Comptroller of the Currency, Fed, FDIC Issues Final Rule on Risk-Based Capital
Regulatory Capital Rules:
A Rule by the Comptroller of the Currency, the
Publication Date:
Agencies:
Dates: This rule is effective on
Effective Date:
Entry Type: Rule
Action: Final rule.
Document Citation: 80 FR 41409
Page: 41409 -41426 (18 pages) CFR: 12 CFR 217
12 CFR 324
12 CFR 3
Agency/Docket Numbers: Docket ID OCC-2014-0025
Regulation Q
Docket No. R-1502
RIN: 1557-AD88
3064-AE12
Document Number: 2015-15748
Shorter URL: https://federalregister.gov/a/2015-15748
Action
Final Rule.
Summary
AGENCIES:
DATES:
This rule is effective on
FOR FURTHER INFORMATION CONTACT:
OCC:
Board:
SUPPLEMENTARY INFORMATION:
I. Background
In 2013, the
The advanced approaches rule applies to large, internationally active banking organizations, generally those with
An advanced approaches banking organization that is required to calculate its risk-based capital requirements under the advanced approaches rule also must determine its risk-based capital requirements under the standardized approach in subpart D of the agencies' regulatory capital framework. [7] In accordance with section 171 of the Dodd-Frank Act, the lower ratio (i.e., the more binding ratio) for each risk-based capital requirement is the ratio the banking organization must use for regulatory capital purposes.
II. Proposed Rule and Summary of Comments
In
The agencies received two comment letters on the proposed revisions--one from a financial services trade association, and another from a public advocacy nonprofit organization. The financial services trade association suggested that several of the proposed changes also be applied to the standardized approach. Both commenters expressed views on the proposed treatment of cleared transactions. The financial services trade association suggested that the agencies expand the proposed treatment, while the public advocacy nonprofit organization suggested that the proposed treatment was too generous. In addition, the public advocacy nonprofit organization disagreed with the proposed exemption for cleared transactions from the higher capital charge applicable to large nettings sets.
III. Overview of the Final Rule 1. Definitions and Applicability
A. Definition of Residential Mortgage Exposure
The proposed rule would have revised the definition of residential mortgage exposure in section 2 of the regulatory capital framework to clarify that an advanced approaches banking organization must manage qualifying exposures as part of a segment of exposures with homogenous risk characteristics, and not on an individual basis, for purposes of classifying an exposure as a residential mortgage exposure under the advanced approaches rule. This clarification was consistent with the agencies' intent in adopting the proposed definition of residential mortgage exposure, and with the requirement that an advanced approaches banking organization have an internal system that groups retail exposures into the appropriate retail exposure subcategory and that groups the retail exposures in each retail exposure subcategory into separate segments with homogenous risk characteristics. [10] The agencies did not receive any comments on this part of the proposed rule and are adopting it as final, with a technical edit to correct a grammatical error.
B. Calculation of Total On-Balance Sheet Foreign Exposure
As mentioned above, the advanced approaches rule generally applies to a banking organization with
2. Disclosure Requirements
A. Disclosure Requirements for Advanced Approaches Banking Organizations
Section 173 of the regulatory capital framework requires advanced approaches banking organizations that have completed the parallel run process to provide qualitative and quantitative disclosures relating to their capital requirements. The proposed rule would have clarified two items related to disclosure requirements in the advanced approaches rule.
First, the proposed rule would have clarified that an advanced approaches banking organization would be required to disclose information related to external ratings in Table 6 to section 173 only if it considered external ratings in its internal ratings approach. An advanced approaches banking organization that did not use or consider external ratings would not be required to make such a disclosure.
Second, the proposed rule would have updated the disclosure requirement related to securitization exposures in Table 9 to reflect the treatment of credit-enhancing interest only strips (CEIOs) and after-tax gain-on-sale resulting from a securitization. Specifically, CEIOs that do not constitute after-tax gain-on-sale would be risk-weighted at 1,250 percent, and an after-tax gain-on-sale resulting from a securitization would be deducted from common equity tier 1 capital, rather than from tier 1 capital. The agencies did not receive any comments on this part of the proposed rule and are adopting it as final.
B. Application and Disclosure of the Supplementary Leverage Ratio
Advanced approaches banking organizations are subject to the supplementary leverage ratio. [11] The agencies proposed to clarify that the supplementary leverage ratio would apply to an advanced approaches banking organization, regardless of whether it had completed its parallel run process. The supplementary leverage ratio described in section 10(c)(4) would begin to apply to a banking organization immediately following the quarter in which the banking organization becomes subject to the advanced approaches rule pursuant to section 100(b)(1) of the advanced approaches rule.
In addition, the agencies proposed to clarify the disclosure requirements applicable to advanced approaches banking organizations. [12] The proposed rule clarified that advanced approaches banking organizations, not just top-tier banking organizations, would be required to publicly disclose the supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) on a quarterly basis. A banking organization that qualified as an advanced approaches banking organization before
In addition to the disclosure requirements above, the proposed rule clarified that all top-tier [13] advanced approaches banking organizations, regardless of their parallel run status, would be required to publicly disclose the quantitative information described in Table 13 in section 173 of the advanced approaches rule [14] for twelve consecutive quarters or a shorter period, as applicable, beginning on
3. Risk Weights for Cleared Transactions
A. Risk Weights for Certain Client Cleared Transactions
The agencies proposed to revise the advanced approaches rule for clearing member banking organizations' exposures to a central counterparty (CCP) where the clearing member does not guarantee the performance of the CCP to the clearing member client. Under the advanced approaches rule, a clearing member banking organization is required to assign a two percent risk weight to the trade exposure amount for a cleared transaction with a qualifying CCP (QCCP), and a risk weight applicable to the CCP under section 32 of the regulatory capital framework for a cleared transaction with a CCP that is not a QCCP. This risk weight is applied when the banking organization is acting as a financial intermediary on behalf of its clearing member client.
The proposed rule would have permitted clearing member banking organizations to assign a zero percent risk weight under the advanced approaches rule to the trade exposure amount of a cleared transaction that arises when a clearing member banking organization does not guarantee the performance of the CCP and has no payment obligation to the clearing member client in the event of a CCP default. The proposed treatment would align the risk-based capital requirements for client-cleared transactions with the treatment under the agencies' 2014 SLR rule.
Both commenters provided views on this provision. The public advocacy nonprofit organization suggested that the agencies not finalize the zero percent risk weight, arguing that it underestimates the clearing member's risk to a CCP default. Conversely, the financial services trade association suggested that the agencies expand the zero percent risk weight to transactions cleared on behalf of clients that would not meet the eligibility criteria in sections 3(a)(3) and (3)(a)(4) of the regulatory capital framework for a cleared transaction, to the extent that the clearing member does not guarantee the performance of the CCP and has no payment obligation to the clearing member client in the event of a CCP default.
The agencies believe that requiring the clearing member banking organization to include in risk-weighted assets a trade exposure amount for the client-cleared transactions could overstate the clearing member's risk where the clearing member is not contractually obligated to perform on the transaction to its client in the event of a CCP failure. Furthermore, the public advocacy nonprofit commenter's concerns are partially addressed by the additional capital requirement for a clearing member banking organization's exposure to the default fund of a CCP, which considers its capitalization and risk profile, and the nature of its default fund. With respect to the financial services trade association's suggestion to make an exception from the requirements in sections 3(a)(3) and 3(a)(4) of the regulatory capital framework, it is not clear that the risks in transactions where the clearing member advanced approaches banking organization does not guarantee the performance of the CCP are negligible. Thus, the agencies are finalizing the changes to the risk weight for certain client-cleared transactions as proposed.
The financial services trade association also noted that the proposed changes should apply to the standardized approach contained in subpart D of the regulatory capital framework. However, the agencies did not seek comment on revisions to the provisions in the standardized approach, and banking organizations subject to the standardized approach but not to the advanced approaches rule may not have had sufficient notice of the change. Therefore, the agencies are not adopting the change requested by the commenter, but will consider the suggested change in the context of future proposed rulemakings.
B. Margin Period of Risk in the Internal Models Methodology (IMM)
The regulatory capital framework increases the margin period of risk in the IMM for large netting sets, netting sets involving illiquid collateral or over-the-counter (OTC) derivatives that cannot easily be replaced, or netting sets with more than two margin disputes with the counterparty over the previous two quarters that lasted more than the margin period of risk. [15] In the proposed rule, the agencies proposed to clarify that a cleared transaction would be exempt from the higher margin period of risk solely due to the fact that it is part of a large netting set (i.e., a netting set that exceeds 5,000 trades at any time during the previous quarter). A cleared transaction would be subject to the higher margin period of risk if the netting set contained illiquid collateral, derivatives that could not easily be replaced, or the banking organization had more than two margin disputes with the counterparty over the previous two quarters that lasted more than the margin period of risk.
The public advocacy nonprofit commenter raised concerns about the exemption of cleared transactions that are part of a large netting set from the twenty business day margin-period-of-risk requirement. However, in the agencies' view, the fact that cleared transactions are part of a large netting set should not automatically subject them to a higher capital requirement. In order for trades to meet the regulatory capital framework's definition of cleared transaction, they must involve a CCP, which facilitates trades between counterparties and has a proven record of being able to efficiently process a large volume of transactions. Furthermore, most types of cleared transactions must meet the operational criteria in section 3(a) of the regulatory capital framework, including the portability requirement in section 3(a)(4). These factors sufficiently mitigate the risk to warrant not applying an increased margin-period-of-risk for a netting set of cleared transactions solely because of the size of the netting set. In addition, this change promotes international regulatory consistency by aligning the advanced approaches rule with international standards regarding the requirements for netting sets containing 5,000 or more cleared transactions. Thus, the agencies are finalizing the changes to the margin period of risk in the IMM as proposed.
C. Collateral Posted by a
The agencies proposed to correct a cross-reference related to the calculation of exposure for cleared transactions for clearing member banking organizations and for clearing member client banking organizations in section 133 of the regulatory capital framework. Prior to the proposed change, the provisions for measuring the risk-weighted asset amount for posted collateral cross-referenced only to section 131 of the regulatory capital framework, which contained the provisions for risk-weighting wholesale and retail exposures. [16] Because collateral may be in the form of a securitization exposure, equity exposure, or a covered position, the proposed change would have replaced the cross-reference to section 131 with a cross-reference to subparts E and F.
The agencies did not receive any comments on this proposed revision to the advanced approaches rule, and are adopting it as final. Notably, the financial services trade association commenter noted that the proposed clarifications should be applied to the standardized approach and suggested that the agencies make a corresponding change to section 35 in subpart D of the regulatory capital framework. However, the agencies did not seek comment on revisions to the standardized approach, and non-advanced approaches banking organizations subject to the standardized approach may not have had sufficient notice of the change. Therefore, the agencies are not adopting the change requested by the commenter, but will consider the suggested change in the context of future proposed rulemakings.
4. Risk Weights for Derivatives
A. Exposure at Default Adjustment for Recognized Credit Valuation Adjustment (CVA)
In calculating risk weights for derivative contracts, banking organizations may use the IMM if they receive approval from their primary Federal supervisor, or they may use the current exposure methodology (CEM). In calculating exposure at default (EAD) for derivative contracts under the IMM, a banking organization may reduce EAD by the CVA that the banking organization has recognized in the fair value of derivative contracts reported on its balance sheet. This adjustment reflects the fair value adjustment for counterparty credit risk in the valuation of the netting set. Under the regulatory capital framework, a banking organization could not make a similar adjustment under the CEM.
In the proposed rule, the agencies proposed to adjust the CEM (section 132(c)(1)) to permit an advanced approaches banking organization to reduce the EAD by the recognized CVA on the balance sheet. The agencies noted that, for purposes of calculating standardized total risk-weighted assets as required under section 10 of the regulatory capital framework, advanced approaches banking organizations would not be permitted to reduce the EAD calculated according to the CEM. The agencies did not receive comment on this proposed revision to the advanced approaches rule and are adopting it as final, with an update in section 132(c)(1) to remove a reference to section 132(d) and a technical edit in section 132(c)(2) to also permit an adjustment to EAD by the recognized CVA for OTC derivatives subject to a qualifying master netting agreement.
One commenter proposed that the agencies make a corresponding change to the standardized approach and permit banking organizations to reduce the EAD amount for derivative contracts by recognized CVA. The commenter argued that the current treatment under the standardized approach double counts the impact of CVA, and noted that the adjustment to the standardized approach would more closely align the regulatory capital framework with international standards. However, the agencies did not seek comment on revisions to the provisions in the standardized approach, and non-advanced approaches banking organizations subject to the standardized approach may not have had sufficient notice of the change. Therefore, the agencies are not adopting the change requested by the commenter, but will consider the suggested change in the context of future proposed rulemakings.
B. Fair Value of Liabilities due to Changes in the
Section 22 of the regulatory capital framework requires a banking organization to adjust its common equity tier 1 capital for changes in the fair value of liabilities due to changes in the banking organization's own credit risk. The agencies proposed to clarify that, for derivative liabilities, an advanced approaches banking organization would deduct the difference between its credit spread premium and the risk-free rate as part of this adjustment, and not in addition to this adjustment.
The agencies did not receive any comments on this part of the proposed rule and are adopting it as final.
5. Requirements and Mechanics Applicable to Banking Organizations That Use the Advanced Approaches Rule
In
Sections 122 and 131 of the regulatory capital framework set forth the qualification requirements for the internal ratings-based approach (IRB) for advanced approaches banking organizations and describe the mechanics for calculating risk-weighted assets for wholesale and retail exposures under the advanced approaches rule. When the agencies initially adopted the advanced approaches rule in 2007, [18] they incorporated these elements into the supervisory review process rather than into the advanced approaches rule. However, the agencies believe that certain elements of sections 122 and 131 of the regulatory capital framework should be clarified to ensure that advanced approaches banking organizations appropriately: (1) Obtain and consider all relevant and material information to estimate probability of default (PD), loss given default (LGD), and EAD; (2) quantify risk parameters for wholesale and retail exposures; and (3) establish internal requirements for collateral and risk management processes.
Accordingly, in the proposed rule, the agencies proposed incorporating new rule text to add specificity and enhance transparency regarding the IRB process and the mechanics used to calculate total wholesale and retail risk-weighted assets. More specifically, the proposed rule would have amended sections 122 and 131 of the regulatory capital framework to clarify requirements associated with: (1) The frequency for reviewing risk rating systems, (2) the independence of the systems' development, design, and implementation, (3) time horizons for default and loss data when estimating risk parameters, (4) changes in advanced approaches banking organizations' lending, payment processing, and account monitoring practices, (5) the use of all relevant available data for assigning risk ratings, and (6) the need for internal requirements for collateral management and risk management processes. These proposed modifications are consistent with the current overarching principles in sections 122 and 131 of the regulatory capital framework under which advanced approaches banking organizations must have an internal risk rating and segmentation system that accurately and reliably differentiates among degrees of credit risk for wholesale and retail exposures, and must have a comprehensive risk-parameter quantification process that produces accurate, timely, and reliable risk-parameter estimates. The agencies emphasize that the revisions were intended to clarify, but not change, existing requirements. In fact, many of these clarifications in subpart E of the regulatory capital framework are included in agency supervisory guidance and examination materials. Therefore, because they demonstrated that they comply with the existing requirements, advanced approaches banking organizations that have already exited parallel run demonstrated that they met the proposed requirements upon exit. The agencies did not receive any comments on this part of the proposed rule and are adopting the changes as final, with a technical edit to the rule text in section 122(c)(2)(v)(11) to include language that was included in the regulatory capital framework but inadvertently omitted from the proposed revisions.
6. Technical Corrections
In addition to the revisions discussed above, the agencies proposed to make the following technical corrections:
In section 131(e)(3)(vi), the rule would have been revised to reference section 22(d) and not section 22(a)(7);
In Table 1 of section 132, the reference in the column heading would have been corrected to state that "Non-sovereign issuers risk weight under this section (in percent)" and "Sovereign issuers risk weight under this section (in percent)" are found in section 32.
In section 132(d)(7)(iv)(B), the agencies would have revised the rule to reference section 132(b)(2) and not section 131(b)(2);
In section 132(d)(9)(ii), the agencies would have revised the rule to reference section 132(e)(6) and not section 132(e)(3);
In section 133(b)(3)(i)(B), the agencies would have revised the rule to reference section 133(b)(3)(i)(A) and not section 132(b)(3)(i)(A); and
In section 136(e)(2)(i) and 136(e)(2)(ii), the agencies would have revised the rule to reference section 136(e)(1) and (e)(2) and not section 135(e)(1) and (e)(2).
No comments were received on the above proposed technical corrections. The agencies are finalizing these changes as proposed and are correcting an additional internal cross-reference error in section 132 that was identified after the publication of the proposed rule. Specifically, the agencies are amending section 132(d)(2)(iv)(C) to replace the reference to paragraph (d)(5) with the correct reference to paragraph (d)(6).
In addition, the
IV. Regulatory Analyses A. Paperwork Reduction Act (PRA)
In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) (PRA), the agencies may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C.
As described in the SUPPLEMENTARY INFORMATION section of the preamble, the final rule would apply only to advanced approaches banking organizations. No OCC-supervised advanced approaches banking organization qualifies as a small entity as defined by the SBA. Therefore, the OCC certifies that the final rule will not have a significant economic impact on a substantial number of OCC-supervised small entities.
Using the SBA's size standards, as of
The
Board: The Board is providing a final regulatory flexibility analysis with respect to this final rule. As discussed above, this final rule would clarify, correct, and update aspects of the agencies' regulatory capital framework applicable to banking organizations that are subject to the advanced approaches rule. The revisions are largely driven by observations made by the agencies during the parallel run review process of advanced approaches banking organizations as well as a recent assessment of the regulatory capital framework.
Under regulations issued by the SBA, a small entity includes a depository institution, bank holding company, or savings and loan holding company with total assets of
The final rule applies only to advanced approaches banking organizations, which, generally, are banking organizations with total consolidated assets of
The Board is aware of no other Federal rules that duplicate, overlap, or conflict with the final rule. The Board believes that the final rule will not have a significant economic impact on small banking organizations supervised by the Board and therefore believes that there are no significant alternatives to the final rule that would reduce the economic impact on small banking organizations supervised by the Board.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the final rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the final rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of
The final rule includes clarifications, corrections, and updates for certain aspects of the agencies' regulatory capital framework applicable to national banks and Federal savings associations subject to the OCC's advanced approaches rule.
Because the final rule is designed to clarify, correct, and update existing rules, and does not introduce any new requirements, the OCC has determined that it would not result in expenditures by State, local, and Tribal governments, or by the private sector, of
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal banking agencies to use plain language in all proposed and final rules published after
List of Subjects 12 CFR Part 3
Administrative practice and procedure
Capital
National banks
Reporting and recordkeeping requirements
Risk
12 CFR Part 217
Administrative practice and procedure
Banks
Banking
Capital
Holding companies
Reporting and recordkeeping requirements
Securities
12 CFR Part 324
Administrative practice and procedure
Banks
Banking
Capital Adequacy
Reporting and recordkeeping requirements
Savings associations
State non-member banks
Dated:
Comptroller of the Currency.
By order of the
Robert deV. Frierson,
Secretary of the Board.
Dated at
By order of the Board of Directors.
Executive Secretary.
Editor's Note: Regulatory text for this document has been omitted. If you are interested in this material, send an e-mail to [email protected].
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