
Sec. 238.130 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation
methodologies at 12 CFR part 217, subpart E, as applicable.
Baseline scenario means a set of conditions that affect the U.S.
economy or the financial condition of a covered company and that
reflect the consensus views of the economic and financial outlook.
Covered company means a covered savings and loan holding company
(other than a foreign banking organization) subject to this subpart.
Planning horizon means the period of at least nine consecutive
quarters, beginning on the first day of a stress test cycle over which
the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and
non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and,
(2) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board
has established minimum requirements for the covered savings and loan
holding company by regulation or order, including, as applicable, the
company's regulatory capital ratios calculated under 12 CFR part 217
and the deductions required under 12 CFR 248.12; except that the
company shall not use the advanced approaches to calculate its
regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a covered company that the Board
determines are appropriate for use in the supervisory stress tests,
including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the
U.S. economy or the financial condition of a covered company and that
overall are significantly more severe than those associated with the
baseline scenario and may include trading or other additional
components.
Stress test cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in Sec. 225.2(o) of this
chapter.
Sec. 238.131 Applicability.
(a) Scope--(1) Applicability. Except as provided in paragraph (b)
of this
[[Page 59084]]
section, this subpart applies to any covered savings and loan holding
company with average total consolidated assets of $100 billion or more.
(2) Ongoing applicability. A covered savings and loan holding
company (including any successor company) that is subject to any
requirement in this subpart shall remain subject to any such
requirement unless and until its total consolidated assets fall below
$100 billion for each of four consecutive quarters, effective on the
as-of date of the fourth consecutive FR Y-9C.
(b) Transitional arrangements. (1) A covered savings and loan
holding company that becomes a covered company on or before September
30 of a calendar year must comply with the requirements of this subpart
beginning on January 1 of the second calendar year after the covered
savings and loan holding company becomes a covered company, unless that
time is extended by the Board in writing.
(2) A covered savings and loan holding company that becomes a
covered company after September 30 of a calendar year must comply with
the requirements of this subpart beginning on January 1 of the third
calendar year after the covered savings and loan holding company
becomes a covered company, unless that time is extended by the Board in
writing.
Sec. 238.132 Analysis conducted by the Board.
(a) In general. (1) The Board will conduct an analysis of each
covered company's capital, on a total consolidated basis, taking into
account all relevant exposures and activities of that covered company,
to evaluate the ability of the covered company to absorb losses in
specified economic and financial conditions.
(2) The analysis will include an assessment of the projected
losses, net income, and pro forma capital levels and regulatory capital
ratios and other capital ratios for the covered company and use such
analytical techniques that the Board determines are appropriate to
identify, measure, and monitor risks of the covered company.
(3) In conducting the analyses, the Board will coordinate with the
appropriate primary financial regulatory agencies and the Federal
Insurance Office, as appropriate.
(b) Economic and financial scenarios related to the Board's
analysis. The Board will conduct its analysis using a minimum of two
different scenarios, including a baseline scenario and a severely
adverse scenario. The Board will notify covered companies of the
scenarios that the Board will apply to conduct the analysis for each
stress test cycle to which the covered company is subject by no later
than February 15 of that year, except with respect to trading or any
other components of the scenarios and any additional scenarios that the
Board will apply to conduct the analysis, which will be communicated by
no later than March 1 of that year.
(c) Frequency of analysis conducted by the Board--(1) General.
Except as provided in paragraph (c)(2) of this section, the Board will
conduct its analysis of a covered company according to the frequency in
Table 1 to Sec. 238.132(c)(1).
Table 1 to Sec. 238.132(c)(1)
------------------------------------------------------------------------
Then the Board will conduct its
If the covered company is a analysis
------------------------------------------------------------------------
Category II savings and loan holding Annually.
company.
Category III savings and loan holding Annually.
company.
Category IV savings and loan holding Biennially, occurring in each
company. year ending in an even number.
------------------------------------------------------------------------
(2) Change in frequency. The Board may conduct a stress test of a
covered company on a more or less frequent basis than would be required
under paragraph (c)(1) of this section based on the company's financial
condition, size, complexity, risk profile, scope of operations, or
activities, or risks to the U.S. economy.
(3) Notice and response--(i) Notification of change in frequency.
If the Board determines to change the frequency of the stress test
under paragraph (c)(2), the Board will notify the company in writing
and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under paragraph (c)(2) of
this section, a covered company may request in writing that the Board
reconsider the requirement to conduct a stress test on a more or less
frequent basis than would be required under paragraph (c)(1) of this
section. A covered company's request for reconsideration must include
an explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
Sec. 238.133 Data and information required to be submitted in
support of the Board's analyses.
(a) Regular submissions. Each covered company must submit to the
Board such data, on a consolidated basis, that the Board determines is
necessary in order for the Board to derive the relevant pro forma
estimates of the covered company over the planning horizon under the
scenarios described in Sec. 238.132(b).
(b) Additional submissions required by the Board. The Board may
require a covered company to submit any other information on a
consolidated basis that the Board deems necessary in order to:
(1) Ensure that the Board has sufficient information to conduct its
analysis under this subpart; and
(2) Project a company's pre-provision net revenue, losses,
provision for credit losses, and net income; and pro forma capital
levels, regulatory capital ratios, and any other capital ratio
specified by the Board under the scenarios described in Sec.
238.132(b).
(c) Confidential treatment of information submitted. The
confidentiality of information submitted to the Board under this
subpart and related materials shall be determined in accordance with
the Freedom of Information Act (5 U.S.C. 552(b)) and the Board's Rules
Regarding Availability of Information (12 CFR part 261).
Sec. 238.134 Review of the Board's analysis; publication of summary
results.
(a) Review of results. Based on the results of the analysis
conducted under this subpart, the Board will conduct an evaluation to
determine whether the covered company has the capital, on a total
consolidated basis, necessary to absorb losses and continue its
operation by maintaining ready access to funding, meeting its
obligations to creditors and other counterparties, and continuing to
serve as a credit intermediary under baseline and severely adverse
scenarios, and any additional scenarios.
(b) Publication of results by the Board. (1) The Board will
publicly disclose a summary of the results of the Board's analyses of a
covered company by June 30 of the calendar year in which the
[[Page 59085]]
stress test was conducted pursuant to Sec. 238.132.
(2) The Board will notify companies of the date on which it expects
to publicly disclose a summary of the Board's analyses pursuant to
paragraph (b)(1) of this section at least 14 calendar days prior to the
expected disclosure date.
Sec. 238.135 Corporate use of stress test results.
The board of directors and senior management of each covered
company must consider the results of the analysis conducted by the
Board under this subpart, as appropriate:
(a) As part of the covered company's capital plan and capital
planning process, including when making changes to the covered
company's capital structure (including the level and composition of
capital); and
(b) When assessing the covered company's exposures, concentrations,
and risk positions.
0
11. Add subpart P to read as follows:
Subpart P--Company-Run Stress Test Requirements for Savings and
Loan Holding Companies
Sec.
238.140 Authority and purpose.
238.141 Definitions.
238.142 Applicability.
238.143 Stress test.
238.144 Methodologies and practices.
238.145 Reports of stress test results.
238.146 Disclosure of stress test results.
Sec. 238.140 Authority and purpose.
(a) Authority. 12 U.S.C. 1467; 1467a, 1818, 5361, 5365.
(b) Purpose. This subpart establishes the requirement for a covered
company to conduct stress tests. This subpart also establishes
definitions of stress test and related terms, methodologies for
conducting stress tests, and reporting and disclosure requirements.
Sec. 238.141 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation
methodologies at 12 CFR part 217, subpart E, as applicable.
Baseline scenario means a set of conditions that affect the U.S.
economy or the financial condition of a covered company and that
reflect the consensus views of the economic and financial outlook.
Capital action means any issuance or redemption of a debt or equity
capital instrument, any capital distribution, and any similar action
that the Federal Reserve determines could impact a savings and loan
holding company's consolidated capital.
Covered company means:
(1) A Category II savings and loan holding company;
(2) A Category III savings and loan holding company; or
(3) A savings and loan holding company with average total
consolidated assets of greater than $250 billion.
Planning horizon means the period of at least nine consecutive
quarters, beginning on the first day of a stress test cycle over which
the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and
non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and
(2) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board
has established minimum requirements for the savings and loan holding
company by regulation or order, including, as applicable, the company's
regulatory capital ratios calculated under 12 CFR part 217 and the
deductions required under 12 CFR 248.12; except that the company shall
not use the advanced approaches to calculate its regulatory capital
ratios.
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a covered company that the Board
determines are appropriate for use in the company-run stress tests,
including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the
U.S. economy or the financial condition of a covered company and that
overall are significantly more severe than those associated with the
baseline scenario and may include trading or other additional
components.
Stress test means a process to assess the potential impact of
scenarios on the consolidated earnings, losses, and capital of a
covered company over the planning horizon, taking into account its
current condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Sec. 238.142 Applicability.
(a) Scope--(1) Applicability. Except as provided in paragraph (b)
of this section, this subpart applies to any covered company, which
includes:
(i) Any Category II savings and loan holding company;
(ii) Any Category III savings and loan holding company; and
(iii) Any savings and loan holding company with average total
consolidated assets of greater than $250 billion.
(2) Ongoing applicability. A savings and loan holding company
(including any successor company) that is subject to any requirement in
this subpart shall remain subject to any such requirement unless and
until the savings and loan holding company:
(i) Is not a Category II savings and loan holding company;
(ii) Is not a Category III savings and loan holding company; and
(iii) Has $250 billion or less in total consolidated assets in each
of four consecutive calendar quarters.
(b) Transitional arrangements. (1) A savings and loan holding
company that is subject to minimum capital requirements and that
becomes a covered company on or before September 30 of a calendar year
must comply with the requirements of this subpart beginning on January
1 of the second calendar year after the savings and loan holding
company becomes a covered company, unless that time is extended by the
Board in writing.
(2) A savings and loan holding company that is subject to minimum
capital requirements and that becomes a covered company after September
30 of a calendar year must comply with the requirements of this subpart
beginning on January 1 of the third calendar year after the savings and
loan holding company becomes a covered company, unless that time is
extended by the Board in writing.
Sec. 238.143 Stress test.
(a) Stress test requirement--(1) In general. A covered company must
conduct a stress test as required under this subpart.
(2) Frequency. (i) General. Except as provided in paragraph
(a)(2)(ii) of this section, a covered company must conduct a stress
test according to the frequency in Table 1 of Sec. 238.143(a)(2)(i).
[[Page 59086]]
Table 1 of Sec. 238.143(a)(2)(i)
------------------------------------------------------------------------
Then the stress test must be
If the covered company is a conducted
------------------------------------------------------------------------
Category II savings and loan holding Annually, by April 5 of each
company. calendar year based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Category III savings and loan holding Biennially, by April 5 of each
company. calendar year ending in an
even number, based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Savings and loan holding company that Periodically, as determined by
is not:. rule or order.
(A) A Category II savings and loan
holding company; or
(B) A Category III savings and loan
holding company.
------------------------------------------------------------------------
(ii) Change in frequency. The Board may require a covered company
to conduct a stress test on a more or less frequent basis than would be
required under paragraphs (a)(2)(i) of this section based on the
company's financial condition, size, complexity, risk profile, scope of
operations, or activities, or risks to the U.S. economy.
(3) Notice and response--(i) Notification of change in frequency.
If the Board requires a covered company to change the frequency of the
stress test under paragraph (a)(2)(ii) of this section, the Board will
notify the company in writing and provide a discussion of the basis for
its determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under this paragraph (a)(3),
a covered company may request in writing that the Board reconsider the
requirement to conduct a stress test on a more or less frequent basis
than would be required under paragraph (a)(2)(i) of this section. A
covered company's request for reconsideration must include an
explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
(b) Scenarios provided by the Board--(1) In general. In conducting
a stress test under this section, a covered company must, at a minimum,
use the scenarios provided by the Board. Except as provided in
paragraphs (b)(2) and (3) of this section, the Board will provide a
description of the scenarios to each covered company no later than
February 15 of the calendar year in which the stress test is performed
pursuant to this section.
(2) Additional components. (i) The Board may require a covered
company with significant trading activity, as determined by the Board
and specified in the Capital Assessments and Stress Testing report (FR
Y-14), to include a trading and counterparty component in its severely
adverse scenario in the stress test required by this section. The data
used in this component must be as-of a date selected by the Board
between October 1 of the previous calendar year and March 1 of the
calendar year in which the stress test is performed pursuant to this
section, and the Board will communicate the as-of date and a
description of the component to the company no later than March 1 of
the calendar year in which the stress test is performed pursuant to
this section.
(ii) The Board may require a covered company to include one or more
additional components in its severely adverse scenario in the stress
test required by this section based on the company's financial
condition, size, complexity, risk profile, scope of operations, or
activities, or risks to the U.S. economy.
(3) Additional scenarios. The Board may require a covered company
to use one or more additional scenarios in the stress test required by
this section based on the company's financial condition, size,
complexity, risk profile, scope of operations, or activities, or risks
to the U.S. economy.
(4) Notice and response--(i) Notification of additional component.
If the Board requires a covered company to include one or more
additional components in its severely adverse scenario under paragraph
(b)(2) of this section or to use one or more additional scenarios under
paragraph (b)(3) of this section, the Board will notify the company in
writing and include a discussion of the basis for its determination.
The Board will provide such notification no later than December 31 of
the preceding calendar year. The notification will include a general
description of the additional component(s) or additional scenario(s)
and the basis for requiring the company to include the additional
component(s) or additional scenario(s).
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under this paragraph, the
covered company may request in writing that the Board reconsider the
requirement that the company include the additional component(s) or
additional scenario(s), including an explanation as to why the request
for reconsideration should be granted. The Board will respond in
writing within 14 calendar days of receipt of the company's request.
(iii) Description of component. The Board will provide the covered
company with a description of any additional component(s) or additional
scenario(s) by March 1 of the calendar year in which the stress test is
performed pursuant to this section.
Sec. 238.144 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under
Sec. 238.143, for each quarter of the planning horizon, a covered
company must estimate the following for each scenario required to be
used:
(1) Losses, pre-provision net revenue, provision for credit losses,
and net income; and
(2) The potential impact on pro forma regulatory capital levels and
pro forma capital ratios (including regulatory capital ratios and any
other capital ratios specified by the Board), incorporating the effects
of any capital actions over the planning horizon and maintenance of an
allowance for credit losses appropriate for credit exposures throughout
the planning horizon.
(b) Assumptions regarding capital actions. In conducting a stress
test under Sec. 238.143, a covered company is required to make the
following assumptions regarding its capital actions over the planning
horizon:
(1) For the first quarter of the planning horizon, the covered
company must take into account its actual capital actions as of the end
of that quarter; and
(2) For each of the second through ninth quarters of the planning
horizon, the covered company must include in the projections of
capital:
(i) Common stock dividends equal to the quarterly average dollar
amount of common stock dividends that the company paid in the previous
year (that is, the first quarter of the planning horizon and the
preceding three
[[Page 59087]]
calendar quarters) plus common stock dividends attributable to
issuances related to expensed employee compensation or in connection
with a planned merger or acquisition to the extent that the merger or
acquisition is reflected in the covered company's pro forma balance
sheet estimates;
(ii) Payments on any other instrument that is eligible for
inclusion in the numerator of a regulatory capital ratio equal to the
stated dividend, interest, or principal due on such instrument during
the quarter;
(iii) An assumption of no redemption or repurchase of any capital
instrument that is eligible for inclusion in the numerator of a
regulatory capital ratio; and
(iv) An assumption of no issuances of common stock or preferred
stock, except for issuances related to expensed employee compensation
or in connection with a planned merger or acquisition to the extent
that the merger or acquisition is reflected in the covered company's
pro forma balance sheet estimates.
(c) Controls and oversight of stress testing processes--(1) In
general. The senior management of a covered company must establish and
maintain a system of controls, oversight, and documentation, including
policies and procedures, that are designed to ensure that its stress
testing processes are effective in meeting the requirements in this
subpart. These policies and procedures must, at a minimum, describe the
covered company's stress testing practices and methodologies, and
processes for validating and updating the company's stress test
practices and methodologies consistent with applicable laws and
regulations.
(2) Oversight of stress testing processes. The board of directors,
or a committee thereof, of a covered company must review and approve
the policies and procedures of the stress testing processes as
frequently as economic conditions or the condition of the covered
company may warrant, but no less than each year a stress test is
conducted. The board of directors and senior management of the covered
company must receive a summary of the results of any stress test
conducted under this subpart.
(3) Role of stress testing results. The board of directors and
senior management of each covered company must consider the results of
the analysis it conducts under this subpart, as appropriate:
(i) As part of the covered company's capital plan and capital
planning process, including when making changes to the covered
company's capital structure (including the level and composition of
capital); and
(ii) When assessing the covered company's exposures,
concentrations, and risk positions.
Sec. 238.145 Reports of stress test results.
(a) Reports to the Board of stress test results. A covered company
must report the results of the stress test required under Sec. 238.143
to the Board in the manner and form prescribed by the Board. Such
results must be submitted by April 5 of the calendar year in which the
stress test is performed pursuant to Sec. 238.143, unless that time is
extended by the Board in writing.
(b) Confidential treatment of information submitted. The
confidentiality of information submitted to the Board under this
subpart and related materials shall be determined in accordance with
applicable exemptions under the Freedom of Information Act (5 U.S.C.
552(b)) and the Board's Rules Regarding Availability of Information (12
CFR part 261).
Sec. 238.146 Disclosure of stress test results.
(a) Public disclosure of results--(1) In general. A covered company
must publicly disclose a summary of the results of the stress test
required under Sec. 238.143 within the period that is 15 calendar days
after the Board publicly discloses the results of its supervisory
stress test of the covered company pursuant to Sec. 238.134, unless
that time is extended by the Board in writing.
(2) Disclosure method. The summary required under this section may
be disclosed on the website of a covered company, or in any other forum
that is reasonably accessible to the public.
(b) Summary of results. The summary results must, at a minimum,
contain the following information regarding the severely adverse
scenario:
(1) A description of the types of risks included in the stress
test;
(2) A general description of the methodologies used in the stress
test, including those employed to estimate losses, revenues, provision
for credit losses, and changes in capital positions over the planning
horizon;
(3) Estimates of--
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses or gains on
available-for-sale and held-to-maturity securities, trading and
counterparty losses, and other losses or gains;
(iii) Net income before taxes;
(iv) Loan losses (dollar amount and as a percentage of average
portfolio balance) in the aggregate and by subportfolio, including:
Domestic closed-end first-lien mortgages; domestic junior lien
mortgages and home equity lines of credit; commercial and industrial
loans; commercial real estate loans; credit card exposures; other
consumer loans; and all other loans; and
(v) Pro forma regulatory capital ratios and any other capital
ratios specified by the Board; and
(4) An explanation of the most significant causes for the changes
in regulatory capital ratios; and
(5) With respect to any depository institution subsidiary that is
subject to stress testing requirements pursuant to 12 U.S.C.
5365(i)(2), 12 CFR part 46 (OCC), or 12 CFR part 325, subpart C (FDIC),
changes over the planning horizon in regulatory capital ratios and any
other capital ratios specified by the Board and an explanation of the
most significant causes for the changes in regulatory capital ratios.
(c) Content of results. (1) The following disclosures required
under paragraph (b) of this section must be on a cumulative basis over
the planning horizon:
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses or gains on
available-for-sale and held-to-maturity securities, trading and
counterparty losses, and other losses or gains;
(iii) Net income before taxes; and
(iv) Loan losses in the aggregate and by subportfolio.
(2) The disclosure of pro forma regulatory capital ratios and any
other capital ratios specified by the Board that is required under
paragraph (b) of this section must include the beginning value, ending
value, and minimum value of each ratio over the planning horizon.
0
12. Add subpart Q to read as follows:
Subpart Q--Single Counterparty Credit Limits for Covered Savings
and Loan Holding Companies
Sec.
238.150 Applicability and general provisions.
238.151 Definitions.
238.152 Credit exposure limits.
238.153 Gross credit exposure.
238.154 Net credit exposure.
238.155 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
subsidiaries of the covered company.
238.156 Aggregation of exposures to more than one counterparty due
to economic interdependence or control relationships.
238.157 Exemptions.
238.158 Compliance.
[[Page 59088]]
Sec. 238.150 Applicability and general provisions.
(a) In general. This subpart establishes single counterparty credit
limits for a covered company. For purposes of this subpart, covered
company means:
(i) A Category II savings and loan holding company; or
(ii) A Category III savings and loan holding company.
(b) Credit exposure limits. (1) Section 238.152 establishes credit
exposure limits for a covered company.
(2) A covered company is required to calculate its aggregate net
credit exposure, gross credit exposure, and net credit exposure to a
counterparty using the methods in this subpart.
(c) Applicability of this subpart. (1) A covered company that
becomes subject to this subpart must comply with the requirements of
this subpart beginning on the first day of the ninth calendar quarter
after it becomes a covered company, unless that time is accelerated or
extended by the Board in writing.
(d) Cessation of requirements. Any company that becomes a covered
company will remain subject to the requirements of this subpart unless
and until it is not a Category II savings and loan holding company or a
Category III savings and loan holding company.
Sec. 238.151 Definitions.
Unless defined in this section, terms that are set forth in Sec.
238.2 and used in this subpart have the definitions assigned in Sec.
238.2. For purposes of this subpart:
(a) Adjusted market value means:
(1) With respect to the value of cash, securities, or other
eligible collateral transferred by the covered company to a
counterparty, the sum of:
(i) The market value of the cash, securities, or other eligible
collateral; and
(ii) The product of the market value of the securities or other
eligible collateral multiplied by the applicable collateral haircut in
Table 1 to Sec. 217.132 of this chapter; and
(2) With respect to cash, securities, or other eligible collateral
received by the covered company from a counterparty:
(i) The market value of the cash, securities, or other eligible
collateral; minus
(ii) The market value of the securities or other eligible
collateral multiplied by the applicable collateral haircut in Table 1
to Sec. 217.132 of this chapter.
(3) Prior to calculating the adjusted market value pursuant to
paragraphs (a)(1) and (2) of this section, with regard to a transaction
that meets the definition of ``repo-style transaction'' in Sec. 217.2
of this chapter, the covered company would first multiply the
applicable collateral haircuts in Table 1 to Sec. 217.132 of this
chapter by the square root of 1/2.
(b) Affiliate means, with respect to a company:
(1) Any subsidiary of the company and any other company that is
consolidated with the company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards
referenced in paragraph (b)(1) of this section, any subsidiary of the
company and any other company that would be consolidated with the
company, if consolidation would have occurred if such principles or
standards had applied.
(c) Aggregate net credit exposure means the sum of all net credit
exposures of a covered company and all of its subsidiaries to a single
counterparty as calculated under this subpart.
(d) Bank-eligible investments means investment securities that a
national bank is permitted to purchase, sell, deal in, underwrite, and
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Counterparty means, with respect to a credit transaction:
(1) With respect to a natural person, the natural person, and, if
the credit exposure of the covered company to such natural person
exceeds 5 percent of the covered company's tier 1 capital, the natural
person and members of the person's immediate family collectively;
(2) With respect to any company that is not a subsidiary of the
covered company, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies,
instrumentalities, and political subdivisions (including any
municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned
a zero percent risk weight under the standardized approach in 12 CFR
part 217, subpart D, the foreign sovereign entity and all of its
agencies and instrumentalities (but not including any political
subdivision) collectively; and
(5) With respect to a political subdivision of a foreign sovereign
entity such as a state, province, or municipality, any political
subdivision of the foreign sovereign entity and all of such political
subdivision's agencies and instrumentalities, collectively.\1\
---------------------------------------------------------------------------
\1\ In addition, under Sec. 238.156, under certain
circumstances, a covered company is required to aggregate its net
credit exposure to one or more counterparties for all purposes under
this subpart.
---------------------------------------------------------------------------
(f) Covered company is defined in Sec. 238.150(a)
(g) Credit derivative has the same meaning as in Sec. 217.2 of
this chapter.
(h) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans,
deposits, and lines of credit, but excluding uncommitted lines of
credit;
(2) Any repurchase agreement or reverse repurchase agreement with
the counterparty;
(3) Any securities lending or securities borrowing transaction with
the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any
endorsement, confirmed letter of credit, or standby letter of credit)
issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the
counterparty;
(6) Any credit exposure to the counterparty in connection with a
derivative transaction between the covered company and the
counterparty;
(7) Any credit exposure to the counterparty in connection with a
credit derivative or equity derivative between the covered company and
a third party, the reference asset of which is an obligation or equity
security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above,
and any other similar transaction that the Board, by regulation or
order, determines to be a credit transaction for purposes of this
subpart.
(i) Depository institution has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(j) Derivative transaction means any transaction that is a
contract, agreement, swap, warrant, note, or option that is based, in
whole or in part, on the value of, any interest in, or any quantitative
measure or the occurrence of any event relating to, one or more
commodities, securities, currencies, interest or other rates, indices,
or other assets.
(k) Eligible collateral means collateral in which, notwithstanding
the prior security interest of any custodial agent, the covered company
has a perfected, first priority security interest (or the legal
equivalent thereof, if outside of the United States), with the
exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered company or a subsidiary of the
covered company (including cash in foreign currency or U.S. dollars
held for the covered company by a custodian or trustee, whether inside
or outside of the United States);
[[Page 59089]]
(2) Debt securities (other than mortgage- or asset-backed
securities and resecuritization securities, unless those securities are
issued by a U.S. government-sponsored enterprise) that are bank-
eligible investments and that are investment grade, except for any debt
securities issued by the covered company or any subsidiary of the
covered company;
(3) Equity securities that are publicly traded, except for any
equity securities issued by the covered company or any subsidiary of
the covered company;
(4) Convertible bonds that are publicly traded, except for any
convertible bonds issued by the covered company or any subsidiary of
the covered company; or
(5) Gold bullion.
(l) Eligible credit derivative means a single-name credit
derivative or a standard, non-tranched index credit derivative,
provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap, the contract
includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that
is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or
inability of the reference exposure issuer to pay its debts, or its
failure or admission in writing of its inability generally to pay its
debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provide that any required consent to transfer may not be
unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract
clearly identifies the parties responsible for determining whether a
credit event has occurred, specifies that this determination is not the
sole responsibility of the protection provider, and gives the
protection purchaser the right to notify the protection provider of the
occurrence of a credit event.
(m) Eligible equity derivative means an equity derivative, provided
that:
(1) The derivative contract has been confirmed by all relevant
parties;
(2) Any assignment of the derivative contract has been confirmed by
all relevant parties; and
(3) The terms and conditions dictating the manner in which the
derivative contract is to be settled are incorporated into the
contract.
(n) Eligible guarantee has the same meaning as in Sec. 217.2 of
this chapter.
(o) Eligible guarantor has the same meaning as in Sec. 217.2 of
this chapter.
(p) Equity derivative has the same meaning as ``equity derivative
contract'' in Sec. 217.2 of this chapter.
(q) Exempt counterparty means an entity that is identified as
exempt from the requirements of this subpart under Sec. 238.157, or
that is otherwise excluded from this subpart, including any sovereign
entity assigned a zero percent risk weight under the standardized
approach in 12 CFR part 217, subpart D.
(r) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings
and loan holding company; a U.S. intermediate holding company
established or designated pursuant to 12 CFR 252.153; or a nonbank
financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that
is organized under the laws of a foreign country and that engages
directly in the business of banking outside the United States; a
federal credit union or state credit union as defined in section 2 of
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national
association, state member bank, or state nonmember bank that is not a
depository institution; an institution that functions solely in a trust
or fiduciary capacity as described in section 2(c)(2)(D) of the Bank
Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan
company, an industrial bank, or other similar institution described in
section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C.
1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money
lender; installment lender; consumer lender or lending company;
mortgage lender, broker, or bank; motor vehicle title pledge lender;
payday or deferred deposit lender; premium finance company; commercial
finance or lending company; or commercial mortgage company; except
entities registered or licensed solely on account of financing the
entity's direct sales of goods or services to customers;
(B) A money services business, including a check casher; money
transmitter; currency dealer or exchange; or money order or traveler's
check issuer;
(iv) Any person registered with the Commodity Futures Trading
Commission as a swap dealer or major swap participant pursuant to the
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that
is registered with the U.S. Securities and Exchange Commission as a
security-based swap dealer or a major security-based swap participant
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.);
(v) A securities holding company as defined in section 618 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an
investment adviser as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company
registered with the U.S. Securities and Exchange Commission under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company
that has elected to be regulated as a business development company
pursuant to section 54(a) of the Investment Company Act of 1940 (15
U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an
investment company under section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is
deemed not to be an investment company under section 3 of the
Investment Company Act of 1940 pursuant to Investment Company Act Rule
3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity
trading advisor as defined, respectively, in sections 1a(10), 1a(11),
and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10),
1a(11), and 1a(12)); a floor broker, a floor trader, or introducing
[[Page 59090]]
broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and
1a(31)); or a futures commission merchant as defined in section 1a(28)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and
(32) of section 3 of the Employee Retirement Income and Security Act of
1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily
engaged in writing insurance or reinsuring risks underwritten by
insurance companies, or is subject to supervision as such by a State
insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section
803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in
paragraphs (r)(1)(i) through (x) of this section, if it were organized
under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, ``financial
entity'' does not include any counterparty that is a foreign sovereign
entity or multilateral development bank.
(s) Foreign sovereign entity means a sovereign entity other than
the United States government and the entity's agencies, departments,
ministries, and central bank collectively.
(t) Gross credit exposure means, with respect to any credit
transaction, the credit exposure of the covered company before
adjusting, pursuant to Sec. 238.154, for the effect of any eligible
collateral, eligible guarantee, eligible credit derivative, eligible
equity derivative, other eligible hedge, and any unused portion of
certain extensions of credit.
(u) Immediate family means the spouse of an individual, the
individual's minor children, and any of the individual's children
(including adults) residing in the individual's home.
(v) Intraday credit exposure means credit exposure of a covered
company to a counterparty that by its terms is to be repaid, sold, or
terminated by the end of its business day in the United States.
(w) Investment grade has the same meaning as in Sec. 217.2 of this
chapter.
(x) Multilateral development bank has the same meaning as in Sec.
217.2 of this chapter.
(y) Net credit exposure means, with respect to any credit
transaction, the gross credit exposure of a covered company and all of
its subsidiaries calculated under Sec. 238.153, as adjusted in
accordance with Sec. 238.154.
(z) Qualifying central counterparty has the same meaning as in
Sec. 217.2 of this chapter.
(aa) Qualifying master netting agreement has the same meaning as in
Sec. 217.2 of this chapter.
(bb) Securities financing transaction means any repurchase
agreement, reverse repurchase agreement, securities borrowing
transaction, or securities lending transaction.
(cc) Short sale means any sale of a security which the seller does
not own or any sale which is consummated by the delivery of a security
borrowed by, or for the account of, the seller.
(dd) Sovereign entity means a central national government
(including the U.S. government) or an agency, department, ministry, or
central bank, but not including any political subdivision such as a
state, province, or municipality.
(ee) Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company under
applicable accounting standards; or
(2) For a company that is not subject to principles or standards
referenced in paragraph (ee)(1) of this section, consolidation would
have occurred if such principles or standards had applied.
(ff) Tier 1 capital means common equity tier 1 capital and
additional tier 1 capital, as defined in 12 CFR part 217 and as
reported by the covered savings and loan holding company on the most
recent FR Y-9C report on a consolidated basis.
(gg) Total consolidated assets. A company's total consolidated
assets are determined based on:
(1) The average of the company's total consolidated assets in the
four most recent consecutive quarters as reported quarterly on the FR
Y-9C; or
(2) If the company has not filed an FR Y-9C for each of the four
most recent consecutive quarters, the average of the company's total
consolidated assets, as reported on the company's FR Y-9C, for the most
recent quarter or consecutive quarters, as applicable.
Sec. 238.152 Credit exposure limits.
General limit on aggregate net credit exposure. No covered company
may have an aggregate net credit exposure to any counterparty that
exceeds 25 percent of the tier 1 capital of the covered company.
Sec. 238.153 Gross credit exposure.
(a) Calculation of gross credit exposure. The amount of gross
credit exposure of a covered company to a counterparty with respect to
a credit transaction is, in the case of:
(1) A deposit of the covered company held by the counterparty, loan
by a covered company to the counterparty, and lease in which the
covered company is the lessor and the counterparty is the lessee, equal
to the amount owed by the counterparty to the covered company under the
transaction.
(2) A debt security or debt investment held by the covered company
that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-
for-sale securities; and
(ii) The amortized purchase price of the securities or investments,
for securities or investments held to maturity.
(3) An equity security held by the covered company that is issued
by the counterparty, equity investment in a counterparty, and other
direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of
the methods that the covered company is authorized to use under 12 CFR
part 217, subparts D and E to value such transactions:
(i)(A) As calculated for each transaction, in the case of a
securities financing transaction between the covered company and the
counterparty that is not subject to a bilateral netting agreement or
does not meet the definition of ``repo-style transaction'' in Sec.
217.2 of this chapter; or
(B) As calculated for a netting set, in the case of a securities
financing transaction between the covered company and the counterparty
that is subject to a bilateral netting agreement with that counterparty
and meets the definition of ``repo-style transaction'' in Sec. 217.2
of this chapter;
(ii) For purposes of paragraph (a)(4)(i) of this section, the
covered company must:
(A) Assign a value of zero to any security received from the
counterparty that does not meet the definition of ``eligible
collateral'' in Sec. 238.151; and
(B) Include the value of securities that are eligible collateral
received by the covered company from the counterparty (including any
exempt counterparty), calculated in accordance with paragraphs
(a)(4)(i) through (iv) of this section, when calculating its gross
credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraphs (a)(4)(i) and (ii) of this section
and with respect to each credit transaction, a covered company's gross
credit exposure to a collateral issuer under this paragraph (a)(4) is
limited to the covered company's gross credit
[[Page 59091]]
exposure to the counterparty on the credit transaction; and
(iv) In cases where the covered company receives eligible
collateral from a counterparty in addition to the cash or securities
received from that counterparty, the counterparty may reduce its gross
credit exposure to that counterparty in accordance with Sec.
238.154(b).
(5) A committed credit line extended by a covered company to a
counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered company on
behalf of a counterparty, equal to the maximum potential loss to the
covered company on the transaction.
(7) A derivative transaction must be valued using any of the
methods that the covered company is authorized to use under 12 CFR part
217, subparts D and E to value such transactions:
(i)(A) As calculated for each transaction, in the case of a
derivative transaction between the covered company and the
counterparty, including an equity derivative but excluding a credit
derivative described in paragraph (a)(8) of this section, that is not
subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative
transaction between the covered company and the counterparty, including
an equity derivative but excluding a credit derivative described in
paragraph (a)(8) of this section, that is subject to a qualifying
master netting agreement.
(ii) In cases where a covered company is required to recognize an
exposure to an eligible guarantor pursuant to Sec. 238.154(d), the
covered company must exclude the relevant derivative transaction when
calculating its gross exposure to the original counterparty under this
section.
(8) A credit derivative between the covered company and a third
party where the covered company is the protection provider and the
reference asset is an obligation or debt security of the counterparty,
equal to the maximum potential loss to the covered company on the
transaction.
(b) Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
subsidiaries. Notwithstanding paragraph (a) of this section, a covered
company must calculate pursuant to Sec. 238.155 its gross credit
exposure due to any investment in the debt or equity of, and any credit
derivative or equity derivative between the covered company and a third
party where the covered company is the protection provider and the
reference asset is an obligation or equity security of, or equity
investment in, a securitization vehicle, investment fund, and other
special purpose vehicle that is not a subsidiary of the covered
company.
(c) Attribution rule. Notwithstanding any other requirement in this
subpart, a covered company must treat any transaction with any natural
person or entity as a credit transaction with another party, to the
extent that the proceeds of the transaction are used for the benefit
of, or transferred to, the other party.
Sec. 238.154 Net credit exposure.
(a) In general. For purposes of this subpart, a covered company
must calculate its net credit exposure to a counterparty by adjusting
its gross credit exposure to that counterparty in accordance with the
rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure
to a counterparty for any credit transaction other than a securities
financing transaction, a covered company must reduce its gross credit
exposure on the transaction by the adjusted market value of any
eligible collateral.
(2) A covered company that reduces its gross credit exposure to a
counterparty as required under paragraph (b)(1) of this section must
include the adjusted market value of the eligible collateral, when
calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered
company's gross credit exposure to a collateral issuer under this
paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction if valued in accordance with Sec.
238.153(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to
a counterparty for any credit transaction, a covered company must
reduce its gross credit exposure to the counterparty by the amount of
any eligible guarantee from an eligible guarantor that covers the
transaction.
(2) A covered company that reduces its gross credit exposure to a
counterparty as required under paragraph (c)(1) of this section must
include the amount of eligible guarantees when calculating its gross
credit exposure to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered
company's gross credit exposure to an eligible guarantor with respect
to an eligible guarantee under this paragraph (c) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible
guarantee if valued in accordance with Sec. 238.153(a).
(d) Eligible credit and equity derivatives. (1) In calculating net
credit exposure to a counterparty for a credit transaction under this
section, a covered company must reduce its gross credit exposure to the
counterparty by:
(i) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 238.153(a)(7)).
(2)(i) A covered company that reduces its gross credit exposure to
a counterparty as provided under paragraph (d)(1) of this section must
include, when calculating its net credit exposure to the eligible
guarantor, including in instances where the underlying credit
transaction would not be subject to the credit limits of Sec. 238.152
(for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible
guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible
guarantor, the gross credit exposure amount to the counterparty
(calculated in accordance with Sec. 238.153(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases
where the eligible credit derivative or eligible equity derivative is
used to hedge covered positions that are subject to the Board's market
risk rule (12 CFR part 217, subpart F) and the counterparty on the
hedged transaction is not a financial entity, the amount of credit
exposure that a company must recognize to the eligible guarantor is the
amount that would be calculated pursuant to Sec. 238.153(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered
company's
[[Page 59092]]
gross credit exposure to an eligible guarantor with respect to an
eligible credit derivative or an eligible equity derivative this
paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit
transaction prior to recognition of the eligible credit derivative or
the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit
exposure that would have been attributable to that exempt counterparty
on the credit transaction prior to recognition of the eligible credit
derivative or the eligible equity derivative if valued in accordance
with Sec. 238.153(a).
(e) Other eligible hedges. In calculating net credit exposure to a
counterparty for a credit transaction under this section, a covered
company may reduce its gross credit exposure to the counterparty by the
face amount of a short sale of the counterparty's debt security or
equity security, provided that:
(1) The instrument in which the covered company has a short
position is junior to, or pari passu with, the instrument in which the
covered company has the long position; and
(2) The instrument in which the covered company has a short
position and the instrument in which the covered company has the long
position are either both treated as trading or available-for-sale
exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In
computing its net credit exposure to a counterparty for a committed
credit line or revolving credit facility under this section, a covered
company may reduce its gross credit exposure by the amount of the
unused portion of the credit extension to the extent that the covered
company does not have any legal obligation to advance additional funds
under the extension of credit and the used portion of the credit
extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has
been secured by eligible collateral, the covered company may reduce its
gross credit exposure by the adjusted market value of any eligible
collateral received from the counterparty, even if the used portion has
not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this
paragraph, the credit contract must specify that any used portion of
the credit extension must be fully secured by the adjusted market value
of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A
covered company's credit transactions with an exempt counterparty are
not subject to the requirements of this subpart, including but not
limited to Sec. 238.152.
(2) Notwithstanding paragraph (g)(1) of this section, in cases
where a covered company has a credit transaction with an exempt
counterparty and the covered company has obtained eligible collateral
from that exempt counterparty or an eligible guarantee or eligible
credit or equity derivative from an eligible guarantor, the covered
company must include (for purposes of this subpart) such exposure to
the issuer of such eligible collateral or the eligible guarantor, as
calculated in accordance with the rules set forth in this section, when
calculating its gross credit exposure to that issuer of eligible
collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
company must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral
and calculating its gross credit exposure to an issuer of eligible
collateral, pursuant to paragraph (b) of this section, the currency
mismatch adjustment approach of Sec. 217.37(c)(3)(ii) of this chapter;
and
(2) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible guarantee,
eligible equity derivative, or eligible credit derivative from an
eligible guarantor and calculating its gross credit exposure to an
eligible guarantor, pursuant to paragraphs (c) and (d) of this section,
the currency mismatch adjustment approach of Sec. 217.36(f) of this
chapter.
(i) Maturity mismatch adjustments. For purposes of calculating its
net credit exposure to a counterparty under this section, a covered
company must apply, as applicable, the maturity mismatch adjustment
approach of Sec. 217.36(d) of this chapter:
(1) When reducing its gross credit exposure to a counterparty
resulting from any credit transaction due to any eligible collateral or
any eligible guarantees, eligible equity derivatives, or eligible
credit derivatives from an eligible guarantor, pursuant to paragraphs
(b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of
eligible collateral, pursuant to paragraph (b) of this section, or to
an eligible guarantor, pursuant to paragraphs (c) and (d) of this
section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity
derivative, or eligible credit derivative subject to paragraph (i)(1)
of this section:
(i) Has a shorter maturity than the credit transaction;
(ii) Has an original maturity equal to or greater than one year;
(iii) Has a residual maturity of not less than three months; and
(iv) The adjustment approach is otherwise applicable.
Sec. 238.155 Investments in and exposures to securitization vehicles,
investment funds, and other special purpose vehicles that are not
subsidiaries of the covered company.
(a) In general. (1) For purposes of this section, the following
definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other
special purpose vehicle that is not a subsidiary of the covered
company.
(ii) SPV exposure means an investment in the debt or equity of an
SPV, or a credit derivative or equity derivative between the covered
company and a third party where the covered company is the protection
provider and the reference asset is an obligation or equity security
of, or equity investment in, an SPV.
(2)(i) A covered company must determine whether the amount of its
gross credit exposure to an issuer of assets in an SPV, due to an SPV
exposure, is equal to or greater than 0.25 percent of the covered
company's tier 1 capital using one of the following two methods:
(A) The sum of all of the issuer's assets (with each asset valued
in accordance with Sec. 238.153(a)) in the SPV; or
(B) The application of the look-through approach described in
paragraph (b) of this section.
(ii) With respect to the determination required under paragraph
(a)(2)(i) of this section, a covered company must use the same method
to calculate gross credit exposure to each issuer of assets in a
particular SPV.
(iii) In making a determination under paragraph (a)(2)(i) of this
section, the covered company must consider only the credit exposure to
the issuer arising from the covered company's SPV exposure.
(iv) For purposes of this paragraph (a)(2), a covered company that
is unable to identify each issuer of assets in an SPV must attribute to
a single unknown counterparty the amount of its gross credit exposure
to all unidentified issuers and calculate such gross credit exposure
using one method in either
[[Page 59093]]
paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of this section.
(3)(i) If a covered company determines pursuant to paragraph (a)(2)
of this section that the amount of its gross credit exposure to an
issuer of assets in an SPV is less than 0.25 percent of the covered
company's tier 1 capital, the amount of the covered company's gross
credit exposure to that issuer may be attributed to either that issuer
of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets
must be identified as a counterparty, and the gross credit exposure
calculated under paragraph (a)(2)(i)(A) of this section to that issuer
of assets must be aggregated with any other gross credit exposures
(valued in accordance with Sec. 238.153) to that same counterparty;
and
(B) If attributed to the SPV, the covered company's gross credit
exposure is equal to the covered company's SPV exposure, valued in
accordance with Sec. 238.153(a).
(ii) If a covered company determines pursuant to paragraph (a)(2)
of this section that the amount of its gross credit exposure to an
issuer of assets in an SPV is equal to or greater than 0.25 percent of
the covered company's tier 1 capital or the covered company is unable
to determine that the amount of the gross credit exposure is less than
0.25 percent of the covered company's tier 1 capital:
(A) The covered company must calculate the amount of its gross
credit exposure to the issuer of assets in the SPV using the look-
through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a
counterparty, and the gross credit exposure calculated in accordance
with paragraph (b) of this section must be aggregated with any other
gross credit exposures (valued in accordance with Sec. 238.153) to
that same counterparty; and
(C) When applying the look-through approach in paragraph (b) of
this section, a covered company that is unable to identify each issuer
of assets in an SPV must attribute to a single unknown counterparty the
amount of its gross credit exposure, calculated in accordance with
paragraph (b) of this section, to all unidentified issuers.
(iii) For purposes of this section, a covered company must
aggregate all gross credit exposures to unknown counterparties for all
SPVs as if the exposures related to a single unknown counterparty; this
single unknown counterparty is subject to the limits of Sec. 238.152
as if it were a single counterparty.
(b) Look-through approach. A covered company that is required to
calculate the amount of its gross credit exposure with respect to an
issuer of assets in accordance with this paragraph (b) must calculate
the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of
the gross credit exposure to the issuer of assets is equal to the
covered company's pro rata share of the SPV multiplied by the value of
the underlying asset in the SPV, valued in accordance with Sec.
238.153(a); and
(2) Where all investors in the SPV do not rank pari passu, the
amount of the gross credit exposure to the issuer of assets is equal
to:
(i) The pro rata share of the covered company's investment in the
tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered company
has invested, except in the case of a debt security that is held to
maturity, in which case the tranche must be valued at the amortized
purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in
the SPV, each as calculated pursuant to Sec. 238.153(a).
(c) Exposures to third parties. (1) Notwithstanding any other
requirement in this section, a covered company must recognize, for
purposes of this subpart, a gross credit exposure to each third party
that has a contractual obligation to provide credit or liquidity
support to an SPV whose failure or material financial distress would
cause a loss in the value of the covered company's SPV exposure.
(2) The amount of any gross credit exposure that is required to be
recognized to a third party under paragraph (c)(1) of this section is
equal to the covered company's SPV exposure, up to the maximum
contractual obligation of that third party to the SPV, valued in
accordance with Sec. 238.153(a). (This gross credit exposure is in
addition to the covered company's gross credit exposure to the SPV or
the issuers of assets of the SPV, calculated in accordance with
paragraphs (a) and (b) of this section.)
(3) A covered company must aggregate the gross credit exposure to a
third party recognized in accordance with paragraphs (c)(1) and (2) of
this section with its other gross credit exposures to that third party
(that are unrelated to the SPV) for purposes of compliance with the
limits of Sec. 238.152.
Sec. 238.156 Aggregation of exposures to more than one counterparty
due to economic interdependence or control relationships.
(a) In general. (1) If a covered company has an aggregate net
credit exposure to any counterparty that exceeds 5 percent of its tier
1 capital, the covered company must assess its relationship with the
counterparty under paragraph (b)(2) of this section to determine
whether the counterparty is economically interdependent with one or
more other counterparties of the covered company and under paragraph
(c)(1) of this section to determine whether the counterparty is
connected by a control relationship with one or more other
counterparties.
(2) If, pursuant to an assessment required under paragraph (a)(1)
of this section, the covered company determines that one or more of the
factors of paragraph (b)(2) or (c)(1) of this section are met with
respect to one or more counterparties, or the Board determines pursuant
to paragraph (d) of this section that one or more other counterparties
of a covered company are economically interdependent or that one or
more other counterparties of a covered company are connected by a
control relationship, the covered company must aggregate its net credit
exposure to the counterparties for all purposes under this subpart,
including, but not limited to, Sec. 238.152.
(3) In connection with any request pursuant to paragraph (b)(3) or
(c)(2) of this section, the Board may require the covered company to
provide additional information.
(b) Aggregation of exposures to more than one counterparty due to
economic interdependence. (1) For purposes of this paragraph, two
counterparties are economically interdependent if the failure, default,
insolvency, or material financial distress of one counterparty would
cause the failure, default, insolvency, or material financial distress
of the other counterparty, taking into account the factors in paragraph
(b)(2) of this section.
(2) A covered company must assess whether the financial distress of
one counterparty (counterparty A) would prevent the ability of the
other counterparty (counterparty B) to fully and timely repay
counterparty B's liabilities and whether the insolvency or default of
counterparty A is likely to be associated with the insolvency or
default of counterparty B and, therefore, these counterparties are
economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty's gross revenue
is derived
[[Page 59094]]
from, or gross expenditures are directed to, transactions with the
other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the
credit exposure of counterparty B, or is liable by other means, in an
amount that is 50 percent or more of the covered company's net credit
exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty's production
or output is sold to the other counterparty, which cannot easily be
replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of
both counterparties is the same and neither counterparty has another
independent source of income from which the loans may be serviced and
fully repaid; \1\ and
---------------------------------------------------------------------------
\1\ An employer will not be treated as a source of repayment
under this paragraph because of wages and salaries paid to an
employee.
---------------------------------------------------------------------------
(v) Whether two or more counterparties rely on the same source for
the majority of their funding and, in the event of the common
provider's default, an alternative provider cannot be found.
(3)(i) Notwithstanding paragraph (b)(2) of this section, if a
covered company determines that one or more of the factors in paragraph
(b)(2) is met, the covered company may request in writing a
determination from the Board that those counterparties are not
economically interdependent and that the covered company is not
required to aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph
(b)(3) of this section, the Board may grant temporary relief to the
covered company and not require the covered company to aggregate one
counterparty with another counterparty provided that the counterparty
could promptly modify its business relationships, such as by reducing
its reliance on the other counterparty, to address any economic
interdependence concerns, and provided that such relief is in the
public interest and is consistent with the purpose of this subpart.
(c) Aggregation of exposures to more than one counterparty due to
certain control relationships. (1) For purposes of this subpart, one
counterparty (counterparty A) is deemed to control the other
counterparty (counterparty B) if:
(i) Counterparty A owns, controls, or holds with the power to vote
25 percent or more of any class of voting securities of counterparty B;
or
(ii) Counterparty A controls in any manner the election of a
majority of the directors, trustees, or general partners (or
individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a
covered company determines that one or more of the factors in paragraph
(c)(1) is met, the covered company may request in writing a
determination from the Board that counterparty A does not control
counterparty B and that the covered company is not required to
aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph
(c)(2) of this section, the Board may grant temporary relief to the
covered company and not require the covered company to aggregate
counterparty A with counterparty B provided that, taking into account
the specific facts and circumstances, such indicia of control does not
result in the entities being connected by control relationships for
purposes of this subpart, and provided that such relief is in the
public interest and is consistent with the purpose of this subpart.
(d) Board determinations for aggregation of counterparties due to
economic interdependence or control relationships. The Board may
determine, after notice to the covered company and opportunity for
hearing, that one or more counterparties of a covered company are:
(1) Economically interdependent for purposes of this subpart,
considering the factors in paragraph (b)(2) of this section, as well as
any other indicia of economic interdependence that the Board determines
in its discretion to be relevant; or
(2) Connected by control relationships for purposes of this
subpart, considering the factors in paragraph (c)(1) of this section
and whether counterparty A:
(i) Controls the power to vote 25 percent or more of any class of
voting securities of Counterparty B pursuant to a voting agreement;
(ii) Has significant influence on the appointment or dismissal of
counterparty B's administrative, management, or governing body, or the
fact that a majority of members of such body have been appointed solely
as a result of the exercise of counterparty A's voting rights; or
(iii) Has the power to exercise a controlling influence over the
management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to
prevent evasion. Notwithstanding paragraphs (b) and (c) of this
section, a covered company must aggregate its exposures to a
counterparty with the covered company's exposures to another
counterparty if the Board determines in writing after notice and
opportunity for hearing, that the exposures to the two counterparties
must be aggregated to prevent evasions of the purposes of this subpart,
including, but not limited to Sec. 238.156.
Sec. 238.157 Exemptions.
(a) Exempted exposure categories. The following categories of
credit transactions are exempt from the limits on credit exposure under
this subpart:
(1) Any direct claim on, and the portion of a claim that is
directly and fully guaranteed as to principal and interest by, the
Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, only while operating under the conservatorship or
receivership of the Federal Housing Finance Agency, and any additional
obligation issued by a U.S. government-sponsored entity as determined
by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related
to the covered company's clearing activity, including potential future
exposure arising from transactions cleared by the qualifying central
counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International
Settlements, the International Monetary Fund, the International Bank
for Reconstruction and Development, the International Finance
Corporation, the International Development Association, the
Multilateral Investment Guarantee Agency, or the International Centre
for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the
European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that
such exemption is in the public interest and is consistent with the
purpose of this subpart.
(b) Exemption for Federal Home Loan Banks. For purposes of this
subpart, a covered company does not include any Federal Home Loan Bank.
(c) Additional exemptions by the Board. The Board may, by
regulation or order, exempt transactions, in whole or in part, from the
definition of the term ``credit exposure,'' if the Board finds that the
exemption is in the public interest.
Sec. 238.158 Compliance.
(a) Scope of compliance. (1) Using all available data, including
any data required to be maintained or reported to the Federal Reserve
under this subpart,
[[Page 59095]]
a covered company must comply with the requirements of this subpart on
a daily basis at the end of each business day.
(2) A covered company must report its compliance to the Federal
Reserve as of the end of the quarter, unless the Board determines and
notifies that company in writing that more frequent reporting is
required.
(3) In reporting its compliance, a covered company must calculate
and include in its gross credit exposure to an issuer of eligible
collateral or eligible guarantor the amounts of eligible collateral,
eligible guarantees, eligible equity derivatives, and eligible credit
derivatives that were provided to the covered company in connection
with credit transactions with exempt counterparties, valued in
accordance with and as required by Sec. 238.154(b) through (d) and
Sec. 238.154 (g).
(b) Qualifying master netting agreement. With respect to any
qualifying master netting agreement, a covered company must establish
and maintain procedures that meet or exceed the requirements of Sec.
217.3(d) of this chapter to monitor possible changes in relevant law
and to ensure that the agreement continues to satisfy these
requirements.
(c) Noncompliance. (1) Except as otherwise provided in this
section, if a covered company is not in compliance with this subpart
with respect to a counterparty solely due to the circumstances listed
in paragraphs (c)(2)(i) through (v) of this section, the covered
company will not be subject to enforcement actions for a period of 90
days (or, with prior notice to the company, such shorter or longer
period determined by the Board, in its sole discretion, to be
appropriate to preserve the safety and soundness of the covered
company), if the covered company uses reasonable efforts to return to
compliance with this subpart during this period. The covered company
may not engage in any additional credit transactions with such a
counterparty in contravention of this rule during the period of
noncompliance, except as provided in paragraph (c)(2) of this section.
(2) A covered company may request a special temporary credit
exposure limit exemption from the Board. The Board may grant approval
for such exemption in cases where the Board determines that such credit
transactions are necessary or appropriate to preserve the safety and
soundness of the covered company. In acting on a request for an
exemption, the Board will consider the following:
(i) A decrease in the covered company's capital stock and surplus;
(ii) The merger of the covered company with another covered
company;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a
counterparty as a result of which the covered company's credit exposure
to the counterparty becomes limited by the requirements of this
section; or
(v) Any other factor(s) the Board determines, in its discretion, is
appropriate.
(d) Other measures. The Board may impose supervisory oversight and
additional reporting measures that it determines are appropriate to
monitor compliance with this subpart. Covered companies must furnish,
in the manner and form prescribed by the Board, such information to
monitor compliance with this subpart and the limits therein as the
Board may require.
0
13. Add subpart R to read as follows:
Subpart R--Company-Run Stress Test Requirements for Foreign Savings and
Loan Holding Companies With Total Consolidated Assets Over $250 Billion
Sec.
238.160 Definitions.
238.161 Applicability.
238.162 Capital stress testing requirements.
Subpart R--Company-Run Stress Test Requirements for Foreign Savings
and Loan Holding Companies With Total Consolidated Assets Over $250
Billion
Sec. [thinsp]238.160 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Foreign savings and loan holding company means a savings and
loan holding company as defined in section 10 of the Home Owners' Loan
Act (12 U.S.C. 1467a(a)) that is incorporated or organized under the
laws of a country other than the United States.
(b) Pre-provision net revenue means revenue less expenses before
adjusting for total loan loss provisions.
(c) Stress test cycle has the same meaning as in subpart O of this
part.
(d) Total loan loss provisions means the amount needed to make
reserves adequate to absorb estimated credit losses, based upon
management's evaluation of the loans and leases that the company has
the intent and ability to hold for the foreseeable future or until
maturity or payoff, as determined under applicable accounting
standards.
Sec. [thinsp]238.161 Applicability.
(a) Applicability for foreign savings and loan holding companies
with total consolidated assets of more than $250 billion--(1) General.
A foreign savings and loan holding company must comply with the stress
test requirements set forth in this section beginning on the first day
of the ninth quarter following the date on which its average total
consolidated assets exceed $250 billion.
(2) Cessation of requirements. A foreign savings and loan holding
company will remain subject to requirements of this subpart until the
date on which the foreign savings and loan holding company's total
consolidated assets are below $250 billion for each of four most recent
calendar quarters.
(b) [Reserved]
Sec. [thinsp]238.162 Capital stress testing requirements.
(a) In general. (1) A foreign savings and loan holding company
subject to this subpart must:
(i) Be subject on a consolidated basis to a capital stress testing
regime by its home-country supervisor that meets the requirements of
paragraph (a)(2) of this section; and
(ii) Conduct such stress tests or be subject to a supervisory
stress test and meet any minimum standards set by its home-country
supervisor with respect to the stress tests.
(2) The capital stress testing regime of a foreign savings and loan
holding company's home-country supervisor must include:
(i) A supervisory capital stress test conducted by the relevant
home-country supervisor or an evaluation and review by the home-country
supervisor of an internal capital adequacy stress test conducted by the
foreign savings and loan holding company, conducted on at least a
biennial basis; and
(ii) Requirements for governance and controls of stress testing
practices by relevant management and the board of directors (or
equivalent thereof).
(b) Additional standards. (1) Unless the Board otherwise determines
in writing, a foreign savings and loan holding company that does not
meet each of the requirements in paragraphs (a)(1) and (2) of this
section must:
(i) Conduct an annual stress test of its U.S. subsidiaries to
determine whether those subsidiaries have the capital necessary to
absorb losses as a result of adverse economic conditions; and
(ii) Report on at least a biennial basis a summary of the results
of the stress test to the Board that includes a description of the
types of risks included in the stress test, a description of the
conditions or scenarios used in the stress test, a summary description
of the methodologies used in the stress
[[Page 59096]]
test, estimates of aggregate losses, pre-provision net revenue, total
loan loss provisions, net income before taxes and pro forma regulatory
capital ratios required to be computed by the home-country supervisor
of the foreign savings and loan holding company and any other relevant
capital ratios, and an explanation of the most significant causes for
any changes in regulatory capital ratios.
(2) An enterprise-wide stress test that is approved by the Board
may meet the stress test requirement of paragraph (b)(1)(ii) of this
section.
PART 242--DEFINITIONS RELATING TO TITLE I OF THE DODD-FRANK ACT
(REGULATION PP)
0
14. The authority citation for part 242 continues to read as follows:
Authority: 12 U.S.C. 5311.
0
15. In Sec. 242.1, paragraph (b)(2)(ii)(B) is revised to read as
follows:
Sec. 242.1 Authority and purpose
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(B) A bank holding company or foreign bank subject to the Bank
Holding Company Act (BHC Act) (12 U.S.C. 1841 et seq.) that is a bank
holding company described in section 165(a) of the Dodd-Frank Act (12
U.S.C. 5365(a)).
0
16. Section 242.4 is revised to read as follows:
Sec. 242.4 Significant nonbank financial companies and significant
bank holding companies
For purposes of Title I of the Dodd-Frank Act, the following
definitions shall apply:
(a) Significant nonbank financial company. A ``significant nonbank
financial company'' means--
(1) Any nonbank financial company supervised by the Board; and
(2) Any other nonbank financial company that had $100 billion or
more in total consolidated assets (as determined in accordance with
applicable accounting standards) as of the end of its most recently
completed fiscal year.
(b) Significant bank holding company. A ``significant bank holding
company'' means any bank holding company or company that is, or is
treated in the United States as, a bank holding company, that had $100
billion or more in total consolidated assets as of the end of the most
recently completed calendar year, as reported on either the Federal
Reserve's FR Y-9C (Consolidated Financial Statement for Holding
Companies), or any successor form thereto, or the Federal Reserve's
Form FR Y-7Q (Capital and Asset Report for Foreign Banking
Organizations), or any successor form thereto.
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
17. The authority citation for part 252 is revised to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1818, 1828, 1831n,
1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 3101
note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367, 5368,
5371.
Subpart A--General Provisions
0
18. Revise Sec. 252.1 to read as follows:
Sec. 252.1 Authority and purpose.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (the Board) under sections 162, 165, 167, and
168 of Title I of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376,
1423-1432, 12 U.S.C. 5362, 5365, 5367, and 5368); section 9 of the
Federal Reserve Act (12 U.S.C. 321-338a); section 5(b) of the Bank
Holding Company Act (12 U.S.C. 1844(b)); sections 8 and 39 of the
Federal Deposit Insurance Act (12 U.S.C. 1818(b) and 1831p-1); the
International Banking Act (12 U.S.C. 3101et seq.); the Foreign Bank
Supervision Enhancement Act (12 U.S.C. 3101 note); and 12 U.S.C. 3904,
3906-3909, and 4808.
(b) Purpose. This part implements certain provisions of section 165
of the Dodd-Frank Act (12 U.S.C. 5365), which require the Board to
establish enhanced prudential standards for certain bank holding
companies, foreign banking organizations, nonbank financial companies
supervised by the Board, and certain other companies.
0
19. Revise Sec. 252.2 to read as follows:
Sec. 252.2 Definitions.
Unless otherwise specified, the following definitions apply for
purposes of this part:
Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act (12 U.S.C. 1841(k)) and 12 CFR 225.2(a).
Applicable accounting standards means GAAP, international financial
reporting standards, or such other accounting standards that a company
uses in the ordinary course of its business in preparing its
consolidated financial statements.
Average combined U.S. assets means the average of combined U.S.
assets for the four most recent calendar quarters or, if the banking
organization has not reported combined U.S. assets for each of the four
most recent calendar quarters, the combined U.S. assets for the most
recent calendar quarter or average of the most recent calendar
quarters, as applicable.
Average cross-jurisdictional activity means the average of cross-
jurisdictional activity for the four most recent calendar quarters or,
if the banking organization has not reported cross-jurisdictional
activity for each of the four most recent calendar quarters, the cross-
jurisdictional activity for the most recent calendar quarter or average
of the most recent calendar quarters, as applicable.
Average off-balance sheet exposure means the average of off-balance
sheet exposure for the four most recent calendar quarters or, if the
banking organization has not reported total exposure and total
consolidated assets or combined U.S. assets, as applicable, for each of
the four most recent calendar quarters, the off-balance sheet exposure
for the most recent calendar quarter or average of the most recent
calendar quarters, as applicable.
Average total consolidated assets means the average of total
consolidated assets for the four most recent calendar quarters or, if
the banking organization has not reported total consolidated assets for
each of the four most recent calendar quarters, the total consolidated
assets for the most recent calendar quarter or average of the most
recent calendar quarters, as applicable.
Average total nonbank assets means the average of total nonbank
assets for the four most recent calendar quarters or, if the banking
organization has not reported or calculated total nonbank assets for
each of the four most recent calendar quarters, the total nonbank
assets for the most recent calendar quarter or average of the most
recent calendar quarters, as applicable.
Average U.S. non-branch assets means the average of U.S. non-branch
assets for the four most recent calendar quarters or, if the banking
organization has not reported the total consolidated assets of its top-
tier U.S. subsidiaries for each of the four most recent calendar
quarters, the U.S. non-branch assets for the most recent calendar
quarter or average of the most recent calendar quarters, as applicable.
Average weighted short-term wholesale funding means the average of
weighted short-term wholesale funding for each of the four most recent
calendar quarters or, if the banking organization has not reported
weighted short-term wholesale funding for each of the four
[[Page 59097]]
most recent calendar quarters, the weighted short-term wholesale
funding for the most recent calendar quarter or average of the most
recent calendar quarters, as applicable.
Bank holding company has the same meaning as in section 2(a) of the
Bank Holding Company Act (12 U.S.C. 1841(a)) and 12 CFR 225.2(c).
Banking organization means:
(1) A bank holding company that is a U.S. bank holding company;
(2) A U.S. intermediate holding company; or
(3) A foreign banking organization.
Board means the Board of Governors of the Federal Reserve System.
Category II bank holding company means a U.S. bank holding company
identified as a Category II banking organization pursuant to Sec.
252.5.
Category II foreign banking organization means a foreign banking
organization identified as a Category II banking organization pursuant
to Sec. 252.5.
Category II U.S. intermediate holding company means a U.S.
intermediate holding company identified as a Category II banking
organization pursuant to Sec. 252.5.
Category III bank holding company means a U.S. bank holding company
identified as a Category III banking organization pursuant to Sec.
252.5.
Category III foreign banking organization means a foreign banking
organization identified as a Category III banking organization pursuant
to Sec. 252.5.
Category III U.S. intermediate holding company means a U.S.
intermediate holding company identified as a Category III banking
organization pursuant to Sec. 252.5.
Category IV bank holding company means a U.S. bank holding company
identified as a Category IV banking organization pursuant to Sec.
252.5.
Category IV foreign banking organization means a foreign banking
organization identified as a Category IV banking organization pursuant
to Sec. 252.5.
Category IV U.S. intermediate holding company means a U.S.
intermediate holding company identified as a Category IV banking
organization pursuant to Sec. 252.5.
Combined U.S. assets means the sum of the consolidated assets of
each top-tier U.S. subsidiary of the foreign banking organization
(excluding any section 2(h)(2) company, if applicable) and the total
assets of each U.S. branch and U.S. agency of the foreign banking
organization, as reported by the foreign banking organization on the FR
Y-15 or FR Y-7Q.
Combined U.S. operations means:
(1) The U.S. branches and agencies of the foreign banking
organization; and
(2) The U.S. subsidiaries of the foreign banking organization
(excluding any section 2(h)(2) company, if applicable) and subsidiaries
of such U.S. subsidiaries.
Company means a corporation, partnership, limited liability
company, depository institution, business trust, special purpose
entity, association, or similar organization.
Control has the same meaning as in section 2(a) of the Bank Holding
Company Act (12 U.S.C. 1841(a)), and the terms controlled and
controlling shall be construed consistently with the term control.
Council means the Financial Stability Oversight Council established
by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
Credit enhancement means a qualified financial contract of the type
set forth in section 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI),
or (vi)(VI) of Title II of the Dodd-Frank Act (12 U.S.C.
5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or a
credit enhancement that the Federal Deposit Insurance Corporation
determines by regulation is a qualified financial contract pursuant to
section 210(c)(8)(D)(i) of Title II of the Act (12 U.S.C.
5390(c)(8)(D)(i)).
Cross-jurisdictional activity. The cross-jurisdictional activity of
a banking organization is equal to the cross-jurisdictional activity of
the banking organization as reported on the FR Y-15.
Depository institution has the same meaning as in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
DPC branch subsidiary means any subsidiary of a U.S. branch or a
U.S. agency acquired, or formed to hold assets acquired, in the
ordinary course of business and for the sole purpose of securing or
collecting debt previously contracted in good faith by that branch or
agency.
Foreign banking organization has the same meaning as in 12 CFR
211.21(o), provided that if the top-tier foreign banking organization
is incorporated in or organized under the laws of any State, the
foreign banking organization shall not be treated as a foreign banking
organization for purposes of this part.
FR Y-7 means the Annual Report of Foreign Banking Organizations
reporting form.
FR Y-7Q means the Capital and Asset Report for Foreign Banking
Organizations reporting form.
FR Y-9C means the Consolidated Financial Statements for Holding
Companies reporting form.
FR Y-9LP means the Parent Company Only Financial Statements of
Large Holding Companies.
FR Y-15 means the Systemic Risk Report.
Global methodology means the assessment methodology and the higher
loss absorbency requirement for global systemically important banks
issued by the Basel Committee on Banking Supervision, as updated from
time to time.
Global systemically important banking organization means a global
systemically important bank, as such term is defined in the global
methodology.
Global systemically important BHC means a bank holding company
identified as a global systemically important BHC pursuant to 12 CFR
217.402.
Global systemically important foreign banking organization means a
top-tier foreign banking organization that is identified as a global
systemically important foreign banking organization under Sec.
252.147(b)(4) or Sec. 252.153(b)(4) of this part.
GAAP means generally accepted accounting principles as used in the
United States.
Home country, with respect to a foreign banking organization, means
the country in which the foreign banking organization is chartered or
incorporated.
Home country resolution authority, with respect to a foreign
banking organization, means the governmental entity or entities that
under the laws of the foreign banking organization's home county has
responsibility for the resolution of the top-tier foreign banking
organization.
Home-country supervisor, with respect to a foreign banking
organization, means the governmental entity or entities that under the
laws of the foreign banking organization's home county has
responsibility for the supervision and regulation of the top-tier
foreign banking organization.
Nonbank financial company supervised by the Board means a company
that the Council has determined under section 113 of the Dodd-Frank Act
(12 U.S.C. 5323) shall be supervised by the Board and for which such
determination is still in effect.
Non-U.S. affiliate means any affiliate of a foreign banking
organization that is incorporated or organized in a country other than
the United States.
[[Page 59098]]
Off-balance sheet exposure. (1) The off-balance sheet exposure of a
U.S. bank holding company or U.S. intermediate holding company is equal
to:
(i) The total exposure of such banking organization, as reported by
the banking organization on the FR Y-15; minus
(ii) The total consolidated assets of such banking organization for
the same calendar quarter.
(2) The off-balance sheet exposure of a foreign banking
organization is equal to:
(i) The total exposure of the combined U.S. operations of the
foreign banking organization, as reported by the foreign banking
organization on the FR Y-15; minus
(ii) The combined U.S. assets of the foreign banking organization
for the same calendar quarter.
Publicly traded means an instrument that is traded on:
(1) Any exchange registered with the U.S. Securities and Exchange
Commission as a national securities exchange under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a non-U.S. national
securities regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question, meaning that there are enough independent bona fide offers to
buy and sell so that a sales price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can be
determined promptly and a trade can be settled at such price within a
reasonable time period conforming with trade custom.
(3) A company can rely on its determination that a particular non-
U.S.-based securities exchange provides a liquid two-way market unless
the Board determines that the exchange does not provide a liquid two-
way market.
Section 2(h)(2) company has the same meaning as in section 2(h)(2)
of the Bank Holding Company Act (12 U.S.C. 1841(h)(2)).
State means any state, commonwealth, territory, or possession of
the United States, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa,
Guam, or the United States Virgin Islands.
State member bank has the same meaning as in 12 CFR 208.2(g).
Subsidiary has the same meaning as in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
Top-tier foreign banking organization, with respect to a foreign
bank, means the top-tier foreign banking organization or,
alternatively, a subsidiary of the top-tier foreign banking
organization designated by the Board.
Total consolidated assets. (1) Total consolidated assets of a U.S.
bank holding company or a U.S. intermediate holding company is equal to
the total consolidated assets of such banking organization calculated
based on the average of the balances as of the close of business for
each day for the calendar quarter or an average of the balances as of
the close of business on each Wednesday during the calendar quarter, as
reported on the FR Y-9C.
(2) Total consolidated assets of a foreign banking organization is
equal to the total consolidated assets of the foreign banking
organization, as reported on the FR Y-7Q.
(3) Total consolidated assets of a state member bank is equal to
the total consolidated assets as reported by a state member bank on its
Consolidated Report of Condition and Income (Call Report).
Total nonbank assets. (1) Total nonbank assets of a U.S. bank
holding company or U.S. intermediate holding company is equal to the
total nonbank assets of such banking organization, as reported on the
FR Y-9LP.
(2) Total nonbank assets of a foreign banking organization is equal
to:
(i) The sum of the total nonbank assets of any U.S. intermediate
holding company, if any, as reported on the FR Y-9LP; plus
(ii) The assets of the foreign banking organization's nonbank U.S.
subsidiaries excluding the U.S. intermediate holding company, if any;
plus
(iii) The sum of the foreign banking organization's equity
investments in unconsolidated U.S. subsidiaries, excluding equity
investments in any section 2(h)(2) company; minus
(iv) The assets of any section 2(h)(2) company.
U.S. agency has the same meaning as the term ``agency'' in Sec.
211.21(b) of this chapter.
U.S. bank holding company means a bank holding company that is:
(1) Incorporated in or organized under the laws of the United
States or any State; and
(2) Not a consolidated subsidiary of a bank holding company that is
incorporated in or organized under the laws of the United States or any
State.
U.S. branch has the same meaning as the term ``branch'' in Sec.
211.21(e) of this chapter.
U.S. branches and agencies means the U.S. branches and U.S.
agencies of a foreign banking organization.
U.S. government agency means an agency or instrumentality of the
United States whose obligations are fully and explicitly guaranteed as
to the timely payment of principal and interest by the full faith and
credit of the United States.
U.S. government-sponsored enterprise means an entity originally
established or chartered by the U.S. government to serve public
purposes specified by the U.S. Congress, but whose obligations are not
explicitly guaranteed by the full faith and credit of the United
States.
U.S. intermediate holding company means a top-tier U.S. company
that is required to be established pursuant to Sec. 252.147 or Sec.
252.153.
U.S. non-branch assets. U.S. non-branch assets are equal to the sum
of the consolidated assets of each top-tier U.S. subsidiary of the
foreign banking organization (excluding any section 2(h)(2) company and
DPC branch subsidiary, if applicable) as reported on the FR Y-7Q. In
calculating U.S. non-branch assets, a foreign banking organization must
reduce its U.S. non-branch assets by the amount corresponding to
balances and transactions between a top-tier U.S. subsidiary and any
other top-tier U.S. subsidiary (excluding any 2(h)(2) company or DPC
branch subsidiary) to the extent such items are not already eliminated
in consolidation.
U.S. subsidiary means any subsidiary that is incorporated in or
organized under the laws of the United States or any State,
commonwealth, territory, or possession of the United States, the
Commonwealth of Puerto Rico, the Commonwealth of the North Mariana
Islands, American Samoa, Guam, or the United States Virgin Islands.
Weighted short-term wholesale funding is equal to the weighted
short-term wholesale funding of a banking organization, as reported on
the FR Y-15.
0
19. In Sec. 252.3, add paragraph (c) to read as follows:
Sec. 252.3 Reservation of authority.
* * * * *
(c) Reservation of authority for certain foreign banking
organizations. The Board may permit a foreign banking organization to
comply with the requirements of this part through a subsidiary. In
making this determination, the Board shall consider:
(1) The ownership structure of the foreign banking organization,
including
[[Page 59099]]
whether the foreign banking organization is owned or controlled by a
foreign government;
(2) Whether the action would be consistent with the purposes of
this part; and
(3) Any other factors that the Board determines are relevant.
0
20. Section 252.5 is added to read as follows:
Sec. 252.5 Categorization of banking organizations.
(a) General. (1) A U.S. bank holding company with average total
consolidated assets of $100 billion or more must determine its category
among the four categories described in paragraphs (b) through (e) of
this section at least quarterly.
(2) A U.S. intermediate holding company with average total
consolidated assets of $100 billion or more must determine its category
among the three categories described in paragraphs (c) through (e) of
this section at least quarterly.
(3) A foreign banking organization with average total consolidated
assets of $100 billion or more and average combined U.S. assets of $100
billion or more must determine its category among the three categories
described in paragraphs (c) through (e) of this section at least
quarterly.
(b) Global systemically important BHC. A banking organization is a
global systemically important BHC if it is identified as a global
systemically important BHC pursuant to 12 CFR 217.402.
(c) Category II. (1) A banking organization is a Category II
banking organization if the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate
holding company, $700 billion or more in average total consolidated
assets;
(2) For a foreign banking organization, $700 billion or more in
average combined U.S. assets; or
(B)(1) $75 billion or more in average cross-jurisdictional
activity; and
(2)(i) For a U.S. bank holding company or a U.S. intermediate
holding company, $100 billion or more in average total consolidated
assets; or
(ii) For a foreign banking organization, $100 billion or more in
average combined U.S. assets; and
(ii) Is not a global systemically important BHC.
(2) After meeting the criteria in paragraph (c)(1) of this section,
a banking organization continues to be a Category II banking
organization until the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate
holding company, less than $700 billion in total consolidated assets
for each of the four most recent calendar quarters; or
(2) For a foreign banking organization, less than $700 billion in
combined U.S. assets for each of the four most recent calendar
quarters; and
(B) Less than $75 billion in cross-jurisdictional activity for each
of the four most recent calendar quarters;
(ii) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding
company, less than $100 billion in total consolidated assets for each
of the four most recent calendar quarters;
(B) For a foreign banking organization, less than $100 billion in
combined U.S. assets for each of the four most recent calendar
quarters; or
(iii) Meets the criteria in paragraph (b) to be a global
systemically important BHC.
(d) Category III. (1) A banking organization is a Category III
banking organization if the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate
holding company, $250 billion or more in average total consolidated
assets; or
(2) For a foreign banking organization, $250 billion or more in
average combined U.S. assets; or
(B)(1)(i) For a U.S. bank holding company or a U.S. intermediate
holding company, $100 billion or more in average total consolidated
assets; or
(ii) For a foreign banking organization, $100 billion or more in
average combined U.S. assets; and
(2) At least:
(i) $75 billion in average total nonbank assets;
(ii) $75 billion in average weighted short-term wholesale funding;
or
(iii) $75 billion in average off-balance sheet exposure;
(ii) Is not a global systemically important BHC; and
(iii) Is not a Category II banking organization.
(2) After meeting the criteria in paragraph (d)(1) of this section,
a banking organization continues to be a Category III banking
organization until the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate
holding company, less than $250 billion in total consolidated assets
for each of the four most recent calendar quarters; or
(2) For a foreign banking organization, less than $250 billion in
combined U.S. assets for each of the four most recent calendar
quarters;
(B) Less than $75 billion in total nonbank assets for each of the
four most recent calendar quarters;
(C) Less than $75 billion in weighted short-term wholesale funding
for each of the four most recent calendar quarters; and
(D) Less than $75 billion in off-balance sheet exposure for each of
the four most recent calendar quarters; or
(ii) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding
company, less than $100 billion in total consolidated assets for each
of the four most recent calendar quarters; or
(B) For a foreign banking organization, less than $100 billion in
combined U.S. assets for each of the four most recent calendar
quarters;
(iii) Meets the criteria in paragraph (b) of this section to be a
global systemically important BHC; or
(iv) Meets the criteria in paragraph (c)(1) of this section to be a
Category II banking organization.
(e) Category IV. (1) A banking organization is a Category IV
banking organization if the banking organization:
(i) Is not global systemically important BHC;
(ii) Is not a Category II banking organization;
(iii) Is not a Category III banking organization; and
(iv) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding
company, average total consolidated assets of $100 billion or more; or
(B) For a foreign banking organization, average combined U.S.
assets of $100 billion or more.
(2) After meeting the criteria in paragraph (e)(1), a banking
organization continues to be a Category IV banking organization until
the banking organization:
(i) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding
company, less than $100 billion in total consolidated assets for each
of the four most recent calendar quarters;
(B) For a foreign banking organization, less than $100 billion in
combined U.S. assets for each of the four most recent calendar
quarters;
(ii) Meets the criteria in paragraph (b) of this section to be a
global systemically important BHC;
(iii) Meets the criteria in paragraph (c)(1) of this section to be
a Category II banking organization; or
(iv) Meets the criteria in paragraph (d)(1) of this section to be a
Category III banking organization.
0
21. Revise the heading of subpart B to read as follows:
[[Page 59100]]
Subpart B--Company-Run Stress Test Requirements for State Member
Banks With Total Consolidated Assets Over $250 Billion
0
22. Section 252.11 is revised to read as follows:
Sec. 252.11 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 3906-3909, 5365.
(b) Purpose. This subpart implements section 165(i)(2) of the Dodd-
Frank Act (12 U.S.C. 5365(i)(2)), which requires state member banks
with total consolidated assets of greater than $250 billion to conduct
stress tests. This subpart also establishes definitions of stress tests
and related terms, methodologies for conducting stress tests, and
reporting and disclosure requirements.
0
23. Section 252.12 is revised to read as follows:
Sec. 252.12 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the regulatory capital requirements at 12
CFR 217, subpart E, as applicable, and any successor regulation.
Asset threshold means average total consolidated assets of greater
than $250 billion.
Baseline scenario means a set of conditions that affect the U.S.
economy or the financial condition of a state member bank, and that
reflect the consensus views of the economic and financial outlook.
Capital action has the same meaning as in 12 CFR 225.8(d)).
Covered company subsidiary means a state member bank that is a
subsidiary of a covered company as defined in subpart F of this part.
Planning horizon means the period of at least nine consecutive
quarters, beginning on the first day of a stress test cycle over which
the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and
non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a state member bank that has adopted the
current expected credit losses methodology under GAAP, the provision
for credit losses, as would be reported by the state member bank on the
Call Report in the current stress test cycle; and
(2) With respect to a state member bank that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the state member bank
on the Call Report in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board
has established minimum requirements for the state member bank by
regulation or order, including, as applicable, the state member bank's
regulatory capital ratios calculated under 12 CFR part 217 and the
deductions required under 12 CFR 248.12; except that the state member
bank shall not use the advanced approaches to calculate its regulatory
capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a state member bank that the Board
determines are appropriate for use in the company-run stress tests,
including, but not limited to baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the
U.S. economy or the financial condition of a state member bank and that
overall are significantly more severe than those associated with the
baseline scenario and may include trading or other additional
components.
Stress test means a process to assess the potential impact of
scenarios on the consolidated earnings, losses, and capital of a state
member bank over the planning horizon, taking into account the current
condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2(o).
0
24. Section 252.13 is revised to read as follows:
Sec. 252.13 Applicability.
(a) Scope--(1) Applicability. Except as provided in paragraph (b)
of this section, this subpart applies to any state member bank with
average total consolidated assets of greater than $250 billion.
(2) Ongoing applicability. A state member bank (including any
successor company) that is subject to any requirement in this subpart
shall remain subject to any such requirement unless and until its total
consolidated assets fall below $250 billion for each of four
consecutive quarters, effective on the as-of date of the fourth
consecutive Call Report.
(b) Transition period. (1) A state member bank that exceeds the
asset threshold for the first time on or before September 30 of a
calendar year must comply with the requirements of this subpart
beginning on January 1 of the second calendar year after the state
member bank becomes subject to this subpart, unless that time is
extended by the Board in writing.
(2) A state member bank that exceeds the asset threshold for the
first time after September 30 of a calendar year must comply with the
requirements of this subpart beginning on January 1 of the third year
after the state member bank becomes subject to this subpart, unless
that time is extended by the Board in writing.
0
25. Section 252.14 is revised to read as follows:
Sec. 252.14 Stress test.
(a) In general. (1) A state member bank must conduct a stress test
as required under this subpart.
(2) Frequency--(i) General. Except as provided in paragraph
(a)(2)(ii) of this section, a state member bank must conduct a stress
test according to the frequency in table 1 to Sec. 252.14(a)(2)(i).
Table 1 to Sec. 252.14(a)(2)(i)
------------------------------------------------------------------------
Then the stress test must be
If the state member bank is a conducted
------------------------------------------------------------------------
Subsidiary of a global systemically Annually, by April 5 of each
important BHC. calendar year, based on data
as of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Subsidiary of a Category II bank Annually, by April 5 of each
holding company. calendar year, based on data
as of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Subsidiary of a Category II U.S. Annually, by April 5 of each
intermediate holding company. calendar year, based on data
as of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
[[Page 59101]]
Not a subsidiary of a:................. Biennially, by April 5 of each
(A) Global systemically important BHC;. calendar year ending in an
(B) Category II bank holding company; even number, based on data as
or. of December 31 of the
(C) Category II U.S. intermediate preceding calendar year,
holding company.. unless the time or the as-of
date is extended by the Board
in writing.
------------------------------------------------------------------------
(ii) Change in frequency. The Board may require a state member bank
to conduct a stress test on a more or less frequent basis than would be
required under paragraph (a)(2)(i) of this section based on the
company's financial condition, size, complexity, risk profile, scope of
operations, or activities, or risks to the U.S. economy.
(3) Notice and response--(i) Notification of change in frequency.
If the Board requires a state member bank to change the frequency of
the stress test under paragraph (a)(2)(ii) of this section, the Board
will notify the state member bank in writing and provide a discussion
of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under paragraph (a)(3)(i) of
this section, a state member bank may request in writing that the Board
reconsider the requirement to conduct a stress test on a more or less
frequent basis than would be required under paragraph (a)(2)(i) of this
section. A state member bank's request for reconsideration must include
an explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
(b) Scenarios provided by the Board--(1) In general. In conducting
a stress test under this section, a state member bank must, at a
minimum, use the scenarios provided by the Board. Except as provided in
paragraphs (b)(2) and (3) of this section, the Board will provide a
description of the scenarios no later than February 15 of each calendar
year.
(2) Additional components. (i) The Board may require a state member
bank with significant trading activity, as determined by the Board and
specified in the Capital Assessments and Stress Testing report (FR Y-
14), to include a trading and counterparty component in its severely
adverse scenario in the stress test required by this section. The Board
may also require a state member bank that is subject to 12 CFR part
217, subpart F or that is a subsidiary of a bank holding company that
is subject to section Sec. 252.54(b)(2)(i) to include a trading and
counterparty component in the state member bank's severely adverse
scenario in the stress test required by this section. The data used in
this component must be as of a date between October 1 of the previous
calendar year and March 1 of the calendar year in which the stress test
is performed, and the Board will communicate the as-of date and a
description of the component to the company no later than March 1 of
that calendar year.
(ii) The Board may require a state member bank to include one or
more additional components in its severely adverse scenario in the
stress test required by this section based on the state member bank's
financial condition, size, complexity, risk profile, scope of
operations, or activities, or risks to the U.S. economy.
(3) Additional scenarios. The Board may require a state member bank
to include one or more additional scenarios in the stress test required
by this section based on the state member bank's financial condition,
size, complexity, risk profile, scope of operations, or activities, or
risks to the U.S. economy.
(4) Notice and response--(i) Notification of additional component
or scenario. If the Board requires a state member bank to include one
or more additional components in its severely adverse scenario under
paragraph (b)(2) of this section or to use one or more additional
scenarios under paragraph (b)(3) of this section, the Board will notify
the company in writing by December 31 and include a discussion of the
basis for its determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under paragraph (b)(4)(i) of
this section, the state member bank may request in writing that the
Board reconsider the requirement that the company include the
additional component(s) or additional scenario(s), including an
explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
(iii) Description of component. The Board will provide the state
member bank with a description of any additional component(s) or
additional scenario(s) by March 1.
0
26. In Sec. 252.15, paragraphs (a) introductory text and (b) are
revised and paragraph (c) is removed.
The revisions read as follows:
Sec. 252.15 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under
Sec. 252.14, for each quarter of the planning horizon, a state member
bank must estimate the following for each scenario required to be used:
* * * * *
(b) Controls and oversight of stress testing processes--(1) In
general. The senior management of a state member bank must establish
and maintain a system of controls, oversight, and documentation,
including policies and procedures, that are designed to ensure that its
stress testing processes are effective in meeting the requirements in
this subpart. These policies and procedures must, at a minimum,
describe the company's stress testing practices and methodologies, and
processes for validating and updating the company's stress test
practices and methodologies consistent with applicable laws and
regulations.
(2) Oversight of stress testing processes. The board of directors,
or a committee thereof, of a state member bank must review and approve
the policies and procedures of the stress testing processes as
frequently as economic conditions or the condition of the company may
warrant, but no less than each year that a stress test is conducted.
The board of directors and senior management of the state member bank
must receive a summary of the results of the stress test conducted
under this section.
(3) Role of stress testing results. The board of directors and
senior management of a state member bank must consider the results of
the stress test in the normal course of business, including but not
limited to, the state member bank's capital planning, assessment of
capital adequacy, and risk management practices.
0
27. In Sec. 252.16, paragraphs (a) and (b) are revised to read as
follows:
[[Page 59102]]
Sec. 252.16 Reports of stress test results.
(a) Reports to the Board of stress test results--(1) General. A
state member bank must report the results of the stress test to the
Board in the manner and form prescribed by the Board, in accordance
with paragraphs (a)(2) of this section.
(2) Timing. For each stress test cycle in which a stress test is
conducted:
(i) A state member bank that is a covered company subsidiary must
report the results of the stress test to the Board by April 5, unless
that time is extended by the Board in writing; and
(ii) A state member bank that is not a covered company subsidiary
must report the results of the stress test to the Board by July 31,
unless that time is extended by the Board in writing.
(b) Contents of reports. The report required under paragraph (a) of
this section must include the following information for the baseline
scenario, severely adverse scenario, and any other scenario required
under Sec. 252.14(b)(3):
* * * * *
0
28. In Sec. 252.17, paragraphs (a) and (b) are revised to read as
follows:
Sec. 252.17 Disclosure of stress test results.
(a) Public disclosure of results--(1) General. A state member bank
must publicly disclose a summary of the results of the stress test
required under this subpart.
(2) Timing. For each stress test cycle in which a stress test is
conducted:
(i) A state member bank that is a covered company subsidiary must
publicly disclose a summary of the results of the stress test within 15
calendar days after the Board discloses the results of its supervisory
stress test of the covered company pursuant to Sec. 252.46(b), unless
that time is extended by the Board in writing; and
(ii) A state member bank that is not a covered company subsidiary
must publicly disclose a summary of the results of the stress test in
the period beginning on October 15 and ending on October 31, unless
that time is extended by the Board in writing.
(3) Disclosure method. The summary required under this section may
be disclosed on the website of a state member bank, or in any other
forum that is reasonably accessible to the public.
(b) Summary of results--(1) State member banks that are
subsidiaries of bank holding companies. A state member bank that is a
subsidiary of a bank holding company satisfies the public disclosure
requirements under this subpart if the bank holding company publicly
discloses summary results of its stress test pursuant to this section
or Sec. 252.58, unless the Board determines that the disclosures at
the holding company level do not adequately capture the potential
impact of the scenarios on the capital of the state member bank and
requires the state member bank to make public disclosures.
(2) State member banks that are not subsidiaries of bank holding
companies. A state member bank that is not a subsidiary of a bank
holding company or that is required to make disclosures under paragraph
(b)(1) of this section must publicly disclose, at a minimum, the
following information regarding the severely adverse scenario:
(i) A description of the types of risks being included in the
stress test;
(ii) A summary description of the methodologies used in the stress
test;
(iii) Estimates of--
(A) Aggregate losses;
(B) Pre-provision net revenue
(C) Provision for credit losses;
(D) Net income; and
(E) Pro forma regulatory capital ratios and any other capital
ratios specified by the Board; and
(iv) An explanation of the most significant causes for the changes
in regulatory capital ratios.
* * * * *
0
29. The heading of subpart C is revised to read as follows:
Subpart C--Risk Committee Requirement for Bank Holding Companies
With Total Consolidated Assets of $50 Billion or More and Less Than
$100 Billion
0
30. Section 252.21 is revised to read as follows:
Sec. 252.21 Applicability.
(a) General applicability. A bank holding company must comply with
the risk-committee requirements set forth in this subpart beginning on
the first day of the ninth quarter following the date on which its
average total consolidated assets equal or exceed $50 billion.
(b) Cessation of requirements. A bank holding company will remain
subject to the requirements of this subpart until the earlier of the
date on which:
(1) Its total consolidated assets are below $50 billion for each of
four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart D of this
part.
0
31. Section 252.22 is revised to read as follows:
Sec. 252.22 Risk committee requirement for bank holding companies
with total consolidated assets of $50 billion or more.
(a) Risk committee--(1) General. A bank holding company subject to
this subpart must maintain a risk committee that approves and
periodically reviews the risk-management policies of the bank holding
company's global operations and oversees the operation of the bank
holding company's global risk-management framework.
(2) Risk-management framework. The bank holding company's global
risk-management framework must be commensurate with its structure, risk
profile, complexity, activities, and size, and must include:
(i) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control infrastructure
for its global operations; and
(ii) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and
risk-management deficiencies, including regarding emerging risks, and
ensuring effective and timely implementation of actions to address
emerging risks and risk-management deficiencies for its global
operations;
(B) Processes and systems for establishing managerial and employee
responsibility for risk management;
(C) Processes and systems for ensuring the independence of the
risk-management function; and
(D) Processes and systems to integrate risk management and
associated controls with management goals and its compensation
structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the bank
holding company's board of directors;
(ii) Be an independent committee of the board of directors that
has, as its sole and exclusive function, responsibility for the risk-
management policies of the bank holding company's global operations and
oversight of the operation of the bank holding company's global risk-
management framework;
(iii) Report directly to the bank holding company's board of
directors;
(iv) Receive and review regular reports on a not less than a
quarterly basis from the bank holding company's chief risk officer
provided pursuant to paragraph (b)(3)(ii) of this section; and
(v) Meet at least quarterly, or more frequently as needed, and
fully document and maintain records of its proceedings, including risk-
management decisions.
[[Page 59103]]
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the bank holding company and
has not been an officer or employee of the bank holding company during
the previous three years;
(B) Is not a member of the immediate family, as defined in 12 CFR
225.41(b)(3), of a person who is, or has been within the last three
years, an executive officer of the bank holding company, as defined in
12 CFR 215.2(e)(1); and
(C)(1) Is an independent director under Item 407 of the Securities
and Exchange Commission's Regulation S-K (17 CFR 229.407(a)), if the
bank holding company has an outstanding class of securities traded on
an exchange registered with the U.S. Securities and Exchange Commission
as a national securities exchange under section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. 78f) (national securities exchange); or
(2) Would qualify as an independent director under the listing
standards of a national securities exchange, as demonstrated to the
satisfaction of the Board, if the bank holding company does not have an
outstanding class of securities traded on a national securities
exchange.
(b) Chief risk officer--(1) General. A bank holding company subject
to this subpart must appoint a chief risk officer with experience in
identifying, assessing, and managing risk exposures of large, complex
financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for
overseeing:
(A) The establishment of risk limits on an enterprise-wide basis
and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies
and procedures set forth in paragraph (a)(2)(i) of this section and the
development and implementation of the processes and systems set forth
in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters
of the company's risk-control framework, and monitoring and testing of
the company's risk controls.
(ii) The chief risk officer is responsible for reporting risk-
management deficiencies and emerging risks to the risk committee and
resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The bank holding company
must ensure that the compensation and other incentives provided to the
chief risk officer are consistent with providing an objective
assessment of the risks taken by the bank holding company; and
(ii) The chief risk officer must report directly to both the risk
committee and chief executive officer of the company.
0
32. Revise the heading of subpart D to read as follows:
Subpart D--Enhanced Prudential Standards for Bank Holding Companies
With Total Consolidated Assets of $100 Billion or More
0
33. Section 252.30 is revised to read as follows:
Sec. 252.30 Scope.
This subpart applies to bank holding companies with average total
consolidated assets of $100 billion or more.
0
34. Section 252.31 is revised to read as follows:
Sec. 252.31 Applicability.
(a) Applicability--(1) Initial applicability. Subject to paragraph
(c) of this section, a bank holding company must comply with the risk-
management and risk-committee requirements set forth in Sec. 252.33
and the liquidity risk-management and liquidity stress test
requirements set forth in Sec. Sec. 252.34 and 252.35 no later than
the first day of the fifth quarter following the date on which its
average total consolidated assets equal or exceed $100 billion.
(2) Changes in requirements following a change in category. A bank
holding company with average total consolidated assets of $100 billion
or more that changes from one category of banking organization
described in Sec. 252.5(b) through (e) to another of such categories
must comply with the requirements applicable to the new category no
later than on the first day of the second quarter following the change
in the bank holding company's category.
(b) Cessation of requirements. Except as provided in paragraph (c)
of this section, a bank holding company is subject to the risk-
management and risk committee requirements set forth in Sec. 252.33
and the liquidity risk-management and liquidity stress test
requirements set forth in Sec. Sec. 252.34 and 252.35 until its total
consolidated assets are below $100 billion for each of four consecutive
calendar quarters.
(c) Applicability for bank holding companies that are subsidiaries
of foreign banking organizations. If a bank holding company that has
average total consolidated assets of $100 billion or more is controlled
by a foreign banking organization, the U.S. intermediate holding
company established or designated by the foreign banking organization
must comply with the risk-management and risk committee requirements
set forth in Sec. 252.153(e)(3) and the liquidity risk-management and
liquidity stress test requirements set forth in Sec. 252.153(e)(4).
0
35. Section 252.32 is revised to read as follows:
Sec. 252.32 Risk-based and leverage capital and stress test
requirements.
A bank holding company subject to this subpart must comply with,
and hold capital commensurate with the requirements of, any regulations
adopted by the Board relating to capital planning and stress tests, in
accordance with the applicability provisions set forth therein.
0
36. In Sec. 252.33, paragraphs (a)(1) and (b)(1) are revised to read
as follows:
Sec. 252.33 Risk-management and risk committee requirements.
(a) Risk committee--(1) General. A bank holding company subject to
this subpart must maintain a risk committee that approves and
periodically reviews the risk-management policies of the bank holding
company's global operations and oversees the operation of the bank
holding company's global risk-management framework. The risk
committee's responsibilities include liquidity risk-management as set
forth in Sec. 252.34(b).
* * * * *
(b) Chief risk officer--(1) General. A bank holding company subject
to this subpart must appoint a chief risk officer with experience in
identifying, assessing, and managing risk exposures of large, complex
financial firms.
* * * * *
0
37. In Sec. 252.34, paragraphs (a)(1) introductory text, (c)(1)(i),
(d), (e)(1), (f)(1), (f)(2)(i), (g), and (h) are revised to read as
follows:
Sec. 252.34 Liquidity risk-management requirements.
(a) * * *
(1) Liquidity risk tolerance. The board of directors of a bank
holding company that is subject to this subpart must:
* * * * *
(c) * * *
(1) * * *
(i) Senior management of a bank holding company subject to this
subpart must establish and implement
[[Page 59104]]
strategies, policies, and procedures designed to effectively manage the
risk that the bank holding company's financial condition or safety and
soundness would be adversely affected by its inability or the market's
perception of its inability to meet its cash and collateral obligations
(liquidity risk). The board of directors must approve the strategies,
policies, and procedures pursuant to paragraph (a)(2) of this section.
* * * * *
(d) Independent review function. (1) A bank holding company subject
to this subpart must establish and maintain a review function that is
independent of management functions that execute funding to evaluate
its liquidity risk management.
(2) The independent review function must:
(i) Regularly, but no less frequently than annually, review and
evaluate the adequacy and effectiveness of the company's liquidity
risk-management processes, including its liquidity stress test
processes and assumptions;
(ii) Assess whether the company's liquidity risk-management
function complies with applicable laws and regulations, and sound
business practices; and
(iii) Report material liquidity risk-management issues to the board
of directors or the risk committee in writing for corrective action, to
the extent permitted by applicable law.
(e) * * *
(1) A bank holding company subject to this subpart must produce
comprehensive cash-flow projections that project cash flows arising
from assets, liabilities, and off-balance sheet exposures over, at a
minimum, short- and long-term time horizons. The bank holding company
must update short-term cash-flow projections daily and must update
longer-term cash-flow projections at least monthly.
* * * * *
(f) * * *
(1) General. A bank holding company subject to this subpart must
establish and maintain a contingency funding plan that sets out the
company's strategies for addressing liquidity needs during liquidity
stress events. The contingency funding plan must be commensurate with
the company's capital structure, risk profile, complexity, activities,
size, and established liquidity risk tolerance. The company must update
the contingency funding plan at least annually, and when changes to
market and idiosyncratic conditions warrant.
(2) * * *
(i) Quantitative assessment. The contingency funding plan must:
(A) Identify liquidity stress events that could have a significant
impact on the bank holding company's liquidity;
(B) Assess the level and nature of the impact on the bank holding
company's liquidity that may occur during identified liquidity stress
events;
(C) Identify the circumstances in which the bank holding company
would implement its action plan described in paragraph (f)(2)(ii)(A) of
this section, which circumstances must include failure to meet any
minimum liquidity requirement imposed by the Board;
(D) Assess available funding sources and needs during the
identified liquidity stress events;
(E) Identify alternative funding sources that may be used during
the identified liquidity stress events; and
(F) Incorporate information generated by the liquidity stress
testing required under Sec. 252.35(a).
* * * * *
(g) Liquidity risk limits--(1) General. A bank holding company must
monitor sources of liquidity risk and establish limits on liquidity
risk that are consistent with the company's established liquidity risk
tolerance and that reflect the company's capital structure, risk
profile, complexity, activities, and size.
(2) Liquidity risk limits established by a global systemically
important BHC, Category II bank holding company, or Category III bank
holding company. If the bank holding company is a global systemically
important BHC, Category II bank holding company, or Category III bank
holding company, liquidity risk limits established under paragraph
(g)(1) of this section must include limits on:
(i) Concentrations in sources of funding by instrument type, single
counterparty, counterparty type, secured and unsecured funding, and as
applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time
horizons; and
(iii) Off-balance sheet exposures and other exposures that could
create funding needs during liquidity stress events.
(h) Collateral, legal entity, and intraday liquidity risk
monitoring. A bank holding company subject to this subpart must
establish and maintain procedures for monitoring liquidity risk as set
forth in this paragraph.
(1) Collateral. The bank holding company must establish and
maintain policies and procedures to monitor assets that have been, or
are available to be, pledged as collateral in connection with
transactions to which it or its affiliates are counterparties. These
policies and procedures must provide that the bank holding company:
(i) Calculates all of its collateral positions according to the
frequency specified in paragraph (h)(1)(i)(A) or (B) of this section,
or as directed by the Board, specifying the value of pledged assets
relative to the amount of security required under the relevant
contracts and the value of unencumbered assets available to be pledged;
(A) If the bank holding company is not a Category IV bank holding
company, on at least a weekly basis; or
(B) If the bank holding company is a Category IV bank holding
company, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be
pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the bank holding company's funding
patterns, such as shifts between intraday, overnight, and term pledging
of collateral; and
(iv) Tracks operational and timing requirements associated with
accessing collateral at its physical location (for example, the
custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies, and business lines. The bank
holding company must establish and maintain procedures for monitoring
and controlling liquidity risk exposures and funding needs within and
across significant legal entities, currencies, and business lines,
taking into account legal and regulatory restrictions on the transfer
of liquidity between legal entities.
(3) Intraday exposures. The bank holding company must establish and
maintain procedures for monitoring intraday liquidity risk exposures
that are consistent with the bank holding company's capital structure,
risk profile, complexity, activities, and size. If the bank holding
company is a global systemically important BHC, Category II bank
holding company, or a Category III bank holding company, these
procedures must address how the management of the bank holding company
will:
(i) Monitor and measure expected daily gross liquidity inflows and
outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the
bank holding company can meet these obligations as expected and settle
less critical obligations as soon as possible;
[[Page 59105]]
(iv) Manage the issuance of credit to customers where necessary;
and
(v) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the bank holding company's
overall liquidity needs.
0
38. In Sec. 252.35:
0
a. Paragraphs (a)(1) introductory text, (a)(2), and (a)(7)(i) and (ii)
are revised;
0
b. Paragraph (a)(8) is added; and
0
c. Paragraphs (b)(1) and (3) are revised.
The revisions and addition read as follows:
Sec. 252.35 Liquidity stress testing and buffer requirements.
(a) * * *
(1) General. A bank holding company subject to this subpart must
conduct stress tests to assess the potential impact of the liquidity
stress scenarios set forth in paragraph (a)(3) of this section on its
cash flows, liquidity position, profitability, and solvency, taking
into account its current liquidity condition, risks, exposures,
strategies, and activities.
* * * * *
(2) Frequency. The bank holding company must perform the liquidity
stress tests required under paragraph (a)(1) of this section according
to the frequency specified in paragraph (a)(2)(i) or (ii), or as
directed by the Board:
(i) If the bank holding company is not a Category IV bank holding
company, at least monthly; or
(ii) If the bank holding company is a Category IV bank holding
company, at least quarterly.
* * * * *
(7) * * *
(i) Policies and procedures. A bank holding company subject to this
subpart must establish and maintain policies and procedures governing
its liquidity stress testing practices, methodologies, and assumptions
that provide for the incorporation of the results of liquidity stress
tests in future stress testing and for the enhancement of stress
testing practices over time.
(ii) Controls and oversight. A bank holding company subject to this
subpart must establish and maintain a system of controls and oversight
that is designed to ensure that its liquidity stress testing processes
are effective in meeting the requirements of this section. The controls
and oversight must ensure that each liquidity stress test appropriately
incorporates conservative assumptions with respect to the stress
scenario in paragraph (a)(3) of this section and other elements of the
stress test process, taking into consideration the bank holding
company's capital structure, risk profile, complexity, activities,
size, business lines, legal entity or jurisdiction, and other relevant
factors. The assumptions must be approved by the chief risk officer and
be subject to the independent review under Sec. 252.34(d) of this
subpart.
* * * * *
(8) Notice and response. If the Board determines that a bank
holding company must conduct liquidity stress tests according to a
frequency other than the frequency provided in paragraphs (a)(2)(i) and
(ii) of this section, the Board will notify the bank holding company
before the change in frequency takes effect, and describe the basis for
its determination. Within 14 calendar days of receipt of a notification
under this paragraph, the bank holding company may request in writing
that the Board reconsider the requirement. The Board will respond in
writing to the company's request for reconsideration prior to requiring
the company conduct liquidity stress tests according to a frequency
other than the frequency provided in paragraphs (a)(2)(i) and (ii) of
this section.
(b) Liquidity buffer requirement. (1) A bank holding company
subject to this subpart must maintain a liquidity buffer that is
sufficient to meet the projected net stressed cash-flow need over the
30-day planning horizon of a liquidity stress test conducted in
accordance with paragraph (a) of this section under each scenario set
forth in paragraph (a)(3)(i) through (iii) of this section.
* * * * *
(3) Asset requirements. The liquidity buffer must consist of highly
liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii)
of this section:
(i) Highly liquid asset. A highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as
defined in 12 CFR 249.20; or
(C) Any other asset that the bank holding company demonstrates to
the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has
committed market makers and independent bona fide offers to buy and
sell so that a price reasonably related to the last sales price or
current bona fide competitive bid and offer quotations can be
determined within one day and settled at that price within a reasonable
time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased
in periods of financial market distress during which market liquidity
has been impaired.
(ii) Unencumbered. An asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual, or other
restrictions on the ability of such company promptly to liquidate, sell
or transfer the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to
any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored
enterprise, to the extent potential credit secured by the asset is not
currently extended by such central bank or U.S. government-sponsored
enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In
calculating the amount of a highly liquid asset included in the
liquidity buffer, the bank holding company must discount the fair
market value of the asset to reflect any credit risk and market price
volatility of the asset.
(iv) Operational requirements. With respect to the liquidity
buffer, the bank holding company must:
(A) Establish and implement policies and procedures that require
highly liquid assets comprising the liquidity buffer to be under the
control of the management function in the bank holding company that is
charged with managing liquidity risk; and
(B) Demonstrate the capability to monetize a highly liquid asset
under each scenario required under Sec. 252.35(a)(3).
(v) Diversification. The liquidity buffer must not contain
significant concentrations of highly liquid assets by issuer, business
sector, region, or other factor related to the bank holding company's
risk, except with respect to cash and securities issued or guaranteed
by the United States, a U.S. government agency, or a U.S. government-
sponsored enterprise.
0
39. The heading of subpart E is revised to read as follows:
Subpart E--Supervisory Stress Test Requirements for Certain U.S.
Banking Organizations With $100 Billion or More in Total
Consolidated Assets and Nonbank Financial Companies Supervised by
the Board
0
40. Section 252.41 is revised to read as follows
Sec. 252.41 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 1844(b), 1844(c),
5361,
[[Page 59106]]
5365, 5366, sec. 401(e), Pub. L. 115-174, 132 Stat. 1296.
(b) Purpose. This subpart implements section 165 of the Dodd-Frank
Act (12 U.S.C. 5365) and section 401(e) of the Economic Growth,
Regulatory Relief, and Consumer Protection Act, which requires the
Board to conduct annual analyses of nonbank financial companies
supervised by the Board and bank holding companies with $100 billion or
more in total consolidated assets to evaluate whether such companies
have the capital, on a total consolidated basis, necessary to absorb
losses as a result of adverse economic conditions.
0
41. Section 252.42 is revised to read as follows:
Sec. 252.42 Definitions
For purposes of this subpart E, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation
methodologies at 12 CFR part 217, subpart E, as applicable, and any
successor regulation.
Baseline scenario means a set of conditions that affect the U.S.
economy or the financial condition of a covered company and that
reflect the consensus views of the economic and financial outlook.
Covered company means:
(1) A U.S. bank holding company with average total consolidated
assets of $100 billion or more;
(2) A U.S. intermediate holding company subject to this section
pursuant to Sec. 252.153; and
(3) A nonbank financial company supervised by the Board.
Foreign banking organization has the same meaning as in 12 CFR
211.21(o).
Pre-provision net revenue means the sum of net interest income and
non-interest income less expenses before adjusting for loss provisions.
Planning horizon means the period of at least nine consecutive
quarters, beginning on the first day of a stress test cycle over which
the relevant projections extend.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and,
(2) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board
has established minimum requirements for the company by regulation or
order, including, as applicable, the company's regulatory capital
ratios calculated under 12 CFR part 217 and the deductions required
under 12 CFR 248.12; except that the company shall not use the advanced
approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a covered company that the Board
determines are appropriate for use in the supervisory stress tests,
including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the
U.S. economy or the financial condition of a covered company and that
overall are significantly more severe than those associated with the
baseline scenario and may include trading or other additional
components.
Stress test cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2.
0
42. In Sec. 252.43, paragraph (a) is revised to read as follows:
Sec. 252.43 Applicability.
(a) Scope--(1) Applicability. Except as provided in paragraph (b)
of this section, this subpart applies to any covered company, which
includes:
(i) Any U.S. bank holding company with average total consolidated
assets of $100 billion or more;
(ii) Any U.S. intermediate holding company subject to this section
pursuant to Sec. 252.153; and
(iii) Any nonbank financial company supervised by the Board that is
made subject to this section pursuant to a rule or order of the Board.
(2) Ongoing applicability. A bank holding company or U.S.
intermediate holding company (including any successor company) that is
subject to any requirement in this subpart shall remain subject to any
such requirement unless and until its total consolidated assets fall
below $100 billion for each of four consecutive quarters.
* * * * *
0
43. In Sec. 252.44, the section heading and paragraphs (a)(1) and (b)
are revised and paragraph (c) is added to read as follows:
Sec. 252.44 Analysis conducted by the Board.
(a) In general. (1) The Board will conduct an analysis of each
covered company's capital, on a total consolidated basis, taking into
account all relevant exposures and activities of that covered company,
to evaluate the ability of the covered company to absorb losses in
specified economic and financial conditions.
* * * * *
(b) Economic and financial scenarios related to the Board's
analysis. The Board will conduct its analysis using a minimum of two
different scenarios, including a baseline scenario and a severely
adverse scenario. The Board will notify covered companies of the
scenarios that the Board will apply to conduct the analysis for each
stress test cycle to which the covered company is subject by no later
than February 15 of that year, except with respect to trading or any
other components of the scenarios and any additional scenarios that the
Board will apply to conduct the analysis, which will be communicated by
no later than March 1 of that year.
(c) Frequency of analysis conducted by the Board--(1) General.
Except as provided in paragraph (c)(2) of this section, the Board will
conduct its analysis of a covered company according to the frequency in
Table 1 to Sec. 252.44(c)(1).
Table 1 to Sec. 252.44(c)(1)
------------------------------------------------------------------------
Then the Board will conduct its
If the covered company is a analysis
------------------------------------------------------------------------
Global systemically important BHC...... Annually.
Category II bank holding company....... Annually.
Category II U.S. intermediate holding Annually.
company.
Category III bank holding company...... Annually.
Category III U.S. intermediate holding Annually.
company.
Category IV bank holding company....... Biennially, occurring in each
year ending in an even number.
Category IV U.S. intermediate holding Biennially, occurring in each
company. year ending in an even number.
[[Page 59107]]
Nonbank financial company supervised by Annually.
the Board.
------------------------------------------------------------------------
(2) Change in frequency. The Board may conduct a stress test of a
covered company on a more or less frequent basis than would be required
under paragraph (c)(1) of this section based on the company's financial
condition, size, complexity, risk profile, scope of operations, or
activities, or risks to the U.S. economy.
(3) Notice and response--(i) Notification of change in frequency.
If the Board determines to change the frequency of the stress test
under paragraph (c)(2) of this section, the Board will notify the
company in writing and provide a discussion of the basis for its
determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under paragraph (c)(3)(i) of
this section, a covered company may request in writing that the Board
reconsider the requirement to conduct a stress test on a more or less
frequent basis than would be required under paragraph (c)(1) of this
section. A covered company's request for reconsideration must include
an explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
0
44. The heading of subpart F is revised to read as follows:
Subpart F--Company-Run Stress Test Requirements for Certain U.S.
Bank Holding Companies and Nonbank Financial Companies Supervised
by the Board
0
45. Section 252.51 is revised to read as follows:
Sec. 252.51 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 1844(b), 1844(c),
5361, 5365, 5366.
(b) Purpose. This subpart establishes the requirement for a covered
company to conduct stress tests. This subpart also establishes
definitions of stress test and related terms, methodologies for
conducting stress tests, and reporting and disclosure requirements.
0
46. Section 252.52 is revised as follows:
Sec. 252.52 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation
methodologies at 12 CFR part 217, subpart E, as applicable, and any
successor regulation.
Baseline scenario means a set of conditions that affect the U.S.
economy or the financial condition of a covered company and that
reflect the consensus views of the economic and financial outlook.
Capital action has the same meaning as in 12 CFR 225.8(d).
Covered company means:
(1) A global systemically important BHC;
(2) A Category II bank holding company;
(3) A Category III bank holding company;
(4) A Category II U.S. intermediate holding company subject to this
section pursuant to Sec. 252.153;
(5) A Category III U.S. intermediate holding company subject to
this section pursuant to Sec. 252.153; and
(6) A nonbank financial company supervised by the Board that is
made subject to this section pursuant to a rule or order of the Board.
Foreign banking organization has the same meaning as in 12 CFR
211.21(o).
Planning horizon means the period of at least nine consecutive
quarters, beginning on the first day of a stress test cycle over which
the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and
non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and
(2) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board
has established minimum requirements for the company by regulation or
order, including, as applicable, the company's regulatory capital
ratios calculated under 12 CFR part 217 and the deductions required
under 12 CFR 248.12; except that the company shall not use the advanced
approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a covered company that the Board
determines are appropriate for use in the company-run stress tests,
including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the
U.S. economy or the financial condition of a covered company and that
overall are significantly more severe than those associated with the
baseline scenario and may include trading or other additional
components.
Stress test means a process to assess the potential impact of
scenarios on the consolidated earnings, losses, and capital of a
covered company over the planning horizon, taking into account its
current condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a
calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2.
0
47. Section 252.53 is revised to read as follows:
Sec. 252.53 Applicability.
(a) Scope--(1) Applicability. Except as provided in paragraph (b)
of this section, this subpart applies to any covered company, which
includes:
(i) Any global systemically important BHC;
(ii) Any Category II bank holding company;
(iii) Any Category III bank holding company;
(iv) Any Category II U.S. intermediate holding company subject to
this section pursuant to Sec. 252.153;
(v) Any Category III U.S. intermediate holding company subject to
this section pursuant to Sec. 252.153; and
(vi) Any nonbank financial company supervised by the Board that is
made subject to this section pursuant to a rule or order of the Board.
(2) Ongoing applicability. (i) A bank holding company (including
any successor company) that is subject to any requirement in this
subpart shall
[[Page 59108]]
remain subject to any such requirement unless and until the bank
holding company:
(A) Is not a global systemically important BHC;
(B) Is not a Category II bank holding company; and
(C) Is not a Category III bank holding company.
(ii) A U.S. intermediate holding company (including any successor
company) that is subject to any requirement in this subpart shall
remain subject to any such requirement unless and until the U.S.
intermediate holding company:
(A) Is not a Category II U.S. intermediate holding company; and
(B) Is not a Category III U.S. intermediate holding company.
(b) Transitional arrangements. (1) A company that becomes a covered
company on or before September 30 of a calendar year must comply with
the requirements of this subpart beginning on January 1 of the second
calendar year after the company becomes a covered company, unless that
time is extended by the Board in writing.
(2) A company that becomes a covered company after September 30 of
a calendar year must comply with the requirements of this subpart
beginning on January 1 of the third calendar year after the company
becomes a covered company, unless that time is extended by the Board in
writing.
0
48. In Sec. 252.54 the section heading, paragraphs (a), (b)(2)(i), and
(b)(4)(ii) and (iii) are revised to read as follows:
Sec. 252.54 Stress test.
(a) Stress test--(1) In general. A covered company must conduct a
stress test as required under this subpart.
(2) Frequency--(i) General. Except as provided in paragraph
(a)(2)(ii) of this section, a covered company must conduct a stress
test according to the frequency in Table 1 to Sec. 252.54(a)(2)(i).
Table 1 to Sec. 252.54(a)(2)(i)
------------------------------------------------------------------------
Then the stress test must be
If the covered company is a conducted
------------------------------------------------------------------------
Global systemically important BHC...... Annually, by April 5 of each
calendar year based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Category II bank holding company....... Annually, by April 5 of each
calendar year based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Category II U.S. intermediate holding Annually, by April 5 of each
company. calendar year based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Category III bank holding company...... Biennially, by April 5 of each
calendar year ending in an
even number, based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Category III U.S. intermediate holding Biennially, by April 5 of each
company. calendar year ending in an
even number, based on data as
of December 31 of the
preceding calendar year,
unless the time or the as-of
date is extended by the Board
in writing.
Nonbank financial company supervised by Periodically, as determined by
the Board. rule or order.
------------------------------------------------------------------------
(ii) Change in frequency. The Board may require a covered company
to conduct a stress test on a more or less frequent basis than would be
required under paragraph (a)(2)(i) of this section based on the
company's financial condition, size, complexity, risk profile, scope of
operations, or activities, or risks to the U.S. economy.
(3) Notice and response--(i) Notification of change in frequency.
If the Board requires a covered company to change the frequency of the
stress test under paragraph (a)(2)(ii) of this section, the Board will
notify the company in writing and provide a discussion of the basis for
its determination.
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under paragraph (a)(3)(i) of
this section, a covered company may request in writing that the Board
reconsider the requirement to conduct a stress test on a more or less
frequent basis than would be required under paragraph (a)(2)(i) of this
section. A covered company's request for reconsideration must include
an explanation as to why the request for reconsideration should be
granted. The Board will respond in writing within 14 calendar days of
receipt of the company's request.
(b) * * *
(2) * * *
(i) The Board may require a covered company with significant
trading activity, as determined by the Board and specified in the
Capital Assessments and Stress Testing report (FR Y-14), to include a
trading and counterparty component in its severely adverse scenario in
the stress test required by this section. The data used in this
component must be as of a date selected by the Board between October 1
of the previous calendar year and March 1 of the calendar year in which
the stress test is performed pursuant to this section, and the Board
will communicate the as-of date and a description of the component to
the company no later than March 1 of the calendar year in which the
stress test is performed pursuant to this section.
(ii) The Board may require a covered company to include one or more
additional components in its severely adverse scenario in the stress
test required by this section based on the company's financial
condition, size, complexity, risk profile, scope of operations, or
activities, or risks to the U.S. economy.
* * * * *
(4) * * *
(ii) Request for reconsideration and Board response. Within 14
calendar days of receipt of a notification under this paragraph, the
covered company may request in writing that the Board reconsider the
requirement that the company include the additional component(s) or
additional scenario(s), including an explanation as to why the request
for reconsideration should be granted. The Board will respond in
writing within 14 calendar days of receipt of the company's request.
(iii) Description of component. The Board will provide the covered
company with a description of any additional component(s) or additional
scenario(s) by March 1 of the calendar year in which the stress test is
performed pursuant to this section.
Sec. 252.55 [Removed and Reserved]
0
49. Section 252.55 is removed and reserved.
[[Page 59109]]
0
50. Section 252.56, paragraphs (a) introductory text, (b) introductory
text, and (c)(1) and (2) are revised to read as follows:
Sec. 252.56 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under
Sec. 252.54, for each quarter of the planning horizon, a covered
company must estimate the following for each scenario required to be
used:
* * * * *
(b) Assumptions regarding capital actions. In conducting a stress
test under Sec. 252.54, a covered company is required to make the
following assumptions regarding its capital actions over the planning
horizon:
* * * * *
(c) * * *
(1) In general. The senior management of a covered company must
establish and maintain a system of controls, oversight, and
documentation, including policies and procedures, that are designed to
ensure that its stress testing processes are effective in meeting the
requirements in this subpart. These policies and procedures must, at a
minimum, describe the covered company's stress testing practices and
methodologies, and processes for validating and updating the company's
stress test practices and methodologies consistent with applicable laws
and regulations.
(2) Oversight of stress testing processes. The board of directors,
or a committee thereof, of a covered company must review and approve
the policies and procedures of the stress testing processes as
frequently as economic conditions or the condition of the covered
company may warrant, but no less than each year a stress test is
conducted. The board of directors and senior management of the covered
company must receive a summary of the results of any stress test
conducted under this subpart.
* * * * *
0
51. In Sec. 252.57, paragraph (a) is revised to read as follows:
Sec. 252.57 Reports of stress test results.
(a) Reports to the Board of stress test results. A covered company
must report the results of the stress test required under Sec. 252.54
to the Board in the manner and form prescribed by the Board. Such
results must be submitted by April 5 of the calendar year in which the
stress test is conducted pursuant to Sec. 252.54, unless that time is
extended by the Board in writing.
* * * * *
0
52. In Sec. 252.58, paragraph (a)(1) is revised to read as follows:
Sec. 252.58 Disclosure of stress test results.
(a) * * *
(1) In general. A covered company must publicly disclose a summary
of the results of the stress test required under Sec. 252.54 within
the period that is 15 calendar days after the Board publicly discloses
the results of its supervisory stress test of the covered company
pursuant to Sec. 252.46(c), unless that time is extended by the Board
in writing.
* * * * *
Subpart H--Single-Counterparty Credit Limits
0
53. In Sec. 252.70, paragraphs (a) and (d)(1) are revised to read as
follows:
Sec. 252.70 Applicability and general provisions.
(a) In general. (1) This subpart establishes single counterparty
credit limits for a covered company.
(2) For purposes of this subpart:
(i) Covered company means:
(A) A global systemically important BHC;
(B) A Category II bank holding company; and
(C) A Category III bank holding company;
(ii) Major covered company means any covered company that is a
global systemically important BHC.
* * * * *
(d) * * *
(1) Any company that becomes a covered company will remain subject
to the requirements of this subpart unless and until:
(i) The covered company is not a global systemically important BHC;
(ii) The covered company is not a Category II bank holding company;
and
(iii) The covered company is not a Category III bank holding
company.
* * * * *
Subpart L--[Removed and Reserved]
0
54. Subpart L, consisting of Sec. Sec. 252.120 through 252.122, is
removed.
0
55. Revise the heading for subpart M to read as follows.
Subpart M--Risk Committee Requirement for Foreign Banking
Organizations With Total Consolidated Assets of at Least $50
Billion but Less Than $100 Billion
0
56. Section 252.131 is revised to read as follows:
Sec. 252.131 Applicability.
(a) General applicability. A foreign banking organization with
average total consolidated assets of at least $50 billion but less than
$100 billion must comply with the risk-committee requirements set forth
in this subpart beginning on the first day of the ninth quarter
following the date on which its average total consolidated assets equal
or exceed $50 billion.
(b) Cessation of requirements. A foreign banking organization will
remain subject to the risk-committee requirements of this section until
the earlier of the date on which:
(1) Its total consolidated assets are below $50 billion for each of
four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart N or subpart
O of this part.
0
57. In Sec. 252.132, the section heading and paragraphs (a)
introductory text and (d) are revised to read as follows:
Sec. 252.132 Risk-committee requirements for foreign banking
organizations with total consolidated assets of $50 billion or more but
less than $100 billion.
(a) U.S. risk committee certification. A foreign banking
organization subject to this subpart, must, on an annual basis, certify
to the Board that it maintains a committee of its global board of
directors (or equivalent thereof), on a standalone basis or as part of
its enterprise-wide risk committee (or equivalent thereof) that:
* * * * *
(d) Noncompliance with this section. If a foreign banking
organization does not satisfy the requirements of this section, the
Board may impose requirements, conditions, or restrictions relating to
the activities or business operations of the combined U.S. operations
of the foreign banking organization. The Board will coordinate with any
relevant State or Federal regulator in the implementation of such
requirements, conditions, or restrictions. If the Board determines to
impose one or more requirements, conditions, or restrictions under this
paragraph, the Board will notify the organization before it applies any
requirement, condition or restriction, and describe the basis for
imposing such requirement, condition, or restriction. Within 14
calendar days of receipt of a notification under this paragraph, the
company may request in writing that the Board reconsider the
requirement, condition, or restriction. The Board will respond in
writing to the organization's request for reconsideration prior to
applying the requirement, condition, or restriction.
0
58. The heading of subpart N is revised as follows:
[[Page 59110]]
Subpart N--Enhanced Prudential Standards for Foreign Banking
Organizations With Total Consolidated Assets of $100 Billion or
More and Combined U.S. Assets of Less Than $100 Billion
0
59. Section 252.140 is revised to read as follows:
Sec. 252.140 Scope.
This subpart applies to foreign banking organizations with average
total consolidated assets of $100 billion or more, but average combined
U.S. assets of less than $100 billion.
0
60. Section 252.142 is revised to read as follows:
Sec. 252.142 Applicability.
(a) General applicability. A foreign banking organization with
average total consolidated assets of $100 billion or more and average
combined U.S. assets of less than $100 billion must:
(1) Comply with the capital stress testing, risk-management and
risk-committee requirements set forth in this subpart beginning no
later than on the first day of the ninth quarter the date on which its
average total consolidated assets equal or exceed $100 billion; and
(2) Comply with the risk-based and leverage capital requirements
and liquidity risk-management requirements set forth in this subpart
beginning no later than on the first day of the ninth quarter following
the date on which its total consolidated assets equal or exceed $250
billion; and
(3) Comply with the U.S. intermediate holding company requirement
set forth in Sec. 252.147 beginning no later than on the first day of
the ninth quarter following the date on which its average U.S. non-
branch assets equal or exceed $50 billion.
(b) Cessation of requirements--(1) Enhanced prudential standards
applicable to the foreign banking organization. (i) A foreign banking
organization will remain subject to the requirements set forth in
Sec. Sec. 252.144 and 252.146 until its total consolidated assets are
below $100 billion for each of four consecutive calendar quarters, or
it becomes subject to the requirements of subpart O of this part.
(ii) A foreign banking organization will remain subject to the
requirements set forth in Sec. Sec. 252.143 and 252.145 until its
total consolidated assets are below $250 billion for each of four
consecutive calendar quarters, or it becomes subject to the
requirements of subpart O of this part.
(2) Intermediate holding company requirement. A foreign banking
organization will remain subject to the U.S. intermediate holding
company requirement set forth in Sec. 252.147 until the sum of the
total consolidated assets of the top-tier U.S. subsidiaries of the
foreign banking organization (excluding any section 2(h)(2) company and
DPC branch subsidiary) is below $50 billion for each of four
consecutive calendar quarters, or it becomes subject to the U.S.
intermediate holding company requirements of subpart O of this part.
0
61. In Sec. 252.143, the section heading and paragraphs (a)(1)
introductory text, (b), and (c) are revised to read as follows:
Sec. 252.143 Risk-based and leverage capital requirements for
foreign banking organizations with total consolidated assets of $250
billion or more and combined U.S. assets of less than $100 billion.
(a) * * *
(1) A foreign banking organization subject to this subpart and with
average total consolidated assets of $250 billion or more must certify
to the Board that it meets capital adequacy standards on a consolidated
basis established by its home-country supervisor that are consistent
with the regulatory capital framework published by the Basel Committee
on Banking Supervision, as amended from time to time (Basel Capital
Framework).
* * * * *
(b) Reporting. A foreign banking organization subject to this
subpart and with average total consolidated assets of $250 billion or
more must provide to the Board reports relating to its compliance with
the capital adequacy measures described in paragraph (a) of this
section concurrently with filing the FR Y-7Q.
(c) Noncompliance with the Basel Capital Framework. If a foreign
banking organization does not satisfy the requirements of this section,
the Board may impose requirements, conditions, or restrictions,
including risk-based or leverage capital requirements, relating to the
activities or business operations of the U.S. operations of the
organization. The Board will coordinate with any relevant State or
Federal regulator in the implementation of such requirements,
conditions, or restrictions. If the Board determines to impose one or
more requirements, conditions, or restrictions under this paragraph,
the Board will notify the organization before it applies any
requirement, condition or restriction, and describe the basis for
imposing such requirement, condition, or restriction. Within 14
calendar days of receipt of a notification under this paragraph, the
organization may request in writing that the Board reconsider the
requirement, condition, or restriction. The Board will respond in
writing to the organization's request for reconsideration prior to
applying the requirement, condition, or restriction.
0
62. Section 252.144 is revised to read as follows:
Sec. 252.144 Risk-management and risk-committee requirements for
foreign banking organizations with total consolidated assets of $100
billion or more but combined U.S. assets of less than $100 billion.
(a) Risk-management and risk-committee requirements for foreign
banking organizations with combined U.S. assets of less than $50
billion--(1) U.S. risk committee certification. A foreign banking
organization with average combined U.S. assets of less than $50 billion
must, on an annual basis, certify to the Board that it maintains a
committee of its global board of directors (or equivalent thereof), on
a standalone basis or as part of its enterprise-wide risk committee (or
equivalent thereof) that:
(i) Oversees the risk-management policies of the combined U.S.
operations of the foreign banking organization; and
(ii) Includes at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex firms.
(2) Timing of certification. The certification required under
paragraph (a) of this section must be filed on an annual basis with the
Board concurrently with the FR Y-7.
(b) Risk-management and risk-committee requirements for foreign
banking organizations with combined U.S. assets of $50 billion or more
but less than $100 billion--(1) U.S. risk committee--(i) General. A
foreign banking organization subject to this this subpart and with
average combined U.S. assets of $50 billion or more must maintain a
U.S. risk committee that approves and periodically reviews the risk-
management policies of the combined U.S. operations of the foreign
banking organization and oversees the risk-management framework of such
combined U.S. operations.
(ii) Risk-management framework. The foreign banking organization's
risk-management framework for its combined U.S. operations must be
commensurate with the structure, risk profile, complexity, activities,
and size of its combined U.S. operations and consistent with its
enterprise-wide risk management policies. The framework must include:
(A) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control
[[Page 59111]]
infrastructure for the combined U.S. operations of the foreign banking
organization; and
(B) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and
risk-management deficiencies, including regarding emerging risks, on a
combined U.S. operations basis and ensuring effective and timely
implementation of actions to address emerging risks and risk-management
deficiencies;
(2) Processes and systems for establishing managerial and employee
responsibility for risk management of the combined U.S. operations;
(3) Processes and systems for ensuring the independence of the
risk-management function of the combined U.S. operations; and
(4) Processes and systems to integrate risk management and
associated controls with management goals and the compensation
structure of the combined U.S. operations.
(iii) Placement of the U.S. risk committee. (A) A foreign banking
organization that conducts its operations in the United States solely
through a U.S. intermediate holding company must maintain its U.S. risk
committee as a committee of the board of directors of its U.S.
intermediate holding company (or equivalent thereof).
(B) A foreign banking organization that conducts its operations
through U.S. branches or U.S. agencies (in addition to through its U.S.
intermediate holding company, if any) may maintain its U.S. risk
committee either:
(1) As a committee of the global board of directors (or equivalent
thereof), on a standalone basis or as a joint committee with its
enterprise-wide risk committee (or equivalent thereof); or
(2) As a committee of the board of directors of its U.S.
intermediate holding company (or equivalent thereof), on a standalone
basis or as a joint committee with the risk committee of its U.S.
intermediate holding company required pursuant to Sec. 252.147(e)(3).
(iv) Corporate governance requirements. The U.S. risk committee
must meet at least quarterly and otherwise as needed, and must fully
document and maintain records of its proceedings, including risk-
management decisions.
(v) Minimum member requirements. The U.S. risk committee must:
(A) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking
organization or its affiliates and has not been an officer or employee
of the foreign banking organization or its affiliates during the
previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR
225.41(b)(3), of a person who is, or has been within the last three
years, an executive officer, as defined in 12 CFR 215.2(e)(1) of the
foreign banking organization or its affiliates.
(2) [Reserved]
(c) U.S. chief risk officer--(1) General. A foreign banking
organization with average combined U.S. assets of $50 billion or more
but less than $100 billion or its U.S. intermediate holding company, if
any, must appoint a U.S. chief risk officer with experience in
identifying, assessing, and managing risk exposures of large, complex
financial firms.
(2) Responsibilities. (i) The U.S. chief risk officer is
responsible for overseeing:
(A) The measurement, aggregation, and monitoring of risks
undertaken by the combined U.S. operations;
(B) The implementation of and ongoing compliance with the policies
and procedures for the foreign banking organization's combined U.S.
operations set forth in paragraph (b)(1)(ii)(A) of this section and the
development and implementation of processes and systems set forth in
paragraph (b)(1)(ii)(B) of this section; and
(C) The management of risks and risk controls within the parameters
of the risk-control framework for the combined U.S. operations, and the
monitoring and testing of such risk controls.
(ii) The U.S. chief risk officer is responsible for reporting risks
and risk-management deficiencies of the combined U.S. operations, and
resolving such risk-management deficiencies in a timely manner.
(3) Corporate governance and reporting. The U.S. chief risk officer
must:
(i) Receive compensation and other incentives consistent with
providing an objective assessment of the risks taken by the combined
U.S. operations of the foreign banking organization;
(ii) Be employed by and located in the U.S. branch, U.S. agency,
U.S. intermediate holding company, if any, or another U.S. subsidiary;
(iii) Report directly to the U.S. risk committee and the global
chief risk officer or equivalent management official (or officials) of
the foreign banking organization who is responsible for overseeing, on
an enterprise-wide basis, the implementation of and compliance with
policies and procedures relating to risk-management governance,
practices, and risk controls of the foreign banking organization unless
the Board approves an alternative reporting structure based on
circumstances specific to the foreign banking organization;
(iv) Regularly provide information to the U.S. risk committee,
global chief risk officer, and the Board regarding the nature of and
changes to material risks undertaken by the foreign banking
organization's combined U.S. operations, including risk-management
deficiencies and emerging risks, and how such risks relate to the
global operations of the foreign banking organization; and
(v) Meet regularly and as needed with the Board to assess
compliance with the requirements of this section.
(d) Responsibilities of the foreign banking organization. The
foreign banking organization must take appropriate measures to ensure
that its combined U.S. operations implement the risk-management
policies overseen by the U.S. risk committee described in paragraph (a)
or (b) of this section, and its combined U.S. operations provide
sufficient information to the U.S. risk committee to enable the U.S.
risk committee to carry out the responsibilities of this subpart.
(e) Noncompliance with this section. If a foreign banking
organization does not satisfy the requirements of this section, the
Board may impose requirements, conditions, or restrictions relating to
the activities or business operations of the combined U.S. operations
of the foreign banking organization. The Board will coordinate with any
relevant State or Federal regulator in the implementation of such
requirements, conditions, or restrictions. If the Board determines to
impose one or more requirements, conditions, or restrictions under this
paragraph, the Board will notify the organization before it applies any
requirement, condition, or restriction, and describe the basis for
imposing such requirement, condition, or restriction. Within 14
calendar days of receipt of a notification under this paragraph, the
organization may request in writing that the Board reconsider the
requirement, condition, or restriction. The Board will respond in
writing to the organization's request for reconsideration prior to
applying the requirement, condition, or restriction.
0
63. In Sec. 252.145, the section heading and paragraph (a) are revised
to read as follows:
[[Page 59112]]
Sec. 252.145 Liquidity risk-management requirements for foreign
banking organizations with total consolidated assets of $250 billion or
more and combined U.S. assets of less than $100 billion.
(a) A foreign banking organization subject to this subpart with
average total consolidated assets of $250 billion or more must report
to the Board on an annual basis the results of an internal liquidity
stress test for either the consolidated operations of the foreign
banking organization or the combined U.S. operations of the foreign
banking organization. Such liquidity stress test must be conducted
consistent with the Basel Committee principles for liquidity risk
management and must incorporate 30-day, 90-day, and one-year stress-
test horizons. The ``Basel Committee principles for liquidity risk
management'' means the document titled ``Principles for Sound Liquidity
Risk Management and Supervision'' (September 2008) as published by the
Basel Committee on Banking Supervision, as supplemented and revised
from time to time.
* * * * *
0
64. In Sec. 252.146, the section heading and paragraphs (b)(1)
introductory text, (b)(2)(i), and (c)(1)(ii) and (iii) are revised to
read as follows:
Sec. 252.146 Capital stress testing requirements for foreign banking
organizations with total consolidated assets of $100 billion or more
and combined U.S. assets of less than $100 billion.
* * * * *
(b) * * *
(1) A foreign banking organization subject to this subpart must:
* * * * *
(2) * * *
(i) A supervisory capital stress test conducted by the foreign
banking organization's home-country supervisor or an evaluation and
review by the foreign banking organization's home-country supervisor of
an internal capital adequacy stress test conducted by the foreign
banking organization, according to the frequency specified in the
following paragraph (b)(2)(i)(A) or (B) of this section:
(A) If the foreign banking organization has average total
consolidated assets of $250 billion or more, on at least an annual
basis; or
(B) If the foreign banking organization has average total
consolidated assets of less than $250 billion, at least biennially; and
* * * * *
(c) * * *
(1) * * *
(ii) Conduct a stress test of its U.S. subsidiaries to determine
whether those subsidiaries have the capital necessary to absorb losses
as a result of adverse economic conditions, according to the frequency
specified in paragraph (c)(1)(ii)(A) or (B) of this section:
(A) If the foreign banking organization has average total
consolidated assets of $250 billion or more, on at least an annual
basis; or
(B) If the foreign banking organization has average total
consolidated assets of less than $250 billion, at least biennially; and
(iii) Report a summary of the results of the stress test to the
Board that includes a description of the types of risks included in the
stress test, a description of the conditions or scenarios used in the
stress test, a summary description of the methodologies used in the
stress test, estimates of aggregate losses, pre-provision net revenue,
total loan loss provisions, net income before taxes and pro forma
regulatory capital ratios required to be computed by the home-country
supervisor of the foreign banking organization and any other relevant
capital ratios, and an explanation of the most significant causes for
any changes in regulatory capital ratios.
* * * * *
0
65. Section 252.147 is added to read as follows:
Sec. 252.147 U.S. intermediate holding company requirement for
foreign banking organizations with combined U.S. assets of less than
$100 billion and U.S. non-branch assets of $50 billion or more.
(a) Requirement to form a U.S. intermediate holding company--(1)
Formation. A foreign banking organization with average U.S. non-branch
assets of $50 billion or more must establish a U.S. intermediate
holding company, or designate an existing subsidiary that meets the
requirements of paragraph (a)(2) of this section, as its U.S.
intermediate holding company.
(2) Structure. The U.S. intermediate holding company must be:
(i) Organized under the laws of the United States, any one of the
fifty states of the United States, or the District of Columbia; and
(ii) Be governed by a board of directors or managers that is
elected or appointed by the owners and that operates in an equivalent
manner, and has equivalent rights, powers, privileges, duties, and
responsibilities, to a board of directors of a company chartered as a
corporation under the laws of the United States, any one of the fifty
states of the United States, or the District of Columbia.
(3) Notice. Within 30 days of establishing or designating a U.S.
intermediate holding company under this section, a foreign banking
organization must provide to the Board:
(i) A description of the U.S. intermediate holding company,
including its name, location, corporate form, and organizational
structure;
(ii) A certification that the U.S. intermediate holding company
meets the requirements of this section; and
(iii) Any other information that the Board determines is
appropriate.
(b) Holdings and regulation of the U.S. intermediate holding
company--(1) General. Subject to paragraph (c) of this section, a
foreign banking organization that is required to form a U.S.
intermediate holding company under paragraph (a) of this section must
hold its entire ownership interest in any U.S. subsidiary (excluding
each section 2(h)(2) company or DPC branch subsidiary, if any) through
its U.S. intermediate holding company.
(2) Reporting. Each U.S. intermediate holding company shall submit
information in the manner and form prescribed by the Board.
(3) Examinations and inspections. The Board may examine or inspect
any U.S. intermediate holding company and each of its subsidiaries and
prepare a report of their operations and activities.
(4) Global systemically important banking organizations. For
purposes of this part, a top-tier foreign banking organization with
average U.S. non-branch assets that equal or exceed $50 billion is a
global systemically important foreign banking organization if any of
the following conditions are met:
(i) The top-tier foreign banking organization determines, pursuant
to paragraph (b)(6) of this section, that the top-tier foreign banking
organization has the characteristics of a global systemically important
banking organization under the global methodology; or
(ii) The Board, using information available to the Board,
determines:
(A) That the top-tier foreign banking organization would be a
global systemically important banking organization under the global
methodology;
(B) That the top-tier foreign banking organization, if it were
subject to the Board's Regulation Q, would be identified as a global
systemically important BHC under 12 CFR 217.402; or
(C) That the U.S. intermediate holding company, if it were subject
to 12 CFR 217.402, would be identified as a global systemically
important BHC.
[[Page 59113]]
(5) Notice. Each top-tier foreign banking organization that
controls a U.S. intermediate holding company shall submit to the Board
by January 1 of each calendar year through the U.S. intermediate
holding company:
(i) Notice of whether the home-country supervisor (or other
appropriate home country regulatory authority) of the top-tier foreign
banking organization of the U.S. intermediate holding company has
adopted standards consistent with the global methodology; and
(ii) Notice of whether the top-tier foreign banking organization
prepares or reports the indicators used by the global methodology to
identify a banking organization as a global systemically important
banking organization and, if it does, whether the top-tier foreign
banking organization has determined that it has the characteristics of
a global systemically important banking organization under the global
methodology pursuant to paragraph (b)(6) of this section.
(6) Global systemically important banking organization under the
global methodology. A top-tier foreign banking organization that
controls a U.S. intermediate holding company and prepares or reports
for any purpose the indicator amounts necessary to determine whether
the top-tier foreign banking organization is a global systemically
important banking organization under the global methodology must use
the data to determine whether the top-tier foreign banking organization
has the characteristics of a global systemically important banking
organization under the global methodology.
(c) Alternative organizational structure--(1) General. Upon a
written request by a foreign banking organization, the Board may permit
the foreign banking organization to: Establish or designate multiple
U.S. intermediate holding companies; not transfer its ownership
interests in certain subsidiaries to a U.S. intermediate holding
company; or use an alternative organizational structure to hold its
combined U.S. operations.
(2) Factors. In making a determination under paragraph (c)(1) of
this section, the Board may consider whether applicable law would
prohibit the foreign banking organization from owning or controlling
one or more of its U.S. subsidiaries through a single U.S. intermediate
holding company, or whether circumstances otherwise warrant an
exception based on the foreign banking organization's activities, scope
of operations, structure, or similar considerations.
(3) Request--(i) Contents. A request submitted under this section
must include an explanation of why the request should be granted and
any other information required by the Board.
(ii) Timing. The Board shall act on a request for an alternative
organizational structure within 90 days of receipt of a complete
request, unless the Board provides notice to the organization that it
is extending the period for action.
(4) Conditions. The Board may grant relief under this section upon
such conditions as the Board deems appropriate, including, but not
limited to, requiring the U.S. operations of the foreign banking
organization to comply with additional enhanced prudential standards,
or requiring the foreign banking organization to enter into supervisory
agreements governing such alternative organizational structure.
(d) Modifications. The Board may modify the application of any
section of this subpart to a foreign banking organization that is
required to form a U.S. intermediate holding company or to such U.S.
intermediate holding company if appropriate to accommodate the
organizational structure of the foreign banking organization or
characteristics specific to such foreign banking organization and such
modification is appropriate and consistent with the capital structure,
size, complexity, risk profile, scope of operations, or financial
condition of each U.S. intermediate holding company, safety and
soundness, and the financial stability mandate of section 165 of the
Dodd-Frank Act.
(e) Enhanced prudential standards for U.S. intermediate holding
companies--(1) Capital requirements for a U.S. intermediate holding
company. (i)(A) A U.S. intermediate holding company must comply with 12
CFR part 217, other than subpart E of 12 CFR part 217, in the same
manner as a bank holding company.
(B) A U.S. intermediate holding company may choose to comply with
subpart E of 12 CFR part 217.
(ii) A U.S. intermediate holding company must comply with capital
adequacy standards beginning on the date it is required to established
under this subpart, or if the U.S. intermediate holding company is
subject to capital adequacy standards on the date that the foreign
banking organization becomes subject to Sec. 252.142(a)(3), on the
date that the foreign banking organization becomes subject to this
subpart.
(2) Risk-management and risk-committee requirements--(i) General. A
U.S. intermediate holding company must establish and maintain a risk
committee that approves and periodically reviews the risk-management
policies and oversees the risk-management framework of the U.S.
intermediate holding company. The risk committee must be a committee of
the board of directors of the U.S. intermediate holding company (or
equivalent thereof). The risk committee may also serve as the U.S. risk
committee for the combined U.S. operations required pursuant to Sec.
252.144(b).
(ii) Risk-management framework. The U.S. intermediate holding
company's risk-management framework must be commensurate with the
structure, risk profile, complexity, activities, and size of the U.S.
intermediate holding company and consistent with the risk management
policies for the combined U.S. operations of the foreign banking
organization. The framework must include:
(A) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control infrastructure
for the U.S. intermediate holding company; and
(B) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and
risk-management deficiencies at the U.S. intermediate holding company,
including regarding emerging risks and ensuring effective and timely
implementation of actions to address emerging risks and risk-management
deficiencies;
(2) Processes and systems for establishing managerial and employee
responsibility for risk management of the U.S. intermediate holding
company;
(3) Processes and systems for ensuring the independence of the
risk-management function of the U.S. intermediate holding company; and
(4) Processes and systems to integrate risk management and
associated controls with management goals and the compensation
structure of the U.S. intermediate holding company.
(iii) Corporate governance requirements. The risk committee of the
U.S. intermediate holding company must meet at least quarterly and
otherwise as needed, and must fully document and maintain records of
its proceedings, including risk-management decisions.
(iv) Minimum member requirements. The risk committee must:
(A) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
[[Page 59114]]
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking
organization or its affiliates and has not been an officer or employee
of the foreign banking organization or its affiliates during the
previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR
225.41(b)(3), of a person who is, or has been within the last three
years, an executive officer, as defined in 12 CFR 215.2(e)(1), of the
foreign banking organization or its affiliates.
(v) The U.S. intermediate holding company must take appropriate
measures to ensure that it implements the risk-management policies for
the U.S. intermediate holding company and it provides sufficient
information to the U.S. risk committee to enable the U.S. risk
committee to carry out the responsibilities of this subpart;
(vi) A U.S. intermediate holding company must comply with risk-
committee and risk-management requirements beginning on the date that
it is required to be established or designated under this subpart or,
if the U.S. intermediate holding company is subject to risk-committee
and risk-management requirements on the date that the foreign banking
organization becomes subject to Sec. 252.147(a)(3), on the date that
the foreign banking organization becomes subject to this subpart.
0
66. The heading of subpart O is revised to read as follows:
Subpart O--Enhanced Prudential Standards for Foreign Banking
Organizations With Total Consolidated Assets of $100 Billion or
More and Combined U.S. Assets of $100 Billion or More
0
67. Section 252.150 is revised to read as follows:
Sec. 252.150 Scope.
This subpart applies to foreign banking organizations with average
total consolidated assets of $100 billion or more and average combined
U.S. assets of $100 billion or more.
0
68. Section 252.152 is revised to read as follows:
Sec. 252.152 Applicability.
(a) General applicability. (1) A foreign banking organization must:
(i) Comply with the requirements of this subpart (other than the
U.S. intermediate holding company requirement set forth in Sec.
252.153) beginning on the first day of the ninth quarter following the
date on which its average combined U.S. assets equal or exceed $100
billion; and
(ii) Comply with the requirement to establish or designate a U.S.
intermediate holding company requirement set forth in Sec. 252.153(a)
beginning on the first day of the ninth quarter following the date on
which its average U.S. non-branch assets equal or exceed $50 billion
or, if the foreign banking organization has established or designated a
U.S. intermediate holding company pursuant to Sec. 252.147, beginning
on the first day following the date on which the foreign banking
organization's average combined U.S. assets equal or exceed $100
billion.
(2) Changes in requirements following a change in category. A
foreign banking organization that changes from one category of banking
organization described in Sec. 252.5(c) through (e) to another of such
categories must comply with the requirements applicable to the new
category under this subpart no later than on the first day of the
second quarter following the change in the foreign banking
organization's category.
(b) Cessation of requirements--(1) Enhanced prudential standards
applicable to the foreign banking organization. Subject to paragraph
(c)(2) of this section, a foreign banking organization will remain
subject to the applicable requirements of this subpart until its
combined U.S. assets are below $100 billion for each of four
consecutive calendar quarters.
(2) Intermediate holding company requirement. A foreign banking
organization will remain subject to the U.S. intermediate holding
company requirement set forth in Sec. 252.153 until the sum of the
total consolidated assets of the top-tier U.S. subsidiaries of the
foreign banking organization (excluding any section 2(h)(2) company and
DPC branch subsidiary) is below $50 billion for each of four
consecutive calendar quarters, or until the foreign banking
organization is subject to subpart N of this part and is in compliance
with the U.S. intermediate holding company requirements as set forth in
Sec. 252.147.
0
69. In Sec. 252.153:
0
a.Revise the section heading and paragraph (a)(1);
0
b. Add a subject heading to paragraph (a)(2); and
0
c. Revise paragraphs (a)(3) and (c) through (e).
The revisions and addition read as follows:
Sec. 252.153 U.S. intermediate holding company requirement for
foreign banking organizations with combined U.S. assets of $100 billion
or more and U.S. non-branch assets of $50 billion or more.
(a) * * *
(1) Formation. A foreign banking organization with average U.S.
non-branch assets of $50 billion or more must establish a U.S.
intermediate holding company, or designate an existing subsidiary that
meets the requirements of paragraph (a)(2) of this section, as its U.S.
intermediate holding company.
(2) Structure. * * *
(3) Notice. Within 30 days of establishing or designating a U.S.
intermediate holding company under this section, a foreign banking
organization must provide to the Board:
(i) A description of the U.S. intermediate holding company,
including its name, location, corporate form, and organizational
structure;
(ii) A certification that the U.S. intermediate holding company
meets the requirements of this section; and
(iii) Any other information that the Board determines is
appropriate.
* * * * *
(c) Alternative organizational structure--(1) General. Upon a
written request by a foreign banking organization, the Board may permit
the foreign banking organization to: Establish or designate multiple
U.S. intermediate holding companies; not transfer its ownership
interests in certain subsidiaries to a U.S. intermediate holding
company; or use an alternative organizational structure to hold its
combined U.S. operations.
(2) Factors. In making a determination under paragraph (c)(1) of
this section, the Board may consider whether applicable law would
prohibit the foreign banking organization from owning or controlling
one or more of its U.S. subsidiaries through a single U.S. intermediate
holding company, or whether circumstances otherwise warrant an
exception based on the foreign banking organization's activities, scope
of operations, structure, or other similar considerations.
(3) Request--(i) Contents. A request submitted under this section
must include an explanation of why the request should be granted and
any other information required by the Board.
(ii) Timing. The Board will act on a request for an alternative
organizational structure within 90 days of receipt of a complete
request, unless the Board provides notice to the organization that it
is extending the period for action.
(4) Conditions. (i) The Board may grant relief under this section
upon such
[[Page 59115]]
conditions as the Board deems appropriate, including, but not limited
to, requiring the U.S. operations of the foreign banking organization
to comply with additional enhanced prudential standards, or requiring
the foreign banking organization to enter into supervisory agreements
governing such alternative organizational structure.
(ii) If the Board permits a foreign banking organization to form
two or more U.S. intermediate holding companies under this section,
each U.S. intermediate holding company must determine its category
pursuant to Sec. 252.5 of this part as though the U.S. intermediate
holding companies were a consolidated company.
(d) Modifications. The Board may modify the application of any
section of this subpart to a foreign banking organization that is
required to form a U.S. intermediate holding company or to such U.S.
intermediate holding company if appropriate to accommodate the
organizational structure of the foreign banking organization or
characteristics specific to such foreign banking organization and such
modification is appropriate and consistent with the capital structure,
size, complexity, risk profile, scope of operations, or financial
condition of each U.S. intermediate holding company, safety and
soundness, and the mandate of section 165 of the Dodd-Frank Act.
(e) Enhanced prudential standards for U.S. intermediate holding
companies--(1) Capital requirements for a U.S. intermediate holding
company. (i)(A) A U.S. intermediate holding company must comply with 12
CFR part 217, other than subpart E of 12 CFR part 217, in the same
manner as a bank holding company.
(B) A U.S. intermediate holding company may choose to comply with
subpart E of 12 CFR part 217.
(ii) A U.S. intermediate holding company must comply with
applicable capital adequacy standards beginning on the date that it is
required to be established or designated under this subpart or, if the
U.S. intermediate holding company is subject to capital adequacy
standards on the date that the foreign banking organization becomes
subject to paragraph (a)(1)(ii) of this section, on the date that the
foreign banking organization becomes subject to this subpart.
(2) Capital planning. (i) A U.S. intermediate holding company with
total consolidated assets of $100 billion or more must comply with 12
CFR 225.8 in the same manner as a bank holding company.
(ii) A U.S. intermediate holding company with total consolidated
assets of $100 billion or more must comply with 12 CFR 225.8 on the
date prescribed in the transition provisions of 12 CFR 225.8.
(3) Risk-management and risk committee requirements--(i) General. A
U.S. intermediate holding company must establish and maintain a risk
committee that approves and periodically reviews the risk-management
policies and oversees the risk-management framework of the U.S.
intermediate holding company. The risk committee must be a committee of
the board of directors of the U.S. intermediate holding company (or
equivalent thereof). The risk committee may also serve as the U.S. risk
committee for the combined U.S. operations required pursuant to Sec.
252.155(a).
(ii) Risk-management framework. The U.S. intermediate holding
company's risk-management framework must be commensurate with the
structure, risk profile, complexity, activities, and size of the U.S.
intermediate holding company and consistent with the risk management
policies for the combined U.S. operations of the foreign banking
organization. The framework must include:
(A) Policies and procedures establishing risk-management
governance, risk-management procedures, and risk-control infrastructure
for the U.S. intermediate holding company; and
(B) Processes and systems for implementing and monitoring
compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and
risk-management deficiencies at the U.S. intermediate holding company,
including regarding emerging risks and ensuring effective and timely
implementation of actions to address emerging risks and risk-management
deficiencies;
(2) Processes and systems for establishing managerial and employee
responsibility for risk management of the U.S. intermediate holding
company;
(3) Processes and systems for ensuring the independence of the
risk-management function of the U.S. intermediate holding company; and
(4) Processes and systems to integrate risk management and
associated controls with management goals and the compensation
structure of the U.S. intermediate holding company.
(iii) Corporate governance requirements. The risk committee of the
U.S. intermediate holding company must meet at least quarterly and
otherwise as needed, and must fully document and maintain records of
its proceedings, including risk-management decisions.
(iv) Minimum member requirements. The risk committee must:
(A) Include at least one member having experience in identifying,
assessing, and managing risk exposures of large, complex financial
firms; and
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking
organization or its affiliates and has not been an officer or employee
of the foreign banking organization or its affiliates during the
previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR
225.41(b)(3), of a person who is, or has been within the last three
years, an executive officer, as defined in 12 CFR 215.2(e)(1), of the
foreign banking organization or its affiliates.
(v) The U.S. intermediate holding company must take appropriate
measures to ensure that it implements the risk-management policies for
the U.S. intermediate holding company and it provides sufficient
information to the U.S. risk committee to enable the U.S. risk
committee to carry out the responsibilities of this subpart.
(vi) A U.S. intermediate holding company must comply with risk-
committee and risk-management requirements beginning on the date that
it is required to be established or designated under this subpart or,
if the U.S. intermediate holding company is subject to risk-committee
and risk-management requirements on the date that the foreign banking
organization becomes subject to Sec. 252.153(a)(1)(ii), on the date
that the foreign banking organization becomes subject to this subpart.
(4) Liquidity requirements. (i) A U.S. intermediate holding company
must comply with the liquidity risk-management requirements in Sec.
252.156 and conduct liquidity stress tests and hold a liquidity buffer
pursuant to Sec. 252.157.
(ii) A U.S. intermediate holding company must comply with liquidity
risk-management, liquidity stress test, and liquidity buffer
requirements beginning on the date that it is required to be
established or designated under this subpart.
(5) Stress test requirements. (i)(A) A U.S. intermediate holding
company with total consolidated assets of $100 billion or more must
comply with the requirements of subpart E of this part in the same
manner as a bank holding company;
[[Page 59116]]
(B) A U.S. intermediate holding company must comply with the
requirements of subpart E beginning the later of:
(1) The stress test cycle of the calendar year after the calendar
year in which the U.S. intermediate holding company becomes subject to
regulatory capital requirements; or
(2) The transition period provided under subpart E.
(ii)(A) A Category II U.S. intermediate holding company or a
Category III U.S. intermediate holding company must comply with the
requirements of subpart F of this part in the same manner as a bank
holding company;
(B) A Category II U.S. intermediate holding company or Category III
U.S. intermediate holding company must comply with the requirements of
subpart F beginning the later of:
(1) The stress test cycle of the calendar year after the calendar
year in which the U.S. intermediate holding company becomes subject to
regulatory capital requirements; or
(2) The transition period provided under subpart F.
0
70. In Sec. 252.154 the section heading and paragraphs (a)(1), (b),
and (c) are revised to read as follows:
Sec. 252.154 Risk-based and leverage capital requirements for
foreign banking organizations with combined U.S. assets of $100 billion
or more.
(a) * * *
(1) A foreign banking organization subject to this subpart more
must certify to the Board that it meets capital adequacy standards on a
consolidated basis that are established by its home-country supervisor
and that are consistent with the regulatory capital framework published
by the Basel Committee on Banking Supervision, as amended from time to
time (Basel Capital Framework).
* * * * *
(b) Reporting. A foreign banking organization subject to this
subpart must provide to the Board reports relating to its compliance
with the capital adequacy measures described in paragraph (a) of this
section concurrently with filing the FR Y-7Q.
(c) Noncompliance with the Basel Capital Framework. If a foreign
banking organization does not satisfy the requirements of this section,
the Board may impose requirements, conditions, or restrictions relating
to the activities or business operations of the U.S. operations of the
foreign banking organization. The Board will coordinate with any
relevant State or Federal regulator in the implementation of such
requirements, conditions, or restrictions. If the Board determines to
impose one or more requirements, conditions, or restrictions under this
paragraph, the Board will notify the organization before it applies any
requirement, condition, or restriction, and describe the basis for
imposing such requirement, condition, or restriction. Within 14
calendar days of receipt of a notification under this paragraph, the
organization may request in writing that the Board reconsider the
requirement, condition, or restriction. The Board will respond in
writing to the organization's request for reconsideration prior to
applying the requirement, condition, or restriction.
0
71. In Sec. 252.155 revise the section heading and paragraphs (a)(1)
and (3) and (b)(1) to read as follows:
Sec. 252.155 Risk-management and risk-committee requirements for
foreign banking organizations with combined U.S. assets of $100 billion
or more.
(a) * * *
(1) General. A foreign banking organization subject to this subpart
must maintain a U.S. risk committee that approves and periodically
reviews the risk-management policies of the combined U.S. operations of
the foreign banking organization and oversees the risk-management
framework of such combined U.S. operations. The U.S. risk committee's
responsibilities include the liquidity risk-management responsibilities
set forth in Sec. 252.156(a).
* * * * *
(3) Placement of the U.S. risk committee. (i) A foreign banking
organization that conducts its operations in the United States solely
through a U.S. intermediate holding company must maintain its U.S. risk
committee as a committee of the board of directors of its U.S.
intermediate holding company (or equivalent thereof).
(ii) A foreign banking organization that conducts its operations
through U.S. branches or U.S. agencies (in addition to through its U.S.
intermediate holding company, if any) may maintain its U.S. risk
committee either:
(A) As a committee of the global board of directors (or equivalent
thereof), on a standalone basis or as a joint committee with its
enterprise-wide risk committee (or equivalent thereof); or
(B) As a committee of the board of directors of its U.S.
intermediate holding company (or equivalent thereof), on a standalone
basis or as a joint committee with the risk committee of its U.S.
intermediate holding company required pursuant to Sec. 252.153(e)(3).
* * * * *
(b) * * *
(1) General. A foreign banking organization subject to this subpart
or its U.S. intermediate holding company, if any, must appoint a U.S.
chief risk officer with experience in identifying, assessing, and
managing risk exposures of large, complex financial firms.
* * * * *
0
72. In Sec. 252.156, the section heading and paragraphs (a)(1)
introductory text, (b)(1) and (2), (b)(3)(i), (b)(4) through (6),
(c)(1), (c)(2)(ii), (d)(1), (e)(1), (e)(2)(i)(A) and (C),
(e)(2)(ii)(A), (f), and (g) are revised to read as follows:
The revisions read as follows:
Sec. 252.156 Liquidity risk-management requirements for foreign
banking organizations with combined U.S. assets of $100 billion or
more.
(a) * * *
(1) The U.S. risk committee established by a foreign banking
organization pursuant to Sec. 252.155(a) (or a designated subcommittee
of such committee composed of members of the board of directors (or
equivalent thereof)) of the U.S. intermediate holding company or the
foreign banking organization, as appropriate must:
* * * * *
(b) * * *
(1) Liquidity risk. The U.S. chief risk officer of a foreign
banking organization subject to this subpart must review the strategies
and policies and procedures established by senior management of the
U.S. operations for managing the risk that the financial condition or
safety and soundness of the foreign banking organization's combined
U.S. operations would be adversely affected by its inability or the
market's perception of its inability to meet its cash and collateral
obligations (liquidity risk).
(2) Liquidity risk tolerance. The U.S. chief risk officer of a
foreign banking organization subject to this subpart must review
information provided by the senior management of the U.S. operations to
determine whether the combined U.S. operations are operating in
accordance with the established liquidity risk tolerance. The U.S.
chief risk officer must regularly, and, at least semi-annually, report
to the foreign banking organization's U.S. risk committee and
enterprise-wide risk committee, or the equivalent thereof (if any) (or
a designated subcommittee of such committee composed of members of the
relevant board of directors (or equivalent thereof)) on the liquidity
risk profile of the foreign banking organization's combined U.S.
operations and whether it is operating in accordance with the
established liquidity risk tolerance for the U.S.
[[Page 59117]]
operations, and must establish procedures governing the content of such
reports.
(3) * * *
(i) The U.S. chief risk officer of a foreign banking organization
subject to this subpart must approve new products and business lines
and evaluate the liquidity costs, benefits, and risks of each new
business line and each new product offered, managed or sold through the
foreign banking organization's combined U.S. operations that could have
a significant effect on the liquidity risk profile of the U.S.
operations of the foreign banking organization. The approval is
required before the foreign banking organization implements the
business line or offers the product through its combined U.S.
operations. In determining whether to approve the new business line or
product, the U.S. chief risk officer must consider whether the
liquidity risk of the new business line or product (under both current
and stressed conditions) is within the foreign banking organization's
established liquidity risk tolerance for its combined U.S. operations.
* * * * *
(4) Cash-flow projections. The U.S. chief risk officer of a foreign
banking organization subject to this subpart must review the cash-flow
projections produced under paragraph (d) of this section at least
quarterly (or more often, if changes in market conditions or the
liquidity position, risk profile, or financial condition of the foreign
banking organization or the U.S. operations warrant) to ensure that the
liquidity risk of the foreign banking organization's combined U.S.
operations is within the established liquidity risk tolerance.
(5) Liquidity risk limits. The U.S. chief risk officer of a foreign
banking organization subject to this subpart must establish liquidity
risk limits as set forth in paragraph (f) of this section and review
the foreign banking organization's compliance with those limits at
least quarterly (or more often, if changes in market conditions or the
liquidity position, risk profile, or financial condition of the U.S.
operations of the foreign banking organization warrant).
(6) Liquidity stress testing. The U.S. chief risk officer of a
foreign banking organization subject to this subpart must:
(i) Approve the liquidity stress testing practices, methodologies,
and assumptions required in Sec. 252.157(a) at least quarterly, and
whenever the foreign banking organization materially revises its
liquidity stress testing practices, methodologies or assumptions;
(ii) Review the liquidity stress testing results produced under
Sec. 252.157(a) of this subpart at least quarterly; and
(iii) Approve the size and composition of the liquidity buffer
established under Sec. 252.157(c) of this subpart at least quarterly.
(c) * * *
(1) A foreign banking organization subject to this subpart must
establish and maintain a review function, which is independent of the
management functions that execute funding for its combined U.S.
operations, to evaluate the liquidity risk management for its combined
U.S. operations.
(2) * * *
(ii) Assess whether the foreign banking organization's liquidity
risk-management function of its combined U.S. operations complies with
applicable laws and regulations, and sound business practices; and
* * * * *
(d) * * *
(1) A foreign banking organization subject to this subpart must
produce comprehensive cash-flow projections for its combined U.S.
operations that project cash flows arising from assets, liabilities,
and off-balance sheet exposures over, at a minimum, short- and long-
term time horizons. The foreign banking organization must update short-
term cash-flow projections daily and must update longer-term cash-flow
projections at least monthly.
* * * * *
(e) * * *
(1) A foreign banking organization subject to this subpart must
establish and maintain a contingency funding plan for its combined U.S.
operations that sets out the foreign banking organization's strategies
for addressing liquidity needs during liquidity stress events. The
contingency funding plan must be commensurate with the capital
structure, risk profile, complexity, activities, size, and the
established liquidity risk tolerance for the combined U.S. operations.
The foreign banking organization must update the contingency funding
plan for its combined U.S. operations at least annually, and when
changes to market and idiosyncratic conditions warrant.
(2) * * *
(i) * * *
(A) Identify liquidity stress events that could have a significant
impact on the liquidity of the foreign banking organization or its
combined U.S. operations;
* * * * *
(C) Identify the circumstances in which the foreign banking
organization would implement its action plan described in paragraph
(e)(2)(ii)(A) of this section, which circumstances must include failure
to meet any minimum liquidity requirement imposed by the Board on the
foreign banking organization's combined U.S. operations;
* * * * *
(ii) * * *
(A) Include an action plan that clearly describes the strategies
that the foreign banking organization will use to respond to liquidity
shortfalls in its combined U.S. operations for identified liquidity
stress events, including the methods that the organization or the
combined U.S. operations will use to access alternative funding
sources;
* * * * *
(f) Liquidity risk limits--(1) General. A foreign banking
organization must monitor sources of liquidity risk and establish
limits on liquidity risk that are consistent with the organization's
established liquidity risk tolerance and that reflect the
organization's capital structure, risk profile, complexity, activities,
and size.
(2) Liquidity risk limits established by a Category II foreign
banking organization or Category III foreign banking organization. If
the foreign banking organization is not a Category IV foreign banking
organization, liquidity risk limits established under paragraph (f)(1)
of this section must include limits on:
(i) Concentrations in sources of funding by instrument type, single
counterparty, counterparty type, secured and unsecured funding, and as
applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time
horizons; and
(iii) Off-balance sheet exposures and other exposures that could
create funding needs during liquidity stress events.
(g) Collateral, legal entity, and intraday liquidity risk
monitoring. A foreign banking organization subject to this subpart or
more must establish and maintain procedures for monitoring liquidity
risk as set forth in this paragraph (g).
(1) Collateral. The foreign banking organization must establish and
maintain policies and procedures to monitor assets that have been, or
are available to be, pledged as collateral in connection with
transactions to which entities in its U.S. operations are
counterparties. These policies and procedures must provide that the
foreign banking organization:
[[Page 59118]]
(i) Calculates all of the collateral positions for its combined
U.S. operations according to the frequency specified in paragraph
(g)(1)(i)(A) or (B) of this section or as directed by the Board,
specifying the value of pledged assets relative to the amount of
security required under the relevant contracts and the value of
unencumbered assets available to be pledged:
(A) If the foreign banking organization is not a Category IV
foreign banking organization, on at least a weekly basis; or
(B) If the foreign banking organization is a Category IV foreign
banking organization, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be
pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the foreign banking organization's funding
patterns, including shifts between intraday, overnight, and term
pledging of collateral; and
(iv) Tracks operational and timing requirements associated with
accessing collateral at its physical location (for example, the
custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies and business lines. The foreign
banking organization must establish and maintain procedures for
monitoring and controlling liquidity risk exposures and funding needs
of its combined U.S. operations, within and across significant legal
entities, currencies, and business lines and taking into account legal
and regulatory restrictions on the transfer of liquidity between legal
entities.
(3) Intraday exposure. The foreign banking organization must
establish and maintain procedures for monitoring intraday liquidity
risk exposure for its combined U.S. operations that are consistent with
the capital structure, risk profile, complexity, activities, and size
of the foreign banking organization and its combined U.S. operations.
If the foreign banking organization is not a Category IV banking
organization these procedures must address how the management of the
combined U.S. operations will:
(i) Monitor and measure expected gross daily inflows and outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the
foreign banking organizations can meet these obligations as expected
and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to customers where necessary;
and
(v) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the overall liquidity needs
of the combined U.S. operations.
0
73. In Sec. 252.157:
0
a. The section heading and paragraphs (a)(1)(i) through (iv), (a)(2),
and (a)(7)(i) through (iii) are revised;
0
b. Paragraph (a)(8) is added;
0
c. Paragraphs (b) and (c)(1) and (c)(7)(i) through (iv) are revised;
and
0
d. Paragraph (c)(7)(v) is added.
The revisions and addition read as follows:
Sec. 252.157 Liquidity stress testing and buffer requirements for
foreign banking organizations with combined U.S. assets of $100 billion
or more.
(a) * * *
(1) * * *
(i) A foreign banking organization subject to this subpart must
conduct stress tests to separately assess the potential impact of
liquidity stress scenarios on the cash flows, liquidity position,
profitability, and solvency of:
(A) Its combined U.S. operations as a whole;
(B) Its U.S. branches and agencies on an aggregate basis; and
(C) Its U.S. intermediate holding company, if any.
(ii) Each liquidity stress test required under this paragraph
(a)(1) must use the stress scenarios described in paragraph (a)(3) of
this section and take into account the current liquidity condition,
risks, exposures, strategies, and activities of the combined U.S.
operations.
(iii) The liquidity stress tests required under this paragraph
(a)(1) must take into consideration the balance sheet exposures, off-
balance sheet exposures, size, risk profile, complexity, business
lines, organizational structure and other characteristics of the
foreign banking organization and its combined U.S. operations that
affect the liquidity risk profile of the combined U.S. operations.
(iv) In conducting a liquidity stress test using the scenarios
described in paragraphs (a)(3)(i) and (iii) of this section, the
foreign banking organization must address the potential direct adverse
impact of associated market disruptions on the foreign banking
organization's combined U.S. operations and the related indirect effect
such impact could have on the combined U.S. operations of the foreign
banking organization and incorporate the potential actions of other
market participants experiencing liquidity stresses under the market
disruptions that would adversely affect the foreign banking
organization or its combined U.S. operations.
(2) Frequency. The foreign banking organization must perform the
liquidity stress tests required under paragraph (a)(1) of this section
according to the frequency specified in paragraph (a)(2)(i) or (ii) of
this section or as directed by the Board:
(i) If the foreign banking organization is not a Category IV
foreign banking organization, at least monthly; or
(ii) If the foreign banking organization is a Category IV foreign
banking organization, at least quarterly.
* * * * *
(7) * * *
(i) Stress test function. A foreign banking organization subject to
this subpart, within its combined U.S. operations and its enterprise-
wide risk management, must establish and maintain policies and
procedures governing its liquidity stress testing practices,
methodologies, and assumptions that provide for the incorporation of
the results of liquidity stress tests in future stress testing and for
the enhancement of stress testing practices over time.
(ii) Controls and oversight. The foreign banking organization must
establish and maintain a system of controls and oversight that is
designed to ensure that its liquidity stress testing processes are
effective in meeting the requirements of this section. The controls and
oversight must ensure that each liquidity stress test appropriately
incorporates conservative assumptions with respect to the stress
scenario in paragraph (a)(3) of this section and other elements of the
stress-test process, taking into consideration the capital structure,
risk profile, complexity, activities, size, and other relevant factors
of the combined U.S. operations. These assumptions must be approved by
U.S. chief risk officer and subject to independent review consistent
with the standards set out in Sec. 252.156(c).
(iii) Management information systems. The foreign banking
organization must maintain management information systems and data
processes sufficient to enable it to effectively and reliably collect,
sort, and aggregate data and other information related to the liquidity
stress testing of its combined U.S. operations.
(8) Notice and response. If the Board determines that a foreign
banking organization must conduct liquidity stress tests according to a
frequency other than the frequency provided in paragraphs (a)(2)(i) and
(ii) of this section, the Board will notify the foreign banking
organization before the change in frequency takes effect, and describe
the basis for its determination. Within
[[Page 59119]]
14 calendar days of receipt of a notification under this paragraph, the
foreign banking organization may request in writing that the Board
reconsider the requirement. The Board will respond in writing to the
organization's request for reconsideration prior to requiring the
foreign banking organization to conduct liquidity stress tests
according to a frequency other than the frequency provided in
paragraphs (a)(2)(i) and (ii) of this section.
(b) Reporting of liquidity stress tests required by home-country
regulators. A foreign banking organization subject to this subpart must
make available to the Board, in a timely manner, the results of any
liquidity internal stress tests and establishment of liquidity buffers
required by regulators in its home jurisdiction. The report required
under this paragraph must include the results of its liquidity stress
test and liquidity buffer, if required by the laws or regulations
implemented in the home jurisdiction, or expected under supervisory
guidance.
(c) * * *
(1) General. A foreign banking organization subject to this subpart
must maintain a liquidity buffer for its U.S. intermediate holding
company, if any, calculated in accordance with paragraph (c)(2) of this
section, and a separate liquidity buffer for its U.S. branches and
agencies, if any, calculated in accordance with paragraph (c)(3) of
this section.
* * * * *
(7) * * *
(i) Highly liquid assets. The asset must be a highly liquid asset.
For these purposes, a highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as
defined in 12 CFR 249.20; or
(C) Any other asset that the foreign banking organization
demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has
committed market makers and independent bona fide offers to buy and
sell so that a price reasonably related to the last sales price or
current bona fide competitive bid and offer quotations can be
determined within one day and settled at that price within a reasonable
time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased
in periods of financial market distress during which market liquidity
has been impaired.
(ii) Unencumbered. The asset must be unencumbered. For these
purposes, an asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual or other restrictions
on the ability of such company promptly to liquidate, sell or transfer
the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to
any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored
enterprise, to the extent potential credit secured by the asset is not
currently extended by such central bank or U.S. government-sponsored
enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In
calculating the amount of a highly liquid asset included in the
liquidity buffer, the foreign banking organization must discount the
fair market value of the asset to reflect any credit risk and market
price volatility of the asset.
(iv) Operational requirements. With respect to the liquidity
buffer, the foreign banking organization must:
(A) Establish and implement policies and procedures that require
highly liquid assets comprising the liquidity buffer to be under the
control of the management function in the foreign banking organization
that is charged with managing liquidity risk of its combined U.S.
operations; and
(B) Demonstrate the capability to monetize a highly liquid asset
under each scenario required under Sec. 252.157(a)(3).
(v) Diversification. The liquidity buffer must not contain
significant concentrations of highly liquid assets by issuer, business
sector, region, or other factor related to the foreign banking
organization's risk, except with respect to cash and securities issued
or guaranteed by the United States, a U.S. government agency, or a U.S.
government sponsored enterprise.
* * * * *
0
74. In Sec. 252.158, the section heading and paragraphs (b)(1)
introductory text, (b)(2)(i), (c)(1) introductory text, and (c)(2)
introductory text are revised to read as follows:
Sec. 252.158 Capital stress testing requirements for foreign banking
organizations with combined U.S. assets of $100 billion or more.
* * * * *
(b) * * *
(1) A foreign banking organization subject to this subpart and that
has a U.S. branch or U.S. agency must:
* * * * *
(2) * * *
(i) A supervisory capital stress test conducted by the foreign
banking organization's home-country supervisor or an evaluation and
review by the foreign banking organization's home-country supervisor of
an internal capital adequacy stress test conducted by the foreign
banking organization, according to the frequency specified in paragraph
(b)(2)(A) or (B):
(A) If the foreign banking organization is not a Category IV
foreign banking organization, at least annually; or
(B) If the foreign banking organization is a Category IV foreign
banking organization, at least biennially; and
* * * * *
(c) * * *
(1) In general. A foreign banking organization subject to this
subpart must report to the Board by January 5 of each calendar year,
unless such date is extended by the Board, summary information about
its stress-testing activities and results, including the following
quantitative and qualitative information:
* * * * *
(2) Additional information required for foreign banking
organizations in a net due from position. If, on a net basis, the U.S.
branches and agencies of a foreign banking organization subject to this
subpart provide funding to the foreign banking organization's non-U.S.
offices and non-U.S. affiliates, calculated as the average daily
position over a stress test cycle for a given year, the foreign banking
organization must report the following information to the Board by
January 5 of each calendar year, unless such date is extended by the
Board:
* * * * *
Subpart Q--Single-Counterparty Credit Limits
0
75. Section 252.170 is revised to read as follows:
Sec. 252.170 Applicability and general provisions.
(a) In general. (1) This subpart establishes single counterparty
credit limits for a covered foreign entity.
(2) For purposes of this subpart:
(i) Covered foreign entity means:
(A) A Category II foreign banking organization;
(B) A Category III foreign banking organization;
(C) A foreign banking organization with total consolidated assets
that equal or exceed $250 billion;
(D) A Category II U.S. intermediate holding company; and
(E) A Category III U.S. intermediate holding company.
[[Page 59120]]
(ii) Major foreign banking organization means a foreign banking
organization that is a covered foreign entity and meets the
requirements of Sec. 252.172(c)(3) through (5).
(b) Credit exposure limits. (1) Section 252.172 establishes credit
exposure limits for covered foreign entities and major foreign banking
organizations.
(2) A covered foreign entity is required to calculate its aggregate
net credit exposure, gross credit exposure, and net credit exposure to
a counterparty using the methods in this subpart.
(c) Applicability of this subpart--(1) Foreign banking
organizations. (i) A foreign banking organization that is a covered
foreign entity as of October 5, 2018, must comply with the requirements
of this subpart, including but not limited to Sec. 252.172, beginning
on July 1, 2020, unless that time is extended by the Board in writing.
(ii) Notwithstanding paragraph (c)(1)(i) of this section, a foreign
banking organization that is a major foreign banking organization as of
October 5, 2018, must comply with the requirements of this subpart,
including but not limited to Sec. 252.172, beginning on January 1,
2020, unless that time is extended by the Board in writing.
(iii) A foreign banking organization that becomes a covered foreign
entity subject to this subpart after October 5, 2018, must comply with
the requirements of this subpart beginning on the first day of the
ninth calendar quarter after it becomes a covered foreign entity,
unless that time is accelerated or extended by the Board in writing.
(2) U.S. intermediate holding companies. (i) A U.S. intermediate
holding company that is a covered foreign entity as of October 5, 2018,
must comply with the requirements of this subpart, including but not
limited to Sec. 252.172, beginning on July 1, 2020, unless that time
is extended by the Board in writing.
(ii) [Reserved]
(iii) A U.S. intermediate holding company that becomes a covered
foreign entity subject to this subpart after October 5, 2018, must
comply with the requirements of this subpart beginning on the first day
of the ninth calendar quarter after it becomes a covered foreign
entity, unless that time is accelerated or extended by the Board in
writing.
(d) Cessation of requirements--(1) Foreign banking organizations.
(i) Any foreign banking organization that becomes a covered foreign
entity will remain subject to the requirements of this subpart unless
and until:
(A) The covered foreign entity is not a Category II foreign banking
organization;
(B) The covered foreign entity is not a Category III foreign
banking organization; and
(C) Its total consolidated assets fall below $250 billion for each
of four consecutive quarters, as reported on the covered foreign
entity's FR Y-7Q, effective on the as-of date of the fourth consecutive
FR Y-7Q.
(ii) A foreign banking organization that is a covered foreign
entity and that has ceased to be a major foreign banking organization
for purposes of Sec. 252.172(c) is no longer subject to the
requirements of Sec. 252.172(c) beginning on the first day of the
calendar quarter following the reporting date on which it ceased to be
a major foreign banking organization; provided that the foreign banking
organization remains subject to the requirements of this subpart,
unless it ceases to be a foreign banking organization that is a covered
foreign entity pursuant to paragraph (d)(1)(i) of this section.
(2) U.S. intermediate holding companies. (i) Any U.S. intermediate
holding company that becomes a covered foreign entity will remain
subject to the requirements of this subpart unless and until:
(A) The covered foreign entity is not a Category II U.S.
intermediate holding company; or
(B) The covered foreign entity is not a Category III U.S.
intermediate holding company.
0
76. In Sec. 252.171,
0
a. Paragraph (f)(1) is revised;
0
b. Paragraph (aa) is removed; and
0
c. Paragraphs (bb) through (ll) are redesignated as paragraphs (aa)
through (kk).
The revision reads as follows:
Sec. 252.171 Definitions.
* * * * *
(f) * * *
(1) With respect to a natural person:
(i) The natural person;
(ii) Except as provided in paragraph (f)(1)(iii) of this section,
if the credit exposure of the covered foreign entity to such natural
person exceeds 5 percent of tier 1 capital, the natural person and
members of the person's immediate family collectively; and
(iii) Until January 1, 2021, with respect to a U.S. intermediate
holding company that is a covered foreign entity and that has less than
$250 billion in total consolidated assets as of December 31, 2019, if
the credit exposure of the U.S. intermediate holding company to such
natural person exceeds 5 percent of its capital stock and surplus, the
natural person and member of the person's immediately family
collectively.
* * * * *
0
77. In Sec. 252.172:
0
a. Paragraphs (a), (b), and (c) introductory text are revised;
0
b. Paragraph (c)(1) is removed and reserved; and
0
c. Paragraph (c)(2) is revised.
The revisions read as follows:
Sec. 252.172 Credit exposure limits.
(a) Transition limit on aggregate credit exposure for certain
covered foreign entities. (1) A U.S. intermediate holding company that
is a covered foreign entity and that has less than $250 billion in
total consolidated assets as of December 31, 2019 is not required to
comply with paragraph (b)(1) of this section until January 1, 2021.
(2) Until January 1, 2021, no U.S. intermediate holding company
that is a covered foreign entity and that has less than $250 billion in
total consolidated assets as of December 31, 2019 may have an aggregate
net credit exposure that exceeds 25 percent of the consolidated capital
stock and surplus of the U.S. intermediate holding company.
(b) Limit on aggregate net credit exposure for covered foreign
entities. (1) Except as provided in paragraph (a) of this section, no
U.S. intermediate holding company that is a covered foreign entity may
have an aggregate net credit exposure to any counterparty that exceeds
25 percent of the tier 1 capital of the U.S. intermediate holding
company.
(2) No foreign banking organization that is a covered foreign
entity may permit its combined U.S. operations to have aggregate net
credit exposure to any counterparty that exceeds 25 percent of the tier
1 capital of the foreign banking organization.
(c) Limit on aggregate net credit exposure of major foreign banking
organizations to major counterparties.
(1) [Reserved]
(2) No major foreign banking organization may permit its combined
U.S. operations to have aggregate net credit exposure to any major
counterparty that exceeds 15 percent of the tier 1 capital of the major
foreign banking organization.
* * * * *
0
76. In Sec. 252.173 paragraphs (b)(1) and (2) are revised and
paragraph (b)(3) is added to read as follows:
Sec. 252.173 Gross credit exposure.
* * * * *
(b) * * *
[[Page 59121]]
(1) A U.S. intermediate holding company that is a covered foreign
entity and that has less than $250 billion in total consolidated assets
as of December 31, 2019 is not required to comply with paragraph (b)(3)
of this section until January 1, 2021.
(2) Until January 1, 2021, unless the Board applies the
requirements of Sec. 252.175 to the transaction pursuant to Sec.
252.175(d), a U.S. intermediate holding company that is a covered
foreign entity and that has less than $250 billion in total
consolidated assets as of December 31, 2019 must:
(i) Calculate pursuant to paragraph (a) of this section its gross
credit exposure due to any investment in the debt or equity of, and any
credit derivative or equity derivative between the covered foreign
entity and a third party where the covered foreign entity is in the
protection provider and the reference asset is an obligation or equity
security of, or equity investment in, a securitization vehicle,
investment fund, and other special purpose vehicle that is not an
affiliate of the covered foreign entity; and
(ii) Attribute that gross credit exposure to the securitization
vehicle, investment fund, or other special purpose vehicle for purposes
of this subpart.
(3) Except as provided in paragraph (b)(1) of this section, a
covered foreign entity must calculate pursuant to Sec. 252.175 its
gross credit exposure due to any investment in the debt or equity of,
and any credit derivative or equity derivative between the covered
foreign entity and a third party where the covered foreign entity is
the protection provider and the reference asset is an obligation or
equity security of, or equity investment in, a securitization vehicle,
investment fund, and other special purpose vehicle that is not an
affiliate of the covered foreign entity.
* * * * *
0
77. In Sec. 252.175, paragraph (a)(1) is revised to read as follows:
Sec. 252.175 Investments in an exposure to securitization vehicles,
investment funds, and other special purpose vehicles that are not
affiliates of the covered foreign entity.
(a) * * *
(1) This section applies to a covered foreign entity, except as
provided in paragraph (a)(1)(i) of this section.
(i) Until January 1, 2021, this section does not apply to a U.S.
intermediate holding company that is a covered foreign entity with less
than $250 billion in total consolidated assets as of December 31, 2019,
provided that:
(A) In order to avoid evasion of this subpart, the Board may
determine, after notice to the covered foreign entity and opportunity
for hearing, that a U.S. intermediate holding company with less than
$250 billion in total consolidated assets must apply either the
approach in this paragraph (a) or the look-through approach in
paragraph (b) of this section, or must recognize exposures to a third
party that has a contractual obligation to provide credit or liquidity
support to a securitization vehicle, investment fund, or other special
purpose vehicle that is not an affiliate of the covered foreign entity,
as provided in paragraph (c) of this section; and
(B) For purposes of paragraph (a)(1)(i)(A) of this section, the
Board, in its discretion and as applicable, may allow a covered foreign
entity to measure its capital base using the covered foreign entity's
capital stock and surplus rather than its tier 1 capital.
* * * * *
0
78. In Sec. 252.176 paragraphs (a)(1) and (a)(2)(i) are revised to
read as follows:
Sec. 252.176 Aggregation of exposures to more than one counterparty
due to economic interdependence or control relationships.
(a) * * *
(1) This section applies to a covered foreign entity except as
provided in paragraph (a)(1)(i) of this section.
(i) Until January 1, 2021, paragraphs (a)(2) through (d) of this
section do not apply to a U.S. intermediate holding company that is a
covered foreign entity with less than $250 billion in total
consolidated assets as of December 31, 2019.
(ii) [Reserved]
(2)(i) If a covered foreign entity has an aggregate net credit
exposure to any counterparty that exceeds 5 percent of its tier 1
capital, the covered foreign entity must assess its relationship with
the counterparty under paragraph (b)(2) of this section to determine
whether the counterparty is economically interdependent with one or
more other counterparties of the covered foreign entity and under
paragraph (c)(1) of this section to determine whether the counterparty
is connected by a control relationship with one or more other
counterparties.
* * * * *
0
79. In Sec. 252.178, paragraphs (a)(1) and (2) and (c)(2) are revised
to read as follows:
Sec. 252.178 Compliance.
(a) * * *
(1) Except as provided in paragraph (a)(2) of this section, using
all available data, including any data required to be maintained or
reported to the Federal Reserve under this subpart, a covered foreign
entity must comply with the requirements of this subpart on a daily
basis at the end of each business day.
(2) Until December 31, 2020, using all available data, including
any data required to be maintained or reported to the Federal Reserve
under this subpart, a U.S. intermediate holding company that is a
covered foreign entity with less than $250 billion in total
consolidated assets as of December 31, 2019 must comply with the
requirements of this subpart on a quarterly basis, unless the Board
determines and notifies the entity in writing that more frequent
compliance is required.
* * * * *
(c) * * *
(2) A covered foreign entity may request a special temporary credit
exposure limit exemption from the Board. The Board may grant approval
for such exemption in cases where the Board determines that such credit
transactions are necessary or appropriate to preserve the safety and
soundness of the covered foreign entity or U.S. financial stability. In
acting on a request for an exemption, the Board will consider the
following:
(i) A decrease in the covered foreign entity's capital stock and
surplus or tier 1 capital, as applicable;
(ii) The merger of the covered foreign entity with another covered
foreign entity;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a
counterparty as a result of which the covered foreign entity's credit
exposure to the counterparty becomes limited by the requirements of
this section; or
(v) Any other factor(s) the Board determines, in its discretion, is
appropriate.
* * * * *
0
80. In appendix A to part 252:
0
a. Section 1, paragraphs (a) and (b) are revised;
0
b. Section 2 is revised
0
c. Section 3, paragraph (a) is revised
0
d. Section 3.2, paragraph (a) is revised;
0
e. Section 4 is revised;
0
f. Section 4.1, paragraph (a) is revised;
0
g. Section 4.2 is revised;
0
h. Section 4.3 is removed;
0
i. Section 5, paragraphs (a) and (b) are revised;
0
j. Section 5.2.2, paragraph (a) is revised;
0
k. Section 5.3 is removed; and
0
l. Section 6, paragraph (d) is removed.
The revisions read as follows:
[[Page 59122]]
Appendix A to Part 252--Policy Statement on the Scenario Design
Framework for Stress Testing
1. Background
(a) The Board has imposed stress testing requirements through
its regulations (stress test rules) implementing section 165(i) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act or Act) and section 401(e) of the Economic Growth,
Regulatory Relief, and Consumer Protection Act, and through its
capital plan rule (12 CFR 225.8). Under the stress test rules, the
Board conducts a supervisory stress test of each bank holding
company with total consolidated assets of $100 billion or more,
intermediate holding company of a foreign banking organization with
total consolidated assets of $100 billion or more, and nonbank
financial company that the Financial Stability Oversight Council has
designated for supervision by the Board (together, covered
companies).\1\ In addition, under the stress test rules, certain
firms are also subject to company-run stress test requirements.\2\
The Board will provide for at least two different sets of conditions
(each set, a scenario), including baseline and severely adverse
scenarios for both supervisory and company-run stress tests
(macroeconomic scenarios).\3\
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5365(i)(1); 12 CFR part 252, subpart E.
\2\ 12 U.S.C. 5365(i)(2); 12 CFR part 252, subparts B and F.
\3\ The stress test rules define scenarios as those sets of
conditions that affect the United States economy or the financial
condition of a company that the Board determines are appropriate for
use in stress tests, including, but not limited to, baseline and
severely adverse scenarios. The stress test rules define baseline
scenario as a set of conditions that affect the United States
economy or the financial condition of a company and that reflect the
consensus views of the economic and financial outlook. The stress
test rules define severely adverse scenario as a set of conditions
that affect the U.S. economy or the financial condition of a company
and that overall are significantly more severe than those associated
with the baseline scenario and may include trading or other
additional components.
---------------------------------------------------------------------------
(b) The stress test rules provide that the Board will notify
covered companies by no later than February 15 of each year of the
scenarios it will use to conduct its supervisory stress tests and
provide, also by no later than February 15, covered companies and
other financial companies subject to the final rules the set of
scenarios they must use to conduct their company-run stress tests.
Under the stress test rules, the Board may require certain companies
to use additional components in the severely adverse scenario or
additional scenarios. For example, the Board expects to require
large banking organizations with significant trading activities to
include a trading and counterparty component (market shock,
described in the following sections) in their severely adverse
scenario. The Board will provide any additional components or
scenario by no later than March 1 of each year.\4\ The Board expects
that the scenarios it will require the companies to use will be the
same as those the Board will use to conduct its supervisory stress
tests (together, stress test scenarios).
---------------------------------------------------------------------------
\4\ Id.
---------------------------------------------------------------------------
* * * * *
2. Overview and Scope
(a) This policy statement provides more detail on the
characteristics of the stress test scenarios and explains the
considerations and procedures that underlie the approach for
formulating these scenarios. The considerations and procedures
described in this policy statement apply to the Board's stress
testing framework, including to the stress tests required under 12
CFR part 252, subparts B, E, and F as well as the Board's capital
plan rule (12 CFR 225.8).\6\
---------------------------------------------------------------------------
\6\ 12 CFR 252.14(a), 12 CFR 252.44(a), 12 CFR 252.54(a).
---------------------------------------------------------------------------
(b) Although the Board does not envision that the broad approach
used to develop scenarios will change from year to year, the stress
test scenarios will reflect changes in the outlook for economic and
financial conditions and changes to specific risks or
vulnerabilities that the Board, in consultation with the other
federal banking agencies, determines should be considered in the
annual stress tests. The stress test scenarios should not be
regarded as forecasts; rather, they are hypothetical paths of
economic variables that will be used to assess the strength and
resilience of the companies' capital in various economic and
financial environments.
(c) The remainder of this policy statement is organized as
follows. Section 3 provides a broad description of the baseline and
severely adverse scenarios and describes the types of variables that
the Board expects to include in the macroeconomic scenarios and the
market shock component of the stress test scenarios applicable to
companies with significant trading activity. Section 4 describes the
Board's approach for developing the macroeconomic scenarios, and
section 5 describes the approach for the market shocks. Section 6
describes the relationship between the macroeconomic scenario and
the market shock components. Section 7 provides a timeline for the
formulation and publication of the macroeconomic assumptions and
market shocks.
3. Content of the Stress Test Scenarios
(a) The Board will publish a minimum of two different scenarios,
including baseline and severely adverse conditions, for use in
stress tests required in the stress test rules.\7\ In general, the
Board anticipates that it will not issue additional scenarios.
Specific circumstances or vulnerabilities that in any given year the
Board determines require particular vigilance to ensure the
resilience of the banking sector will be captured in the severely
adverse scenario. A greater number of scenarios could be needed in
some years--for example, because the Board identifies a large number
of unrelated and uncorrelated but nonetheless significant risks.
---------------------------------------------------------------------------
\7\ 12 CFR 252.14(b), 12 CFR 252.44(b), 12 CFR 252.54(b).
---------------------------------------------------------------------------
* * * * *
3.2 Market Shock Component
(a) The market shock component of the severely adverse scenario
will only apply to companies with significant trading activity and
their subsidiaries.\10\ The component consists of large moves in
market prices and rates that would be expected to generate losses.
Market shocks differ from macroeconomic scenarios in a number of
ways, both in their design and application. For instance, market
shocks that might typically be observed over an extended period
(e.g., 6 months) are assumed to be an instantaneous event which
immediately affects the market value of the companies' trading
assets and liabilities. In addition, under the stress test rules,
the as-of date for market shocks will differ from the quarter-end,
and the Board will provide the as-of date for market shocks no later
than February 1 of each year. Finally, as described in section 4,
the market shock includes a much larger set of risk factors than the
set of economic and financial variables included in macroeconomic
scenarios. Broadly, these risk factors include shocks to financial
market variables that affect asset prices, such as a credit spread
or the yield on a bond, and, in some cases, the value of the
position itself (e.g., the market value of private equity
positions).
---------------------------------------------------------------------------
\10\ Currently, companies with significant trading activity
include any bank holding company or intermediate holding company
that (1) has aggregate trading assets and liabilities of $50 billion
or more, or aggregate trading assets and liabilities equal to 10
percent or more of total consolidated assets, and (2) is not a large
and noncomplex firm. The Board may also subject a state member bank
subsidiary of any such bank holding company to the market shock
component. The set of companies subject to the market shock
component could change over time as the size, scope, and complexity
of financial company's trading activities evolve.
---------------------------------------------------------------------------
* * * * *
4. Approach for Formulating the Macroeconomic Assumptions for Scenarios
(a) This section describes the Board's approach for formulating
macroeconomic assumptions for each scenario. The methodologies for
formulating this part of each scenario differ by scenario, so these
methodologies for the baseline and severely adverse scenarios are
described separately in each of the following subsections.
(b) In general, the baseline scenario will reflect the most
recently available consensus views of the macroeconomic outlook
expressed by professional forecasters, government agencies, and
other public-sector organizations as of the beginning of the stress-
test cycle. The severely adverse scenario will consist of a set of
economic and financial conditions that reflect the conditions of
post-war U.S. recessions.
(c) Each of these scenarios is described further in sections
below as follows: Baseline (subsection 4.1) and severely adverse
(subsection 4.2)
4.1 Approach for Formulating Macroeconomic Assumptions in the
Baseline Scenario
(a) The stress test rules define the baseline scenario as a set
of conditions that affect the
[[Page 59123]]
U.S. economy or the financial condition of a banking organization,
and that reflect the consensus views of the economic and financial
outlook. Projections under a baseline scenario are used to evaluate
how companies would perform in more likely economic and financial
conditions. The baseline serves also as a point of comparison to the
severely adverse scenario, giving some sense of how much of the
company's capital decline could be ascribed to the scenario as
opposed to the company's capital adequacy under expected conditions.
* * * * *
4.2 Approach for Formulating the Macroeconomic Assumptions in the
Severely Adverse Scenario
The stress test rules define a severely adverse scenario as a
set of conditions that affect the U.S. economy or the financial
condition of a financial company and that overall are significantly
more severe than those associated with the baseline scenario. The
financial company will be required to publicly disclose a summary of
the results of its stress test under the severely adverse scenario,
and the Board intends to publicly disclose the results of its
analysis of the financial company under the severely adverse
scenario.
* * * * *
5. Approach for Formulating the Market Shock Component
(a) This section discusses the approach the Board proposes to
adopt for developing the market shock component of the severely
adverse scenario appropriate for companies with significant trading
activities. The design and specification of the market shock
component differs from that of the macroeconomic scenarios because
profits and losses from trading are measured in mark-to-market
terms, while revenues and losses from traditional banking are
generally measured using the accrual method. As noted above, another
critical difference is the time-evolution of the market shock
component. The market shock component consists of an instantaneous
``shock'' to a large number of risk factors that determine the mark-
to-market value of trading positions, while the macroeconomic
scenarios supply a projected path of economic variables that affect
traditional banking activities over the entire planning period.
(b) The development of the market shock component that are
detailed in this section are as follows: Baseline (subsection 5.1)
and severely adverse (subsection 5.2).
* * * * *
5.2.2 Approaches to Market Shock Design
(a) As an additional component of the severely adverse scenario,
the Board plans to use a standardized set of market shocks that
apply to all companies with significant trading activity. The market
shocks could be based on a single historical episode, multiple
historical periods, hypothetical (but plausible) events, or some
combination of historical episodes and hypothetical events (hybrid
approach). Depending on the type of hypothetical events, a scenario
based on such events may result in changes in risk factors that were
not previously observed. In the supervisory scenarios for 2012 and
2013, the shocks were largely based on relative moves in asset
prices and rates during the second half of 2008, but also included
some additional considerations to factor in the widening of spreads
for European sovereigns and financial companies based on actual
observation during the latter part of 2011.
* * * * *
By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-23662 Filed 10-31-19; 8:45 am]
BILLING CODE 6210-01-P