[Federal Register Volume 85, Number 59 (Thursday, March 26, 2020)]
[Rules and Regulations]
[Pages 17003-17006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06371]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Rules
and Regulations
[[Page 17003]]
FEDERAL RESERVE SYSTEM
12 CFR Part 252
[Regulation YY; Docket No. R-1706]
RIN 7100-AF80
Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding
Company Requirements for Systemically Important U.S. Bank Holding
Companies and Intermediate Holding Companies of Systemically Important
Foreign Banking Organizations: Eligible Retained Income
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for comments.
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SUMMARY: In light of recent disruptions in economic conditions caused
by the coronavirus disease 2019 (COVID-19) and current strains in U.S.
financial markets, the Board is issuing an interim final rule that
revises the definition of eligible retained income for purposes of the
Board's total loss-absorbing capacity (TLAC) rule. The revised
definition of eligible retained income will make any automatic
limitations on capital distributions that could apply under the TLAC
rule more gradual and aligns to recent action taken by the Board and
the other Federal banking agencies in the capital rule.
DATES: The interim final rule is effective March 26, 2020. Comments on
the interim final rule must be received no later than May 11, 2020.
ADDRESSES: You may submit comments, identified by Docket No. R-1706;
7100-AF80, by any of the following methods:
Agency website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
and RIN numbers in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006,
between 9:00 a.m. and 5:00 p.m. on weekdays. For security reasons, the
Board requires that visitors make an appointment to inspect comments.
You may do so by calling (202) 452-3684.
FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Associate Director,
(202) 530-6360, Constance Horsley, Deputy Associate Director, (202)
452-5239, Juan Climent, Manager, (202) 460 2180, Sean Healey, Lead
Financial Institution Policy Analyst, (202) 912-4611, Division of
Supervision and Regulation; Benjamin McDonough, Assistant General
Counsel, (202) 452-2036, or Mark Buresh, Senior Counsel, (202) 452-
5270, Legal Division, Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue NW, Washington, DC 20551. Users of
Telecommunication Device for Deaf (TDD) only, call (202) 263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. The Interim Final Rule
III. Impact Assessment
IV. Administrative Law Matters
A. Administrative Procedure Act
B. Congressional Review Act
C. Paperwork Reduction Act
D. Regulatory Flexibility Act
E. Use of Plain Language
I. Background
In December 2016, the Board issued a final rule (TLAC rule) to
require the largest domestic and foreign banking organizations
operating in the United States to maintain a minimum amount of total
loss-absorbing capacity (TLAC), consisting of a minimum amount of long-
term debt (LTD) and tier 1 capital.\1\ In addition, the TLAC rule
prescribed certain buffers above the minimum TLAC amounts that could
result in limitations on the capital distributions and certain
discretionary bonus payments of a firm. The final rule also included a
separate requirement that these companies maintain a minimum amount of
LTD.
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\1\ 82 FR 8266 (January 27, 2017); 12 CFR part 252, subparts G
and P.
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The TLAC rule applies to the largest and most systemic U.S. banking
organizations (U.S. GSIBs) and the U.S. operations of the largest and
most systemic foreign banking organizations (covered IHCs), because the
failure or material financial distress of these companies has the
greatest potential to disrupt U.S. financial stability (collectively,
covered companies).\2\
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\2\ See 12 CFR 252.60; 12 CFR 252.160.
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The TLAC and LTD requirements in the final rule build on, and serve
as a complement to, the regulatory capital requirements in the Board's
capital rule.\3\ Banking organizations subject to the capital rule must
maintain a minimum amount of regulatory capital and maintain a capital
buffer above the minimum capital requirements in order to avoid
restrictions on capital distributions and discretionary bonus
payments.\4\ The requirements in the capital rule take the form of
ratios of different forms of regulatory capital to risk-based and
leverage-based measures of assets.
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\3\ While capital rule's requirements are intended to ensure
that a banking organization has sufficient capital to remain a going
concern, the objective of the TLAC rule is to reduce the financial
stability impact of the failure of a covered company by requiring
sufficient loss-absorbing capacity on both a going concern and a
gone-concern basis. A firm's regulatory capital, and especially its
equity capital, is likely to be significantly or completely depleted
in the lead up to a bankruptcy or resolution. Thus, if a firm is to
re-emerge from resolution with sufficient capital to successfully
operate as a going concern, there must be a source of capital for
the firm. The TLAC rule therefore requires covered companies to
maintain LTD because LTD can absorb losses and serve as a source of
capital in resolution.
\4\ See 12 CFR part 217.
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The requirements of the TLAC rule are based on many of the same
measures as those that are in the capital rule. For example, the TLAC
requirements are based on the risk-based and leverage-
[[Page 17004]]
based measures used in the capital rule and the TLAC rule also includes
buffer requirements in addition to the minimum TLAC requirements (TLAC
buffer requirements) that function in a manner similar to the buffer
requirements in the capital rule.
As with the capital rule, the TLAC buffer requirements were
established to encourage better capital conservation by covered
companies and to enhance the resilience of the banking system during
stress periods.\5\ In particular, the TLAC buffer requirements were
intended to limit the ability of covered companies to distribute
capital in the form of dividends and discretionary bonus payments and
therefore strengthen the ability of covered companies to continue
lending and conducting other financial intermediation activities during
stress periods. A covered company with TLAC levels that fall short of
the TLAC buffer requirements faces limitations on capital distributions
and discretionary bonus payments, in a manner designed to parallel the
restrictions on capital distributions and discretionary bonus payments
under the capital rule.
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\5\ 78 FR 62018, 62034 (Oct. 11, 2013).
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II. The Interim Final Rule
The Board, together with the other federal banking agencies
(collectively, the agencies), recently revised a core aspect of the
buffer requirements in the capital rule, the definition of ``eligible
retained income.'' \6\ The Board is now issuing this interim final rule
to carry over this change to the TLAC buffer requirements.
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\6\ 85 FR 15909 (March 20, 2020).
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Before these revisions to the capital rule, the limitations on
capital distributions could have been sudden and severe if a banking
organization was to experience even a modest reduction in its capital
ratios, undermining the ability of the banking organization to use its
capital buffers. This same concern applies to covered companies and the
TLAC buffer requirements because, as noted, the TLAC buffers uses the
former definition of eligible retained income.
The interim final rule revises the definition of eligible retained
income under the TLAC rule to be consistent with the recently revised
definition of eligible retained income in the capital rule. By
modifying the definition of eligible retained income and thereby
allowing covered companies to use their capital buffers in a more
gradual manner, the interim final rule should help to promote lending
activity and other financial intermediation activities by covered
companies and avoid compounding negative impacts on the financial
markets.\7\
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\7\ The interim final rule does not make changes to any other
rule or regulation that may limit capital distributions or
discretionary bonus payments by covered companies.
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Under the TLAC rule, if a covered company's TLAC levels fall within
its TLAC buffer requirements, the maximum amount of capital
distributions and discretionary bonus payments it can make is a
function of its eligible retained income. The original definition of
eligible retained income under the TLAC rule, as under the capital
rule, was four quarters of net income, net of distributions and
associated tax effects not already reflected in net income. Under a
benign business environment, some covered companies may decide to
distribute all or nearly all of their net income. Because the measure
of eligible retained income subtracts capital distributions made during
the previous year, a period of sudden stress following a period of
relatively benign conditions could result in very low or zero eligible
retained income. In this or similar scenarios, a covered company could
face sudden and severe distribution limitations even if its TLAC ratio
only marginally falls below applicable buffer requirements.
Recent events have suddenly and significantly impacted financial
markets. The spread of COVID-19 has disrupted economic activity in many
countries. In addition, financial markets have experienced significant
volatility. The magnitude and persistence of the overall effects on the
economy remain highly uncertain. In light of these developments,
covered companies may realize a sudden, unanticipated drop in capital
ratios. This could create a strong incentive for covered companies to
limit their lending and other financial intermediation activities in
order to avoid facing abrupt limitations on capital distributions.
To better allow a covered company to continue lending during times
of stress, the Board is issuing the interim final rule to revise the
definition of eligible retained income in the TLAC rule to the greater
of (1) a covered company's net income for the four preceding calendar
quarters, net of any distributions and associated tax effects not
already reflected in net income, and (2) the average of a covered
company's net income over the preceding four quarters. This definition
will apply with respect to all of the TLAC buffer requirements under
the TLAC rule.\8\ This definition is consistent with the recently
revised definition of eligible retained income in the capital rule.\9\
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\8\ Under the TLAC rule, a U.S. GSIB is subject to the external
TLAC risk-weighted buffer, which sits above the minimum risk-based
TLAC requirement, and the external TLAC leverage buffer, which sits
above the minimum total-leverage exposure-based TLAC requirement. 12
CFR 252.63(c). Similarly, a covered IHC is subject to covered IHC
TLAC buffer, which sits above the minimum risk-based TLAC
requirement. 12 CFR 252.165(d).
\9\ 85 FR 15909 (March 20, 2020).
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This interim final rule is intended to facilitate use by a covered
company of its TLAC buffers as intended and serve as a financial
intermediary and source of credit to the economy. As noted, this
revision would reduce the likelihood that a covered company is suddenly
subject to abrupt and restrictive distribution limitations in a
scenario of lower than expected TLAC levels.
Question 1: What would be the advantages and disadvantages of
defining eligible retained income as the average of a covered company's
net income over the preceding four quarters instead of the greater of
(i) a covered company's net income for the four preceding calendar
quarters, net of any distributions and associated tax effects not
already reflected in net income, and (ii) the average of a covered
company's net income over the preceding four quarters?
Question 2: Under what circumstances, if any, should a covered
company be restricted from making any capital distributions?
III. Impact Assessment
As discussed above, the revised definition of eligible net income
in the interim final rule allows a covered company to more gradually
reduce distributions as it enters stress, and provides a covered
company with stronger incentives to continue to lend in such a
scenario. On the other hand, by enabling a covered company to gradually
decrease capital distributions as it enters stress (rather than
mandating a sharp decrease), the rule could incrementally reduce the
covered company's loss-absorption capacity in stress.
The definition of eligible retained income affects the
distributions of covered companies with TLAC levels within their TLAC
buffer requirements. It does not have an impact on minimum TLAC or LTD
levels, per se. As such, the revised definition of eligible retained
income in the interim final rule is not likely to have any noticeable
effect on the TLAC or LTD requirements applicable to covered companies.
[[Page 17005]]
IV. Administrative Law Matters
A. Administrative Procedure Act
The Board is issuing the interim final rule without prior notice
and the opportunity for public comment and the delayed effective date
ordinarily prescribed by the Administrative Procedure Act (APA)).\10\
Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \11\
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\10\ 5 U.S.C. 553.
\11\ 5 U.S.C. 553(b)(3)(B)
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The Board believes that the public interest is best served by
implementing the interim final rule immediately upon publication in the
Federal Register. As discussed above, the spread of COVID-19 has
disrupted economic activity in the United States. In addition, U.S.
financial markets have featured extreme levels of volatility. The
magnitude and persistence of COVID-19 on the economy remain uncertain.
In light of the current market uncertainty, covered companies have a
strong incentive to limit their lending activity in order to avoid
facing abrupt restrictions on distributions. By making the automatic
limitations on a covered company's distributions more gradual as the
covered company's TLAC levels decline, the interim final rule would
allow covered companies to focus on continuing to lend to creditworthy
households and businesses rather than on managing their TLAC levels and
reducing the potential of exacerbating negative impacts on the
financial markets. For these reasons, the Board finds that there is
good cause consistent with the public interest to issue the rule
without advance notice and comment.\12\
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\12\ 5 U.S.C. 553(b)(3)(B); 553(d)(3).
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The APA also requires a 30-day delayed effective date, except for
(1) substantive rules which grant or recognize an exemption or relieve
a restriction; (2) interpretative rules and statements of policy; or
(3) as otherwise provided by the agency for good cause.\13\ Because the
rule relieves a restriction, the interim final rule is exempt from the
APA's delayed effective date requirement.\14\
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\13\ 5 U.S.C. 553(d).
\14\ 5 U.S.C. 553(d)(1).
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While the Board believes that there is good cause to issue the rule
without advance notice and comment and with an immediate effective
date, the Board is interested in the views of the public and requests
comment on all aspects of the interim final rule.
B. Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\15\ If a rule is deemed a ``major rule'' by the Office of
Management and Budget (OMB), the Congressional Review Act generally
provides that the rule may not take effect until at least 60 days
following its publication.\16\
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\15\ 5 U.S.C. 801 et seq.
\16\ 5 U.S.C. 801(a)(3).
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The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\17\
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\17\ 5 U.S.C. 804(2).
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For the same reasons set forth above, the Board is adopting the
interim final rule without the delayed effective date generally
prescribed under the Congressional Review Act. The delayed effective
date required by the Congressional Review Act does not apply to any
rule for which an agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rule issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.\18\ In light of
current market uncertainty, the Board believes that delaying the
effective date of the rule would be contrary to the public interest. In
addition, as discussed above, the revised definition of eligible
retained income in the interim final rule is not likely to have any
significant effect on the requirements of the TLAC rule.
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\18\ 5 U.S.C. 808.
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As required by the Congressional Review Act, the Board will submit
the final rule and other appropriate reports to Congress and the
Government Accountability Office for review.
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
(PRA), an agency may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
The Board has reviewed this interim final rule pursuant to authority
delegated by the OMB and has determined that it does not contain any
collections of information pursuant to the PRA.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \19\ requires an agency to
consider whether the rules it proposes will have a significant economic
impact on a substantial number of small entities.\20\ The RFA applies
only to rules for which an agency publishes a general notice of
proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed
previously, consistent with section 553(b)(B) of the APA, the Board has
determined for good cause that general notice and opportunity for
public comment is unnecessary, and therefore the Board is not issuing a
notice of proposed rulemaking. Accordingly, the Board has concluded
that the RFA's requirements relating to initial and final regulatory
flexibility analysis do not apply.
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\19\ 5 U.S.C. 601 et seq.
\20\ Under regulations issued by the Small Business
Administration, a small entity includes a depository institution,
bank holding company, or savings and loan holding company with total
assets of $600 million or less and trust companies with total assets
of $41.5 million or less. See 13 CFR 121.201.
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Nevertheless, the Board seeks comment on whether, and the extent to
which, the interim final rule would affect a significant number of
small entities.
E. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \21\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Board has sought to present the
interim final rule in a simple and straightforward manner. The Board
invites comments on whether there are additional steps it could take to
make the rule easier to understand. For example:
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\21\ 12 U.S.C. 4809.
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Has the Board organized the material to suit your needs?
If not, how could this material be better organized?
Are the requirements in the regulation clearly stated? If
not, how could the regulation be more clearly stated?
[[Page 17006]]
Does the regulation contain language or jargon that is not
clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 252
Administrative practice and procedure, Banks, banking, Credit,
Federal Reserve System, Holding companies, Investments, Qualified
financial contracts, Reporting and recordkeeping requirements,
Securities.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends 12 CFR chapter II as follows:
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
1. The authority citation for part 252 is revised to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.
Subpart G--[Amended]
0
2. Section 252.63 is amended by revising paragraph (c)(2)(i) to read as
follows:
Sec. 252.63 External total loss-absorbing capacity requirement and
buffer.
* * * * *
(c) * * *
(2) * * *
(i) Eligible retained income. The eligible retained income of a
global systemically important BHC is the greater of:
(A) The global systemically important BHC's net income, calculated
in accordance with the instructions to the FR Y-9C, for the four
calendar quarters preceding the current calendar quarter, net of any
distributions and associated tax effects not already reflected in net
income; and
(B) The average of the global systemically important BHC's net
income, calculated in accordance with the instructions to the FR Y-9C,
for the four calendar quarters preceding the current calendar quarter.
* * * * *
Subpart P--[Amended]
0
3. Section 252.165 is amended by revising paragraph (d)(2)(i) to read
as follows:
Sec. 252.165 Covered IHC total loss-absorbing capacity requirement
and buffer.
* * * * *
(d) * * *
(2) * * *
(i) Eligible retained income. The eligible retained income of a
Covered IHC is the greater of:
(A) The Covered IHC's net income, calculated in accordance with the
instructions to the FR Y-9C, for the four calendar quarters preceding
the current calendar quarter, net of any distributions and associated
tax effects not already reflected in net income; and
(B) The average of the Covered IHC's net income, calculated in
accordance with the instructions to the FR Y-9C, for the four calendar
quarters preceding the current calendar quarter.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 23, 2020.
Michele Taylor Fennell,
Assistant Secretary of the Board.
[FR Doc. 2020-06371 Filed 3-24-20; 4:15 pm]
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