Office of Comptroller of Currency, Federal Reserve System, FDIC Rule: Regulatory, Total Loss-Absorbing Capacity Rule
The rule was issued by
DATES: The final rule is effective
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The OCC, Board, and
The final rule revises the definition of eligible retained income to make more gradual any automatic limitations on capital distributions that could apply under the agencies' capital rule.
Separately, in this final rule, the Board also is adopting as final the definition of eligible retained income made under the interim final rule published in the
The final rule adopts these interim final rules with no changes.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Capital Rule
B. TLAC Rule
III. Overview of the Interim Final Rules and Public Comments
A. Capital Interim Final Rule
B. TLAC Interim Final Rule
C. Public Comments
IV. Summary of the Final Rule
V. Impact Assessment
VI. Administrative Law Matters
A. Congressional Review Act
B. Paperwork Reduction Act
C. Regulatory Flexibility Act
D.
E. Use of Plain Language
F. OCC Unfunded Mandates Reform Act of 1995
I. Introduction
In light of recent disruptions in economic conditions caused by the coronavirus disease 2019 (COVID-19) and current strains in
In this final rule, the agencies are adopting as final and without change Start Printed Page 63424the revisions to the definition of eligible retained income made under the capital interim final rule and TLAC interim final rule, as detailed further below.
II. Background
A. Capital Rule
Under the capital rule, a banking organization[3] must maintain minimum risk-based capital and leverage ratios.[4] In addition, a banking organization under the capital rule must maintain a buffer of regulatory capital above its applicable minimum risk-based capital and leverage ratio requirements, as applicable, to avoid restrictions on capital distributions--including in the form of dividends and share buybacks and certain discretionary bonus payments (collectively, capital distributions).[5]
Banking organizations under the capital rule are generally subject to a fixed capital conservation buffer requirement, composed solely of common equity tier 1 capital, of greater than 2.5 percent of risk-weighted assets. On
The agencies established the capital buffer requirements to encourage better capital conservation by banking organizations and to enhance the resilience of the banking system during stress periods.[10] In particular, the agencies intended for the capital buffer requirements to limit gradually the ability of banking organizations to distribute capital if their capital ratios fall below certain levels, thereby strengthening the ability of banking organizations to continue lending and conducting other financial intermediation activities during stress periods.
Under the capital rule, if a banking organization's capital ratios fall within its applicable minimum-plus-buffer requirements, the maximum amount of capital distributions it can make is a function of its eligible retained income.[11] All of the buffer requirements in the capital rule use the same definition of eligible retained income and the same definition of eligible retained income applies to depository institutions and holding companies. Prior to the issuance of the capital interim final rule, the capital rule generally defined eligible retained income as four quarters of net income, net of distributions and associated tax effects not already reflected in net income.[12]
B. TLAC Rule
In
The TLAC rule applies to
A TLAC covered company with a TLAC level that falls below the applicable minimum-plus-buffer requirements faces limitations on Start Printed Page 63425capital distributions, in a manner designed to parallel the restrictions on capital distributions under the Board capital rule. In particular, the maximum amount of capital distributions that a TLAC covered company can make is limited as a percentage of its eligible retained income, as defined in the TLAC rule.
Prior to the issuance of TLAC interim final rule, the TLAC rule used the same definition of eligible retained income for purposes of the TLAC buffer as the definition used under the Board capital rule prior to the adoption of the capital interim final rule.
III. Overview of the Interim Final Rules and Public Comments
The spread of COVID-19 has disrupted economic activity in
A. Capital Interim Final Rule
In
The capital interim final rule's changes to the definition of eligible retained income allow banking organizations to more freely use their capital and leverage buffers and supports banking organizations' lending activity and other financial intermediation activities to avoid compounding negative impacts on the financial markets.
The revised definition of eligible retained income under the capital interim final rule applies to all of a banking organization's buffer requirements, including the fixed greater than 2.5 percent capital conservation buffer and, if applicable, the countercyclical capital buffer, as well as, for global systemically important bank holding companies, the GSIB surcharge, and enhanced supplementary leverage ratio buffer. Once the stress capital buffer requirements for covered holding companies under the SCB final rule apply, the revised definition would also apply to all parts of a covered holding company's buffer requirements. The agencies believe that having one definition of eligible retained income for all banking organizations under the capital rule simplifies the regulatory capital framework and ensures fairness across banking organizations of all sizes.
In addition, the revised definition of eligible retained income under the capital interim final rule assists in the ability of S-corporation banking organizations to provide dividends to shareholders in order to meet their pass-through tax liabilities. S-corporation banking organizations do not pay federal income taxes. Instead, income and losses of an S-corporation are attributed to shareholders, potentially increasing their personal tax liability when the S-corporation has income and potentially reducing their personal tax liability when the S-corporation has losses. In a situation where the S-corporation has income but does not pay dividends, its shareholders are responsible for meeting their increased personal tax liability using their own resources. When an otherwise adequately capitalized S-corporation banking organization is restricted from making dividends because one or more of its capital ratios breach its buffer requirements, a situation can arise in which the banking organization's dividends to its shareholders would be insufficient to pay their share of taxes on the banking organization's income.[18]
The agencies encourage banking organizations to make prudent decisions regarding capital distributions.[19] The capital interim final rule was intended to strengthen the incentives for a banking organization to use its buffers in a prudent manner in adverse conditions and continue to serve as a financial intermediary and source of credit to the economy. The capital interim final rule does not make changes to any other requirement that may limit capital distributions.[20] For instance, under the prompt corrective action requirements, an insured depository institution that becomes less than adequately capitalized would be subject to dividend restrictions.[21]
B. TLAC Interim Final Rule
The COVID-19 stress period has presented analogous concerns under the TLAC rule to those described above around buffer use and continued financial intermediation. That is, in light of developments in connection with COVID-19, TLAC covered companies rule may experience a sudden and unanticipated decline in TLAC and, prior to the issuance of the TLAC interim final rule, the Board was similarly concerned that the mechanics around buffer requirements set forth in the TLAC rule did not reflect the intended gradual manner in which capital distribution restrictions applied. A modest reduction in TLAC could result in sudden and severe limitations on capital distributions, undermining a TLAC covered company's ability to use its TLAC buffer and creating a strong incentive to limit lending and other financial intermediation activities, thereby deterring the company from continued lending to creditworthy businesses and households during a stress period.
In
Start Printed Page 63426
C. Public Comments
The agencies received five public comment letters on the capital interim final rule, and the Board received two public comments on the TLAC interim final rule.
Comments on the Capital Interim Final Rule
Some commenters on the capital interim final rule supported the change to the definition of eligible retained income in the capital rule, indicating that flexibility provided by the change will help banking organizations continue to lend through the COVID-19 crisis. One commenter indicated that the capital interim final rule would assist community banking organizations organized as S-corporations to meet tax obligations and still raise capital as needed. Another commenter was supportive of the capital interim final rule's application of a consistent definition of eligible retained income across banking organizations of all sizes and suggested that the new definition will add consistency to the capital rule while balancing the need for banking organizations to lend to borrowers affected by COVID-19 and still maintain general safety and soundness.
Other commenters opposed the change to the definition of eligible retained income in the capital interim final rule and advocated that the agencies be more prescriptive in compelling banking organizations to take actions to conserve capital or continue lending, such as prohibiting capital distributions while the COVID-19 crisis continues.[23] One commenter was supportive of the capital interim final rule, but asserted that the revised definition of eligible retained income should only be used by a banking organization if the capital distributions enhance the financial institution's ability to contribute to economic recovery of both the stock market and main street businesses. The commenter suggested that capital distributions should have requirements and restrictions associated with them, such as limits on executive bonuses or payouts and limits on share repurchases, and should not be permitted in certain situations.
The agencies note that the capital buffer requirements do restrict capital distributions. As described above, if a banking organization's capital or leverage ratios fall within its applicable minimum-plus-buffer requirements, the maximum amount of capital distributions it can make is limited as a percentage of its eligible retained income, as defined in the capital rule. Accordingly, the capital buffer requirements compel banking organizations to increasingly constrain distributions as their regulatory capital ratios approach their applicable minimums. For instance, a banking organization in or below the bottom quartile of its buffer requirement may not make any capital distributions without prior approval from its primary Federal regulator.
The revised definition of eligible retained income under the final rule facilitates banking organizations' use of their buffers as intended by ensuring that the limits on capital distributions apply gradually. The revised definition reduces the incentive for banking organizations to limit their lending and other financial intermediation activities in order to avoid facing abrupt limitations on capital distributions.
Comments on the TLAC Interim Final Rule
The comment letters addressing the TLAC interim final rule generally opposed the Board's change to the definition of eligible retained income and advocated for additional restrictions on capital distributions. These comments closely aligned with similar comments received in connection with the capital interim final rule.
A commenter to the TLAC interim final rule suggested that TLAC covered companies that utilize
Another commenter to the TLAC interim final rule indicated that, given the uncertainties surrounding COVID-19 and potential economic effects, TLAC covered companies should be taking actions to conserve capital. This commenter asserted that the TLAC interim final rule may pose risks to safety and soundness because capital distributed will not be available to absorb future losses of unknown severity. Further, the commenter expressed doubt that the TLAC interim final rule would achieve the Board's intent of promoting lending to the economy. The commenter concluded that the best way to promote lending would be for the Board to prohibit capital distributions by TLAC covered companies for the duration of the crisis. In addition, the commenter requested that the Board delay implementation of the revised definition of eligible retained income until after the crisis has passed.
The revised definition of eligible retained income under the TLAC interim final rule facilitates TLAC covered companies' use of their buffers as intended by ensuring that the limits on capital distributions apply gradually. The revised definition reduces the incentive for TLAC covered companies to limit their lending and other financial intermediation activities in order to avoid facing abrupt limitations on capital distributions.
Acting Comptroller of the Currency
By order of the
Secretary of the Board
By order of the Board of Directors.
Dated at
Acting Assistant Executive Secretary.
[FR Doc. 2020-19829 Filed 10-7-20;
BILLING CODE 4810-33-P, 6210-01-P; 6714-01-P
The document is published in the
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