Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions
Notice of proposed rulemaking with request for public comment.
CFR Part: "12 CFR Parts 3 and 54 "; "12 CFR Parts 216, 217, 238, and 252 "; "12 CFR Parts 324 and 374 "
RIN Number: "RIN 1557-AF21"; "RIN 7100-AG66"; "RIN 3064-AF86"
Citation: "88 FR 64524"
Document Number: "Docket ID OCC-2023-0011] "; "Regulations P, Q, LL, and YY; Docket No. [R-1815]] "
Page Number: "64524"
"Proposed Rules"
Agency: "
SUMMARY:
DATES:
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Table of Contents
I. Introduction and Overview of the Proposal
A. Background and Introduction
B. Overview of the Proposal
II. Advance Notice of Proposed Rulemaking
III. LTD Requirement for Covered Entities
A. Scope of Application
B. Covered Savings and Loan Holding Companies
C. Calibration of Covered Entity LTD Requirement
IV. LTD Requirement for Covered IDIs
A. Scope of Application
B. Calibration of Covered IDI LTD Requirement
V. Features of Eligible LTD
A. Eligible
B. Eligible
C. Special Considerations for Covered IHCs
D. Legacy External LTD Counted Towards Requirements
VI. Clean Holding Company Requirements
A. No External Issuance of Short-Term Debt Instruments
B. Qualified Financial Contracts With Third Parties
C. Guarantees That are Subject to Cross-Defaults
D. Upstream Guarantees and Offset Rights
VII. Deduction of Investments in Eligible External LTD From
VIII. Transition Periods
IX. Changes to the Board's TLAC rule
A. Haircut for LTD Used to Meet TLAC Requirement
B. Minimum Denominations for LTD Used to Satisfy TLAC Requirements
C. Treatment of Certain Transactions for Clean Holding Company Requirements
D. Disclosure Templates for TLAC HCs
E. Reservation of Authority
F. Technical Changes To Accommodate New Requirements
X. Economic Impact Assessment
A. Introduction and Scope of Application
B. Benefits
C. Costs
XI. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C.
D. Solicitation of Comments on the use of Plain Language
E. OCC Unfunded Mandates Reform Act of 1995 determination
F. Providing Accountability Through Transparency Act of 2023
I. Introduction and Overview of the Proposal
A. Background and Introduction Following the 2008 financial crisis, the
FOOTNOTE 1 See Resolution-Related Resource Requirements for Large Banking Organizations, 87 FR 64170 (
To address these risks, the Board is proposing to require Category II, III, and IV bank holding companies (BHCs) and savings and loan holding companies (SLHCs and, together with BHCs, "covered HCs"), and Category II, III, and IV
FOOTNOTE 2 IDIs that are consolidated subsidiaries of
By augmenting loss-absorbing capacity, LTD can provide banking organizations and banking regulators greater flexibility in responding to the failure of covered entities and covered IDIs. In the resolution of a failed IDI, the availability of an outstanding amount of LTD may increase the likelihood of an orderly and cost-effective resolution for the IDI and may help minimize costs to the DIF. Even where the amount of outstanding LTD is insufficient to absorb enough losses so that all depositor claims at the IDI can be fully satisfied, it would reduce potential costs to the DIF and may expand the range of options available to the
1. Risks Presented by Covered Entities and Covered IDIs, and Challenges in Resolution
Covered entities today primarily operate a bank-centric business model, with deposits providing the main source of their funding. /3/ Following the 2008 financial crisis, the reliance of covered entities on uninsured deposits grew dramatically. /4/ This increased reliance on uninsured deposit funding has given rise to vulnerabilities at these banking organizations.
FOOTNOTE 3 According to FR Y-9C and Call Report data as of
FOOTNOTE 4 Data from Call Reports show that the proportion of uninsured deposits to total deposits at covered entities increased from about 31 percent to 43 percent from 2009 to 2022. END FOOTNOTE
As recent events have highlighted, high levels of uninsured deposit funding can pose an especially significant risk of bank runs when customers grow concerned over the solvency of their bank. The failure of covered entities or covered IDIs can also spread to a broader range of banking organizations, impacting the provision of financial services and access to credit for individuals, families, and businesses.
FOOTNOTE 5 See FDIC, Deposit Inflows and Outflows in Failing Banks: The Role of
Among covered entities that are subject to resolution planning requirements under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), most indicate that their preferred resolution strategy involves the resolution of their IDI subsidiaries under the Federal Deposit Insurance Act of 1950, as amended (FDI Act), with the covered entities being resolved under Chapter 11 of the
The
FOOTNOTE 6 See 12 U.S.C. 1823(c)(4). END FOOTNOTE
FOOTNOTE 7 Invocation of the systemic risk exception allows the
The recent failures of three IDIs that would have been covered within the scope of this proposal,
FOOTNOTE 8 Regional banking organizations generally are considered those with total consolidated assets between
FOOTNOTE 9 See GAO, Preliminary Review of Agency Actions Related to
2. Key Benefits and Rationale of the Proposal
The proposed LTD requirements would improve the resolvability of covered entities and covered IDIs because LTD can be used to absorb loss and create equity in resolution. In particular, because LTD is subordinate to deposits and can be used by the
Expanding the
Although the primary benefits of LTD relate to the resolution of covered entities and their covered IDI subsidiaries, LTD can also improve the resiliency of these banking organizations prior to failure. Considering its long maturity, LTD would be a stable source of funding and, in contrast to other forms of funding like uninsured deposits, may serve as a source of market discipline through pricing.
B. Overview of the Proposal
The agencies are inviting comment on this notice of proposed rulemaking to improve the resolvability of covered entities and covered IDIs. The proposal includes five key components.
First, the proposal would require Category II, III, and IV covered entities to issue and maintain outstanding minimum levels of eligible LTD. This aspect of the proposal is being issued solely by the Board. /10/
FOOTNOTE 10 The proposal would also require covered entities to purchase the debt of their subsidiaries that are internally issuing IDIs under the proposal. END FOOTNOTE
Second, the proposal would require covered IDIs to issue and maintain outstanding a minimum amount of eligible LTD. /11/ This aspect of the proposal is being issued by all of the agencies. A covered IDI that is a consolidated subsidiary of a covered entity or a foreign GSIB IHC would be required to issue eligible LTD internally to an entity that directly or indirectly consolidates the covered IDI. /12/ A covered IDI that is not a controlled subsidiary of a further parent entity would be required to issue eligible LTD to investors that are not affiliates. A covered IDI that is a consolidated subsidiary of a further parent entity that is not a covered entity or that is a controlled but not consolidated subsidiary of a covered entity or a foreign GSIB IHC would be permitted to issue eligible LTD to a company that controls the covered IDI or to investors that are not affiliates.
FOOTNOTE 11 The IDI requirement would apply to an IDI of a
FOOTNOTE 12 A subsidiary is considered a consolidated subsidiary based on
Third, the operations of covered entities would be subject to "clean holding company" requirements to further improve the resolvability of covered entities and their operating subsidiaries. This aspect of the proposal is being issued solely by the Board. In particular, the proposal would prohibit covered entities from issuing short-term debt instruments to third parties, entering into qualified financial contracts (QFCs) with third parties, having liabilities that are subject to "upstream guarantees" /13/ or that are subject to contractual offset against amounts owed to subsidiaries of the covered entity. The proposal would also cap the amount of a covered entity's liabilities that are not LTD and that rank at either the same priority as or junior to its eligible external LTD at 5 percent of the sum of the covered entity's common equity tier 1 capital, additional tier 1 capital, and eligible LTD amount.
FOOTNOTE 13 Upstream guarantees are when a parent company's obligations are guaranteed by one of its subsidiaries. END FOOTNOTE
Fourth, to limit the potential for financial sector contagion due to interconnectivity in the event of the failure of a covered entity or covered IDI, the proposed rule would expand the existing capital deduction framework for LTD issued by
Finally, the proposal would make certain technical changes to the existing TLAC rule that applies to the
The revisions introduced by the proposal would interact with the agencies' capital rule and proposed amendments to those rules. /14/
FOOTNOTE 14 On
Question 1: The agencies invite comment on the implications of the interaction of the proposal with other existing rules and with other notices of proposed rulemaking. How do proposed changes to the agencies' capital rule affect the advantages and disadvantages of this proposed rule?
II. Advance Notice of Proposed Rulemaking
In
FOOTNOTE 15 Resolution-Related Resource Requirements for Large Banking Organizations, 87 FR 64170 (
Many commenters asserted that an LTD requirement for covered entities and covered IDIs is unnecessary and that most covered entities and covered IDIs are prepared for orderly resolution pursuant to their existing resolution plans submitted to the
Multiple commenters, while supporting the spirit of the policy options raised in the ANPR, suggested the agencies should raise equity capital requirements rather than impose an LTD requirement to improve the resiliency of covered entities. Alternatively, some commenters argued that covered entities should be able to count any equity capital in excess of regulatory minimums toward any LTD requirement.
Several commenters argued that the benefits of an LTD requirement for covered entities would not outweigh its immediate costs. These commenters asserted that an excessive LTD requirement could decrease the availability of credit to businesses and consumers. Further, a few commenters suggested that an LTD requirement could imply uninsured depositor protection for IDIs subject to such a requirement, thereby increasing moral hazard. Several commenters stressed that any LTD requirement should be supported by a rigorous cost-benefit analysis.
Finally, several commenters questioned whether the Board possesses the statutory authority to impose an LTD requirement on BHCs under section 165(b) of the Dodd-Frank Act, as amended. /16/ These commenters argued that the Board's authority under section 165 to issue enhanced prudential standards is limited to addressing financial stability risks. Commenters stated that covered entities do not pose a threat to financial stability and it is uncertain whether section 165(b) supports imposing an LTD requirement on covered entities.
FOOTNOTE 16 Public Law 111-203; 124 Stat. 1376 (2010), codified at 12 U.S.C. 5365(b). END FOOTNOTE
The agencies considered these comments in developing the proposed rule. In light of recent experiences with SVB, SBNY, and
III. LTD Requirement for Covered Entities
A. Scope of Application
The proposed rule would apply to Category II, III, and IV
FOOTNOTE 17 12 CFR 252.2 (BHCs and
FOOTNOTE 18 12 CFR 252.5(c) (BHCs and IHCs); 12 CFR 238.10(b) (SLHCs). END FOOTNOTE
FOOTNOTE 19 12 CFR 252.5(d) (BHCs and IHCs); 12 CFR 238.10(c) (SLHCs). END FOOTNOTE
FOOTNOTE 20 12 CFR 252.5(e) (BHCs and IHCs); 12 CFR 238.10(d) (SLHCs). END FOOTNOTE
Given the size of covered entities, the agencies continue to believe that the failure of one or more covered entities or covered IDIs could potentially have a negative impact on
FOOTNOTE 21 SBNY had total consolidated assets of around
Question 2: Does the proposed scope of application appropriately address the risks discussed above? What additional factors, if any, should the Board consider in determining which entities should be subject to the proposed rule, other than those that are used to determine whether a covered entity is placed within Categories II-IV? For example, what additional or alternate factors should the Board consider in setting requirements for IHCs (e.g., should the proposed rule only apply to IHCs with IDIs that would be subject to the proposed rule's IDI requirements)? Are there elements of the rule that should be applied differently to Category IV organizations as compared to Category II and III organizations, and what would be the advantages and disadvantages of such differences in requirements?
Question 3: What additional characteristics of banking organizations should the Board consider in setting the scope of the proposed rule and why? Should consideration be given to additional characteristics such as reliance on uninsured deposits; proportion of assets, income, and employees outside of the IDI; or to other aspects of a covered entity's balance sheet? How should these characteristics affect the proposed scope? Please explain.
B. Covered Savings and Loan Holding Companies
As noted above, the proposed rule would apply to Category II, III, and IV SLHCs, as defined in 12 CFR 238.10. Section 10(g) of the Home Owners' Loan Act (HOLA) /22/ authorizes the Board to issue such regulations and orders regarding SLHCs, 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 SLHCs, one of the Board's objectives is to ensure that SLHCs operate in a safe-and-sound manner and in compliance with applicable law. Like BHCs, SLHCs must serve as a source of strength to their subsidiary savings associations and may not conduct operations in an unsafe and unsound manner.
FOOTNOTE 22 12 U.S.C. 1467a(g). END FOOTNOTE
Section 165 of the Dodd-Frank Act directs the Board to establish specific enhanced prudential standards for large BHCs and companies designated by the
FOOTNOTE 23 12 U.S.C. 5365(a)(1). END FOOTNOTE
FOOTNOTE 24 Section 401(b) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-174, 132 Stat. 1356 (2018). END FOOTNOTE
SLHCs that are covered HCs engage in many of the same activities and face similar risks as BHCs that are covered HCs. SLHCs that are covered HCs are substantially engaged in banking and financial activities, including deposit taking and lending. /25/ Some SLHCs that are covered HCs engage in credit card and margin lending and certain complex nonbanking activities that pose higher levels of risk. SLHCs that are covered HCs may also rely on high levels of short-term wholesale funding, which may require sophisticated capital, liquidity, and risk management processes. Similar to BHCs that are covered HCs, SLHCs that are covered HCs conduct business across a large geographic footprint, which in times of stress could present certain operational risks and complexities. Subjecting SLHCs that are covered HCs to the proposed rule would improve their resolvability and promote their safe and sound operations.
FOOTNOTE 25 The proposed rule would not apply to an SLHC with 25 percent or more of its total consolidated assets in insurance underwriting subsidiaries (other than assets associated with insurance underwriting for credit), an SLHC with a top-tier holding company that is an insurance underwriting company, or a grandfathered unitary SLHC that derives a majority of its assets or revenues from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)). See 12 CFR 238.2(ff). END FOOTNOTE
Question 4: What are the advantages and disadvantages to applying the proposed rule to SLHCs that are covered HCs in addition to BHCs that are covered HCs? How are the risks that an SLHC poses in resolution different from the risks that a BHC poses in resolution? How might those differences warrant a different LTD requirement for SLHCs relative to BHCs?
C. Calibration of Covered Entity LTD Requirement
Under the proposal, a covered entity would be required to maintain outstanding eligible LTD in an amount that is the greater of 6.0 percent of the covered entity's total risk-weighted assets, /26/ 3.5 percent of its average total consolidated assets, /27/ and 2.5 percent of its total leverage exposure if the covered entity is subject to the supplementary leverage ratio rule. /28/ A covered entity would be prohibited from redeeming or repurchasing eligible LTD prior to its stated maturity date without obtaining prior approval from the Board where the redemption or repurchase would cause the covered entity's eligible LTD to fall below its LTD requirement.
FOOTNOTE 26 Total risk weighted assets would be defined as the greater of a bank's standardized total risk-weighted assets and advanced approaches total risk-weighted assets, if applicable. END FOOTNOTE
FOOTNOTE 27 For purposes of the LTD minimum requirement, average total consolidated assets is defined as the denominator of the Board's tier 1 leverage ratio requirement. See 12 CFR 217.10(b)(4). END FOOTNOTE
FOOTNOTE 28 See 12 CFR 217.10(c)(2). END FOOTNOTE
The proposed eligible LTD requirement was calibrated primarily on the basis of a "capital refill" framework. Under that framework, the objective of the LTD requirement is to ensure that each covered entity has a minimum amount of eligible LTD such that, if the covered entity's going-concern capital is fully depleted and the covered entity fails and enters resolution, the eligible LTD would be sufficient to fully recapitalize the covered entity by replenishing its going-concern capital to at least the amount required to meet minimum leverage capital requirements and common equity tier 1 risk-based capital requirements plus the capital conservation buffer applicable to covered entities.
In terms of risk-weighted assets, a covered entity's common equity tier 1 capital level is subject to a minimum requirement of 4.5 percent of risk-weighted assets plus a capital conservation buffer equal to at least 2.5 percent. /29/ Accordingly, a covered entity would be subject to an external LTD requirement equal to 7 percent of risk-weighted assets minus a 1 percentage point allowance for balance sheet depletion. This results in a proposed LTD requirement equal to 6 percent of risk-weighted assets. The 1 percentage point allowance for balance sheet depletion is appropriate under the capital refill theory because the losses that the covered entity incurs leading to its failure would deplete its risk-weighted assets as well as its capital. Accordingly, the pre-failure losses would result in a smaller balance sheet for the covered entity at the point of failure, meaning that a smaller dollar amount of capital would be required to restore the covered entity's pre-stress common equity tier 1 capital level. Although the specific amount of eligible external LTD necessary to restore a covered entity to its minimum required common equity tier 1 capital level plus minimum buffer in light of the diminished size of its post-failure balance sheet will vary, applying a uniform 1 percentage point allowance for balance sheet depletion avoids undue regulatory complexity.
FOOTNOTE 29 See 12 CFR 217.11. A covered entity may be subject to a buffer greater than 2.5 percent under the capital rule due to the stress capital buffer or countercyclical capital buffer. END FOOTNOTE
The application of the capital refill framework to the leverage-based capital component of the LTD requirement is analogous. A covered entity's tier 1 leverage ratio minimum is 4 percent of average total consolidated assets and its supplementary leverage ratio minimum is 3 percent of total leverage exposure, if the covered entity is subject to the supplementary leverage ratio. /30/ Under the proposal, a covered entity would be subject to an LTD requirement equal to 3.5 percent of average total consolidated assets and 2.5 percent of total leverage exposure, if applicable. These requirements, with a balance sheet depletion allowance of 0.5 percentage points, are appropriate to ensure that a covered entity has a sufficient amount of eligible LTD to refill its leverage ratio minimums in the event it depletes all or substantially all of its tier 1 capital prior to failing.
FOOTNOTE 30 Covered entities are not subject to a buffer requirement corresponding to their leverage ratio or SLR requirement. END FOOTNOTE
The proposed eligible LTD requirement would support an MPOE /31/ resolution through the process by which a covered IDI that is a consolidated subsidiary of a covered entity issues eligible LTD internally. The internally-issued LTD would be available to absorb losses that may otherwise be borne by uninsured depositors and certain other creditors of the subsidiary IDI in the event of its failure, thereby supporting market confidence in the safety of deposits even in the event of resolution, thus limiting the potential for bank runs. The proposed calibration would increase optionality for the
FOOTNOTE 31 Under an MPOE strategy, multiple entities within a consolidated organization would enter separate resolution proceedings. For example, many covered entities plan that the parent holding company would file a petition under chapter 11 of the
FOOTNOTE 32 In an SPOE resolution, only the covered HC itself would enter resolution. In the case of a covered IHC, an SPOE resolution strategy for the
The calibration of the eligible LTD requirement is based on the capital refill framework, which depends on the precise structure and calibration of bank capital requirements. The Board will continue to evaluate the LTD requirement in light of any changes to capital requirements over time. In addition, the proposed rule would reserve the authority for the Board to require a covered entity to maintain more, or allow a covered entity to maintain less, eligible LTD than the minimum amount required by the proposed rule under certain circumstances. This reservation of authority would ensure that the Board could require a covered entity to maintain additional LTD if the covered entity poses elevated risks that the proposed rule seeks to address.
The proposed rule would also prohibit a covered entity from redeeming or repurchasing any outstanding eligible LTD without the prior approval of the Board if after the redemption or repurchase the covered entity would not meet its minimum LTD requirement. The proposed rule would allow a covered entity to redeem or repurchase its eligible LTD without prior approval where such redemption or repurchase would not result in the covered entity failing to comply with the minimum eligible LTD requirement. This would give the covered entity flexibility to manage its outstanding debt levels without interfering with the underlying purpose of the proposed rule. In addition, the proposed rule also includes a provision that would allow the Board, after providing a covered entity with notice and an opportunity to respond, to order the covered entity to exclude from its outstanding eligible LTD amount any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb loss in resolution. /33/
FOOTNOTE 33 Section 263.83 of the Board's rules of procedure describes the notice and response procedures that apply if the Board determines that a company's capital levels are not adequate. See 12 CFR 263.83. The Board would follow the same procedures under the proposed rule to determine that a covered entity must exclude from its eligible LTD amount securities with features that would significantly impair the ability of such debt securities to absorb loss in resolution. For example, the Board would provide notice to a covered entity of its intention to require the covered entity to exclude certain securities from its eligible LTD amount and up to 14 days to respond before the Board would issue a final notice requiring that the covered entity to exclude the securities from its eligible LTD amount, unless the Board determines that a shorter period is necessary. END FOOTNOTE
In addition, the Board could take an enforcement action against a covered entity for falling below its minimum LTD requirement. This would be consistent with the Board's authority to pursue enforcement actions for violations of law, rules, or regulations.
Question 5: What alternative calibration, if any, should the Board consider for the eligible LTD requirement to be applied to covered entities? Is the capital refill framework the appropriate methodology for covered entities? Should the requirements be higher or lower? What other factors should the Board consider in determining the appropriate calibration? How should differences in a covered entity's resolution strategy influence the calibration of the required LTD amount, if at all? Please discuss the advantages and disadvantages of alternative calibrations the Board should consider.
Question 6: Should the Board consider increasing or decreasing the calibration of the eligible external LTD requirement applicable to covered entities based on any other factors, such as the level of uninsured deposits at their IDI subsidiaries? If so, how should the Board differentiate between different types of uninsured deposits (e.g., what features of one type of uninsured deposits make such deposits more stable than other types of uninsured deposits), if at all, and at what level of uninsured deposits should the Board increase or decrease calibration for the LTD requirement? What other differentiated consideration or treatment should be afforded uninsured deposits with these characteristics?
Question 7: The proposal would require covered IDIs to issue LTD, as discussed more fully below. There may be circumstances in which IDIs within a single consolidated group might be required to issue, in the aggregate, a greater amount of internal LTD to a covered entity than the covered entity's external LTD requirement. What would be the advantages or disadvantages of requiring the covered entity to issue an amount of LTD that is as large as the aggregate amount that its covered IDI subsidiaries are required to issue? What alternative approaches should the Board consider to address this circumstance? How might the absence of such a requirement impede the proposed LTD requirement in achieving its intended purposes, if at all?
Question 8: The Board is considering whether and how to specify a period for covered entities to raise additional LTD after the entity has been involved in a situation where the
IV. LTD Requirement for Covered IDIs
The proposed rule also would additionally create a new requirement for covered IDIs to issue eligible LTD. Requiring covered IDIs to maintain minimum amounts of eligible LTD, which would be available to absorb losses in the event of the failure of the IDI, would improve the
Several commenters to the ANPR suggested that increasing bank regulatory capital levels would be a more effective way to improve resiliency of covered entities and covered IDIs because additional capital would reduce their probability of default in the first place. While higher regulatory capital levels would reduce the probability of default of a covered IDI and may increase the chance that a covered entity or covered IDI would have remaining equity in the event of its failure, regulatory capital is likely to be significantly or completely depleted in the lead up to an FDI Act resolution. While eligible LTD would not help a troubled IDI remain adequately capitalized on a going-concern basis, it would significantly reduce the likelihood of contagion and loss to the DIF in resolving the failed bank. For example, if in the lead up to resolution an IDI were to fall below its minimum tier 1 capital requirements, any eligible LTD outstanding at the IDI level would have significant gone-concern benefits in that it would help to recapitalize the IDI. Because eligible LTD of a covered IDI would be available to absorb losses and protect depositors in the event of the failure of the IDI, it would increase optionality for the
A covered IDI that is a consolidated subsidiary of a covered entity would be required to issue its eligible LTD to a company in
A. Scope of Application
The proposed rule would require four categories of IDIs to issue eligible LTD. First, the proposed rule would apply to any IDI that has at least
FOOTNOTE 34 IDIs with
The agencies propose to apply the
Covered IDIs under the proposed rule would include IDIs affiliated with IDIs that have at least
FOOTNOTE 35 See 12 U.S.C. 1815(e). END FOOTNOTE
The proposed rule would apply to mandatory and permitted externally issuing IDIs for the reasons discussed above concerning the risks associated with IDIs that have at least
Question 9: What risks or resolution challenges are presented by IDIs with less than
Question 10: How should the agencies address any evasion concerns (e.g., holding companies managing their IDIs to stay below the
Question 11: What would be the advantages and disadvantages of allowing certain IDIs currently defined as internally issuing IDIs (e.g., covered IDIs that are consolidated subsidiaries of Category IV holding companies) to issue debt externally, even if they are a consolidated subsidiary of a covered entity? If the agencies were to allow some IDIs that are consolidated subsidiaries of a covered entity to issue debt externally, how should the agencies determine which IDIs may issue externally, and which would still be required to issue internally? Should such a requirement replace the requirement that the parent covered entity also issue debt externally?
Question 12: Are there special characteristics of mandatory externally issuing IDIs that affect whether a mandatory externally issuing IDI should be subject to a higher or lower LTD requirement than proposed? For example, should mandatory externally issuing IDIs be required to maintain an amount of LTD such that, if the IDI's equity capital is fully depleted and the LTD is used to capitalize a bridge depository institution, the bridge would be well-capitalized under the agencies' prompt corrective action rules?
Question 13: What would be the advantages and disadvantages to requiring permitted externally issuing IDIs to meet their minimum LTD requirement by issuing only eligible internal debt securities or eligible external debt securities rather than any combination of both? What would be the advantages and disadvantages to requiring such a permitted externally issuing IDI to meet its minimum LTD requirement by issuing eligible external LTD only, rather than allowing issuance to a parent holding company or other affiliates?
Question 14: Should the proposed rule require the holding company of a permitted externally issuing IDI that issues eligible LTD to its holding company to comply with the clean holding company requirements discussed in section VI?
Question 15: Should the agencies take into consideration the resolution plan of a covered entity submitted pursuant to Title I of the Dodd-Frank Act in determining which IDIs to scope into the proposed rule? For example, should the proposed
Question 16: What other methods could the agencies use to achieve the same benefits provided by the proposed rule concerning certainty of the ultimate availability of LTD resources at an IDI that ultimately enters resolution? Are there alternative approaches that might provide beneficial additional flexibility for covered entities in an SPOE resolution? What factors, such as the size and significance of non-bank activities, should the agencies consider in determining whether any such alternative approaches or additional requirements are appropriate?
Question 17: What would be the advantages and disadvantages of requiring IDI subsidiaries of
Question 18: For
Question 19: What are the advantages and disadvantages of requiring IDIs affiliated with IDIs that have at least
Question 20: Under the proposal, an IDI with less than
B. Calibration of Covered IDI LTD Requirement
Under the proposal, a covered IDI would be required to maintain outstanding eligible LTD in an amount that is the greater of 6.0 percent of the covered IDI's total risk-weighted assets, 3.5 percent of its average total consolidated assets, /36/ and 2.5 percent of its total leverage exposure if the covered IDI is subject to the supplementary leverage ratio. /37/
FOOTNOTE 36 For purposes of the LTD minimum requirement, average total consolidated assets is defined as the denominator of the agencies' tier 1 leverage ratio requirement. See 12 CFR 3.10(b)(4) (OCC), 12 CFR 217.10(b)(4) (Board), 12 CFR 324.10(b)(4) (FDIC). END FOOTNOTE
FOOTNOTE 37 See 12 CFR 3.10(c)(2) (OCC), 12 CFR 217.10(c)(2) (Board), 12 CFR 324.10(c)(2) (FDIC). END FOOTNOTE
The proposed
The proposed
The proposed calibration would appropriately support the
The amount of LTD required to be positioned at the covered IDI is based upon the balance sheet of the covered IDI and will reflect the size and importance of the covered IDI relative to the group. Thus, it improves the optionality of resolution at an IDI level while also potentially supporting an SPOE resolution of the covered entity in the event that option is available and would be effective. /38/ Externally issuing IDIs would be subject to the same calibration as other covered IDIs, as they can have similar risk profiles, asset compositions, and liability structures as other covered IDIs and hence should have similar resolution-related resource needs.
FOOTNOTE 38 For example, in an SPOE resolution, if the covered IDI is a consolidated subsidiary of a covered entity, the covered entity could support the covered IDI by forgiving the eligible internal LTD issued by the covered IDI. END FOOTNOTE
The proposed rule would authorize an agency to require a covered IDI that it supervises to maintain an amount of eligible LTD that is greater than the minimum requirement in the proposed rule under certain circumstances. This would ensure that a covered IDI that presents elevated risk that the proposed rule seeks to address would be required to maintain a corresponding amount of eligible LTD.
The proposed rule would include a provision that would allow the appropriate Federal banking agency, after providing a covered IDI with notice and an opportunity to respond, to order the covered IDI to exclude from its outstanding eligible LTD any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb losses in resolution. /39/
FOOTNOTE 39 See 12 CFR 3.404 (OCC), 12 CFR 263.83 (Board), and 12 CFR 324.5(c) (FDIC). END FOOTNOTE
In addition, the appropriate Federal banking agency could take an enforcement action against a covered IDI for falling below a minimum
Question 21: What alternative calibrations should the agencies consider for the
Question 22: What would be the advantages and disadvantages of proposing a different calibration for mandatory and permitted externally issuing IDIs, which do not have a parent holding company that is subject to an external LTD requirement?
Question 23: How should the calibration for the
Question 24: The agencies are considering whether and how to specify a period for covered IDIs to raise additional LTD after the entity has been involved in a situation in which the
V. Features of Eligible LTD
The proposal would require LTD to satisfy certain eligibility criteria to qualify as eligible LTD. Although the requirements for all eligible LTD generally would be the same under the proposed rule, eligible external LTD would have certain features not applicable to eligible LTD issued within a consolidated organization (eligible internal LTD). As discussed above, covered HCs and mandatory externally issuing IDIs may only issue eligible external LTD to satisfy the proposed LTD requirement. Internally issuing IDIs and nonresolution covered IHCs must issue eligible internal LTD, while permitted externally issuing IDIs and resolution covered IHCs may issue either (see section V, subsection C for discussion of nonresolution and resolution covered IHCs). The general purpose of these requirements is to ensure that LTD used to satisfy the proposed rule is in fact able to be used effectively and appropriately to absorb losses in support of the orderly resolution of the issuer. The proposed requirements for eligible LTD are generally the same as those required for firms subject to the TLAC rule. /40/
FOOTNOTE 40 See 12 CFR 252.61 and .161 "Eligible debt security." END FOOTNOTE
Question 25: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible LTD? Would any of the proposed required features for eligible LTD be unnecessary or counterproductive as applied to any of the covered entities or covered IDIs? If so, explain why.
A. Eligible
Under the proposed rule, eligible external LTD issued by covered HCs, mandatory and permitted externally issuing IDIs, and resolution covered IHCs (together, external issuers) must be paid in and issued directly by the external issuer, be unsecured, have a maturity of greater than one year from the date of issuance, have "plain vanilla" features (that is, the debt instrument has no features that would interfere with a smooth resolution proceeding), be issued in a minimum denomination of
FOOTNOTE 41 If a national bank or Federal savings association intends for LTD to qualify as tier 2 capital, the instrument must also satisfy the requirements for subordinated debt at 12 CFR 5.47 (for national banks) and 12 CFR 5.56 (for Federal savings associations). If the national bank or Federal savings association does not intend to treat the LTD as subordinated debt that qualifies as tier 2 capital, the LTD does not need to satisfy these requirements. In any event, all offers and sales of securities by a national bank or Federal savings association are subject to the disclosure requirements set forth at 12 CFR part 16. END FOOTNOTE
Consistent with this purpose, the proposed rule would authorize the agencies, after providing an external issuer with notice and an opportunity to respond, to order the external issuer to exclude from its outstanding LTD amount any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb losses in resolution. /42/ This provision would enable the agencies to respond to new types of LTD instruments, ensuring the proposed rule remains responsive to developments in LTD instruments.
FOOTNOTE 42 The Board would exercise this authority with respect to covered entities. For covered IDIs, a bank's primary Federal banking agency would exercise this authority. END FOOTNOTE
1. External Debt Issuance Directly by Covered Entities and Covered IDIs
Eligible external LTD would be required to be paid in and issued directly by the external issuer. Thus, debt instruments issued by a subsidiary of a covered entity or covered IDI would not qualify as eligible external LTD.
The requirement that eligible external LTD be issued directly by the covered entity or covered IDI and not a subsidiary would serve several purposes. In the case of eligible external LTD issued by a covered entity that is in turn matched by eligible internal LTD at a covered IDI subsidiary, the requirement would make sure that the covered entity has an amount of stable funding that is sourced externally and that could be used to purchase the LTD issued by the covered IDI subsidiary to meet the IDI's minimum LTD requirement.
Additionally, requiring eligible external LTD to be issued by the covered entity (or, in the case of a permitted or mandatory externally issuing IDI, the covered IDI) and not a subsidiary would simplify administration of the proposed rule by preventing a banking organization from issuing external LTD from multiple entities, which could complicate the firm's internal monitoring and examiner monitoring for compliance with the proposed rule. This requirement also would take advantage of the fact that, within a consolidated organization, the holding company generally is the entity used as a capital raising vehicle.
Finally, for external issuers that are covered entities, issuance directly from the covered entity and not a subsidiary would provide flexibility to support a range of resolution strategies. For instance, use by an external issuer (such as a covered HC) of proceeds from the issuance of eligible external LTD to purchase eligible internal LTD from a covered IDI subsidiary would support resolution of the covered IDI under the FDI Act. Where SPOE is an available option, the issuer's eligible external LTD could be used to absorb losses incurred throughout the banking organization, enabling the recapitalization of operating subsidiaries that had incurred losses and enabling those subsidiaries to continue operating on a going-concern basis. For an SPOE approach to be implemented successfully, the eligible external LTD must be issued directly by the covered entity because debt issued by a subsidiary generally cannot be used to absorb losses, even at the issuing subsidiary itself, unless that subsidiary enters a resolution proceeding.
Eligible external LTD also may only be held by certain investors. In the case of covered entities, eligible external LTD must be held by a nonaffiliate. The requirement for eligible external LTD to not be held by an affiliate ensures that LTD issuance generates new loss-absorbing capacity that is truly held externally from the issuer. This requirement also helps ensure that LTD holders are positioned to serve as a source of market discipline for the external issuer. LTD holders may be less likely to critically monitor the performance of the issuer if the holders are affiliated with the issuer. Eligible external LTD issued by a permitted or mandatory externally issuing IDI likewise could not be issued to an affiliate, except an affiliate that controls but does not consolidate the covered IDI (e.g., where a company owns at least 25 percent of, but does not meet the accounting standard to consolidate, a covered IDI). Without this exception for upstream affiliates, eligible LTD of a permitted externally issuing IDI could be held by a company that consolidates the covered IDI (in the form of eligible internal LTD), but not a company that controls without consolidating the covered IDI. Such a prohibition would serve no purpose. Accordingly, the proposal permits a permitted or mandatory externally issuing IDI to issue eligible external LTD to such an affiliate.
2. Unsecured
Eligible external LTD would be required to be unsecured, not guaranteed by the external issuer or a subsidiary or an affiliate of the external issuer, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument (such as a credit enhancement provided by an affiliate).
The primary rationale for these restrictions is to ensure that eligible external LTD can serve its intended purpose of absorbing losses incurred by the banking organization in resolution. To the extent that a creditor is secured, or provided with credit support of any type, it can avoid suffering losses by seizing the collateral that secures the debt. The debt being secured would thwart the purpose of eligible external LTD by leaving losses with the external issuer (which would lose the collateral) rather than imposing them on the eligible external LTD creditor (which could take the collateral). As a result, this requirement ensures that losses can be imposed on eligible LTD in resolution in accordance with the standard creditor hierarchy under bankruptcy or an FDI Act resolution, under which secured creditors are paid ahead of unsecured creditors.
A secondary purpose of these restrictions is to prevent eligible external LTD from contributing to the asset fire sales that can occur when a financial institution fails and its secured creditors seize and liquidate collateral. Asset fire sales can drive down the value of the assets being sold, which can undermine financial stability by transmitting financial stress from the failed firm to other entities that hold similar assets.
3."Plain Vanilla"
Eligible external LTD instruments would be required to be "plain vanilla" instruments. Exotic features could create complexity and thereby diminish the prospects for an orderly resolution of the external issuer. These limitations would help to ensure that eligible external LTD represents loss-absorbing capacity with a definite value that can be quickly determined in resolution. In a resolution proceeding, claims represented by such "plain vanilla" debt instruments are more easily ascertainable and relatively certain compared to more complex and volatile instruments. Permitting exotic features could engender uncertainty as to the level of the issuer's loss-absorbing capacity and could increase the complexity of the resolution proceeding and potentially result in a disorderly resolution.
Under the proposed rule, external LTD instruments would be excluded from treatment as eligible external LTD if they: (i) are structured notes; (ii) have a credit-sensitive feature; (iii) include a contractual provision for conversion into or exchange for equity in the issuer; or (iv) include a provision that gives the holder a contractual right to accelerate payment (including automatic acceleration), other than a right that is exercisable (1) on one or more dates specified in the instrument, (2) in the event of the issuer entering into insolvency or resolution proceedings, or (3) the issuer's failure to make a payment on the instrument when due that continues for 30 days or more. /43/
FOOTNOTE 43 This limitation would be subject to an exception that would permit eligible external LTD instruments to give the holder a future put right as of a date certain, subject to the provisions discussed below regarding when the debt is due to be paid. END FOOTNOTE
a. Structured Notes
The proposed rule would exclude structured notes, including principal-protected structured notes, from treatment as eligible external LTD. Structured notes contain features that could make their valuation uncertain, volatile, or unduly complex. In addition, they are often liabilities held by retail investors (as opposed to institutional investors) and, as discussed in greater detail below in the context of minimum denomination requirements, holdings of LTD by more sophisticated investors can better ensure that LTD holders understand the risks of LTD and that such holders are in a position to provide market discipline with respect to LTD issuers. To promote resiliency and market discipline, it is important that external issuers maintain a minimum amount of loss-absorbing capacity with a value that is easily ascertainable at any given time. Moreover, in resolution, debt instruments that will be subjected to losses must be capable of being valued accurately and with minimal risk of dispute. The requirement that eligible external LTD not contain the features associated with structured notes advances these goals.
For purposes of the proposed rule, a "structured note" is defined as a debt instrument that: (i) has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, /44/ entity, index, or embedded derivative or similar embedded feature; (ii) has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities; (iii) does not have a minimum principal amount that becomes due and payable upon acceleration or early termination; or (iv) is not classified as debt under
FOOTNOTE 44 Assets would include loans, debt securities, and other financial instruments. END FOOTNOTE
Structured notes with principal protection often combine a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product, whose payoff is linked to an underlying asset, index, or benchmark. /45/ For external issuances by covered entities, the derivative feature violates the intent of the clean holding company requirements (described below), which prohibit derivatives entered into by covered entities with third parties. Moreover, investors in structured notes tend to pay less attention to issuer credit risk than investors in other LTD, because structured note investors use structured notes to gain exposure unrelated to the market discipline objective of the minimum LTD requirements.
FOOTNOTE 45
b. Contractual Provision for Conversion Into or Exchange for Equity
The proposed rule would exclude from treatment as eligible external LTD debt that includes contractual provisions for its conversion into equity or for it to be exchanged for equity. The fundamental objective of the external LTD requirement is to ensure that external issuers will have a minimum amount of loss-absorbing capacity available to absorb losses upon the issuer's entry into resolution. Debt instruments that could convert into equity prior to resolution may not serve this goal, since the conversion would reduce the amount of debt that will be available to absorb losses in resolution. In addition, debt with features to allow conversion into equity is often complex and thus may not be characterized as "plain vanilla." Convertible debt instruments may be viewed as debt instruments with an embedded equity call option. The embedded equity call option introduces a derivative-linked feature to the debt instrument that is inconsistent with the purpose of the clean holding company requirements (described below) and introduces uncertainty and complexity into the value of such securities. For these reasons, eligible external LTD may not include contractual provisions allowing for its conversion into equity or for it to be exchanged for equity prior to the issuer's resolution under the proposed rule.
c. Credit-Sensitive Features and Acceleration Clauses
Under the proposal, eligible external LTD cannot have a credit-sensitive feature or provide the holder of the instrument a contractual right to the acceleration of payment of principal or interest at any time prior to the instrument's stated maturity (an acceleration clause), other than upon the occurrence of either a receivership, liquidation, or similar proceeding, /46/ or a payment default event. However, eligible external LTD instruments would be permitted to give the holder a put right as of a future date certain, subject to the remaining maturity provisions discussed below.
FOOTNOTE 46 For the avoidance of doubt, this provision should not be construed to mean that eligible external LTD could be accelerated upon an IDI merely being insolvent. END FOOTNOTE
The restriction on acceleration clauses serves the same purpose as several of the other restrictions discussed above, i.e., to ensure that the required amount of LTD will indeed be available to absorb losses in resolution. Early acceleration clauses, including cross-acceleration clauses, could undermine an orderly resolution by forcing the issuer to make payment on the full value of the debt prior to the entry of the issuer into resolution, potentially depleting the issuer's eligible external LTD immediately prior to resolution. This concern does not apply to acceleration clauses that are triggered by an insolvency or resolution event, however, because the insolvency or resolution that triggers the clause would generally occur concurrently with the issuer's entry into an insolvency or a resolution proceeding.
Senior debt instruments issued by external issuers commonly also include payment default event clauses. These clauses provide the holder with a contractual right to accelerate payment upon the occurrence of a "payment default event"--that is, a failure by the issuer to make a required payment when due. Payment default event clauses, which are not permitted in tier 2 regulatory capital, raise more concerns than insolvency or resolution event clauses because a payment default event may occur (triggering acceleration) before the institution has entered a resolution proceeding and a stay has been imposed. Such a pre-resolution payment default event could cause a decline in the issuer's loss-absorbing capacity.
Nonetheless, the proposed rule would permit eligible external LTD to be subject to payment default event acceleration rights for two reasons. First, default or acceleration rights upon a borrower's default on its direct payment obligations are a standard feature of senior debt instruments, such that a prohibition on such rights could be unduly disruptive to the potential market for eligible external LTD. Second, the payment default of an issuer on an eligible external LTD instrument would likely be a credit event of such significance that whatever diminished capacity led to the payment default event would also be a sufficient trigger for an insolvency or a resolution event acceleration clause, in which case a prohibition on payment default event acceleration clauses would have little or no practical effect.
In addition, the proposed rule would provide that an acceleration clause relating to a failure to pay principal or interest must include a "cure period" of at least 30 days. During this cure period, the issuer could make payment on the eligible external LTD before such debt could be accelerated and if the issuer satisfies its obligations on the eligible external LTD within the cure period, the instrument could not be accelerated. This would ensure that an accidental or temporary failure to pay principal or interest does not trigger immediate acceleration. Moreover, this cure period for interest payments is found in many existing debt instruments and is consistent with current market practice.
4. Minimum Remaining Maturity and Amortization
Under the proposal, the amount of eligible external LTD that is due to be paid between one and two years would be subject to a 50 percent haircut for purposes of the external LTD requirement, and the amount of eligible external LTD that is due to be paid in less than one year would not count toward the external LTD requirement.
The purpose of these restrictions is to limit rollover risk of debt instruments that qualify as eligible external LTD and ensure that eligible external LTD provides stable funding and will be reliably available to absorb losses in the event that the issuer fails and enters resolution. Debt that is due to be paid in less than one year does not adequately serve these purposes because of the possibility that the debt could mature during the period between the time when the issuer begins to experience extreme stress and the time when it enters a resolution proceeding. If the debt matures during that period, then it would be likely that the creditors would be unwilling to maintain their exposure to the issuer and would therefore refuse to roll over the debt or extend new credit, and the distressed issuer would likely be unable to replace the debt with new LTD that would be available to absorb losses in resolution. This run-off dynamic could result in a case where the covered entity enters resolution with materially less loss-absorbing capacity than would be required to support or recapitalize its IDIs or other subsidiaries, potentially resulting in a disorderly resolution. To protect against this outcome, eligible external LTD would cease to count toward the external LTD requirement upon being due to be paid in less than one year, so that the full required amount of loss-absorbing capacity would be available in resolution even if the resolution period were preceded by a year-long stress period. /47/
FOOTNOTE 47 This requirement also accords with market convention, which generally defines "long-term debt" as debt with maturity in excess of one year. END FOOTNOTE
For the same reasons, eligible external LTD that is due to be paid in less than two years but greater than or equal to one year is subject to a 50 percent haircut under the proposed rule for purposes of the external LTD requirement, meaning that only 50 percent of the value of its principal amount would count toward the external LTD requirement. This amortization provision is intended to protect an issuer's loss-absorbing capacity against a run-off period in excess of one year (as might occur during a financial crisis or other protracted stress period) in two ways. First, it requires issuers that rely on eligible external LTD that is vulnerable to such a run-off period (because it is due to be paid in less than two years) to maintain additional loss-absorbing capacity in the form of eligible external LTD. Second, it leads issuers to reduce or eliminate their reliance on loss-absorbing capacity that is due to be paid in less than two years. An issuer could reduce its reliance on eligible external LTD that is due to be paid in less than two years by staggering its issuance, by issuing eligible external LTD that is due to be paid after a longer period, or by redeeming and replacing eligible external LTD once the residual maturity falls below two years.
The proposed rule also provides similar treatment for eligible external LTD that could become subject to a "put" right--that is, a right of the holder to require the issuer to redeem the debt on demand--prior to reaching its stated maturity. Such an instrument would be treated as if it were due to be paid on the day on which it first became subject to the put right, since on that day the creditor would be capable of demanding payment and thereby subtracting the value of the instrument from the issuer's loss-absorbing capacity. /48/
FOOTNOTE 48 The date on which principal is due to be paid would be calculated from the date the put right would first be exercisable regardless of whether the put right would be exercisable on that date only if another event occurred (e.g., a credit rating downgrade). END FOOTNOTE
5. Governing Law
Eligible external LTD instruments would be required to consist only of liabilities that can be effectively used to absorb losses during the resolution of the external issuer without giving rise to material risk of successful legal challenge. To this end, the proposal would require eligible external LTD to be governed by the laws of
FOOTNOTE 49 Consistent with the definition of "State" in the TLAC rule and the Board's Regulation YY, "State" would be defined to mean "any state, commonwealth, territory, or possession of
6. Minimum Denomination and Investor Limitations
The proposed rule also would require eligible external LTD to be issued through instruments with minimum principal denominations and would exclude from eligible external LTD instruments that can be exchanged by the holder for smaller denominations. /50/ The purpose of this requirement is to limit direct investment in eligible LTD by retail investors. Significant holdings of LTD by retail investors may create a disincentive to impose losses on LTD holders, which runs contrary to the agencies' intention that LTD holders expect to absorb losses in resolution after equity shareholders. Imposing requirements that will tend to limit investments in LTD to more sophisticated investors will help ensure that LTD holders will monitor the performance of the issuer and thus support market discipline. These more sophisticated investors are more likely to appreciate that LTD that satisfies the requirements of the proposed rule may present different risks than other types of debt instruments issued by covered entities, covered IDIs, or other firms.
FOOTNOTE 50 The Board also is proposing to introduce an identical requirement for external LTD issued pursuant to the TLAC rule, as discussed in Section IX.B below. END FOOTNOTE
The agencies propose setting the minimum denomination requirement at
FOOTNOTE 51
The agencies considered alternative minimum denomination thresholds between
FOOTNOTE 52 Id. END FOOTNOTE
FOOTNOTE 53 Id. END FOOTNOTE
Question 26: What would be the advantages and disadvantages of limiting direct retail investor exposure to eligible external LTD? To what extent would retail investors be likely to directly own eligible external LTD? Do retail investors, investing on a direct basis as opposed to through institutional funds, constitute a substantial portion of the market for debt instruments such as eligible external LTD, such that prohibiting their direct investment would meaningfully reduce the market for eligible LTD?
Question 27: To what extent would limiting direct retail holdings of eligible external LTD contribute to concentration of eligible external LTD holdings by certain market participants?
Question 28: What minimum denomination amount is most appropriate in the range of
Question 29: What would be the advantages and disadvantages to limiting indirect exposures to eligible LTD by retail investors?
7. Subordination of Eligible LTD Issued by IDIs
The proposed rule would require eligible LTD issued by a covered IDI to be contractually subordinated so that the claim represented by the LTD in the receivership of the IDI would be junior to deposit and general unsecured claims. /54/ This requirement would ensure that eligible LTD absorbs losses prior to depositors and other unsecured creditors, which increases the
FOOTNOTE 54 The proposed rule would define "deposits" to have the same meaning as in the FDI Act. See 12 U.S.C. 1813(l). The eligible LTD would rank in priority in an
Requiring contractual subordination would also provide further clarity about the priority of the claim represented by eligible LTD in a receivership of the issuing institution, which facilitates an orderly resolution. The
FOOTNOTE 55 See Final Rule on "Deposit Insurance Regulations; Definition of Insured Deposit," 78 FR 56583 (
Question 30: What would be the advantages and disadvantages of requiring eligible LTD issued by covered IDIs to be subordinated to general unsecured creditors? What implications, if any, would subordination of eligible LTD to general unsecured creditors have for other requirements?
Question 31: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible external LTD? Would any of the proposed features for eligible external LTD not be appropriate for any covered entities or covered IDIs? What characteristics of the specific types of institutions required to issue internal LTD under the proposed rule would caution against requiring eligible internal LTD to meet any of the proposed eligibility requirements?
B. Eligible
The requirements for eligible internal LTD are generally the same as those for eligible external LTD. However, eligible internal debt securities are subject to two key distinctions from eligible external debt securities under the proposed rule. First, eligible internal LTD issued by an IDI must be issued to and remain held by a company that consolidates the covered IDI, generally an upstream parent. Second, eligible internal LTD would not be subject to the minimum principal denomination requirement. As discussed further below, eligible internal LTD issued by a covered IHC would be required to include a contractual conversion trigger and would not include a prohibition against credit sensitive features.
Where a covered IDI issues eligible internal LTD, such eligible internal LTD would be required to be paid in and issued to a company that consolidates the covered IDI. /56/ This helps ensure that eligible internal LTD issued by the covered IDI is supported by stable funding from its parent, which in turn is generally required to issue eligible external LTD. Accordingly, a covered entity could use the proceeds from the issuance of external LTD to purchase internal LTD issued by its IDI subsidiary.
FOOTNOTE 56 As discussed above, permitted externally issuing IDIs would be permitted to issue eligible LTD to affiliates and to nonaffiliates. END FOOTNOTE
For a covered IDI that is a consolidated subsidiary of a covered IHC, the proposed rule would require that eligible internal LTD of the covered IDI be issued to the covered IHC, or a subsidiary of the covered IHC that consolidates the IDI. In other words, to constitute eligible internal LTD, the LTD of such an IDI could not be directly issued to a foreign affiliate that controls the IDI; doing so would mean that losses could be imposed on foreign affiliates through the
Certain covered IHCs that would not be expected to enter into resolution upon the failure of their parent FBOs would be required to issue eligible internal LTD to a foreign company that directly or indirectly controls the covered IHC, or to a wholly owned subsidiary of a controlling foreign company. /57/ This would ensure that losses incurred by a covered IHC would be distributed to a foreign affiliate that is not a subsidiary of the covered IHC, which would allow the foreign top-tier parent to manage the resolution strategy for its global operations and manage how the IHC would fit into this global resolution strategy. The requirement also would mitigate the risk that conversion of the eligible LTD to equity, as discussed below, would result in a change in control of the covered IHC, which could create additional regulatory and management complexity during a failure scenario.
FOOTNOTE 57 Consistent with the TLAC rule, a "wholly owned subsidiary" of a FBO would be one where the foreign parent owns 100 percent of the subsidiary's outstanding ownership interests, except that 0.5 percent could be owned by a third party for purposes of establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. This recognizes the practice of FBOs to own all but a small part of a subsidiary for corporate practice purposes with which the proposed rule is not intended to interfere. Moreover, allowing a very small amount of a foreign parent's subsidiary to be owned by a third party would not undermine the purposes of this proposed rule. END FOOTNOTE
The proposed rule would not require eligible internal LTD to be issued in minimum denominations. As discussed above, the purpose of the minimum denomination requirement is to increase the chances that LTD holders are sophisticated investors that can provide market discipline for covered entities and covered IDIs. These concerns do not apply in the case of eligible internal LTD, which by definition cannot be held by retail or outside investors.
Question 32: What would be the advantages and disadvantages of permitting all covered IDIs (or certain covered IDIs other than just mandatory or permitted externally issuing IDIs) to satisfy their LTD requirements with external LTD? If covered IDIs were able to satisfy their LTD requirements with external LTD, what would be the advantages and disadvantages of permitting any such eligible external LTD to count towards the LTD requirement of the covered IDI's consolidating parent?
Question 33: What are the advantages and disadvantages of permitting a covered IDI to issue eligible internal LTD to additional non-subsidiary affiliates, beyond consolidating parent entities?
Question 34: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible internal LTD? Which, if any, of the proposed features for eligible internal LTD instruments would not be appropriate for covered IDIs or covered IHCs and why? What characteristics of any specific types of entities required to issue internal LTD under the proposed rule would caution against requiring eligible internal LTD to meet any of the proposed eligibility requirements?
C. Special Considerations for Covered IHCs
The proposed rule would set forth certain requirements for eligible internal LTD that are specific to covered IHCs. Specifically, the proposed rule would require certain covered IHCs to issue only eligible internal LTD, where the resolution strategy of the covered IHC's foreign parent follows an SPOE model. In addition, eligible internal LTD issued by covered IHCs must include a contractual provision that is approved by the Board that provides for immediate conversion or exchange of the instrument into common equity tier 1 capital of the covered IHC upon issuance by the Board of an internal debt conversion order. Finally, eligible internal LTD issued by covered IHCs would not be subject to a prohibition on credit-sensitive features.
Only certain covered IHCs would have the option to issue debt externally to third-party investors. Specifically, covered IHCs of FBOs with a top-tier group-level resolution plan that contemplates their covered IHCs or subsidiaries of their covered IHCs entering into resolution, receivership, insolvency, or similar proceedings in
1. Identification as a Resolution or Non-Resolution Covered IHC
This proposal would require the top-tier FBO of a covered IHC to certify to the Board whether the planned resolution strategy of the top-tier FBO involves the covered IHC or its subsidiaries entering resolution, receivership, insolvency, or similar proceedings in
FOOTNOTE 58 See 12 CFR 252.164. END FOOTNOTE
A covered IHC is a "resolution covered IHC" under the proposed rule if the certification provided indicates that the top-tier FBO's planned resolution strategy involves the covered IHC or its subsidiaries entering into resolution, receivership, insolvency or similar proceeding in
In addition, under the proposed rule, the Board may determine in its discretion that an entity that is certified to be a non-resolution covered IHC is a resolution covered IHC, or that an entity that is certified to be a resolution covered IHC is a non-resolution covered IHC. In reviewing certifications provided with respect to covered IHCs, the Board would expect to review all the information available to it regarding a firm's resolution strategy, including information provided to it by the firm. The Board would also expect to consult with the firm's home-country resolution authority in connection with this review. In addition, the Board may consider a number of factors including but not limited to: (i) whether the FBO conducts substantial
A covered IHC would have one year or a longer period determined by the Board to comply with the requirements of the proposed rule applicable to non-resolution covered IHCs if it would become a non-resolution covered IHC because it either changes its resolution strategy or if the Board disagrees with the covered IHC's certification of its resolution strategy. For example, if the Board determines that a firm that had certified it is a resolution covered IHC is a non-resolution covered IHC for purposes of the rule, the IHC would have up to one year from the date on which the Board notifies the covered IHC in writing of such determination to comply with the requirements of the rule. Since under the proposed rule a resolution covered IHC has the option to issue LTD externally to third parties but non-resolution covered IHCs do not, the one-year period would provide the covered IHC with time to make any necessary adjustments to the composition of its LTD so that all of its LTD would be issued internally.
As noted, under the proposed rule, the Board may extend the one-year period discussed above. In acting on any requests for extensions of this time period, the Board would consider whether the covered IHC had made a good faith effort to comply with the requirements of the rule.
2. Contractual Conversion Trigger
The proposed rule would require eligible internal LTD, whether issued by resolution covered IHCs or non-resolution covered IHCs, to contain a contractual conversion feature. The contractual trigger would allow the Board to require the covered IHC to convert or exchange all or some of the eligible internal LTD into common equity tier 1 capital on a going-concern basis (that is, without the covered IHC's entry into a resolution proceeding) under certain circumstances. These include if the Board determines that the covered IHC is "in default or in danger of default" and any of the three following additional circumstances applies. /59/ First, the top-tier FBO or any of its subsidiaries is placed into resolution proceedings. Second, the home country supervisory authority consents to the exchange or conversion, or did not object to the exchange or conversion following 24 hours' notice. Third and finally, the Board makes a written recommendation to the Secretary of the
FOOTNOTE 59 The phrase "in default or in danger of default" would be defined consistently with the standard provided by section 203(c)(4) of Title II of the Dodd-Frank Act. See 12 U.S.C. 5383(c)(4). Consistent with section 203's definition of the phrase, a covered IHC would be considered to be in default or in danger of default upon a determination by the Board that (A) a case has been, or likely will promptly be, commenced with respect to the covered IHC under the
FOOTNOTE 60 See 12 U.S.C. 5383. END FOOTNOTE
FOOTNOTE 61 The Board has delegated authority to approve these triggers to the General Counsel, in consultation with the Director of the
The principal purpose of this requirement is to ensure that losses incurred by the covered IHC are shifted to a foreign parent without the covered IHC having to enter a resolution proceeding. If the covered IHC's eligible internal LTD is sufficient to recapitalize the covered IHC in light of the losses that the covered IHC has incurred, this goal could be achieved through conversion of the eligible internal LTD into equity upon the occurrence of the trigger conditions.
Eligible external LTD issued by resolution covered IHCs is not required to contain a contractual conversion trigger. The proposed rule gives resolution covered IHCs the option to issue debt externally to third-party investors under the proposed rule on the same terms as covered HCs.
Question 35: The Board maintains an expectation that, following receipt of an internal debt conversion order, the FBO parent of a covered IHC should take steps to preserve the going concern value of the covered IHC, consistent with the resolution strategy of the top-tier FBO. Accordingly, the Board would expect that, following receipt of an internal debt conversion order, a covered IHC would not make any immediate distributions of cash or property, or make immediate payments to repurchase, redeem, or retire, or otherwise acquire any of its shares from its shareholders or affiliates. Should the Board codify this expectation in the proposed rule for covered IHCs and the
3. Allowance of Certain Credit-Sensitive Features
The proposed rule would not require eligible internal LTD issued by covered IHCs to include the prohibition against including certain credit-sensitive features that applies to other eligible LTD. This would match the requirements for eligible internal LTD issued by
FOOTNOTE 62 See 12 CFR 252.161. END FOOTNOTE
Question 36: What would be the advantages and disadvantages of making eligible internal LTD issued by all covered IHCs subject to the proposed rule or the TLAC rule subject to the same prohibition on credit-sensitive features that applies to eligible external LTD?
D. Legacy External LTD Counted Towards Requirements
The agencies anticipate that some covered entities and their subsidiary IDIs, as well as potentially certain other covered IDIs, will have external LTD outstanding at the time of finalization of the proposed rule. To enable covered entities and covered IDIs to most readily and effectively meet minimum LTD requirements as the proposed requirements are phased in, the proposed rule would allow some of this legacy external LTD to count toward the minimum requirements in the proposed rule, even where such legacy external LTD does not meet certain eligibility requirements. Specifically, the proposal would provide an exception for the following categories of outstanding external LTD instruments issued by covered HCs, resolution covered IHCs, and their subsidiary IDIs, and permitted and required externally issuing IDIs, that do not conform to all of the eligibility requirements that will apply to issuances of eligible internal or external LTD going forward once notice of the final rule resulting from this proposal is published in the
The allowance for eligible legacy external LTD would reduce the costs of modifying the terms of existing outstanding debt or issuing new debt to meet applicable minimum LTD requirements. Over time, debt that is subject to the legacy exception will mature and be replaced by LTD that must meet all of the proposal's eligibility requirements. This approach is consistent with the intent of the legacy exceptions that were made available to entities subject to the TLAC rule in relation to LTD instruments issued prior to
FOOTNOTE 63 See 12 CFR 252.61 "Eligible debt security." END FOOTNOTE
As noted above, the proposal would authorize the agencies, after providing a covered entity or covered IDI with notice and an opportunity to respond, to order the covered entity or covered IDI to exclude from its outstanding eligible LTD amount any otherwise eligible debt securities. These provisions would also apply to eligible legacy external LTD.
Question 37: What are the advantages and disadvantages of creating this exception for certain outstanding legacy external LTD issued by covered entities for purposes of the proposed rule?
Question 38: What are the advantages and disadvantages of establishing the date that notice of the final rule resulting from this proposal is published in theFederal Registeras the date before which external LTD must have been issued to qualify as legacy external LTD, as opposed to the date that the rule becomes effective?
Question 39: The agencies welcome quantitative information about outstanding LTD issuances by covered entities or covered IDIs. What amount of LTD do covered entities or covered IDIs have outstanding? What amount would qualify as LTD if all the requirements applied upon finalization of the rule? What amount would qualify as LTD under the proposed exception?
VI. Clean Holding Company Requirements
To promote the resiliency of covered entities and minimize the knock-on effects of the failure of a covered entity to its counterparties and the financial system, the Board proposes to impose "clean holding company" requirements on covered entities. These requirements are similar to those imposed on
FOOTNOTE 64 See 12 CFR 252.64 and .166. END FOOTNOTE
As discussed further below, these provisions provide benefits independent of the resolution strategy of a covered entity, including by improving the resiliency of covered entities, limiting certain transactions that can give rise to financial stability risks before a covered entity fails, and simplifying a covered entity so that it and its relevant subsidiaries can be resolved in a prompt and orderly manner.
These provisions may also advance several goals in connection with the resolution of the covered entity. In the case of SPOE resolution, these provisions support the goal of that resolution strategy to achieve the rapid recapitalization of the material subsidiaries of a covered entity with minimal interruption to the ordinary operations of those subsidiaries. The proposed clean holding company restrictions would advance this goal by prohibiting transactions that would distribute losses that should be borne solely by a covered entity to the covered entity's subsidiaries.
In the case of an MPOE resolution, in which a covered entity and its subsidiary IDI would enter into resolution, these provisions would limit the extent to which a subsidiary of a covered entity would experience losses or disruptions in its operations as a result of the failure of the covered entity prior to and during resolution. In particular, the prohibition on covered entity liabilities that are subject to upstream guarantees or offset rights would prevent a failed covered entity's creditors from passing their losses on to the covered entity's subsidiaries. Furthermore, covered entities that currently plan for an MPOE resolution strategy may nevertheless be resolved pursuant to an SPOE resolution strategy or adopt an SPOE resolution strategy in the future. Applying the clean holding company requirements to covered entities that currently plan for an MPOE resolution ensures that the benefits of these requirements that may be more significant for covered entities with an SPOE resolution strategy are readily available to covered entities with an MPOE resolution strategy that ultimately are resolved with an SPOE resolution strategy or eventually change their resolution strategy to an SPOE strategy.
Question 40: What would be the advantages and disadvantages of imposing clean holding company requirements on covered entities? What would be the costs or consequences on business practices of imposing these requirements?
Question 41: Under the existing TLAC rule,
Question 42: To what extent are the clean holding company requirements appropriate for a firm that employs an MPOE resolution strategy? What specific challenges, if any, would result from applying the clean holding company requirements to these firms?
Question 43: What changes, if any, would result to an IDI's business model if its parent company is a covered entity that becomes subject to the clean holding company requirements, where the covered entity proposes an MPOE resolution strategy?
A. No External Issuance of Short-Term Debt Instruments
The proposed rule would prohibit covered entities from externally issuing debt instruments with an original maturity of less than one year. Under the proposed rule, a liability has an original maturity of less than one year if it would provide the creditor with the option to receive repayment within one year of the creation of the liability, or if it would create such an option or an automatic obligation to pay upon the occurrence of an event that could occur within one year of the creation of the liability (other than an event related to the covered entity's insolvency or a default related to failure to pay that could trigger an acceleration clause).
The prohibition on external issuance of short-term debt instruments would improve the resiliency of covered entities and their subsidiaries and help mitigate the financial stability risks presented by destabilizing funding runs. A covered entity with significant short-term obligations is less resilient because, in the event of real or perceived stress, short-term creditors can refuse to roll over their loans to the covered entity. In that case, the covered entity must either find replacement funding or sell assets in order to pay its short-term creditors. Both of these outcomes normally would weaken the covered entity because replacement funding is likely to be at a premium and the assets would likely be sold at a loss in order to quickly generate cash. In response to the termination or curtailment of a covered entity's short-term funding or the covered entity's asset sales, counterparties or customers of the covered entity's subsidiaries may also lose confidence in those subsidiaries and unwind transactions with or withdraw funding from them. This issue may be acute for IDIs because their main creditors--depositors--generally have the ability to demand their funds on short notice. Prohibiting external issuance of short-term debt instruments by covered entities decreases the likelihood of these outcomes, improving the resiliency of a covered entity and its subsidiaries. For example, a covered entity is better able to serve as a source of managerial and financial strength to its subsidiary IDI if the covered entity is not experiencing a run on its short-term liabilities.
Decreasing the likelihood of a funding run also benefits financial stability. The sale of assets by a covered entity to repay its short-term creditors can be a key channel for the propagation of stress through the financial system. If those assets are widely held by other firms, then the sale by a covered entity of those assets can depress the fair value of those assets, thereby significantly affecting other firms' balance sheets, which could precipitate stress at those institutions, which could require further asset sales. The proposed rule would help mitigate these financial stability risks by prohibiting covered entities from relying on short-term funding and reducing run risk.
The prohibition against short-term funding in the proposed rule applies to both secured and unsecured short-term borrowings. Although secured creditors are less likely to take losses in resolution than unsecured creditors, secured creditors may nonetheless be unwilling to maintain their exposure to a covered entity that comes under stress in order to avoid potential disruptions in access to the collateral during resolution proceedings.
Question 44: What are the advantages and disadvantages to the proposed prohibition on external issuance by covered entities of short-term debt instruments? To what extent do covered entities that would be subject to the proposed rule rely on liabilities that would be subject to this prohibition?
B. Qualified Financial Contracts With Third Parties
Under the proposal, covered HCs would be permitted to enter into QFCs only with their subsidiaries and covered IHCs would be permitted to enter into QFCs only with their affiliates, with the exception described below of entry into certain credit enhancement arrangements with respect to QFCs between a covered entity's subsidiary and third parties. The proposal defines QFCs by reference to Title II of the Dodd-Frank Act, which defines QFCs to include securities contracts, commodities contracts, forward contracts, repurchase agreements, and swap agreements, consistent with the TLAC rule. /65/
FOOTNOTE 65 12 U.S.C. 5390(c)(8)(D). END FOOTNOTE
The failure of a large banking organization that is a party to a material amount of third-party QFCs could pose a substantial risk to the stability of the financial system. Specifically, it is likely that many of that institution's QFC counterparties would respond to the institution's default by immediately liquidating their collateral and seeking replacement trades with third-party dealers, which could cause fire sale effects and propagate financial stress to other firms that hold similar assets by depressing asset prices. The proposed restriction on third-party QFCs would mitigate this threat to financial stability for covered entities under both MPOE and SPOE strategies. In the case of a successful SPOE resolution, covered entities' operating subsidiaries, which may be parties to large quantities of QFCs, should remain solvent and not fail to meet any ordinary course payment or delivery obligations. Therefore, assuming that the cross-default provisions of the QFCs engaged in by the operating subsidiaries of covered entities are appropriately structured, their QFC counterparties generally would have no contractual right to terminate or liquidate collateral on the basis of the covered entity's entry into resolution proceedings. The proposed restrictions also would support successful MPOE resolution as they would encourage covered entities to migrate any external QFC activity currently being conducted at the covered entity level to the relevant operating subsidiaries, a structure that would be better aligned with the activities of the underlying subsidiaries and will enable, in the case of IDI subsidiaries, the direct application of statutory QFC stay provisions provided under the FDI Act with regard to such QFCs. This migration of covered entity QFCs to the subsidiary level should simplify resolution proceedings and enable continuity of necessary QFC activities in resolution. Further, a covered entity itself would have, subject to the exceptions discussed below, no further QFCs with external counterparties, if any, and so the covered entity's entry into resolution proceedings could result in limited or no direct defaults on QFCs and related fire sales, assuming the covered entity complies with the cross-default and upstream guarantee restrictions discussed below. The proposed restriction on third-party QFCs would therefore materially diminish the fire sale risk and contagion effects associated with the failure of a covered entity.
The proposal would only apply prospectively to new agreements entered into after the post-transition period effective date of a final rule. The proposed rule would also exempt certain contracts from the prohibition on third-party QFCs for covered HCs. These exemptions, which are also are being proposed for
Question 45: What are the advantages and disadvantages to the proposed prohibition on third-party QFCs? To what extent do covered entities that would be subject to the proposed rule currently enter into QFCs?
Question 46: What would be the cost or consequences on business practices of imposing a prohibition on third-party QFCs?
C. Guarantees That Are Subject to Cross-Defaults
The proposal would prohibit a covered entity from guaranteeing (including by providing credit support for) any liability between a direct or indirect subsidiary of the covered entity and an external counterparty if the covered entity's insolvency or entry into resolution (other than resolution under Title II of the Dodd-Frank Act) would directly or indirectly provide the subsidiary's counterparty with a default right. The proposal defines the term "default right" broadly. Guarantees by covered entities of subsidiary liabilities, in the case of covered HCs, and of affiliates, in the case of covered IHCs, that are not subject to such cross-default rights would be unaffected by the proposal. The proposal would only apply prospectively to new agreements established after the effective date of a final rule.
This proposal would improve the resolvability and resilience of covered entities that have adopted MPOE and SPOE strategies. The proposed requirements would support the ability of a covered entity's subsidiaries to continue to operate normally or undergo an orderly wind-down upon the covered entity's entry into resolution. For example, an obstacle to resolution would occur if a covered entity's entry into resolution or insolvency operated as a default by the subsidiary and empowered the subsidiary's counterparties to take default-related actions, such as ceasing to perform under the contract or liquidating collateral. Were subsidiary QFC counterparties to take such actions, the subsidiary could face liquidity, reputational, or other stress that could undermine its ability to continue operating normally, including by placing short-term funding strain on the subsidiary. This could have destabilizing effects, even for a subsidiary of a covered entity with an MPOE resolution strategy as it could erode the franchise or market value of the subsidiary and pose obstacles to its orderly resolution or wind-down. The proposed prohibition would also complement other work that has been done to facilitate GSIB resolution through the stay of cross-defaults, including the agencies' final rule imposing restrictions on QFCs and the ISDA Protocol. /66/
FOOTNOTE 66 See 12 CFR part 47 (OCC); 12 CFR 252 subpart I (Board); 12 CFR part 382 (FDIC); ISDA Universal Resolution Stay Protocol (
The prohibition on entry by covered entities into guarantee arrangements covering subsidiary liabilities that contain cross-default rights would exempt guarantees subject to a rule of the Board restricting such cross-default rights or any similar rule of another
FOOTNOTE 67 Liabilities would be considered "subject to" such a rule even if those liabilities were exempted from one or more of the requirements of the rule. END FOOTNOTE
FOOTNOTE 68 See, e.g., 12 CFR part 47 (OCC); 12 CFR 252 subpart I (Board); 12 CFR part 382 (FDIC). END FOOTNOTE
Question 47: Would modifications to the scope of the agencies' existing QFC stay rules be necessary to support the implementation of this provision? What are the advantages and disadvantages of doing so? Should such a rulemaking permit certain guarantee arrangements to contain cross-default provisions, consistent with 12 CFR 252 subpart I?
D. Upstream Guarantees and Offset Rights
The proposed rule would prohibit covered entities from having outstanding liabilities that are subject to a guarantee from any direct or indirect subsidiary of the holding company (upstream guarantees). Both MPOE and SPOE resolution strategies are premised on the assumption that a covered entity's operating subsidiaries face no claims from the creditors of the holding company as those subsidiaries either continue to operate normally or undergo separate resolution proceedings. This arrangement could be undermined if a liability of the covered entity is subject to an upstream guarantee because the effect of such a guarantee is to expose the guaranteeing subsidiary (and, ultimately, its creditors) to the losses that would otherwise be imposed on the holding company's creditors. A prohibition on upstream guarantees would facilitate both MPOE and SPOE resolution strategies by increasing the certainty that the covered entity's eligible external LTD holders will be exposed to loss separately from the creditors of a covered entity's subsidiaries.
Upstream guarantees do not appear to be common among covered entities. Section 23A of the Federal Reserve Act already limits the ability of an IDI to issue guarantees on behalf of its parent holding company. /69/ The principal effect of the prohibition would therefore be to prevent the future issuance of such guarantees by material non-bank subsidiaries.
FOOTNOTE 69 Transactions subject to the quantitative limits of section 23A of the Federal Reserve Act and Regulation W include guarantees issued by a bank on behalf of an affiliate. See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(5). END FOOTNOTE
Similarly, the proposed rule prohibits covered entities from issuing an instrument if the holder of the instrument has a contractual right to offset the holder's liabilities, or the liabilities of an affiliate of the holder, to any of the covered entity's subsidiaries against the covered entity's liability under the instrument. The prohibition includes all such offset rights regardless of whether the right is provided in the instrument itself. Such offset rights are another device by which losses that are expected to flow to the covered entity's external LTD holders in resolution could instead be imposed on operating subsidiaries and their creditors.
For covered HCs, the proposed rule would limit the amount of non-contingent liabilities to third parties (i.e., persons that are not affiliates of the covered entity) that are not eligible LTD, common equity tier 1 capital, or additional tier 1 capital and that would rank at either the same priority as or junior to the covered entity's eligible LTD in the priority scheme of either the
FOOTNOTE 70 See 11 U.S.C. 507; 12 U.S.C. 5390(b). END FOOTNOTE
The purpose of this requirement is to limit the amount of liabilities that are not common equity tier 1 capital, additional tier 1 capital, or eligible LTD that would rank at either the same priority as or junior relative to eligible LTD in a bankruptcy or resolution proceeding. This ensures that eligible LTD absorbs losses prior to almost all other liabilities of the covered entity and mitigates the legal risk that non-LTD creditors of a failed covered entity object to or otherwise complicate the imposition of losses in bankruptcy on the class of creditors that includes the eligible LTD of the covered entity. As a practical matter, the cap also would result in a significant portion of a covered entity's unsecured liabilities being composed of eligible LTD, which is preferable because eligible LTD has the features discussed above that more readily absorb loss and facilitate a simpler resolution relative to other types of unsecured debt.
The proposal would not subject a covered entity to this cap if the covered entity elects to subordinate all of its eligible LTD to all of the covered entity's other liabilities. Subordinating all of a covered entity's eligible LTD also would address the risk that non-LTD creditors might object to or otherwise complicate imposing losses on investors in eligible LTD. Permitting covered entities a choice between adhering to the cap on unrelated liabilities or instead contractually subordinating all eligible LTD to all of the covered entity's other liabilities provides greater flexibility in choosing how to comply with the proposed rule.
The proposed calibration of 5 percent is consistent with the 5 percent calibration for the similar cap on unrelated liabilities that applies to the parent holding companies of
FOOTNOTE 71 See 12 CFR 252.64(b)(1) (cap on unrelated liabilities for
FOOTNOTE 72 Estimated to be approximately 4.6 percent. Calculated by dividing the average of the numerator and denominator for covered HCs and covered IHCs. The liabilities included in the numerator for this calculation are reported, as of
Under the proposed rule, the set of liabilities that would count towards the unrelated liabilities cap for a resolution covered IHC would be different than the liabilities that would count towards the cap for non-resolution covered IHCs (discussed below) because resolution covered IHCs are permitted to issue eligible LTD externally to third parties. The cap for resolution covered IHCs applies to unrelated liabilities owed to parent and sister affiliates, as well as to unaffiliated third parties, because these IHCs have the option to issue external LTD that will be expected to bear losses in the resolution covered IHC's individual resolution proceeding and that may rank at either the same priority as or senior to such unrelated liabilities. Thus, these firms may owe significant amounts of unrelated liabilities to their FBO parents or another affiliate that would remain outstanding when the IHC enters resolution, because such entities are not anticipated to support the IHC under the resolution plan of the parent FBO. /73/ The cap on unrelated liabilities owed to parents and sister affiliates limits the amount of these liabilities that would be outstanding at the time that a resolution covered IHC enters into resolution.
FOOTNOTE 73 This inclusion of liabilities owed to parents of the resolution covered IHC also aligns with the cap on liabilities of covered HCs, which would include liabilities held by shareholders of the covered HC. END FOOTNOTE
The cap on unrelated liabilities for non-resolution covered IHCs does not include liabilities owed to foreign affiliates because for such entities, the eligible LTD held by foreign affiliates should, in a resolution scenario, convert to equity of the covered IHC, either through actions of the parent or the Board. Therefore, in contrast to resolution covered IHCs, concern about liabilities owed to the FBO parent or other affiliated parties is minimal.
Question 48: What would be the advantages and disadvantages of the proposed cap on unrelated liabilities? Could the objectives of the cap be achieved through other means? For example, instead of imposing a cap on unrelated liabilities, should the Board require that the LTD required under this rule be contractually subordinated so that it represents the most subordinated debt claim in receivership, insolvency, or similar proceedings? Would a different threshold for the cap be more appropriate for covered HCs or covered IHCs? For example, should the cap be calibrated to be modestly higher than the cap for
Question 49: What are the advantages and disadvantages of the proposed calibration of 5 percent of the sum of common equity tier 1 capital, additional tier 1 capital, and eligible LTD amount? Would an alternative value in the range of 4 percent to 15 percent be more appropriate? If so, why?
VII. Deduction of Investments in Eligible External LTD From
In 2021, the agencies adopted an amendment to the capital rule that required
FOOTNOTE 74 In addition to LTD issued by
Distress at a covered entity or IDI that issues externally, and the associated write-down or conversion into equity of its eligible LTD, could have a direct negative impact on the capital of investing banking organizations, potentially at a time when such banking organizations may themselves be experiencing financial stress. Requiring that
FOOTNOTE 75 On
Question 50: What are the advantages and disadvantages of expanding the deduction framework to apply to eligible external LTD issued to satisfy the LTD requirements set forth in the proposal? To what extent would the proposed deduction from regulatory capital of investments in eligible external LTD restrict the ability of external issuers to issue eligible external LTD?
Question 51: What would be the advantages or disadvantages of an alternative approach of requiring the deduction of eligible external LTD of only certain external issuers? For example, should eligible LTD of only larger firms within Categories I-IV be subject to the deduction framework? Should eligible external LTD issued by IDIs that are covered IDIs solely due to their affiliation with another covered IDI not be subject to the deduction framework? What considerations should affect whether an external issuer's eligible external LTD should be subject to the deduction framework?
Question 52: What would be the advantages and disadvantages of amending the proposed application of the deduction framework to exclude from deduction eligible legacy external LTD?
VIII. Transition Periods
The agencies propose to provide a transition period for covered entities and covered IDIs that would be subject to the rule when it is finalized, and a transition period for covered entities and covered IDIs that become subject to the rule after it is finalized. The purpose of these proposed transition periods is to minimize the effect of the implementation of the proposal on covered entities and covered IDIs, as well as on credit availability and credit costs in the
The agencies propose to provide covered entities and covered IDIs three years to achieve compliance with the final rule. The three-year transition period would be the same for all covered IDIs, regardless of whether a covered IDI is required to issue internally to a parent or externally. Three years would provide covered entities and covered IDIs adequate time to make necessary arrangements to comply with the final rule without creating undue burden that would have unreasonable adverse impacts for covered entities and covered IDIs. The agencies may accelerate or extend this transition period in writing for the covered IDIs for which they are the appropriate Federal banking agency, and the Board may accelerate or extend this transition period in writing for covered entities.
Over that three-year period, covered entities and covered IDIs would need to meet 25 percent of their LTD requirements by one year after finalization of the rule, 50 percent after two years of finalization, and 100 percent after three years. This required phase-in schedule would apply to covered entities and covered IDIs that are subject to the rule beginning on the effective date of the finalized rule, and would likewise apply upon a firm becoming subject to the rule sometime after finalization. The proposed rule would provide additional clarifications regarding the three-year transition period to prevent evasion of the rule. The three-year transition period would not restart for a covered IDI that changes charters. For example, a national bank subject to the OCC's proposed rule would not have an additional three years to transition into compliance with the
Question 53: Is three years an appropriate amount of time for firms that become subject to the proposed rule immediately upon finalization and those that become subject after the date on which the rule is finalized to transition into full compliance? Would a shorter period, such as two years, be an adequate transition period? If so, should a shorter transition period also include a phase-in of 50 percent of the LTD requirement by year one and 100 percent by year two? Alternatively, would a longer period, such as four years, be appropriate?
Question 54: Should the agencies consider a longer transition specifically for Category IV covered entities and their covered IDI subsidiaries, which may have less existing LTD than larger covered entities and covered IDIs? For example, should these companies have four years to transition to the proposed requirements?
Question 55: During the three-year period proposed by the agencies, what would be the advantages and disadvantages of requiring covered entities and covered IDIs to submit an implementation plan for complying with the proposed requirements at the end of the three-year period rather than or in addition to satisfying the specified phased in percentages of the LTD requirement on the timeline proposed?
Question 56: Should the agencies consider requiring a different phase in, or a phase in that requires partial compliance at a different date? For example, should the agencies consider a phase in that requires covered entities and covered IDIs to meet 30 percent of their LTD requirement by year one, 60 percent by year two, and 100 percent by year three? What factors should the agencies consider in determining the appropriateness of a phase in requirement (for example, how should the agencies account for the fact that some covered entities already have existing LTD instruments that would be eligible LTD) or in structuring the phase-in requirement?
Question 57: If the agencies revise the proposed transition period to be less than three years or retain the phase-in requirement, should the Board amend the requirements in the existing TLAC rule for U. S. GSIBs and
FOOTNOTE 76 Under the TLAC rule,
IX. Changes to the Board's TLAC Rule
In 2017, the Board finalized a TLAC and LTD requirement for the top-tier parent holding companies of domestic
FOOTNOTE 77 Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for
FOOTNOTE 78 12 CFR part 252, subparts G and P. END FOOTNOTE
FOOTNOTE 79 12 CFR 252.63(c) and .165(d). END FOOTNOTE
FOOTNOTE 80 12 CFR 252.64 and .166. END FOOTNOTE
Since adopting the TLAC rule in 2017, the Board has gained experience administering the rule, including by responding to questions from TLAC companies and monitoring compliance by TLAC companies with the rule. In light of that experience, the Board is proposing to make several amendments to the TLAC rule, as discussed in greater detail below. These amendments generally are technical or intended to improve harmony between provisions within the TLAC rule and address items that have been identified through the Board's administration of the TLAC rule.
A. Haircut for LTD Used To Meet TLAC Requirement
The TLAC rule requires TLAC companies to maintain a minimum amount of TLAC and a minimum amount of eligible LTD. /81/ Eligible LTD generally can be used to satisfy both these requirements. However, eligible LTD must have minimum maturities to count towards the requirements, and the minimum maturity required to count towards each requirement is different. For both the TLAC and LTD requirements, 100 percent of the amount of eligible LTD that is due to be paid in two or more years counts towards the requirements, and zero percent of the amount of eligible LTD that is due to be paid within one year counts towards the requirements. However, while 100 percent of the amount of eligible LTD that is due to be paid in one year or more but less than two years counts towards the TLAC requirement, only 50 percent of the amount counts towards the LTD requirement. /82/
FOOTNOTE 81 See 12 CFR 252.62-.62, .162, and .165. END FOOTNOTE
FOOTNOTE 82 Compare 12 CFR 252.62(b)(1)(ii) and .162(b)(1)(ii) with 12 CFR 252.63(b)(3), .165(c)(1)(iii), and .165(c)(2)(iii). END FOOTNOTE
When it adopted the TLAC rule, the Board stated that the purpose of the 50 percent haircut applied for purposes of the LTD requirement with respect to the amount of eligible LTD that is due to be paid between one and two years is to protect a TLAC company's LTD loss-absorbing capacity against a run-off period in excess of one year (as might occur during a financial crisis or other protracted stress period) in two ways. First, the 50 percent haircut requires TLAC companies that rely on eligible LTD that is vulnerable to such a run-off period (because it is due to be paid in less than two years) to maintain additional LTD loss-absorbing capacity. Second, it incentivizes TLAC companies to reduce or eliminate their reliance on LTD loss-absorbing capacity that is due to be paid in less than two years, since by doing so they avoid being required to issue additional eligible LTD in order to account for the haircut. A TLAC company could reduce its reliance on eligible LTD that is due to be paid in less than two years by staggering its issuance, by issuing eligible LTD that is due to be paid after a longer period, or by redeeming and replacing eligible LTD once the amount due to be paid falls below two years.
The Board is proposing to amend the TLAC rule to change the haircuts that are applied to eligible LTD for purposes of compliance with the TLAC requirement to conform to the haircuts that apply for purposes of the LTD requirement. Accordingly, the proposed rule would allow only 50 percent of the amount of eligible LTD with a maturity of one year or more but less than two years to count towards the TLAC requirement. This change would simplify the rule so that the same haircut regime applies across the TLAC and LTD requirements. Adopting the 50 percent haircut for the TLAC requirement also would support the goals the Board noted for applying the haircut for purposes of the LTD rule. Applying the haircut to the TLAC requirement would improve TLAC companies' management of the tenor of their eligible LTD. The proposed change would incentivize firms to reduce reliance on eligible LTD with maturities of less than two years and increase the TLAC requirement for firms that rely heavily on eligible LTD with maturities of less than two years.
Staff analyzed the change in TLAC ratios that would be implied by this proposed 50 percent haircut on eligible LTD maturing between one and two years. Seventeen entities are currently subject to TLAC requirements, eight of which are
Based on these estimates, staff projects that all GSIBs would meet or nearly meet their TLAC requirements under the proposed change. /83/ Staff did not consider whether the proposal might prompt behavioral changes at the seventeen GSIBs, primarily because the magnitudes of possible declines in TLAC and the potential associated effects appear to be modest, as discussed above. However, staff would anticipate that impacted entities would adjust their issuance to mitigate the impact of this change.
FOOTNOTE 83 The agencies recognize that their Basel III reforms proposal would, if adopted, increase risk-weighted assets for this group of firms, which would mechanically increase TLAC requirements and create moderate projected shortfalls in TLAC at several GSIBs. The change in eligible LTD proposed here could modestly increase the size and number of TLAC shortfalls beyond those projected as a result of the Basel III proposal. END FOOTNOTE
The agencies invite comment on the implications of the interaction of the proposal to modify the eligible LTD haircut with proposed changes to the agencies' capital rule under the Basel III proposal.
Question 58: How would a different remaining maturity requirement or amortization schedule better achieve the objectives of the TLAC rule?
B. Minimum Denominations for LTD Used To Satisfy TLAC Requirements
The Board proposes to amend the TLAC rule so that eligible LTD must be issued in minimum denominations for the same reasons discussed in section III.C.7 of this supplementary information section.
Question 59: Should the Board impose a higher minimum denomination for TLAC companies subject to the TLAC rule? Should the minimum denomination be higher (e.g.,
C. Treatment of Certain Transactions for Clean Holding Company Requirements
The TLAC rule applies clean holding company requirements to the operations of TLAC HCs to further improve their resolvability and the resiliency of their operating subsidiaries. /84/ One of these requirements is that a TLAC HC must not enter into a QFC, with the exception of entry into certain credit enhancement arrangements with respect to QFCs between a TLAC HC's subsidiary and third parties, with a counterparty that is not a subsidiary of the TLAC HC (the "QFC prohibition"). /85/ The final rule defined QFC as it is defined in 12 U.S.C. 5390(c)(8)(D). /86/ This definition includes a "securities contract," which is further defined to mean "a contract for the purchase, sale, or loan of a security, . . . a group or index of securities, . . . or any option on any of the foregoing, including any option to purchase or sell any such security, . . . or option. . . ." /87/
FOOTNOTE 84 See 12 CFR 252.64 and 12 CFR 252.166. END FOOTNOTE
FOOTNOTE 85 See 12 CFR 252.64(a)(3). END FOOTNOTE
FOOTNOTE 86 See 12 CFR 252.61 "Qualified financial contract." END FOOTNOTE
FOOTNOTE 87 Id. END FOOTNOTE
The Board explained that the QFC prohibition would mitigate the substantial risk that could be posed by the failure of a large banking organization that is a party to a material amount of third-party QFCs. First, the Board noted that TLAC HCs' operating subsidiaries, which are parties to large quantities of QFCs, are expected to remain solvent under an SPOE resolution and not expected to fail to meet any ordinary course payment or delivery obligations during a successful SPOE resolution. Therefore, assuming that the cross-default provisions of the QFCs engaged in by the operating subsidiaries of TLAC HCs are appropriately structured, their QFC counterparties generally would have no contractual right to terminate or liquidate collateral on the basis of the TLAC HC's entry into resolution proceedings. Second, the TLAC HCs themselves would be subject to a general prohibition on entering into QFCs with external counterparties, so their entry into resolution proceedings would not result in substantial QFC terminations and related fire sales. The restriction on third-party QFCs would therefore materially diminish the fire sale risk and contagion effects associated with the failure of a TLAC HC.
In its administration of the rule since it was finalized, the Board has gained experience with agreements that may constitute QFCs and which the Board believes may not present the risks intended to be addressed by the clean holding company requirements. Accordingly, the Board proposes to amend the clean holding company requirements so that TLAC HCs may enter into underwriting agreements, fully paid structured share repurchase agreements, and employee and director compensation agreements, each described below. The Board also proposes to amend the rule so that the Board may determine, upon request, that additional agreements are not subject to the QFC prohibition.
These changes would also be applied to the clean holding company requirements proposed for covered HCs, discussed in section VI.B of this supplementary information.
1. Underwriting Agreements
An underwriting agreement is an agreement between an issuer of securities, in this case, a
2. Fully Paid Structured Share Repurchase Agreements
Defined as an arrangement between an issuer (e.g., the top level parent holding company of a
3. Employee and Director Compensation Agreements
A stock option represents the right of an employee to purchase a specific number of the issuer's (e.g.,
4. Other Agreements as Determined by the Board
The Board also proposes to reserve the authority to determine that additional agreements would not be subject to the QFC prohibition if the Board determines that exempting the agreement from the QFC prohibition would not pose a material risk to the orderly resolution of the
Question 60: Would exempting underwriting agreements, fully paid structured share repurchase agreements, and employee and director compensation agreements from the QFC prohibition present risk to the orderly resolution of a TLAC HC?
Question 61: Should the Board include in the regulation factors it would consider in determining to exempt additional agreements from the QFC prohibition?
Question 62: Would permitting a TLAC HC to enter into these agreements undermine the purposes of the clean holding company requirements? For example, would it complicate the orderly resolution of
Question 63: Should the proposed exemptions from the QFC prohibition be available for the similar QFC prohibition applicable to TLAC IHCs? /88/ Should they be extended to covered IHCs? To what extent do TLAC and covered IHCs engage in underwriting agreements, fully paid structured share repurchase agreements, and employee and director compensation agreements?
FOOTNOTE 88 See 12 CFR 252.166(a)(3). END FOOTNOTE
D. Disclosure Templates for TLAC HCs
The Board has long supported meaningful public disclosure by TLAC HCs. Public disclosures of a TLAC HC's activities and the features of its risk profile work in tandem with the regulatory and supervisory frameworks applicable to TLAC HCs by helping to support robust market discipline. In this way, meaningful public disclosures help to support the safety and soundness of TLAC HCs and the financial system more broadly.
The proposal would require a TLAC HC to make certain quantitative and qualitative disclosures related to the creditor ranking of the TLAC HC's liabilities. The proposal would not subject a banking organization that is a consolidated subsidiary of a TLAC HC to the proposed public disclosure requirements. The proposal would require a TLAC HC to comply with the same standards related to internal controls and verification of disclosures, as well as senior officer attestation requirements, as applied to the disclosure requirements of banking organizations under the Board's capital rule. A TLAC HC could leverage existing systems it has in place for other public disclosures, including those set forth in the agencies' regulatory capital rule.
1. Frequency of Disclosures
The proposal would require that disclosures be made at least every six months on a timely basis following the disclosure as of date. In general, where a TLAC HC's fiscal year end coincides with the end of a calendar quarter, the Board would consider disclosures to be timely if they are made no later than the applicable
2. Location of Disclosures
The last three years of the proposed disclosure would be required to be made publicly available (for example, included on a public website). Except as discussed below, management would have some discretion to determine the appropriate medium and location of the disclosures. Furthermore, a TLAC HC would have flexibility in formatting its public disclosures, subject to the requirements for using the disclosure template, discussed below.
The Board encourages management to provide the disclosure on the same public website where it provides other required disclosures. This approach, which is broadly consistent with current disclosure requirements, is intended to maximize transparency by ensuring that disclosure data is readily accessible to market participants while reducing burden on TLAC HCs by permitting a certain level of discretion in terms of how and where data are disclosed.
3. Specific Disclosure Requirements
The purpose of the proposed disclosure requirement is to display in an organized fashion the priority of a TLAC HC's creditors. TLAC HCs may alter the formatting of the template to conform to publishing styles used by the TLAC HCs. However, the text set forth in the template must be used by the TLAC HC.
Table 1 to
Question 64: To what extent do the disclosure tables proposed increase the likelihood that market participants fully understand the creditor hierarchy? Should the Board additionally require all Category II, III, and IV covered entities to provide the proposed disclosures?
Question 65: Should the Board require a similar disclosure for liabilities of material subgroup entities of a TLAC HC?
Question 66: What information, if any, that could be subject to disclosure under the proposal might be confidential business information that a TLAC HC should not be required to disclose? If there is any such information, should the Board provide the ability for a TLAC HC to not disclose particular information that is confidential business information, as is provided in 12 CFR 217.62(c)?
E. Reservation of Authority
In addition, the proposed rule would reserve the authority for the Board to require a TLAC company to maintain eligible LTD or TLAC instruments that are greater than or less than the minimum requirement currently required by the rule under certain circumstances. This reservation of authority would ensure that the Board could require a company entity to hold additional LTD or TLAC instruments if the company poses elevated risks that the rule seeks to address.
F. Technical Changes To Accommodate New Requirements
The Board also proposes to make technical changes to simplify the regulation text, where possible. Among other things, these technical changes would (i) move definitions that currently are shared between subparts G and P of Regulation YY to the common definition section in section 252.2 of Regulation YY; (ii) move the transition provisions for the certification provided by covered IHCs to the transition section of the TLAC rule; and (iii) eliminate instances where the regulation text referred to a number of years and a number of days, as not all years have 365 days. These changes are not intended to affect the substance of the rule.
X. Economic Impact Assessment
A. Introduction and Scope of Application
The proposed rule would increase the amount of loss absorbing capacity in the event a covered IDI fails, thereby reducing costs to the DIF and increasing the likelihood of least-cost resolutions in which all deposits are transferred to an acquiring entity. As noted below, the experience in recent bank failures suggests that these benefits could be substantial.
The agencies examined the benefits and costs of the proposed rule. The economic analysis discussed here examines the proposal with an emphasis on a steady-state perspective, meaning that it evaluates the long run effect of the fully phased-in requirement. Because current borrowing practices of covered entities and covered IDIs may not be representative of long run behavior, the agencies consider the phased-in requirement relative to two alternative assumptions about the level of LTD that covered entities and covered IDIs would choose to maintain in the absence of the proposal. One approach (the "incremental shortfall approach") assumes that the current reported principal amount of LTD issuance at covered entities and covered IDIs is a reasonable proxy for the levels of such debt that would be maintained in future periods in the absence of the proposed rule. An alternate approach (the "zero baseline approach") assumes that covered entities and covered IDIs would, in the absence of the proposed rule, choose to maintain no instruments that satisfy the proposed rule's requirements in future periods. Under both forms of analysis, the agencies conclude that the proposal is likely to moderately increase funding costs for covered entities and covered IDIs because LTD--which is generally more expensive than the short-term funding that the agencies anticipate it would replace--would be required as part of the funding structure of a covered entity or covered IDI.
Under the incremental shortfall approach, the estimated steady-state cost of the proposal would derive from the additional LTD the covered entities would need to issue to meet any long-term shortfalls, which as described below would imply only a modest increase in funding costs. Under the zero baseline approach, the steady-state cost of the proposal is the anticipated cost associated with the full estimated amount of LTD that would be currently required if the regulation were fully phased-in. Under this more conservative zero baseline approach, the estimated decrease in profitability would be greater than under the incremental shortfall approach, though, as described below, the decrease is estimated to be moderate.
The primary benefit of the proposed rule is that it supports wider options for the orderly resolution of covered entities and covered IDIs in the event of their failure.
The proposed LTD requirement would apply to Category II, III, and IV banking organizations, including (i) IDIs with at least
FOOTNOTE 89 Covered entity statistics are from the FR Y-9C as of
FOOTNOTE 90 For purposes of the aggregate analysis in this section, the number of covered IDIs does not include IDIs that are fully consolidated subsidiaries of other covered IDIs. END FOOTNOTE
FOOTNOTE 91 In addition to the IDI subsidiaries of non-GSIB LBOs that are newly made subject to LTD requirements under the provisions of the proposal, there are 6 IDI subsidiaries of IHCs owned by foreign GSIBs that would become subject to new internal LTD requirements under the proposal. These IDI subsidiaries of foreign GSIB IHCs held a combined
This impact assessment builds on organization-level analysis that focuses on the highest level of consolidation at which banking organizations within the scope of the proposal would be subject to its requirements.
B. Benefits
The benefits of this proposal fall into two broad categories.
The recent failures of SVB, SBNY, and
1. Benefits of LTD-Enhanced Orderly Resolutions (Gone-Concern)
If adopted, the proposed rule would help improve the likelihood that, in the event a covered IDI fails, a sufficient amount of non-deposit liabilities will be available to absorb losses that otherwise might be imposed on uninsured depositors in resolution (e.g., if LTD helps to enable whole bank resolution) and to potentially facilitate other resolution options without invoking the systemic risk exception. This includes increasing the likelihood of a least-cost resolution scenario in which all deposits can be transferred to the acquiring entity, thereby maintaining depositor access to financial services and supporting financial stability. The magnitude of these benefits in any future IDI resolution would depend on the extent of losses incurred by the failing institution and the extent of its reliance on uninsured deposits. As a general matter, achievement of these benefits, including the policy goals and any attendant effects on the DIF, may also be influenced by future regulatory developments and the operation of bank supervision and regulation more broadly.
More specifically, the agencies examined three channels by which an LTD requirement may provide gone-concern economic benefit.
First, the additional loss-absorbing capacity from LTD in resolution may increase the likelihood that some or all uninsured deposits are protected from losses, even under the least-cost test. This outcome can be beneficial because interruption of access to uninsured deposits and associated services, already harmful to deposit customers, may also have spillover effects that can adversely affect a broader set of economic activity (e.g., if businesses use uninsured deposits to conduct payroll service). /92/ Further, because the LTD requirement for covered entities and covered IDIs can expand regulators' options to reduce or eliminate the potential losses to uninsured deposits, whether in ex-ante (market) expectation or in ex-post outcomes, the requirement may help to limit or reduce the risk of financial contagion, dislocations, and deadweight costs associated with the failure of a covered entity or covered IDI.
FOOTNOTE 92 Deposit insurance already protects the access to financial services and assets of insured depositors. This protection would not change under the proposed rule. END FOOTNOTE
Second, by providing additional loss-absorbing capacity, LTD may increase the likelihood that the least cost resolution option is one that does not involve a merger that results in a sizable increase in the systemic footprint or market concentration of the combined organization, thereby producing potential economic costs. By creating a substantially larger combined successor firm, a merger-based or sale-of-business-line acquisition by another large banking or nonbank financial firm may meaningfully increase the acquiring firm's systemic footprint. While the existing regulatory and supervisory framework is designed to address the expansion of systemic footprints, there may be unexpected costs to be borne by the public. However, increasing the likelihood that a different solution is the least cost resolution option could result in policymakers avoiding transactions that could raise other concerns.
Third, the loss-absorption afforded by LTD may lower the risk that multiple concurrent failures of covered entities or covered IDIs might occur and impose high costs on the DIF, necessitating higher assessments to refill it and potentially requiring other extraordinary actions to stabilize banking conditions.
2. Strengthening Bank Resilience (Going-Concern Benefit)
The agencies analyzed two channels for going-concern benefits of the proposed rule. First, the establishment of an LTD requirement and the associated increase in loss-absorbing capacity improves the funding stability of covered entities and covered IDIs and provides firms and banking regulators greater flexibility in resolution. These features in turn further reinforce confidence in the safety of deposits at
FOOTNOTE 93 See, e.g., Diamond and Dybvig (1983), and Gertler and Kiyotaki (2015). END FOOTNOTE
For the banking system, this strengthened resilience can reduce negative externalities associated with runs. Lowering the risk of runs at covered IDIs may reduce the risk of contagion, thereby reducing risk for the broader banking system. In addition, the increased resilience can reduce fire sale risk by discouraging bank runs on covered entities and covered IDIs that compel them to liquidate assets to meet withdrawals. The economic harms from these channels could be substantial for a run on a large banking organization. LTD requirements may deliver a significant reduction in run risk for covered IDIs, generating considerable benefits.
Second, the proposed LTD requirement may enhance market discipline with respect to covered entities and covered IDIs, incentivizing prudent behavior. The proposed LTD requirement would represent a substantial liability on covered entities' and covered IDIs' balance sheets that is subordinated to deposits, subject to credible threat of default risk, and whose value may be ascertained readily from market prices. If eligible LTD becomes a somewhat more common source of funding relative to instruments held by less sophisticated creditors, then it may strengthen market-based incentives for covered entities and covered IDIs to moderate excessive risk-taking. There is some evidence that TLAC-eligible debt securities are increasing market discipline of GSIBs. /94/ LTD prices may also provide regulators and other stakeholders with valuable signals about the riskiness of covered entities and covered IDIs.
FOOTNOTE 94 See Lewrick et al. (2019). END FOOTNOTE
The agencies believe that harnessing the power of markets to price LTD issued by covered entities and covered IDIs creates a mechanism for firms that take excess risks to appropriately face higher funding costs. These market disciplining effects are incremental to the risk sensitivity already present in DIF premiums. There is a substantial literature over recent decades exploring the potential for enhanced market discipline for large banks based on subordinated LTD. For example, DeYoung, Flannery, Lang and Sorescu (2001) argue that subordinated debt prices reflect the information available to market participants (such as public indicators of bank condition, management concerns, and potential expected loan losses).
The agencies note that the scope for these effects is uncertain for a number of reasons including but not limited to potential lack of understanding and experience among market participants with LTD-based protection for deposits. However, the agencies believe the increased resiliency and market discipline afforded by the proposed LTD requirements provide meaningful additional financial stability benefits.
3. Changes in Deposit Insurance Assessments
Under the
FOOTNOTE 95 The agencies' analysis of steady-state costs (section X.C.2) as well as gone-concern and going-concern benefits (sections X.B.1 and X.B.2) does not consider whether, or to what extent, deposit insurance assessments, or a change in the level of deposit insurance assessments, could have indirect effects on estimated costs and benefits of this proposal. END FOOTNOTE
C. Costs
1. LTD Requirements and Shortfalls
The agencies analyzed the cost impact of the proposed rule for the analysis population. This section details that analysis. First, it approximates the proposed requirements for the analysis population. Second, given these requirements, it estimates the shortfalls in eligible external LTD currently outstanding among firms in the analysis population. Third, it estimates how these requirements would shift bank funding behavior and the consequences of those shifts on bank funding costs. Finally, it discusses the potential implications of these costs.
Agency estimates of LTD requirements and shortfalls are based on organization-level time series averages for the Q4 2021-Q3 2022 period. More recent data are excluded from the sample. This is in part because shortfall estimates may be distorted by debt issuance carried out by covered entities and covered IDIs in anticipation of the rule following the Q4 2022 ANPR. Recent substitution away from deposits due to adverse banking conditions in early 2023 may also overstate the long run prominence of LTD in funding structures for these organizations. Time series averages are used to produce an estimate the agencies believe is more appropriate because it mitigates the variability in point-in-time cross section data. /96/
FOOTNOTE 96 This is of particular importance for shortfall estimates, which can be more vulnerable to this measurement problem. END FOOTNOTE
According to this methodology, staff estimate that the total principal value of external LTD required of firms in the analysis population, irrespective of existing LTD, would be approximately
FOOTNOTE 97 The agencies recognize that their Basel III reforms proposal would, if adopted, increase risk-weighted assets across covered entities. The increased risk-weighted assets would lead mechanically to increased requirements for LTD under the LTD proposal. The increased capital that would be required under the Basel III proposal could also reduce the cost of various forms of debt for impacted firms due to the increased resilience that accompanies additional capital (which is sometimes referred to as the Modigliani-Miller offset). The size of the estimated LTD needs and costs presented in this section do not account for either of these potential effects of the Basel III proposal. END FOOTNOTE
For purposes of the incremental shortfall approach, the agencies estimate the level of future eligible LTD for the analysis population in the absence of the proposed rule as equal to the current level of outstanding LTD at the analysis population that is unsecured, has no exotic features, and is issued externally at any level of the organization (that is, either by a covered entity itself or a subsidiary IDI). /98/ Implicit in this definition is the assumption that over the long term, it will be costless to substitute external holding company-issued debt for external IDI-issued debt, as well as to downstream resources from holding companies to IDIs through eligible internal debt securities, to fulfill the requirements of the proposed rule and general funding needs. /99/ It is assumed, in other words, that there are no additional costs for IDIs to maintain eligible internal debt securities to holding companies beyond those attributable to any external holding company LTD that may be passed through to IDIs.
FOOTNOTE 98 The agencies estimate current eligible external LTD outstanding using a variety of data sources. Unsecured holding company-issued LTD outstanding is estimated with issue-level data from the Mergent Fixed Income Securities Database (FISD), where available. Where FISD issue-level data are not available, the agencies compute proxies for existing LTD issued by holding companies using FR Y-9LP data. The agencies proxy for eligible
FOOTNOTE 99 An implication of this and the other simplifying assumptions noted is that the proposed requirement that eligible external LTD generally be issued at the holding company level would be no costlier to covered entities than an alternative rule that would also allow firms to meet the external requirement with LTD issued externally out of IDIs. This may not always be true. Some covered entities might, if permitted, prefer to partially meet the requirement with external IDI debt, for example, if they believed such a choice could incrementally lower their LTD interest cost. The agencies believe the effect of such choices on cost, if any, are likely small in the long run, and may be one of many potential influences on the cost estimates under both the incremental shortfall and zero baseline approaches. END FOOTNOTE
Based on averages for the Q4 2021-Q3 2022 period, the agencies estimate under the incremental shortfall approach that some firms would need to issue additional eligible external LTD over the long term in order to comply with the proposed rule. Staff estimate that the aggregate shortfall under the incremental approach in the analysis population is approximately
The agencies estimate that current average annual LTD issuance by
FOOTNOTE 100 The market for external LTD was defined as all debt with a term (ignoring call features) of two years or longer in selected banking-related NAICS codes. The average term for these bonds is approximately seven years, and we assume banking organizations will generally call such debt one to three years prior to maturity. We therefore assume that the additional annual issuance needed is between one-fourth and one-sixth of the estimated LTD shortfall. END FOOTNOTE
2. Steady-State Funding Cost Impact
Building on the requirement and shortfall estimates described above, the agencies evaluated the impact of the proposal on steady-state funding costs. Because LTD is generally more expensive than the short-term funding banking organizations could otherwise use, the proposal is likely to raise funding costs in the long run. This analysis assumes that firm assets are held fixed, and the proposed rule therefore permanently shifts firm liabilities to include less short-term funding and more LTD. /101/ The estimated change in funding costs is the estimated quantity of required new eligible external LTD issuance multiplied by the estimated increased funding cost per dollar of issuance (i.e., the difference between the long-term and short-term funding rates). For the purposes of this analysis, interest rates for individual funding sources (e.g., short-term or long-term debt) are assumed to be unaffected by funding structure changes. For example, the analysis does not allow for possible reductions in the cost of uninsured deposits resulting from the additional layer of loss absorbing LTD (which may be material). /102/ The steady-state setting abstracts from continuing adjustment costs that may arise from maintaining eligible external LTD at the required level, for instance through retirement and reissuance of eligible external LTD over time. Accordingly, the analysis also does not consider short-term transition costs.
FOOTNOTE 101 This is a simplifying assumption. Staff believes that results would be broadly similar if balance sheet expansion were modeled under reasonable assumptions about how the expansion would occur (e.g., investment selection) and funding opportunity costs. END FOOTNOTE
FOOTNOTE 102 See Alanis et al. (2015), Jacewitz and Pogach (2015). END FOOTNOTE
Based on market observables from the post-2008 period, the agencies estimate the eligible external LTD funding cost spread as the difference between yields on five-year debt and the national aggregate interest rate on bank non-jumbo three-month certificates of deposit (CDs). /103/ /104/ The five-year debt is more expensive than three-month CDs because it includes premiums for term and for credit risk (reflecting its structural subordination in the capital structure). /105/ Over time, the premium for subordination will reflect the credit risk of the individual covered firms, while the premium for term will also reflect changes in the general interest rate markets. In the agencies' steady state analysis, about one third of the cost of the LTD requirement is attributable to subordination, with the remainder attributable to the term premium.
FOOTNOTE 103 For the analysis, yields on five-year debt are estimated for each firm in the analysis population as the sum of the average five-year CDS credit spread and the average yield on five-year Treasuries. CDS pricing data in this sample, provided by
FOOTNOTE 104 In recent years, these CD rates have been lower on average than one-month Treasury Bill yields, consistent with academic literature that studies the funding advantages of deposits. See Drechsler, Savov, and Schnabl (2017). END FOOTNOTE
FOOTNOTE 105
The agencies estimate that the eligible external LTD requirement would increase pre-tax annual steady-state funding costs for the analysis population by
FOOTNOTE 106 After-tax funding cost increases are approximately 25 percent lower than the corresponding pre-tax value. END FOOTNOTE
FOOTNOTE 107 For simplicity, the agencies assume that pricing any eligible internal debt securities would be consistent with market pricing and terms for eligible external LTD (including but not limited to the eligibility requirements under the proposal). END FOOTNOTE
Under the zero baseline approach, based on total eligible external LTD requirement quantities, the agencies estimate that the proposal would increase pre-tax annual steady-state funding costs by approximately
FOOTNOTE 108 In addition to the total increase in funding costs, the agencies also estimate the credit risk component of these funding costs. Because credit spreads reflect the market expectation of losses that would be absorbed by eligible LTD investors in per annum terms, the component speaks directly to the proposal's expansion of loss absorbing capacity. In the incremental shortfall (zero baseline) approach, the annual steady-state interest expenditure on eligible LTD due to credit risk would be
The agencies believe that the funding cost impact of the proposal is likely between the lower-end estimate from the incremental shortfall approach and the higher-end estimate from the zero baseline approach. The incremental shortfall approach may provide a more accurate near-term perspective on funding cost impact. However, even in the short run, this may underestimate the costs because the proxy for eligible external LTD in this analysis may not satisfy all of the proposal's requirements for eligible external LTD and, therefore, may overestimate the quantity of truly eligible external LTD outstanding among covered entities. /109/ In the long run, current funding structures may differ substantially from what firms would choose in the absence of the rule. The upper range of estimates based on total required eligible external LTD quantities under the zero baseline approach is in deference to, among other considerations, the possibility that prohibiting covered entities and covered IDIs from maintaining lower levels of LTD in the future may carry additional funding costs. /110/
FOOTNOTE 109 The incremental shortfall approach also does not account for the presence of management buffers which are likely to be nonzero. It should be noted that, among other purposes, management buffers can help covered entities and covered IDIs mitigate recurring LTD issuance and retirement costs. These additional costs are not estimated by the agencies. END FOOTNOTE
FOOTNOTE 110 The benefits of the rule, discussed above, may also be larger to the extent firms would have chosen lower LTD levels in the future in the absence of the rule. END FOOTNOTE
An increase in funding costs associated with the rule may be absorbed to varying degrees by stakeholders of covered entities and covered IDIs, including equity holders, depositors, borrowers, employees, or other stakeholders. Covered entities and covered IDIs could seek to offset the higher funding costs from an LTD requirement by lowering deposit rates or increasing interest rates on new loans. Alternatively, the higher funding costs could indirectly affect covered entities and covered IDIs' loan growth, or result in some migration of banking activity from covered entities and covered IDIs to other banks or nonbanks. The modest to moderate range of funding cost impacts presented above suggests a similarly limited scope for these types of indirect effects.
3. Transition Effects
This analysis does not attempt to quantitatively assess the proposal's phase-in effects, such as changes in asset holdings or market conditions for long-term unsecured debt instruments, because the agencies do not possess the necessary information to do so. Estimates of the phase-in effects depend upon the future financial characteristics of each covered entity and covered IDI, future economic and financial conditions, and the decisions and behaviors of covered entities and covered IDIs. However, the agencies believe that, if the proposal is phased-in gradually, the transition-related costs and risks of the proposal's adoption are likely to be small relative to long-run effects. These considerations notwithstanding, this subsection provides a brief overview of potential phase-in effects.
Due to the considerable scope of the proposal, there is a risk that efforts by covered entities and covered IDIs to issue a large volume of LTD over a limited period could strain the market capacity to absorb the full amount of such issuance if issuance volume exceeds debt market appetite for LTD instruments. /111/ If banking organizations are unable to spread out their issuance activity to avoid this problem, they may be forced to issue a significant quantity of LTD at relatively higher yields. /112/ These costs could be exacerbated if they coincide with periods of adverse funding market conditions such as those that followed recent bank failures. It is also worth noting that a strain on debt markets due to the proposal phase-in may also impose negative funding externalities on non-covered institutions, both inside and outside of the financial sector.
FOOTNOTE 111 However, as discussed in section X.C.1, the agencies' estimated eligible external LTD shortfall is a small to moderate fraction of the average total annual bank LTD issuance. END FOOTNOTE
FOOTNOTE 112 Due to practical restrictions on call eligibility, a portion of LTD issued in this fashion at unattractive rates may remain on the balance sheets of covered entities and covered IDIs for a few years. END FOOTNOTE
Other simplifying assumptions that are appropriate for the long run perspective of the funding cost analysis may be less suited for the study of phase-in effects. Recall that the funding cost methodology treats the proposed requirement as a liability side substitution with assets held fixed. In the short run, covered entities are in fact likely to expand their balance sheets, to at least some degree, as a result of the proposed requirements. Under some circumstances this expansion could impose upward pressure on leverage ratios (presumably temporary). It may also take some time for covered entities and covered IDIs to invest the proceeds from sizable LTD issuance productively, which could add to the phase-in costs. Other steady-state simplifying assumptions about the migration of external LTD among entities within organizations and the prepositioning of resources at IDIs are likely to understate short-term disruption due to the proposal. Organizations most exposed to phase-in costs of this kind are those with limited existing external LTD issued out of their holding companies and those with limited internal LTD between their IDIs and holding companies.
4. Conclusion
The discussion in this section highlights a range of gone-concern and going-concern benefits that could derive from the LTD required by the proposal: providing additional coverage for losses and greater optionality in resolution events, and alleviating some of the pressures that could arise as a covered entity comes under significant stress. The extent of these benefits is roughly proportional to the overall loss-absorbing capability of the LTD that the rule would add. As discussed previously, the face value of additional LTD that would be available for loss absorption is estimated to be approximately between
In addition, the loss-absorbing capacity provided by the required LTD may provide savings to the DIF in the future relative to resolutions conducted without benefit of the additional loss absorbing capacity of the long term debt required by the proposed rule.
The direct costs of the proposal derive from the requirements that the LTD be both subordinated and longer term than current sources of funding. In total, these costs are estimated to be moderate. It is possible that alternate means exist to raise loss absorbing resources, such as subordinated debt of a shorter term, that could be less costly to covered entities and covered IDIs. Compared to the LTD requirements of the proposed rule, however, such alternatives would likely be less effective in providing a stable enough source of loss absorption to achieve the objectives of the proposal. The agencies have concluded that the direct loss absorption capacity of the LTD combined with the meaningful intangible benefits of the LTD described in this section justify the overall cost of the proposal.
5. Bibliography
Alanis, Emmanuel,
Chen, Yehning, and
DeYoung, Robert, et al. "The information content of bank exam ratings and subordinated debt prices."
Diamond, Douglas W. and
Gertler, Mark and Nobuhiro Kiyotaki. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy." American Economic Review 105.7 (2015): 2011-2043.
Imai, Masami. "The emergence of market monitoring in Japanese banks: Evidence from the subordinated debt market."
Jacewitz, Stefan, and
Lewrick, Ulf, Jose'
XI. Regulatory Analysis
A. Paperwork Reduction Act
Certain provisions of the proposed rule contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA). /113/ In accordance with the requirements of the 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
FOOTNOTE 113 44 U.S.C. 3501 et seq. END FOOTNOTE
The proposed rule contains revisions to current information collections subject to the PRA. To implement these requirements, the Board would revise and extend for three years the (1) Financial Statements for Holding Companies (FR
Comments are invited on the following:
(a) Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;
(b) The accuracy of the agencies estimates of the burden of the information collections, including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
Commenters may submit comments regarding any aspect of the proposed rule's collections of information, including suggestions for reducing any associated burdens, to the addresses listed under the ADDRESSES heading of this Notice. All comments will become a matter of public record. A copy of the comments may also be submitted to the OMB desk officer for the agencies: By mail to
Proposed Revisions, With Extension, of the Following Information Collections (Board Only)
(1) Collection title: Financial Statements for Holding Companies.
Collection identifier: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR Y-9CS.
OMB control number: 7100-0128.
General description of report: The FR
Frequency: Quarterly, semiannually, and annually.
Affected Public: Businesses or other for-profit.
Respondents: BHCs, SLHCs, securities holding companies (SHCs), and IHCs (collectively, holding companies (HCs)).
Estimated number of respondents: FR Y-9C (non-advanced approaches holding companies with less than
Estimated average hours per response: FR Y-9C (non-advanced approaches holding companies with less than
Estimated annual burden hours: FR Y-9C (non advanced approaches holding companies with less than
Current Actions: The proposed rule would make certain revisions to the FR Y-9C, Schedule HC-R, Part I, Regulatory Capital Components and Ratios, to amend the instructions to allow covered entities to publicly report information regarding their amounts of eligible LTD. Specifically, the instructions for item 54 would be amended to require covered entities to report outstanding eligible LTD. In addition, the proposal would create a new line item for a covered entity and a
The proposed rule would also create a new line item and instruction to allow
The Board estimates that revisions to the FR Y-9C would increase the estimated annual burden by 316 hours. The respondent count for the FR Y-9C would not change because of these changes. The draft reporting forms and instructions are available on the Board's public website at https://www.federalreserve.gov/apps/reportingforms.
(2) Collection title: Reporting, Recordkeeping, and Disclosure Requirements Associated with Regulation YY.
Collection identifier: FR YY.
OMB control number: 7100-0350.
General description of report: Section 165 of the Dodd-Frank Act requires the Board to implement Regulation YY--Enhanced Prudential Standards (12 CFR part 252) for BHCs and FBOs with total consolidated assets of
Frequency of Response: Annual, semiannual, quarterly, one-time, and event-generated.
Affected Public: Business or other for-profit.
Respondents: State member banks,
Estimated number of respondents: 63.
Estimated average hours per response for new disclosures: 20.
Total estimated change in burden hours: 330.
Estimated annual burden hours: 28,082.
Current Actions: The proposal would make certain revisions to the FR YY information collection. Specifically, the proposal would require that
B. Regulatory Flexibility Act
OCC
The Regulatory Flexibility Act (RFA), 5 U.S.C.
FOOTNOTE 114 The OCC bases its estimate of the number of small entities on the SBA's size standards for commercial banks and savings associations, and trust companies, which are
The OCC estimates that the proposed rule would impact none of these small entities, as the scope of the rule only applies to banking organizations with total assets of at least $100 billion. Therefore, the OCC certifies that the proposed rule would not have a significant economic impact on a substantial number of small entities.
Board
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires an agency to consider the impact of its proposed rules on small entities. In connection with a proposed rule, the RFA generally requires an agency to prepare an Initial Regulatory Flexibility Analysis (IRFA) describing the impact of the rule on small entities, unless the head of the agency certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities and publishes such certification along with a statement providing the factual basis for such certification in the Federal Register.
The Board is providing an IRFA with respect to the proposed rule. For the reasons described below, the Board does not believe that the proposal will have a significant economic impact on a substantial number of small entities. The Board invites public comment on all aspects of this IRFA.
1. Reasons Action Is Being Considered
The proposed rule would require covered entities and covered IDIs to maintain minimum levels of LTD funding in order to improve the resolvability of these firms in light of the risks that are posed when a covered entity or covered IDI fails. Further discussion of the rationale for the proposal is provided in section I.A of this Supplementary Information.
2. Objectives of the Proposed Rule
The agencies' objective in proposing this rule is to expand the options available to policymakers in resolving a failed covered entity and its covered IDI subsidiaries and thereby increase the likelihood that such a resolution will occur in an orderly fashion. By increasing the prospects for orderly resolutions of a failed covered entity and its covered IDI subsidiaries, the proposed rule is also intended to achieve the agencies' objective of promoting resiliency among banking organizations and safeguarding stability in the financial system.
3. Description and Estimate of the Number of Small Entities Impacted
The proposed rule would only apply to covered entities, which are Category II, III, and IV BHCs and SLHCs, as well as Category II, III, and IV
Under regulations promulgated by the Small Business Administration (SBA), a small entity, for purposes of the RFA, includes a depository institution, a BHC, or an SLHC with total assets of $850 million or less (small banking organization). /115/ As of March 31, 2023, there were approximately 96 small SLHCs and 2,607 small BHCs. Because only domestic SLHCs and BHCs and
FOOTNOTE 115 See 13 CFR 121.201 (NAICS codes 522110-522210). END FOOTNOTE
FOOTNOTE 116 In any event, consistent with the SBA's General Principles of Affiliation, the Board may count the assets of affiliated IDIs together when determining whether to classify a state member bank that could be subject to the proposed rule by virtue of an affiliate relationship with an IDI with $100 billion or more in total assets as a small entity for purposes of the RFA. See 13 CFR 121.103(a). In such a case, the combined assets of the affiliated IDIs would far exceed the $850 million total asset threshold below which a banking organization qualifies as a small entity. END FOOTNOTE
4. Estimating Compliance Requirements
The proposal would introduce a requirement that covered entities and covered IDIs issue and maintain minimum amounts of LTD that satisfies the eligibility conditions described in section V of this Supplementary Information, as applicable. The proposal would also require covered entities to comply with "clean holding company" limitations on certain corporate practices and transactions that could complicate the orderly resolution of such firms, as described in section VI of this Supplementary Information. Further, the proposal would require banking organizations subject to the capital deduction framework contained in the agencies' capital rule to deduct from regulatory capital external LTD issued by covered entities and externally issuing IDIs to meet the proposal's LTD requirements. Finally, as described in section X of this Supplementary Information, TLAC companies would have to comply with the primarily technical and harmonizing amendments to the Board's TLAC rule. For
With respect to the impact of the proposal on small banking organizations, as discussed above, the Board believes that no such small banking organizations will be subject to the proposal's compliance requirements. Because no small banking organizations will bear additional costs under the proposal, the Board believes that the proposal will not have a significant economic impact on a substantial number of small entities.
5. Duplicative, Overlapping, and Conflicting Rules
The agencies are not aware of any Federal rules that may be duplicative, overlap with, or conflict with the proposed rule.
6. Significant Alternatives Considered
The Board did not consider any significant alternatives to the proposed rule. The Board believes that requiring the availability of LTD funding at covered entities and covered IDIs is the best way to achieve the Board's objectives of safeguarding financial stability by ensuring the orderly resolution of covered entities and covered IDIs should such an entity fail.
The Regulatory Flexibility Act (RFA) generally requires an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. /117/ However, an initial regulatory flexibility analysis is not required if the agency certifies that the proposed rule will not, if promulgated, 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 $850 million. /118/ Generally, the
FOOTNOTE 117 5 U.S.C. 601 et seq. END FOOTNOTE
FOOTNOTE 118 The SBA defines a small banking organization as having $850 million or less in assets, where an organization's "assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year." See 13 CFR 121.201 (as amended by 87 FR 69118, effective December 19, 2022). In its determination, the "SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates." See 13 CFR 121.103. Following these regulations, the
FOOTNOTE 119 FDIC Call Report data, March 31, 2023. END FOOTNOTE
As described above in subsection A. "Scope of Application" of sections III and IV of this Supplementary Information, the proposed rule would require three categories of IDIs to issue eligible LTD. The proposed rule would apply to Category II, III, and IV BHCs, SLHCs, and
FOOTNOTE 120 Id. END FOOTNOTE
The
Question 67: In particular, would this proposed rule have any significant effects on small entities that the
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), /121/ in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on IDIs, each Federal banking agency must consider, consistent with the 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, with certain exceptions, including for good cause. /122/
FOOTNOTE 121 12 U.S.C. 4802(a). END FOOTNOTE
FOOTNOTE 122 12 U.S.C. 4802(b). END FOOTNOTE
The agencies request comment on any administrative burdens that the proposed rule would place on depository institutions, including small depository institutions, and their customers, and the benefits of the proposed rule that the agencies should consider in determining the effective date and administrative compliance requirements for a final rule.
D. Solicitation of Comments on the Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act /123/ (Pub. L. 106-102, 113 Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the proposed rule in a simple and straightforward manner and invite comment on the use of plain language and whether any part of the proposed rule could be more clearly stated. For example:
FOOTNOTE 123 Public Law 106-102, section 722, 113 Stat. 1338, 1471 (1999), 12 U.S.C. 4809. END FOOTNOTE
* Have the agencies presented the material in an organized manner that meets your needs? If not, how could this material be better organized?
* Are the requirements in the notice of proposed rulemaking clearly stated? If not, how could the proposed rule be more clearly stated?
* Does the proposed rule contain language 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 proposed rule easier to understand? If so, what changes to the format would make the proposed rule easier to understand?
* What else could the agencies do to make the proposed rule easier to understand?
E. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation).
The OCC has determined this proposed rule is likely to result in the expenditure by the private sector of $100 million or more in any one year (adjusted annually for inflation). The OCC has prepared an impact analysis and identified and considered alternative approaches. When the proposed rule is published in the Federal Register, the full text of the OCC's analysis will be available at: http://www.regulations.gov, Docket ID OCC-2023-0011.
F. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 (12 U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website under section 206(d) of the E-Government Act of 2002 (44 U.S.C. 3501 note).
In summary, the bank regulatory agencies request comment on a proposal to improve the resolvability and resilience of large banking organizations. The proposal would require certain banking organizations to maintain outstanding a minimum amount of long-term debt that could absorb losses in resolution. The proposal would also impose requirements on the corporate practices of certain holding companies to improve their resolvability, and apply a stringent capital treatment to large banking organizations' holdings of long-term debt issued by other banking organizations. Lastly, the proposal would amend existing total loss absorbing capacity requirements for global systemically important banks.
The proposal and the required summary can be found at https://www.regulations.gov, https://occ.gov/topics/laws-and-regulations/occ-regulations/proposed-issuances/index-proposed-issuances.html,https://www.federalreserve.gov/supervisionreg/reglisting.htm, and https://www.fdic.gov/resources/regulations/federal-register-publications/.
Text of Common Rule
(All Agencies)
PART [__]--LONG-TERM DEBT REQUIREMENTS
Sec.
__.1Applicability, reservations of authority, and timing.
__.2Definitions.
__.3Long-term debt requirement.
Authority:[AGENCY AUTHORITY].
(a) Applicability. (1) [BANKS] that are consolidated subsidiaries of companies subject to a long-term debt requirement. A [BANK] is subject to the requirements of this part if the [BANK]:
(i) Has $100 billion or more of total consolidated assets, as reported on the [BANK's] most recent Call Report; and
(ii) Is a consolidated subsidiary of:
(A) A depository institution holding company that is subject to a long-term debt requirement set forth in
(B) A
(2) [BANKS] that are not consolidated subsidiaries of companies subject to a long-term debt requirement.
(i) A [BANK] is subject to the requirements of this part if the [BANK]:
(A) Is not a consolidated subsidiary of a depository institution holding company or
(B) Has total consolidated assets, calculated based on the average of the [BANK's] total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $100 billion or more. If the [BANK] has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable.
(ii) After meeting the criteria in paragraphs (a)(2)(i)(A) and (B) of this section, a [BANK] continues to be subject to the requirements of this part pursuant to paragraph (a)(2) of this section until the [BANK] has less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters.
(3) [BANKS] affiliated with insured depository institutions subject to the rule. A [BANK] is subject to the requirements of this part if the [BANK] is an affiliate of an insured depository institution described in paragraphs (a)(1) or (2) of this section, or [OTHER AGENCIES' SCOPING PARAGRAPHS].
(b) Timing. A [BANK] must comply with the requirements of this part beginning three years after the date on which the [BANK] becomes subject to this part, [OTHER AGENCIES' LONG-TERM DEBT REQUIREMENT], except that a [BANK] must have an outstanding eligible long-term debt amount that is no less than:
(1) 25 percent of the amount required under
(2) 50 percent of the amount required under
(c) Reservation of authority. The [AGENCY] may require a [BANK] to maintain an eligible long-term debt amount greater than otherwise required under this part if the [AGENCY] determines that the [BANK's] long-term debt requirement under this part is not commensurate with the risk the activities of the [BANK] pose to public and private stakeholders in the event of material distress and failure of the [BANK]. In making a determination under this paragraph (c), the [AGENCY] will apply notice and response procedures in the same manner as the notice and response procedures in [AGENCY NOTICE PROVISION].
For purposes of this part, the following definitions apply:
Affiliate means, with respect to a company, any company that controls, is controlled by, or is under common control with, the company.
Average total consolidated assets means the denominator of the leverage ratio as described in [AGENCY LEVERAGE RATIO].
Bank holding company means a bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841).
Call Report means Consolidated Reports of Condition and Income.
Control. A person or company controls a company if it:
(1) Owns, controls, or holds with the power to vote 25 percent or more of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
Deposit has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Depository institution holding company means a bank holding company or savings and loan holding company.
Eligible debt security means an eligible internal debt security except that, with respect to an externally issuing [BANK], eligible debt security means an eligible external debt security and an eligible internal debt security.
Eligible external debt security means:
(1) New issuances. A debt instrument that:
(i) Is paid in, and issued by the [BANK] to, and remains held by, a person that is not an affiliate of the [BANK], unless the affiliate controls but does not consolidate the [BANK];
(ii) Is not secured, not guaranteed by the [BANK] or an affiliate of the [BANK], and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the [BANK]; or
(B) A failure of the [BANK] to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the [BANK's] credit quality, but may have an interest rate that is adjusted periodically independent of the [BANK's] credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note;
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the [BANK]; and
(ix) Is not issued in denominations of less than $400,000 and must not be exchanged for smaller denominations by the [BANK]; and
(x) Is contractually subordinated to claims of depositors and general unsecured creditors in a receivership, for purposes of 12 U.S.C. 1821(d)(11)(A)(iv), or any similar proceeding.
(2) Legacy external long-term debt. A debt instrument issued prior to [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], that:
(i) Is paid in, and issued by the [BANK] to, and remains held by, a person that is not an affiliate of the [BANK], unless the affiliate controls but does not consolidate the [BANK];
(ii) Is not secured, not guaranteed by the [BANK] or an affiliate of the [BANK], and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the [BANK's] credit quality, but may have an interest rate that is adjusted periodically independent of the [BANK's] credit quality, in relation to general market interest rates or similar adjustments;
(vi) Is not a structured note;
(vii) Does not provide that the instrument may be converted into or exchanged for equity of the [BANK]; and
(viii) Would represent a claim in a receivership or similar proceeding that is subordinated to a deposit.
Eligible internal debt security means:
(1) New issuances. A debt instrument that:
(i) Is paid in, and issued by the [BANK];
(ii) Is not secured, not guaranteed by the [BANK] or an affiliate of the [BANK], and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the [BANK]; or
(B) A failure of the [BANK] to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the [BANK's] credit quality, but may have an interest rate that is adjusted periodically independent of the [BANK's] credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note;
(viii) Is issued to and remains held by a company:
(A) Of which [BANK] is a consolidated subsidiary; and
(B) In the case of a [BANK] that is a consolidated subsidiary of a
(ix) Does not provide that the instrument may be converted into or exchanged for equity of the [BANK]; and
(x) Is contractually subordinated to claims of depositors and general unsecured creditors in a receivership, for purposes of 12 U.S.C. 1821(d)(11)(A)(iv), or any similar proceeding.
(2) Legacy internal long-term debt. A debt instrument issued prior to [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER] that:
(i) Is paid in, and issued by the [BANK] to, and remains held by, a person that is not an affiliate of the [BANK], unless the affiliate controls but does not consolidate the [BANK];
(ii) Is not secured, not guaranteed by the [BANK] or an affiliate of the [BANK], and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the [BANK's] credit quality, but may have an interest rate that is adjusted periodically independent of the [BANK's] credit quality, in relation to general market interest rates or similar adjustments;
(vi) Is not a structured note;
(vii) Does not provide that the instrument may be converted into or exchanged for equity of the [BANK]; and
(viii) Would represent a claim in a receivership or similar proceeding that is subordinated to a deposit.
Externally issuing [BANK] means a [BANK] subject to this part that is not a consolidated subsidiary of a depository institution holding company or
GAAP means generally accepted accounting principles as used in
Global systemically important BHC means a bank holding company identified as a global systemically important BHC pursuant to
Insured depository institution means an insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.
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).
State means any state, commonwealth, territory, or possession of
Structured note--
(1) Means a debt instrument that:
(i) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(ii) Has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(iii) Does not specify a minimum principal amount that becomes due and payable upon acceleration or early termination; or
(iv) Is not classified as debt under GAAP.
(2) Notwithstanding paragraph (1) of this definition, an instrument is not a structured note solely because it is one or both of the following:
(i) A non-dollar-denominated instrument, or
(ii) An instrument whose interest payments are based on an interest rate index.
Subsidiary means, with respect to a company, a company controlled by that company.
Supplementary leverage ratio has the same meaning as in [AGENCY SUPPLEMENTARY LEVERAGE RATIO].
Total leverage exposure has the same meaning as in [AGENCY TOTAL LEVERAGE EXPOSURE].
Total risk-weighted assets means--
(1) For a [BANK] that has completed the parallel run process and received notification from the [AGENCY] pursuant to [AGENCY AA NOTIFICATION PROVISION], the greater of:
(i) Standardized total risk-weighted assets as defined in [AGENCY CAPITAL RULE DEFINITIONS]; and
(ii) Advanced approaches total risk-weighted assets as defined in [AGENCY CAPITAL RULE DEFINITIONS]; and
(2) For any other [BANK], standardized total risk-weighted assets as defined in [AGENCY CAPITAL RULE DEFINITIONS].
(a) Long-term debt requirement. A [BANK] subject to this part must have an outstanding eligible long-term debt amount that is no less than the amount equal to the greater of:
(1) 6 percent of the [BANK's] total risk-weighted assets;
(2) If the [BANK] is required to maintain a minimum supplementary leverage ratio, 2.5 percent of the [BANK's] total leverage exposure; and
(3) 3.5 percent of the [BANK's] average total consolidated assets.
(b) Outstanding eligible long-term debt amount. (1) A [BANK's] outstanding eligible long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the [BANK] in greater than or equal to two years;
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the [BANK] in greater than or equal to one year and less than two years; and
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the [BANK] in less than one year.
(2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the [BANK], or a failure of the [BANK] to pay principal or interest on the instrument when due), the date for the outstanding eligible debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred.
(3) After applying notice and response procedures in the same manner as the notice and response procedures in [AGENCY NOTICE PROVISION], the [AGENCY] may order a [BANK] to exclude from its outstanding eligible long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, banking, Federal Reserve System, Investments, National banks, Reporting and recordkeeping requirements, Savings association.
12 CFR Part 54
Administrative practice and procedure, Capital, National banks, Reporting and recordkeeping requirements, Risk, Savings associations.
12 CFR Part 216
Administrative practice and procedure, Banks, banking, Capital, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, banking, Federal Reserve System, Reporting and recordkeeping requirements, Securities.
12 CFR Part 238
Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities.
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.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Confidential business information, Investments, Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 374
Administrative practice and procedure, Banks, banking, Capital, Confidential business information, Investments, Reporting and recordkeeping requirements, Savings associations, State banking.
Adoption of the Common Rule Text The proposed adoption of the common rules by the agencies, as modified by agency-specific text, is set forth below:
DEPARTMENT OF THE
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble and under the authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the Comptroller of the Currency proposes to amend chapter I of title 12, Code of Federal Regulations, as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, 5412(b)(2)(B), and Pub. L. 116-136, 134 Stat. 281.
2. In
*****
Covered debt instrument means an unsecured debt instrument that is:
(1) Both:
(i) Issued by a depository institution holding company that is subject to a long-term debt requirement set forth in [Sec.]
(ii) An eligible debt security, as defined in [Sec.]
(2) Both:
(i) Issued by a
(ii) An eligible external debt security, as defined in
(3) Issued by a global systemically important banking organization, as defined in
(i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and
(4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to
*****
3. Amend
*****
(c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments /23/ --(1) Investment in the national bank's or Federal savings association's own capital or covered debt instruments. A national bank or Federal savings association must deduct an investment in its own capital instruments, and an advanced approaches national bank or Federal savings association also must deduct an investment in its own covered debt instruments, as follows:
FOOTNOTE 23 The national bank or Federal savings association must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under
(i) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under
(ii) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own additional tier 1 capital instruments from its additional tier 1 capital elements;
(iii) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own tier 2 capital instruments from its tier 2 capital elements; and
(iv) An advanced approaches national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own covered debt instruments from its tier 2 capital elements, as applicable. If the advanced approaches national bank or Federal savings association does not have a sufficient amount of tier 2 capital to effect this deduction, the national bank or Federal savings association must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital.
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(h) * * *
(3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met:
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(iii) For an investment in a national banks' or Federal savings association's own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section:
(A) The national bank or Federal savings association may only net a short position against a long position in an investment in the national bank's or Federal savings association's own capital instrument or own covered debt instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk;
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PART 54--LONG-TERM DEBT REQUIREMENTS
4. Add part 54 as set forth at the end of the common preamble.
5. Amend part 54 by:
a. Removing "[AGENCY]" and adding "Office of the Comptroller of the Currency" in its place wherever it appears.
b. Removing "[AGENCY AUTHORITY]" and adding "12 U.S.C. 1(a), 93a, 161, 1462, 1462a, 1463, 1818, 1828(n), 1828 note, 1831n note, 1831p-1, 1835, 3907, 3909, 5371, and 5412(b)(2)(B)."
c. Removing "[AGENCY TOTAL LEVERAGE EXPOSURE]" and adding "12 CFR 3.10(c)(2)" in its place wherever it appears.
d. Removing "[BANK]" and adding "national bank or Federal savings association" wherever it appears.
e. Removing "[BANK's]" and adding "national bank's or Federal savings association's" in its place wherever it appears.
f. Removing "[BANKS]" and adding "national banks and Federal savings associations" in its place wherever it appears.
g. Removing "[AGENCY NOTICE PROVISION]" and adding "
h. Removing "[AGENCY LEVERAGE RATIO]" and adding "12 CFR 3.10(b)(4)" in its place wherever it appears.
i. Removing "[AGENCY SUPPLEMENTARY LEVERAGE RATIO]" and adding "12 CFR 3.10(c)(1)" in its place wherever it appears.
j. Removing "[OTHER AGENCIES' LONG-TERM DEBT REQUIREMENT]" and adding "part 216 of this title, or part 374 of this title" in its place wherever it appears.
k. Removing "[OTHER AGENCIES' SCOPING PARAGRAPHS]" and adding "
l. Removing "[AGENCY AA NOTIFICATION PROVISION]" and adding "
m. Removing "[AGENCY CAPITAL RULE DEFINITIONS]" and adding "
n. Amend
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Federal savings association means an insured Federal savings association or an insured Federal savings bank chartered under section 5 of the Home Owners' Loan Act of 1933.
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FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance For the reasons set forth in the common preamble, the Board proposes to amend chapter II of title 12 of the Code of Federal Regulations as follows:
PART 216--LONG-TERM DEBT REQUIREMENTS (REGULATION P)
6. In part 216:
a. Add the text of the common rule as set forth at the end of the common preamble.
b. Revise the part heading to read as set forth above.
c. Remove "[AGENCY]" and add "Board" in its place wherever it appears;
d. Remove "[AGENCY AUTHORITY]" and add "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, and 5371 note.";
e. Remove "[AGENCY TOTAL LEVERAGE EXPOSURE]" and add "
f. Remove "[BANK]" and add "state member bank" in its place wherever it appears;
g. Remove "[BANK's]" and add "state member bank's" in its place wherever it appears;
h. Remove "[BANKS]" and add "state member banks" in its place wherever it appears.
i. Remove "[AGENCY NOTICE PROVISION]" and add "
j. Remove "[AGENCY LEVERAGE RATIO]" and add "
k. Remove "[AGENCY SUPPLEMENTARY LEVERAGE RATIO]" and add "
l. Remove "of this title" and add "of this chapter" in its place wherever it appears.
m. Remove "[OTHER AGENCIES' LONG-TERM DEBT REQUIREMENT]" and add "part 54 of this title, or part 374 of this title" in its place wherever it appears; and
n. Remove "[OTHER AGENCIES' SCOPING PARAGRAPHS]" and add "
o. Remove "[AGENCY AA NOTIFICATION PROVISION]" and add "
p. Remove "[AGENCY CAPITAL RULE DEFINITIONS]" and add "
7. In
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Board means the Board of Governors of the Federal Reserve System.
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Insured state bank means a state bank the deposits of which are insured in accordance with the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.).
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State bank means any bank incorporated by special law of any State, or organized under the general laws of any State, or of
State member bank means an insured state bank that is a member of the Federal Reserve System.
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PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
8. 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, 5371 note, and sec. 4012, Pub. L. 116-136, 134 Stat. 281.
9. In
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Covered debt instrument means an unsecured debt instrument that is:
(1) Both:
(i) Issued by a depository institution holding company that is subject to a long-term debt requirement set forth in
(ii) An eligible debt security, as defined in
(2) Both:
(i) Issued by a
(ii) An eligible external debt security, as defined in
(3) Issued by a global systemically important banking organization, as defined in
(i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii), if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company, and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and
(4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to
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PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
10. The authority citation for part 238 continues 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. 78l.
11. Add subpart T to read as follows:
Subpart T--External Long-term Debt Requirement and Restrictions on Corporate Practices for
Sec.
238.180Applicability and reservation of authority.
238.181Definitions.
238.182External long-term debt requirement.
238.183Restrictions on corporate practices.
238.184Requirement to purchase subsidiary long-term debt.
(a) General applicability. This subpart applies to any Category II savings and loan holding company, Category III savings and loan holding company, or Category IV savings and loan holding company.
(b) Initial applicability. A covered company must comply with the requirements of this subpart beginning three years after the date on which the company becomes subject to this part or part 252, subpart G of this chapter.
(c) Timing. Notwithstanding paragraph (b) of this section, a covered company must have an outstanding eligible long-term debt amount that is no less than:
(1) 25 percent of the amount required under
(2) 50 percent of the amount required under
(d) Reservation of authority. The Board may require a covered company to maintain an outstanding eligible external long-term debt amount that is greater than or less than what is otherwise required under this subpart if the Board determines that the requirements under this subpart are not commensurate with the risk the activities of the covered company pose to public and private stakeholders in the event of material distress and failure of the covered company. In making a determination under this paragraph (d), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in
For purposes of this subpart:
Additional tier 1 capital has the same meaning as in
Average total consolidated assets means the denominator of the leverage ratio as described in
Common equity tier 1 capital has the same meaning as in
Covered company means a Category II savings and loan holding company, Category III savings and loan holding company, or Category IV savings and loan holding company.
Default right--
(1) Means any:
(i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate the agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Eligible debt security means, with respect to a covered company:
(1) New issuances. A debt instrument that:
(i) Is paid in, and issued by the covered company to, and remains held by, a person that is not an affiliate of the covered company;
(ii) Is not secured, not guaranteed by the covered company or a subsidiary of the covered company, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the covered company; or
(B) A failure of the covered company to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered company's credit quality, but may have an interest rate that is adjusted periodically independent of the covered company's credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note;
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the covered company; and
(ix) Is not issued in denominations of less than $400,000 and must not be exchanged for smaller denominations by the covered company; and
(2) Legacy long-term debt. A debt instrument issued prior to [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], that:
(i) Is paid in, and issued by the covered company or an insured depository institution that is a consolidated subsidiary of the covered company to, and remains held by, a person that is not an affiliate of the covered company;
(ii) Is not secured, not guaranteed by the covered company or a subsidiary of the covered company, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of
(v) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered company's credit quality, but may have an interest rate that is adjusted periodically independent of the covered company's credit quality, in relation to general market interest rates or similar adjustments;
(vi) Is not a structured note; and
(vii) Does not provide that the instrument may be converted into or exchanged for equity of the covered company's.
Insured depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Outstanding eligible external long-term debt amount is defined in
Qualified financial contract has the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Structured note--
(1) Means a debt instrument that:
(i) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(ii) Has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(iii) Does not specify a minimum principal amount that becomes due upon acceleration or early termination; or
(iv) Is not classified as debt under GAAP.
(2) Notwithstanding paragraph (1) of this definition, an instrument is not a structured note solely because it is one or both of the following:
(i) An instrument that is not denominated in
(ii) An instrument where interest payments are based on an interest rate index.
Supplementary leverage ratio has the same meaning as in
Total leverage exposure has the same meaning as in
Total risk-weighted assets means--
(1) For a covered company that has completed the parallel run process and received notification from the Board pursuant to
(i) Standardized total risk-weighted assets as defined in
(ii) Advanced approaches total risk-weighted assets as defined in
(2) For any other covered company, standardized total risk-weighted assets as defined in
(a) External long-term debt requirement for covered companies. Except as provided under paragraph (c) of this section, a covered company must maintain an outstanding eligible external long-term debt amount that is no less than the amount equal to the greater of:
(1) Six percent of the covered company's total risk-weighted assets;
(2) If the covered company is required to maintain a minimum supplementary leverage ratio under part 217 of this chapter, 2.5 percent of the covered company's total leverage exposure; and
(3) 3.5 percent of the covered company's average total consolidated assets.
(b) Outstanding eligible external long-term debt amount. (1) A covered company's outstanding eligible external long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered company in greater than or equal to two years;
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered company in greater than or equal to one year and less than two years; and
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered company in less than one year.
(2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the covered company, or a failure of the covered company to pay principal or interest on the instrument when due), the date for the outstanding eligible debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred.
(3) After notice and response proceedings consistent with part 263, subpart E of this chapter the Board may order a covered company to exclude from its outstanding eligible long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
(c) Redemption and repurchase. A covered company may not redeem or repurchase any outstanding eligible debt security without the prior approval of the Board if, immediately after the redemption or repurchase, the covered company would not meet its external long-term debt requirement under paragraph (a) of this section.
(a) Prohibited corporate practices. A covered company must not directly:
(1) Issue any debt instrument with an original maturity of less than one year, including short term deposits and demand deposits, to any person, unless the person is a subsidiary of the covered company;
(2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to a subsidiary of the covered company against the amount, or a portion of the amount, owed by the covered company under the instrument;
(3) Enter into a qualified financial contract with a person that is not a subsidiary of the covered company, except for a qualified financial contract that is:
(i) A credit enhancement;
(ii) An agreement with one or more underwriters, dealers, brokers, or other purchasers for the purpose of issuing or distributing the securities of the covered company, whether by means of an underwriting syndicate or through an individual dealer or broker;
(iii) An agreement with an unaffiliated broker-dealer in connection with a stock repurchase plan of the covered company, where the covered company enters into a forward contract with the broker-dealer that is fully prepaid and where the broker-dealer agrees to purchase the issuer's stock in the market over the term of the agreement in order to deliver the shares to the covered company;
(iv) An agreement with an employee or director of the covered company granting the employee or director the right to purchase a specific number of shares of the covered company at a fixed price within a certain period of time, or, if such right is to be cash-settled, to receive a cash payment reflecting the difference between the agreed-upon price and the market price at the time the right is exercised; and
(v) Any other agreement if the Board determines that exempting the agreement from the prohibition in this paragraph (a)(3) would not pose a material risk to the orderly resolution of the covered company or the stability of the
(4) Enter into an agreement in which the covered company guarantees a liability of a subsidiary of the covered company if such liability permits the exercise of a default right that is related, directly or indirectly, to the covered company becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another
(5) Enter into, or otherwise begin to benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an unconsolidated basis, of unrelated liabilities of a covered company owed to persons that are not affiliates of the covered company may not exceed 5 percent of the sum of the covered company's:
(i) Common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(ii) Additional tier 1 capital (excluding any tier 1 minority interest); and
(iii) Outstanding eligible long-term debt amount as calculated pursuant to
(2) For purposes of this paragraph (b), an unrelated liability is any noncontingent liability of the covered company owed to a person that is not an affiliate of the covered company other than:
(i) The instruments included in the covered company's common equity tier 1 capital (excluding any common equity tier 1 minority interest), the covered company's additional tier 1 capital (excluding any common equity tier 1 minority interest), and the covered company's outstanding eligible external LTD amount as calculated under
(ii) Any dividend or other liability arising from the instruments set forth in paragraph (b)(2)(i) of this section;
(iii) An eligible debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 101 et seq.).
(c) Exemption from limit. A covered company is not subject to paragraph (b) of this section if all of the eligible debt securities issued by the covered company would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the covered company.
SEC 238.184Requirement to purchase subsidiary long-term debt.
Whenever necessary for an insured depository institution that is a consolidated subsidiary of a covered company to satisfy the minimum long-term debt requirement set forth in SEC 216.3(a) of this chapter, or SEC 54.3(a) or SEC 374.3(a) of this title, if applicable, the covered company or any subsidiary of the covered company of which the insured depository institution is a consolidated subsidiary must purchase eligible internal debt securities, as defined in SEC 216.2 of this chapter, or SEC 54.2 or SEC 374.2 of this title, if applicable, from the insured depository institution in the amount necessary to satisfy such requirement.
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
12. The authority citation for part 252 continues 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 A--General Provisions
13. In SEC 252.2, add definitions for "Additional tier 1 capital", "Common equity tier1 capital", "Common equity tier 1 capital ratio", "Common equity tier 1 minority interest", "Discretionary bonus payment", "Distribution", "GSIB surcharge", "Insured depository institution", "Supplementary leverage ratio", "Tier 1 capital", "Tier 1 minority interest", "Tier 2 capital", "Total leverage exposure", "Total risk-weighted assets", and "U.S. Federal banking agency" to read as follows:
SEC 252.2Definitions.
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Additional tier 1 capital has the same meaning as in SEC 217.20(c) of this chapter.
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Common equity tier 1 capital has the same meaning as in SEC 217.20(b) of this chapter.
Common equity tier 1 capital ratio has the same meaning as in [Sec.] SEC 217.10(b)(1) and (d)(1) of this chapter, as applicable.
Common equity tier 1 minority interest has the same meaning as in SEC 217.2 of this chapter.
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Discretionary bonus payment has the same meaning as in SEC 217.2 of this chapter.
Distribution has the same meaning as in SEC 217.2 of this chapter.
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GSIB surcharge has the same meaning as in SEC 217.2 of this chapter.
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Insured depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
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Supplementary leverage ratio has the same meaning as in 217.10(c)(1) of this chapter.
Tier 1 capital has the same meaning as in SEC 217.2 of this chapter.
Tier 1 minority interest has the same meaning as in SEC 217.2 of this chapter.
Tier 2 capital has the same meaning as in SEC 217.20(d) of this chapter.
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Total leverage exposure has the same meaning as in SEC 217.10(c)(2) of this chapter.
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Total risk-weighted assets means--
(1) For a bank holding company, or a U.S. intermediate holding company, that has completed the parallel run process and received notification from the Board pursuant to SEC 217.121(d) of this chapter, the greater of--
(i) Standardized total risk-weighted assets as defined in SEC 217.2 of this chapter; and
(ii) Advanced approaches total risk-weighted assets as defined in SEC 217.2 of this chapter; and
(2) For any other bank holding company or U.S. intermediate holding company, standardized total risk-weighted assets as defined in SEC 217.2 of this chapter.
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U.S. Federal banking agency means the Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
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14. Revise subpart G to read as follows:
Subpart G--External Long-Term Debt Requirement, External Total Loss-Absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for U.S. Banking Organizations With Total Consolidated Assets of $100 Billion or More
Sec.
252.60Applicability and reservation of authority.
252.61Definitions.
252.62External long-term debt requirement.
252.63External total loss-absorbing capacity requirement and buffer for global systemically important BHCs.
252.64Restrictions on corporate practices.
252.65Requirement to purchase subsidiary long-term debt.
252.66Disclosure requirements.
SEC 252.60Applicability and reservation of authority.
(a) General applicability. This subpart applies to any global systemically important BHC, Category II bank holding company, Category III bank holding company, or Category IV bank holding company, in each case that is not a covered IHC as defined in SEC 252.161.
(b) Initial applicability. A covered BHC must comply with the requirements of this subpart beginning on:
(1) In the case of a global systemically important BHC, three years after the date on which the company becomes a global systemically important BHC.
(2) In the case of a covered BHC that is not a global systemically important BHC, the later of:
(i) [THREE YEARS AFTER THE DATE OF THE FINAL RULE PUBLISHED IN THE FEDERAL REGISTER; or
(ii) Three years after the date on which the company becomes subject to this part or to part 238, subpart T of this chapter.
(c) Timing. Notwithstanding paragraph (b) of this section, a covered BHC that is not a global systemically important BHC must have an outstanding eligible long-term debt amount that is no less than:
(1) 25 percent of the amount required under SEC 252.62 by one year after the date on which the covered BHC first becomes subject to this subpart or part 238, subpart T of this chapter; and
(2) 50 percent of the amount required under SEC 252.62 by two years after the date on which the covered BHC first becomes subject to this subpart or part 238, subpart T of this chapter.
(d) Transition to global systemically important BHC. During the three-year period set forth in paragraph (b)(1) of this section, a global systemically important BHC must continue to comply with the requirements of this subpart that applied to the covered BHC the day before the date on which the covered BHC became a global systemically important BHC.
(e) Reservation of authority. The Board may require a covered BHC to maintain an outstanding eligible external long-term debt amount or outstanding external total loss-absorbing capacity amount, if applicable, that is greater than or less than what is otherwise required under this subpart if the Board determines that the requirements under this subpart are not commensurate with the risk the activities of the covered BHC pose to public and private stakeholders in the event of material distress and failure of the covered company. In making a determination under this paragraph (e), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in SEC 263.202 of this chapter.
SEC 252.61Definitions.
For purposes of this subpart:
Covered BHC means a global systemically important BHC, Category II bank holding company, Category III bank holding company, or Category IV bank holding company, in each case that is not a covered IHC as defined in SEC 252.161.
Default right:
(1) Means any:
(i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement, or document, and rights afforded by statute, civil code, regulation, and common law), to liquidate, terminate, cancel, rescind, or accelerate the agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Eligible debt security means, with respect to a covered BHC:
(1) New issuances. A debt instrument that:
(i) Is paid in, and issued by the covered BHC to, and remains held by, a person that is not an affiliate of the covered BHC;
(ii) Is not secured, not guaranteed by the covered BHC or a subsidiary of the covered BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the covered BHC; or
(B) A failure of the covered BHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered BHC's credit quality, but may have an interest rate that is adjusted periodically independent of the covered BHC's credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note;
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the covered BHC; and
(ix) In the case of a debt instrument issued on or after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], is not issued in denominations of less than $400,000 and must not be exchanged for smaller denominations by the covered BHC; and
(2) Legacy long-term debt issued by a global systemically important BHC. A debt instrument issued prior to December 31, 2016 that:
(i) Is paid in, and issued by the global systemically important BHC;
(ii) Is not secured, not guaranteed by the global systemically important BHC or a subsidiary of the global systemically important BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the global systemically important BHC's credit quality, but may have an interest rate that is adjusted periodically independent of the global systemically important BHC's credit quality, in relation to general market interest rates or similar adjustments;
(v) Is not a structured note; and
(vi) Does not provide that the instrument may be converted into or exchanged for equity of the global systemically important BHC.
(3) Legacy long-term debt issued by a covered BHC that is not a global systemically important BHC, or by its consolidated subsidiary insured depository institution. With respect to a covered BHC that is not a global systemically important BHC, a debt instrument issued prior to [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], that:
(i) Is paid in, and issued by the covered BHC or an insured depository institution that is a consolidated subsidiary of the covered BHC to, and remains held by, a person that is not an affiliate of the covered BHC;
(ii) Is not secured, not guaranteed by the covered BHC or a subsidiary of the covered BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered BHC's or insured depository institution's credit quality, but may have an interest rate that is adjusted periodically independent of the covered BHC's or insured depository institution's credit quality, in relation to general market interest rates or similar adjustments;
(vi) Is not a structured note; and
(vii) Does not provide that the instrument may be converted into or exchanged for equity of the covered BHC or an insured depository institution that is a consolidated subsidiary of the covered BHC.
External TLAC risk-weighted buffer means, with respect to a global systemically important BHC, the sum of 2.5 percent, any applicable countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and the global systemically important BHC's method 1 capital surcharge.
Method 1 capital surcharge means, with respect to a global systemically important BHC, the most recent method 1 capital surcharge (expressed as a percentage) the global systemically important BHC was required to calculate pursuant to subpart H of Regulation Q (12 CFR 217.400 through 217.406).
Outstanding eligible external long-term debt amount is defined in SEC 252.62(c).
Person has the same meaning as in SEC 225.2(l) of this chapter.
Qualified financial contract has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Structured note--
(1) Means a debt instrument that:
(i) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(ii) Has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(iii) Does not specify a minimum principal amount that becomes due upon acceleration or early termination; or
(iv) Is not classified as debt under GAAP.
(2) Notwithstanding paragraph (1) of this definition, an instrument is not a structured note solely because it is one or both of the following:
(i) An instrument that is not denominated in U.S. dollars; or
(ii) An instrument where interest payments are based on an interest rate index.
SEC 252.62External long-term debt requirement.
(a) External long-term debt requirement for global systemically important BHCs. Except as provided under paragraph (d) of this section, a global systemically important BHC must maintain an outstanding eligible external long-term debt amount that is no less than the amount equal to the greater of:
(1) The global systemically important BHC's total risk-weighted assets multiplied by the sum of 6 percent plus the global systemically important BHC's GSIB surcharge (expressed as a percentage); and
(2) 4.5 percent of the global systemically important BHC's total leverage exposure.
(b) External long-term debt requirement for covered BHCs that are not global systemically important BHCs. Except as provided under paragraph (d) of this section, a covered BHC that is not a global systemically important BHC must maintain an outstanding eligible external long-term debt amount that is no less than the amount equal to the greater of:
(1) 6 percent of the total risk-weighted assets of the covered BHC that is not a global systemically important BHC;
(2) 2.5 percent of the leverage exposure of the covered BHC that is not a global systemically important BHC, if the covered BHC is required to maintain a minimum supplementary leverage ratio under part 217 of this chapter; and
(3) 3.5 percent of the average total consolidated assets of the covered BHC that is not a global systemically important BHC.
(c) Outstanding eligible external long-term debt amount.
(1) A covered BHC's outstanding eligible external long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered BHC in greater than or equal to two years;
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered BHC in greater than or equal to one year and less than two years; and
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the covered BHC in less than one year.
(2) For purposes of paragraph (c)(1) of this section, the date on which principal is due to be paid on an outstanding eligible debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the covered BHC, or a failure of the covered BHC to pay principal or interest on the instrument when due), the date for the outstanding eligible debt security under this paragraph (c)(2)(ii) will be calculated as if the event has occurred.
(3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a covered BHC to exclude from its outstanding eligible long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
(d) Redemption and repurchase. A covered BHC may not redeem or repurchase any outstanding eligible debt security without the prior approval of the Board if, immediately after the redemption or repurchase, the covered BHC would not meet its external long-term debt requirement under paragraphs (a) or (b) of this section, or, if applicable, its external total loss-absorbing capacity requirement under SEC 252.63(a).
SEC 252.63External total loss-absorbing capacity requirement and buffer for global systemically important BHCs.
(a) External total loss-absorbing capacity requirement. A global systemically important BHC must maintain an outstanding external total loss-absorbing capacity amount that is no less than the amount equal to the greater of:
(1) 18 percent of the global systemically important BHC's total risk-weighted assets; and
(2) 7.5 percent of the global systemically important BHC's total leverage exposure.
(b) Outstanding external total loss-absorbing capacity amount. A global systemically important BHC's outstanding external total loss-absorbing capacity amount is the sum of:
(1) The global systemically important BHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(2) The global systemically important BHC's additional tier 1 capital (excluding any tier 1 minority interest); and
(3) The global systemically important BHC's outstanding eligible external long-term debt amount as calculated pursuant SEC 252.62(c).
(c) External TLAC buffer--
(1) Composition of the external TLAC risk-weighted buffer. The external TLAC risk-weighted buffer is composed solely of common equity tier 1 capital.
(2) Definitions. For purposes of this paragraph (c), the following definitions apply:
(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.
(ii) Maximum external TLAC risk-weighted payout ratio. The maximum external TLAC risk-weighted payout ratio is the percentage of eligible retained income that a global systemically important BHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum external TLAC risk-weighted payout ratio is based on the global systemically important BHC's external TLAC risk-weighted buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to paragraph (c)(2)(iii) of this section.
(iii) Maximum external TLAC risk-weighted payout amount. A global systemically important BHC's maximum external TLAC risk-weighted payout amount for the current calendar quarter is equal to the global systemically important BHC's eligible retained income, multiplied by the applicable maximum external TLAC risk-weighted payout ratio, as set forth in Table 1 to this paragraph (c)(2)(iii).
Table 1 to Paragraph (c)(2)(iii) -Calculation of Maximum External TLAC Risk-Weighted Payout Amount
External TLAC risk-weighted buffer level Maximum external TLAC risk-weighted payout ratio
(as a percentage of eligible retained income)
Greater than the external TLAC risk-weighted buffer No payout ratio limitation applies.
Less than or equal to the external TLAC risk-weighted buffer, 60 percent.
and greater than 75 percent of the external TLAC risk-weighted buffer
Less than or equal to 75 percent of the external TLAC risk-weighted buffer, 40 percent.
and greater than 50 percent of the external TLAC risk-weighted buffer
Less than or equal to 50 percent of the external TLAC risk-weighted buffer, 20 percent.
and greater 25 percent of the external TLAC risk-weighted buffer
Less than or equal to 25 percent of the external TLAC risk-weighted buffer 0 percent.
(iv) Maximum external TLAC leverage payout ratio. The maximum external TLAC leverage payout ratio is the percentage of eligible retained income that a global systemically important BHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum external TLAC leverage payout ratio is based on the global systemically important BHC's external TLAC leverage buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 2 to paragraph (c)(2)(v) of this section.
(v) Maximum external TLAC leverage payout amount. A global systemically important BHC's maximum external TLAC leverage payout amount for the current calendar quarter is equal to the global systemically important BHC's eligible retained income, multiplied by the applicable maximum TLAC leverage payout ratio, as set forth in Table 2 to this paragraph (c)(2)(v).
Table 2 to Paragraph (c)(2)(v) -Calculation of Maximum External TLAC Leverage Payout Amount
External TLAC leverage buffer level Maximum external TLAC
leverage payout ratio
(as a percentage of eligible retained income)
Greater than 2.0 percent No payout ratio limitation applies.
Less than or equal to 2.0 percent, and greater than 1.5 percent 60 percent.
Less than or equal to 1.5 percent, and greater than 1.0 percent 40 percent.
Less than or equal to 1.0 percent, and greater than 0.5 percent 20 percent.
Less than or equal to 0.5 percent 0 percent.
(3) Calculation of the external TLAC risk-weighted buffer level. (i) A global systemically important BHC's external TLAC risk-weighted buffer level is equal to the global systemically important BHC's common equity tier 1 capital ratio (expressed as a percentage) minus the greater of zero and the following amount:
(A) 18 percent; minus
(B) The ratio (expressed as a percentage) of the global systemically important BHC's additional tier 1 capital (excluding any tier 1 minority interest) to its total risk-weighted assets; and minus
(C) The ratio (expressed as a percentage) of the global systemically important BHC's outstanding eligible external long-term debt amount as calculated in SEC 252.62(c) to total risk-weighted assets.
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC's external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its risk-weighted assets is less than or equal to 18 percent, the global systemically important BHC's external TLAC risk-weighted buffer level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A global systemically important BHC shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed the maximum external TLAC risk-weighted payout amount or the maximum external TLAC leverage payout amount.
(ii) A global systemically important BHC with an external TLAC risk-weighted buffer level that is greater than the external TLAC risk-weighted buffer and an external TLAC leverage buffer level that is greater than 2.0 percent, in accordance with paragraph (c)(5) of this section, is not subject to a maximum external TLAC risk-weighted payout amount or a maximum external TLAC leverage payout amount.
(iii) Except as provided in paragraph (c)(4)(iv) of this section, a global systemically important BHC may not make distributions or discretionary bonus payments during the current calendar quarter if the global systemically important BHC's:
(A) Eligible retained income is negative; and
(B) External TLAC risk-weighted buffer level was less than the external TLAC risk-weighted buffer as of the end of the previous calendar quarter or external TLAC leverage buffer level was less than 2.0 percent as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (c)(4)(i) through (iii) of this section, the Board may permit a global systemically important BHC to make a distribution or discretionary bonus payment upon a request of the global systemically important BHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the global systemically important BHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(v)(A) A global systemically important BHC is subject to the lowest of the maximum payout amounts as determined under SEC 217.11(a)(2) of this chapter, the maximum external TLAC risk-weighted payout amount as determined under this paragraph (c), and the maximum external TLAC leverage payout amount as determined under this paragraph (c).
(B) Additional limitations on distributions may apply to a global systemically important BHC under [Sec.] SEC 225.4, 225.8, and 263.202 of this chapter.
(5) External TLAC leverage buffer--
(i) General. A global systemically important BHC is subject to the lower of the maximum external TLAC risk-weighted payout amount as determined under paragraph (c)(2)(iii) of this section and the maximum external TLAC leverage payout amount as determined under paragraph (c)(2)(v) of this section.
(ii) Composition of the external TLAC leverage buffer. The external TLAC leverage buffer is composed solely of tier 1 capital.
(iii) Calculation of the external TLAC leverage buffer level. (A) A global systemically important BHC's external TLAC leverage buffer level is equal to the global systemically important BHC's supplementary leverage ratio (expressed as a percentage) minus the greater of zero and the following amount:
(1) 7.5 percent; minus
(2) The ratio (expressed as a percentage) of the global systemically important BHC's outstanding eligible external long-term debt amount as calculated in SEC 252.62(c) to total leverage exposure.
(B) Notwithstanding paragraph (c)(5)(iii) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC's external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its total leverage exposure is less than or equal to 7.5 percent, the global systemically important BHC's external TLAC leverage buffer level is zero.
SEC 252.64Restrictions on corporate practices.
(a) Prohibited corporate practices. A covered BHC must not directly:
(1) Issue any debt instrument with an original maturity of less than one year, including short term deposits and demand deposits, to any person, unless the person is a subsidiary of the covered BHC;
(2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to a subsidiary of the covered BHC against the amount, or a portion of the amount, owed by the covered BHC under the instrument;
(3) Enter into a qualified financial contract with a person that is not a subsidiary of the covered BHC, except for a qualified financial contract that is:
(i) A credit enhancement;
(ii) An agreement with one or more underwriters, dealers, brokers, or other purchasers for the purpose of issuing or distributing the securities of the covered BHC, whether by means of an underwriting syndicate or through an individual dealer or broker;
(iii) An agreement with an unaffiliated broker-dealer in connection with a stock repurchase plan of the covered BHC, where the covered BHC enters into a forward contract with the broker-dealer that is fully prepaid and where the broker-dealer agrees to purchase the covered BHC's stock in the market over the term of the agreement in order to deliver the shares to the covered BHC;
(iv) An agreement with an employee or director of the covered BHC granting the employee or director the right to purchase a specific number of shares of the covered BHC at a fixed price within a certain period of time, or, if such right is to be cash-settled, to receive a cash payment reflecting the difference between the agreed-upon price and the market price at the time the right is exercised; and
(v) Any other agreement for which the Board determines that exempting the agreement from the prohibition in this paragraph (a)(3) would not pose a material risk to the orderly resolution of the covered BHC or the stability of the U.S. banking or financial system.
(4) Enter into an agreement in which the covered BHC guarantees a liability of a subsidiary of the covered BHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the covered BHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. Federal banking agency; or
(5) Enter into, or otherwise begin to benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an unconsolidated basis, of unrelated liabilities of a covered BHC owed to persons that are not affiliates of the covered BHC must not exceed:
(i) In the case of a global systemically important BHC, 5 percent of the covered BHC's external total loss-absorbing capacity amount, as calculated under SEC 252.63(b); and
(ii) In the case of a covered BHC that is not a global systemically important BHC, 5 percent of the sum of the covered BHC's:
(A) Common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(B) Additional tier 1 capital (excluding any tier 1 minority interest); and
(C) Outstanding eligible external long-term debt amount as calculated pursuant to SEC 252.62(c).
(2) For purposes of paragraph (b)(1) of this section, an unrelated liability is any non-contingent liability of the covered BHC owed to a person that is not an affiliate of the covered BHC other than:
(i) The instruments included in the covered BHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest), the covered BHC's additional tier 1 capital (excluding any common equity tier 1 minority interest), and the covered BHC's outstanding eligible external LTD amount as calculated under SEC 252.62(a) or SEC 252.62(b), as applicable;
(ii) Any dividend or other liability arising from the instruments described in paragraph (b)(2)(i) of this section;
(iii) An eligible debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 101 et seq.).
(c) A covered BHC is not subject to paragraph (b) of this section if all of the eligible debt securities issued by the covered BHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the covered BHC.
SEC 252.65Requirement to purchase subsidiary long-term debt.
Whenever necessary for an insured depository institution that is a consolidated subsidiary of a covered BHC to satisfy the minimum long-term debt requirement set forth in SEC 216.3(a) of this chapter, or SEC 54.3(a) or SEC 374.3(a) of this title, if applicable, the covered BHC or any subsidiary of the covered BHC of which the insured depository institution is a consolidated subsidiary must purchase eligible internal debt securities, as defined in SEC 216.2 of this chapter, or SEC 54.2 or SEC 374.2 of this title, if applicable, from the insured depository institution in the amount necessary to satisfy such requirement.
SEC 252.66Disclosure requirements for global systemically important BHCs.
(a) Financial consequences disclosure. (1) A global systemically important BHC must publicly disclose a description of the financial consequences to unsecured debtholders of the global systemically important BHC entering into a resolution proceeding in which the global systemically important BHC is the only entity that would be subject to the resolution proceeding.
(2) A global systemically important BHC must provide the disclosure required by paragraph (a)(1) of this section:
(i) In the offering documents for all of its eligible debt securities issued after the global systemically important BHC becomes subject to this subpart; and
(ii) Either:
(A) On the global systemically important BHC's website; or
(B) In more than one public financial report or other public regulatory reports, provided that the global systemically important BHC publicly provides a summary table specifically indicating the location(s) of this disclosure.
(b) Creditor ranking disclosures for global systemically important BHCs--(1) In general. Subject to the requirements of this paragraph (b), a global systemically important BHC must publicly disclose the information set forth in Table 1 to paragraph (b)(5)(iii) of this section in a format that is substantially similar to that of Table 1 to paragraph (b)(5)(iii) of this section.
(2) Timing and method of disclosure. (i) A global systemically important BHC must provide the public disclosure required by paragraph (b)(1) of this section on a timely basis at least every six months in a direct and prominent manner either:
(A) On the global systemically important BHC's website; or
(B) In more than one public financial report or other public regulatory reports, provided that the global systemically important BHC publicly provides a summary table specifically indicating the location(s) of this disclosure.
(ii) A global systemically important BHC must make a public disclosure required by paragraph (b)(1) of this section publicly available for at least three years after the public disclosure is initially made.
(3) Requirements for the board of directors and senior officers. A global systemically important BHC must comply with the requirements in SEC 217.62(b) of this chapter with respect to the disclosure required by paragraph (b)(1) of this section.
(4) Columns. (i) The table required by paragraph (b)(1) of this section must include the same first and last columns as Table 1 to paragraph (b)(5)(iii) of this section.
(ii) The table required by paragraph (b)(1) of this section must include a separate column for each category of liability or equity instrument issued by the global systemically important BHC that:
(A) Is reported on the global systemically important BHC's balance sheet as a liability of, or equity instrument issued by, the global systemically important BHC; and
(B) Would represent a claim with a priority equal to or less than the claim represented by the global systemically important BHC's most senior class of eligible debt security under the Bankruptcy Code (11 U.S.C. 101 et seq.).
(C) Notwithstanding paragraphs (b)(4)(ii)(A) and (B), liabilities or equity instruments issued by the global systemically important BHC that would have the same ranking under the Bankruptcy Code (11 U.S.C. 101 et seq.) may be aggregated and reported in the same column.
(iii) The columns for each ranking position must be reported in the table in order from most junior claim level to most senior claim level.
(5) Rows. For purposes of the disclosure required under this paragraph (b):
(i) The amount required by row 2 equals the total balance sheet amount associated with the global systemically important BHC's liabilities and outstanding equity instruments in the applicable column.
(ii) For purposes of row 3, "excluded liabilities" refers to liabilities reported in row 2 that are:
(A) Derivative liabilities;
(B) Structured notes;
(C) Liabilities not arising through a contract, including tax liabilities;
(D) Liabilities which that have a greater priority than senior unsecured creditors under the Bankruptcy Code (11 U.S.C. 101 et seq.); or
(E) Any liabilities that, under the laws of the United States or any State applicable to the global systemically important BHC, may not be written down or converted into equity by a resolution authority or bankruptcy court without giving rise to material risk of successful legal challenge or valid compensation claims.
(iii) For purposes of rows 3 through 5, "TLAC" refers to outstanding external total loss-absorbing capacity amount as defined in SEC 252.63(b).
Table 1 to Paragraph (b)(5)(iii) -Creditor Ranking for Resolution Entity
Creditor ranking 1 2 3 Total
(most junior) (most senior)
1. Description of the category of
liability or equity instrument with the
column's ranking to include, if
possible, examples of such liability or
equity instrument
2. Total liabilities and equity
3. Amount of row 2 less excluded
liabilities
4. Total liabilities and equities less
non-TLAC amounts (row 2 minus row 3)
5. Subset of the amount in row 4 that
are potentially eligible as TLAC
6. Subset of the amount in row 5 with
residual maturity greater than or equal
to one year and less than two years
7. Subset of the amount in row 5 with
residual maturity greater than or equal
to two years and less than five years
8. Subset of the amount in row 5 with
residual maturity greater than or equal
to five years and less than ten years
9. Subset of the amount in row 5 with
residual maturity greater than or equal
to 10 years that do not have perpetual
maturities
10. Subset of the amount in row 5 with
perpetual maturities
15. Revise subpart P to read as follows:
Subpart P--Long-Term Debt Requirement, External Total Loss-Absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for U.S. Intermediate Holding Companies
Sec.
252.160Applicability and reservation of authority.
252.161Definitions.
252.162Covered IHC long-term debt requirement.
252.163Internal debt conversion order.
252.164Identification as a resolution covered IHC or a non-resolution covered IHC of a foreign banking organization.
252.165Total loss-absorbing capacity requirement and buffer for IHCs of global systemically important foreign banking organizations.
252.166Restrictions on corporate practices of a covered IHC.
252.167Requirement to purchase subsidiary long-term debt.
252.168Disclosure requirements for resolution covered IHCs controlled by global systemically important foreign banking organizations.
SEC 252.160Applicability and reservation of authority.
(a) Applicability. This subpart applies to a U.S. intermediate holding company that either:
(1) Is controlled by a global systemically important foreign banking organization; or
(2) Is not controlled by a global systemically important foreign banking organization and is a Category II U.S. intermediate holding company, Category III U.S. intermediate holding company, or a Category IV U.S. intermediate holding company.
(b) Timing of requirements. (1) Except with respect to SEC 252.164, a covered IHC must comply with the requirements of this subpart before:
(i) In the case of a covered IHC controlled by a global systemically important foreign banking organization, three years after the date on which the company becomes a covered IHC controlled by a global systemically important foreign banking organization; and
(ii) In the case of a covered IHC that is not controlled by a global systemically important foreign banking organization, the later of:
(A) Three years after the [DATE OF FINALIZATION OF PROPOSED RULE]; or
(B) Three years after the date on which the company becomes a covered IHC.
(2) A covered IHC must comply with the requirements of SEC 252.164 before:
(i) In the case of a covered IHC controlled by a global systemically important foreign banking organization, two years after the date on which the company becomes a covered IHC; and
(ii) In the case of a covered IHC that is not controlled by a global systemically important foreign banking organization, six months after the date on which the company becomes a covered IHC.
(c) Notwithstanding paragraph (b) of this section, a covered IHC that is not controlled by a global systemically important foreign banking organization must have an outstanding eligible long-term debt amount that is no less than:
(1) 25 percent of the amount required under SEC 252.162 by one year after the date on which the covered IHC first becomes subject to this subpart; and
(2) 50 percent of the amount required under SEC 252.162 by two years after the date on which the covered IHC first becomes subject to this subpart.
(d) Transition to being controlled by a global systemically important foreign banking organization. Notwithstanding paragraphs (a) and (b) of this section, if a covered IHC was subject to this subpart the day before the date on which the covered IHC becomes controlled by a global systemically important foreign banking organization:
(1) During the three-year period set forth in paragraph (b)(1)(i) of this section, a covered IHC must continue to comply with the requirements of this subpart that applied to the covered IHC the day before the date on which the covered IHC became controlled by a foreign global systemically important banking organization; and
(2) The last certification provided by a covered IHC pursuant to SEC 252.164 will be treated as the initial certification required by the covered IHC pursuant to SEC 252.164 the day it becomes controlled by a global systemically important foreign banking organization.
(e) Reservation of authority. The Board may require a covered IHC to maintain an outstanding eligible long-term debt amount or outstanding total loss-absorbing capacity amount, if applicable, that is greater than or less than what is otherwise required under this subpart if the Board determines that the requirements under this subpart are not commensurate with the risk the activities of the covered IHC pose to public and private stakeholders in the event of material distress and failure of the covered company. In making a determination under this paragraph (e), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in SEC 263.202 of this chapter.
SEC 252.161Definitions.
For purposes of this subpart:
Average total consolidated assets means the denominator of the leverage ratio as described in SEC 217.10(b)(4) of this chapter.
Covered IHC means a U.S. intermediate holding company described in SEC 252.160(a).
Covered IHC TLAC buffer means, with respect to a covered IHC that is controlled by a global systemically important foreign banking organization, the sum of 2.5 percent and any applicable countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a percentage).
Covered IHC total loss-absorbing capacity amount is defined in SEC 252.165(c).
Default right (1) Means any:
(i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Eligible covered IHC debt security with respect to a non-resolution covered IHC means an eligible internal debt security issued by the non-resolution covered IHC, and with respect to a resolution covered IHC means an eligible internal debt security or an eligible external debt security issued by the resolution covered IHC.
Eligible external debt security means:
(1) New issuances. A debt instrument that:
(i) Is paid in, and issued by the covered IHC to, and remains held by, a person that does not directly or indirectly control the covered IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the covered IHC or a subsidiary of the covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the covered IHC; or
(B) A failure of the covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered IHC's credit quality, but may have an interest rate that is adjusted periodically independent of the covered IHC's credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note;
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the covered IHC; and
(ix) In the case of a debt instrument issued on or after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], is not issued in denominations of less than $400,000 and must not be exchanged for smaller denominations by the covered IHC; and
(2) Legacy long-term debt issued by a covered IHC that is controlled by a global systemically important foreign banking organization. A debt instrument issued prior to December 31, 2016, that:
(i) Is paid in, and issued by the covered IHC to, and remains held by, a person that does not directly or indirectly control the covered IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the covered IHC or a subsidiary of the covered IHC, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered IHC's credit quality, but may have an interest rate that is adjusted periodically independent of the covered IHC's credit quality, in relation to general market interest rates or similar adjustments;
(v) Is not a structured note; and
(vi) Does not provide that the instrument may be converted into or exchanged for equity of the covered IHC; and
(3) Legacy long-term debt issued by a covered IHC that is not controlled by a global systemically important foreign banking organization or a consolidated subsidiary insured depository institution of the covered IHC. A debt instrument issued prior to [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], that:
(i) Is paid in, and issued by the covered IHC or an insured depository institution that is a consolidated subsidiary of the covered IHC to, and remains held by, a person that is not an affiliate of the covered IHC;
(ii) Is not secured, not guaranteed by the covered IHC or a subsidiary of the covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the covered IHC's or insured depository institution's credit quality, but may have an interest rate that is adjusted periodically independent of the covered IHC's or insured depository institution's credit quality, in relation to general market interest rates or similar adjustments;
(vi) Is not a structured note; and
(vii) Does not provide that the instrument may be converted into or exchanged for equity of the covered IHC or an insured depository institution that is a consolidated subsidiary of the covered IHC.
Eligible internal debt security means a debt instrument that:
(i) Is paid in, and issued by the covered IHC;
(ii) Is not secured, not guaranteed by the covered IHC or a subsidiary of the covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to one year from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the covered IHC; or
(B) A failure of the covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Is not a structured note;
(vii) Is issued to and remains held by a company that is incorporated or organized outside of the United States, and directly or indirectly controls the covered IHC or is a wholly owned subsidiary; and
(viii) Has a contractual provision that is approved by the Board that provides for the immediate conversion or exchange of the instrument into common equity tier 1 of the covered IHC upon issuance by the Board of an internal debt conversion order.
Internal debt conversion order means an order by the Board to immediately convert to, or exchange for, common equity tier 1 capital an amount of eligible internal debt securities of the covered IHC specified by the Board in its discretion, as described in SEC 252.163.
Non-resolution covered IHC means a covered IHC identified as or determined to be a non-resolution covered IHC pursuant to SEC 252.164.
Outstanding eligible covered IHC long-term debt amount is defined in SEC 252.162(b).
Person has the same meaning as in SEC 225.2(l) of this chapter.
Qualified financial contract has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Resolution covered IHC means a covered IHC identified as or determined to be a resolution covered IHC pursuant to SEC 252.164.
Structured note--
(1) Means a debt instrument that:
(i) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(ii) Has an embedded derivative or other similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(iii) Does not specify a minimum principal amount that becomes due and payable upon acceleration or early termination; or
(iv) Is not classified as debt under GAAP.
(2) Notwithstanding paragraph (1) of this definition, an instrument is not a structured note solely because it is one or both of the following:
(i) A non-dollar-denominated instrument, or
(ii) An instrument whose interest payments are based on an interest rate index.
Wholly owned subsidiary means an entity, all of the outstanding ownership interests of which are owned directly or indirectly by a global systemically important foreign banking organization that directly or indirectly controls a covered IHC, except that up to 0.5 percent of the entity's outstanding ownership interests may be held by a third party if the ownership interest is acquired or retained by the third party for the purpose of establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.
SEC 252.162Covered IHC long-term debt requirement.
(a) Covered IHC long-term debt requirement. Except as provided under paragraph (c) of this section, a covered IHC must have an outstanding eligible covered IHC long-term debt amount that is no less than the amount equal to the greatest of:
(1) Six percent of the covered IHC's total risk-weighted assets;
(2) If the covered IHC is required to maintain a minimum supplementary leverage ratio, 2.5 percent of the covered IHC's total leverage exposure; and
(3) 3.5 percent of the covered IHC's average total consolidated assets.
(b) Outstanding eligible covered IHC long-term debt amount.
(1) A covered IHC's outstanding eligible covered IHC long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible covered IHC debt securities issued by the covered IHC in greater than or equal to two years; and
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible covered IHC debt securities issued by the covered IHC in greater than or equal to one year and less than two years;
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible covered IHC debt securities issued by the covered IHC in less than one year.
(2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible covered IHC debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the covered IHC, or a failure of the covered IHC to pay principal or interest on the instrument when due), the date for the outstanding eligible covered IHC debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred.
(3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a covered IHC to exclude from its outstanding eligible covered IHC long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
(c) Redemption and repurchase. Without the prior approval of the Board, a covered IHC may not redeem or repurchase any outstanding eligible covered IHC debt security if, immediately after the redemption or repurchase, the covered IHC would not have an outstanding eligible covered IHC long-term debt amount that is sufficient to meet its covered IHC long-term debt requirement under paragraph (a) of this section or, if applicable, its total loss-absorbing capacity requirement under SEC 252.165(a) or (b).
SEC 252.163Internal debt conversion order.
(a) The Board may issue an internal debt conversion order if:
(1) The Board has determined that the covered IHC is in default or danger of default; and
(2) Any of the following circumstances apply:
(i) A foreign banking organization that directly or indirectly controls the covered IHC or any subsidiary of the top-tier foreign banking organization has been placed into resolution proceedings (including the application of statutory resolution powers) in its home country;
(ii) The home country supervisor of the top-tier foreign banking organization has consented or not promptly objected after notification by the Board to the conversion or exchange of the eligible internal debt securities of the covered IHC; or
(iii) The Board has made a written recommendation to the Secretary of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the covered IHC.
(b) For purposes of paragraph (a) of this section, the Board will consider:
(1) A covered IHC in default or danger of default if
(i) A case has been, or likely will promptly be, commenced with respect to the covered IHC under the Bankruptcy Code (11 U.S.C. 101 et seq.);
(ii) The covered IHC has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the covered IHC to avoid such depletion;
(iii) The assets of the covered IHC are, or are likely to be, less than its obligations to creditors and others; or
(iv) The covered IHC is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business; and
(2) An objection by the home country supervisor to the conversion or exchange of the eligible internal debt securities to be prompt if the Board receives the objection no later than 24 hours after the Board requests such consent or non-objection from the home country supervisor.
SEC 252.164Identification as a resolution covered IHC or a non-resolution covered IHC.
(a) Initial certification. On the first business day a covered IHC is required to comply with this section pursuant to SEC 252.160, the top-tier foreign banking organization of a covered IHC must certify to the Board whether the planned resolution strategy of the top-tier foreign banking organization involves the covered IHC or the subsidiaries of the covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(b) Certification update. The top-tier foreign banking organization of a covered IHC must provide an updated certification to the Board upon a change in the resolution strategy described in the certification provided pursuant to paragraph (a) of this section.
(c) Identification of a resolution covered IHC. A covered IHC is a resolution covered IHC if the most recent certification provided pursuant to paragraphs (a) and (b) of this section indicates that the top-tier foreign banking organization's planned resolution strategy involves the covered IHC or the subsidiaries of the covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(d) Identification of a non-resolution covered IHC. A covered IHC is a non-resolution covered IHC if the most recent certification provided pursuant to paragraphs (a) and (b) of this section indicates that the top-tier foreign banking organization's planned resolution strategy involves neither the covered IHC nor the subsidiaries of the covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(e) Board determination. The Board may determine in its discretion that a non-resolution covered IHC identified pursuant to paragraph (d) of this section is a resolution covered IHC, or that a resolution covered IHC identified pursuant to paragraph (c) of this section is a non-resolution covered IHC.
(f) Transition. (1) A covered IHC identified as a resolution covered IHC pursuant to paragraph (b) of this section or determined by the Board to be a resolution covered IHC pursuant to paragraph (e) of this section must comply with the requirements in this subpart applicable to a resolution covered IHC within one year after such identification or determination, unless such time period is extended by the Board in its discretion.
(2) A covered IHC identified as a non-resolution covered IHC pursuant to paragraph (b) of this section or determined by the Board to be a non-resolution covered IHC pursuant to paragraph (e) of this section must comply with the requirements in this subpart applicable to a non-resolution covered IHC one year after such identification or determination, unless such time period is extended by the Board in its discretion.
SEC 252.165Total loss-absorbing capacity requirement and buffer for covered IHCs of global systemically important foreign banking organizations.
(a) Total loss-absorbing capacity requirement for a resolution covered IHC of a global systemically important foreign banking organization. A resolution covered IHC of a global systemically important foreign banking organization must have an outstanding covered IHC total loss-absorbing capacity amount that is no less than the amount equal to the greatest of:
(1) 18 percent of the resolution covered IHC's total risk-weighted assets;
(2) If the Board requires the resolution covered IHC to maintain a minimum supplementary leverage ratio, 6.75 percent of the resolution covered IHC's total leverage exposure; and
(3) Nine (9) percent of the resolution covered IHC's average total consolidated assets.
(b) Total loss-absorbing capacity requirement for a non-resolution covered IHC of a global systemically important foreign banking organization. A non-resolution covered IHC of a global systemically important foreign banking organization must have an outstanding covered IHC total loss-absorbing capacity amount that is no less than the amount equal to the greatest of:
(1) 16 percent of the non-resolution covered IHC's total risk-weighted assets;
(2) If the Board requires the non-resolution covered IHC to maintain a minimum supplementary leverage ratio, 6 percent of the non-resolution covered IHC's total leverage exposure; and
(3) Eight (8) percent of the non-resolution covered IHC's average total consolidated assets.
(c) Covered IHC Total loss-absorbing capacity amount. (1) A non-resolution covered IHC's covered IHC total loss-absorbing capacity amount is equal to the sum of:
(i) The covered IHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the covered IHC;
(ii) The covered IHC's additional tier 1 capital (excluding any tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the covered IHC; and
(iii) The covered IHC's outstanding eligible covered IHC long-term debt amount as calculated in SEC 252.162(b).
(2) A resolution covered IHC's covered IHC total loss-absorbing capacity amount is equal to the sum of:
(i) The covered IHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(ii) The covered IHC's additional tier 1 capital (excluding any tier 1 minority interest); and
(iii) The covered IHC's outstanding eligible covered IHC long-term debt amount as calculated in to SEC 252.162(b).
(d) Covered IHC of a global systemically important foreign banking organization TLAC buffer--
(1) Composition of the covered IHC TLAC buffer. The covered IHC TLAC buffer is composed solely of common equity tier 1 capital.
(2) Definitions. For purposes of paragraph (d) of this section, the following definitions apply:
(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.
(ii) Maximum covered IHC TLAC payout ratio. The maximum covered IHC TLAC payout ratio is the percentage of eligible retained income that a covered IHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum covered IHC TLAC payout ratio is based on the covered IHC's covered IHC TLAC buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to paragraph (d)(2)(iii) of this section.
(iii) Maximum covered IHC TLAC payout amount. A covered IHC's maximum covered IHC TLAC payout amount for the current calendar quarter is equal to the covered IHC's eligible retained income, multiplied by the applicable maximum covered IHC TLAC payout ratio, as set forth in Table 1 to this paragraph (d)(2)(iii).
Table 1 to Paragraph (d)(2)(iii) -Calculation of Maximum Covered IHC TLAC Payout Amount
Covered IHC TLAC buffer level Maximum covered IHC TLAC payout ratio (as a
percentage of eligible
retained income)
Greater than the covered IHC TLAC buffer No payout ratio limitation applies.
Less than or equal to the covered IHC TLAC buffer, and 60 percent.
greater than 75 percent of the covered IHC TLAC buffer
Less than or equal to 75 percent of the covered IHC TLAC buffer, 40 percent.
and greater than 50 percent of the covered IHC TLAC buffer
Less than or equal to 50 percent of the covered IHC TLAC buffer, 20 percent.
and greater 25 percent of the covered IHC TLAC buffer
Less than or equal to 25 percent of the covered IHC TLAC buffer 0 percent.
(3) Calculation of the covered IHC TLAC buffer level. (i) A covered IHC's covered IHC TLAC buffer level is equal to the covered IHC's common equity tier 1 capital ratio (expressed as a percentage) minus the greater of zero and the following amount:
(A) 16 percent for a non-resolution covered IHC, and 18 percent for a resolution covered IHC; minus
(B) The ratio (expressed as a percentage) of the covered IHC's outstanding eligible covered IHC long-term debt amount as calculated in SEC 252.162(b) to total risk-weighted assets; minus
(C) For a covered IHC that is:
(1) A non-resolution covered IHC, the ratio (expressed as a percentage) of the covered IHC's additional tier 1 capital (excluding any tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the covered IHC to the covered IHC's total risk-weighted assets;
(2) A resolution covered IHC, the ratio (expressed as a percentage of the covered IHC's additional tier 1 capital (excluding any tier 1 minority interest) to the covered IHC's total-risk weighted assets; and minus
(ii) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a resolution covered IHC, if the ratio (expressed as a percentage) of the resolution covered IHC's covered IHC total loss-absorbing capacity amount, as calculated under SEC 252.165(a), to the resolution covered IHC's risk-weighted assets is less than or equal to, 18 percent, the covered IHC's covered IHC TLAC buffer level is zero.
(iii) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a non-resolution covered IHC, if the ratio (expressed as a percentage) of the non-resolution covered IHC's covered IHC total loss-absorbing capacity amount, as calculated under SEC 252.165(b), to the covered IHC's risk-weighted assets is less than or equal to 16 percent, the non-resolution covered IHC's covered IHC TLAC buffer level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A covered IHC of a global systemically important foreign banking organization must not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed the maximum covered IHC TLAC payout amount.
(ii) A covered IHC of a global systemically important foreign banking organization with a covered IHC TLAC buffer level that is greater than the covered IHC TLAC buffer is not subject to a maximum covered IHC TLAC payout amount.
(iii) Except as provided in paragraph (d)(4)(iv) of this section, a covered IHC of a global systemically important foreign banking organization must not make distributions or discretionary bonus payments during the current calendar quarter if the covered IHC's:
(A) Eligible retained income is negative; and
(B) Covered IHC TLAC buffer level was less than the covered IHC TLAC buffer as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (d)(4)(i) through (iii) of this section, the Board may permit a covered IHC of a global systemically important foreign banking organization to make a distribution or discretionary bonus payment upon a request of the covered IHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the covered IHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(v) A covered IHC of a global systemically important foreign banking organization is subject to the lowest of the maximum payout amounts as determined under SEC 217.11(a)(2) of this chapter and the maximum covered IHC TLAC payout amount as determined under this paragraph (d).
(vi) Additional limitations on distributions may apply to a covered IHC of a global systemically important foreign banking organization under [Sec.] SEC 225.8 and 263.202 of this chapter.
SEC 252.166Restrictions on corporate practices of a covered IHC.
(a) Prohibited corporate practices. A covered IHC must not directly:
(1) Issue any debt instrument with an original maturity of less than one year, including short term deposits and demand deposits, to any person, unless the person is an affiliate of the covered IHC;
(2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to the covered IHC or a subsidiary of the covered IHC against the amount, or a portion of the amount, owed by the covered IHC under the instrument;
(3) Enter into a qualified financial contract that is not a credit enhancement with a person that is not an affiliate of the covered IHC;
(4) Enter into an agreement in which the covered IHC guarantees a liability of an affiliate of the covered IHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the covered IHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. Federal banking agency; or
(5) Enter into, or otherwise benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an unconsolidated basis, of unrelated liabilities of a covered IHC must not exceed:
(i) In the case of a covered IHC controlled by a global systemically important foreign banking organization, 5 percent of the covered IHC's total loss-absorbing capacity amount, as calculated under SEC 252.165(c); and
(ii) In the case of a covered IHC that is not controlled by a global systemically important foreign banking organization, 5 percent of the covered IHC's:
(A) Common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(B) Additional tier 1 capital (excluding any tier 1 minority interest); and
(C) Outstanding eligible long-term debt amount as calculated pursuant to SEC 252.162(b).
(2) For purposes of paragraph (b)(1) of this section, an unrelated liability includes:
(i) With respect to a non-resolution covered IHC, any non-contingent liability of the non-resolution covered IHC owed to a person that is not an affiliate of the non-resolution covered IHC other than those liabilities specified in paragraph (b)(3) of this section, and
(ii) With respect to a resolution covered IHC, any non-contingent liability of the resolution covered IHC owed to a person that is not a subsidiary of the resolution covered IHC other than those liabilities specified in paragraph (b)(3) of this section.
(3)(i) The instruments included in the covered IHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest), the covered IHC's additional tier 1 capital (excluding any common equity tier 1 minority interest), and the covered IHC's outstanding eligible external LTD amount as calculated under SEC 252.162(a);
(ii) Any dividend or other liability arising from the instruments described in paragraph (b)(3)(i) of this section;
(iii) An eligible covered IHC debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible covered IHC debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 101 et seq.).
(c) Exemption from limit. A covered IHC is not subject to paragraph (b) of this section if all of the eligible covered IHC debt securities issued by the covered IHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the covered IHC.
SEC 252.167Requirement to purchase subsidiary long-term debt.
Whenever necessary for an insured depository institution that is a consolidated subsidiary of a covered IHC to satisfy the minimum long-term debt requirement set forth in SEC 216.3(a) of this chapter, or SEC 54.3(a) or SEC 374.3(a) of this title, if applicable, the covered IHC or any subsidiary of the covered IHC of which the insured depository institution is a consolidated subsidiary must purchase eligible internal debt securities, as defined in SEC 216.2 of this chapter, or SEC 54.2 or SEC 374.2 of this title, if applicable, from the insured depository institution in the amount necessary to satisfy such requirement.
SEC 252.168Disclosure requirements for resolution covered IHCs controlled by global systemically important foreign banking organizations.
(a) A resolution covered IHC that is controlled by a global systemically important foreign banking organization that has any outstanding eligible external debt securities must publicly disclose a description of the financial consequences to unsecured debtholders of the resolution covered IHC entering into a resolution proceeding in which the resolution covered IHC is the only entity in the United States that would be subject to the resolution proceeding.
(b) A resolution covered IHC must provide the disclosure required by paragraph (a) of this section:
(1) In the offering documents for all of its eligible external debt securities issued after the covered IHC becomes controlled by a global systemically important foreign banking organization; and
(2) Either:
(i) On the resolution covered IHC's website; or
(ii) In more than one public financial report or other public regulatory reports, provided that the resolution covered IHC publicly provides a summary table specifically indicating the location(s) of this disclosure.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance For the reasons set forth in the common preamble, the Federal Deposit Insurance Corporation proposes to amend chapter III, subchapter b of title 12, Code of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
16. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note), Pub. L. 115-174; section 4014 SEC 201, Pub. L. 116-136, 134 Stat. 281 (15 U.S.C. 9052).
17. In SEC 324.2, revise the definition of "Covered debt instrument" to read as follows:
SEC 324.2Definitions.
*****
Covered debt instrument means an unsecured debt instrument that is:
(1) Both:
(i) Issued by a depository institution holding company that is subject to a long-term debt requirement set forth in SEC 238.182 or SEC 252.62 of this title, as applicable, or a subsidiary of such depository institution holding company; and
(ii) An eligible debt security, as defined in SEC 238.181 or SEC 252.61 of this title, as applicable, or that is pari passu or subordinated to any eligible debt security issued by the depository institution holding company; or
(2) Both:
(i) Issued by a U.S. intermediate holding company or insured depository institution that is subject to a long-term debt requirement set forth in SEC 374.3 of this chapter or SEC 54.3, SEC 216.3, or SEC 252.162 of this title, as applicable, or a subsidiary of such U.S. intermediate holding company or insured depository institution; and
(ii) An eligible external debt security, as defined in SEC 374.2 of this chapter or SEC 54.2, SEC 216.2, or SEC 252.161 of this title, as applicable, or that is pari passu or subordinated to any eligible external debt security issued by the U.S. intermediate holding company or insured depository institution; or
(3) Issued by a global systemically important banking organization, as defined in SEC 252.2 of this title other than a global systemically important BHC; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a U.S. intermediate holding company subject to a long-term debt requirement set forth in SEC 252.162 of this title; and where,
(i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and
(4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to SEC 324.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer.
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18. In SEC 324.22, revise paragraphs (c)(1) and (h)(3)(iii) introductory paragraph to read as follows:
SEC 324.22Regulatory capital adjustments and deductions.
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(c) * * *
(1) Investment in the FDIC-supervised institution's own capital or covered debt instruments. An FDIC-supervised institution must deduct an investment in its own capital instruments, and an advanced approaches FDIC-supervised institution also must deduct an investment in its own covered debt instruments, as follows:
(i) An FDIC-supervised institution must deduct an investment in the FDIC-supervised institution's own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under SEC 324.20(b)(1);
(ii) An FDIC-supervised institution must deduct an investment in the FDIC-supervised institution's own additional tier 1 capital instruments from its additional tier 1 capital elements;
(iii) An FDIC-supervised institution must deduct an investment in the FDIC-supervised institution's own tier 2 capital instruments from its tier 2 capital elements; and
(iv) An advanced approaches FDIC-supervised institution must deduct an investment in the institution's own covered debt instruments from its tier 2 capital elements, as applicable. If the advanced approaches FDIC-supervised institution does not have a sufficient amount of tier 2 capital to effect this deduction, the institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital.
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(h) * * *
(3) * * *
(iii) For an investment in an FDIC-supervised institution's own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section:
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PART 374--LONG-TERM DEBT REQUIREMENTS
19. Add part 374 as set forth at the end of the common preamble.
20. Amend part 374 by:
a. Removing "[AGENCY]" and adding "FDIC" in its place wherever it appears.
b. Removing "[AGENCY AUTHORITY]" and adding "12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1831o, 1835, 3907, 3909; 5371; 5412; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note)."
c. Removing "[AGENCY TOTAL LEVERAGE EXPOSURE]" and adding "SEC 324.10(c)(2) of this chapter" in its place wherever it appears.
d. Removing "[BANK]" and adding "FDIC-supervised institution" in its place wherever it appears.
e. Removing "A FDIC-supervised institution" and adding "An FDIC-supervised institution" in its place wherever it appears.
f. Removing "a FDIC-supervised institution" and adding "an FDIC-supervised institution" in its place wherever it appears.
g. Removing "[BANK's]" and adding "FDIC-supervised institution's" in its place wherever it appears.
h. Removing "[BANKS]" and adding "FDIC-supervised institutions" in its place wherever it appears.
i. Removing "[AGENCY NOTICE PROVISION]" and adding "SEC 324.5 of this chapter" in its place wherever it appears.
j. Removing "[AGENCY LEVERAGE RATIO]" and adding "SEC 324.10(b)(4) of this chapter" in its place wherever it appears.
k. Removing "[AGENCY SUPPLEMENTARY LEVERAGE RATIO]" and adding "SEC 324.10(c)(1) of this chapter" in its place wherever it appears.
l. Removing "[OTHER AGENCIES' LONG-TERM DEBT REQUIREMENT]" and adding "part 54 of this title, or part 216 of this title" in its place wherever it appears.
m. Removing "[OTHER AGENCIES' SCOPING PARAGRAPHS]" and adding "[Sec.] SEC 54.1(a)(1) through (2) of this title, or [Sec.] SEC 216.1(a)(1) through (2) of this title" in its place wherever it appears.
n. Removing "[AGENCY AA NOTIFICATION PROVISION]" and adding "SEC 324.121(d) of this chapter" in its place wherever it appears.
o. Removing "[AGENCY CAPITAL RULE DEFINITIONS]" and adding "SEC 324.2 of this chapter" in its place wherever it appears.
21. Amend SEC 374.2 by adding definitions for "FDIC-supervised institution", "State nonmember bank", and "State savings association" in alphabetical order to read as follows:
SEC 374.2Definitions.
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FDIC-supervised institution means any state nonmember bank or state savings association.
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State nonmember bank means a State bank that is not a member of the Federal Reserve System as defined in section 3(e)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(e)(2)), the deposits of which are insured by the FDIC.
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State savings association means a State savings association as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3)), the deposits of which are insured by the FDIC. It includes a building and loan, savings and loan, or homestead association, or a cooperative bank (other than a cooperative bank which is a state bank as defined in section 3(a)(2) of the Federal Deposit Insurance Act) organized and operating according to the laws of the State in which it is chartered or organized, or a corporation (other than a bank as defined in section 3(a)(1) of the Federal Deposit Insurance Act) that the Board of Directors of the FDIC determine to be operating substantially in the same manner as a state savings association.
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Michael J. Hsu,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on August 29, 2023.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2023-19265 Filed 9-18-23; 8:45 am]
BILLING CODE 4810-33- 6210-01-6714-01-P
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