Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations
Notice of proposed rulemaking.
CFR Part: "12 CFR Part 3"; "12 CFR Part 217"; "12 CFR Part 324"
RIN Number: "RIN 1557-AE38"; "RIN 7100-AF43"; "RIN 3064-AE79"
Citation: "84 FR 13814"
Document Number: "Docket ID OCC-2018-0019"; "Regulation Q; Docket No. R-1655"
Page Number: "13814"
"Proposed Rules"
Agency: "
SUMMARY: The OCC, Board, and
DATES:
Comments must be received by
ADDRESSES: Comments should be directed to:
OCC: Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title "Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important
* Federal eRulemaking Portal--"regulations.gov": Go to www.regulations.gov. Enter "Docket ID OCC-2018-0019" in the Search Box and click "Search." Click on "Comment Now" to submit public comments. Click on the "Help" tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments.
* Email:[email protected].
* Mail: Chief Counsel's Office,
* Hand Delivery/Courier:
* Fax: (571) 465-4326.
Instructions: You must include "OCC" as the agency name and "Docket ID OCC-2018-0019" in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to this rulemaking action by any of the following methods:
* Viewing Comments Electronically: Go to www.regulations.gov. Enter "Docket ID OCC-2018-0019" in the Search box and click "Search." Click on "Open Docket Folder" on the right side of the screen and then "Comments." Comments can be filtered by clicking on "View All" and then using the filtering tools on the left side of the screen. Click on the "Help" tab on the Regulations.gov home page to get information on using Regulations.gov. Supporting materials may be viewed by clicking on "Open Docket Folder" and then clicking on "Supporting Documents." The docket may be viewed after the close of the comment period in the same manner as during the comment period.
* Viewing Comments Personally: You may personally inspect comments at the OCC,
Board: You may submit comments, identified by Docket No. R-1655, RIN 7100-AF43, by any of the following methods:
* Agency Website:http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
* Email:[email protected]. Include docket number in the subject line of the message.
* Fax: (202) 452-3819 or (202) 452-3102.
* Mail:
* Agency Website:http://www.fdic.gov/regulations/laws/federal/ Follow instructions for submitting comments on the Agency website.
* Mail:
* Hand Delivered/Courier: Comments may be hand-delivered to the guard station at the rear of the 550 17th
* Email:[email protected]. Include the RIN 3064-AE79 on the subject line of the message.
* Public Inspection: All comments received must include the agency name and RIN 3064-AE79 for this rulemaking. All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. Paper copies of public comments may be ordered from the
FOR FURTHER INFORMATION CONTACT:
OCC:
Board:
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction and Summary of the Proposal
A. Background on Capital Requirements
B. Background on TLAC and LTD Requirements
C. 2015 Proposal and General Summary of Comments
D. Overview and Scope of Application of the Proposal
II. Proposed Regulatory Capital Treatment for Advanced Approaches Banking Organizations' Investments in Covered Debt Instruments
A. Amendments to Definitions
B. Investments in
C. Significant and Non-Significant Investments in Covered Debt Instruments
D. Corresponding Deduction Approach
E. Net Long Position
III. Technical Amendment and Additional Requests for Comment
IV. Proposed Changes to Regulatory Reporting
A. Deductions from Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments
B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered IHCs
V. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995 Determination
E.
I. Introduction and Summary of the Proposal
A. Background on Capital Requirements
FOOTNOTE 1 Banking organizations subject to the agencies' capital rule include national banks, state member banks, insured state nonmember banks, savings associations, and top-tier bank holding companies and savings and loan holding companies domiciled in
A banking organization is an advanced approaches banking organization if it has total assets of at least
FOOTNOTE 2 See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12 CFR 324.10(a) (FDIC). In addition to the generally applicable leverage ratio, advanced approaches banking organizations are subject to a supplementary leverage ratio, which measures a banking organization's tier 1 capital relative to its on-balance sheet and certain off-balance sheet exposures. END FOOTNOTE
The agencies' capital rule includes two broad categories of deductions related to investments in the capital instruments of financial institutions. First, it requires a banking organization to deduct any investment in its own regulatory capital instruments and any investment in regulatory capital instruments held reciprocally with another financial institution. /3/ Second, it requires a banking organization to deduct investments in capital instruments issued by unconsolidated financial institutions that would qualify as regulatory capital if issued by the banking organization itself. /4/ For the purpose of the latter deduction, a banking organization may be required to deduct the entire amount of the investment, or it may be required to deduct only the portion of the investment that exceeds a certain threshold. /5/ These deductions are intended to reduce interconnectedness and contagion risk among banks by discouraging banking organizations from investing in the regulatory capital of another financial institution.
FOOTNOTE 3 See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board); and 12 CFR 324.22(c)(1) (FDIC). END FOOTNOTE
FOOTNOTE 4 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). END FOOTNOTE
FOOTNOTE 5 See 12 CFR 3.22(c)(3) through (5) (OCC); 12 CFR 217.22(c)(3) through (5) (Board); and 12 CFR 324.22(c)(3) through (5) (FDIC). END FOOTNOTE
For purposes of the deductions related to investments in the capital instruments of financial institutions, a banking organization must make the deduction from the component of regulatory capital for which the instrument qualifies or would qualify if it were issued by the banking organization that is holding the exposure. /6/ For example, a banking organization that owns less than 10 percent of the common stock of an unaffiliated banking organization (non-significant investment in the capital of unconsolidated financial institution), and is invested in tier 2 instruments issued by the unaffiliated banking organization, must deduct from tier 2 capital the amount, if any, by which the investment exceeds 10 percent of its own common equitytier 1 capital when combined with other non-significant investments in the capital of unconsolidated financial institutions. Any non-significant investments in the capital of unconsolidated financial institutions below the 10 percent threshold must be assigned their appropriate risk-weight. /7/
FOOTNOTE 6 See 12 CFR 3.22(c)(1) and (2) (OCC); 12 CFR 217.22(c)(1) and (2) (Board); and 12 CFR 324.22(c)(1) and (2) (FDIC). END FOOTNOTE
FOOTNOTE 7 See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 12 CFR part 217, subparts D, E, and F, as applicable (FRB); and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC). END FOOTNOTE
B. Background on TLAC and LTD Requirements
In
FOOTNOTE 8 See 80 FR 74926 (
FOOTNOTE 9 See 82 FR 8266 (
The TLAC and LTD requirements in the TLAC Rule build on, and serve as a complement to, the Board's regulatory capital requirements. /10/ Regulatory capital requirements are intended to ensure that a banking organization has sufficient capital to remain a going concern. The objective of the TLAC and LTD requirements is to enhance financial stability by reducing the impact stemming from the failure of certain large and systemically important banking organizations by requiring such organizations to have sufficient loss-absorbing capacity on both a going-concern and a gone-concern basis. The TLAC and LTD requirements in the TLAC Rule apply to a
FOOTNOTE 10 See 12 CFR part 217. END FOOTNOTE
FOOTNOTE 11 In 2015, the Financial Stability Board (FSB), in consultation with the
The requirements in the TLAC Rule use many of the same measures that are set forth in the capital rule. For example, the TLAC Rule includes both risk-based and leverage-based requirements, including buffers on top of the minimum TLAC requirements that function in a manner similar to the capital conservation buffer in the capital rule. /12/ The risk-based measures in the TLAC Rule help to ensure that the amount of TLAC maintained by a covered banking organization is commensurate with its overall risks, while the leverage-based measures in the TLAC Rule act as a backstop to the risk-based measures.
FOOTNOTE 12 Covered banking organizations that do not meet a TLAC buffer face limitations on capital distributions and discretionary bonus payments (in a manner similar to the capital conservation buffer restrictions in the capital rule). END FOOTNOTE
LTD, which count in regulatory capital in limited amounts if they comply with certain eligibility criteria, are capable of absorbing losses in resolution. This is because the debt holders' claim on a company's assets may not receive full payment in a resolution, receivership, insolvency, or similar proceeding, which would increase the size of a company's assets relative to the size of its liabilities and thereby increase the company's equity. This potential loss-absorbing capacity of LTD is part of the rationale for the deduction approach for investments in such debt instruments under this proposal.
The TLAC Rule requires covered BHCs to maintain outstanding minimum levels of "external TLAC" and "external LTD." External TLAC is the sum of the tier 1 capital instruments issued directly by the covered BHC (excluding minority interests) and the external LTD issued by the covered BHC. Under the TLAC Rule, external LTD is generally unsecured debt that is issued directly by a covered BHC, has no features that would interfere with a smooth resolution proceeding, has a remaining maturity of at least one year, and is governed by
FOOTNOTE 13
The TLAC Rule also requires covered IHCs to maintain minimum levels of TLAC and LTD. However, the specific requirements applicable to a covered IHC vary depending on the resolution strategy of the foreign GSIB parent of the covered IHC--either a single point-of-entry (SPOE) /14/ resolution strategy or a multiple point-of-entry (MPOE) resolution strategy. /15/ Under the TLAC Rule, a covered IHC that has a foreign GSIB parent with a SPOE strategy must issue LTD to the foreign GSIB parent or to a wholly owned subsidiary of the foreign GSIB parent, but a covered IHC that is expected to enter into resolution may issue LTD externally to third party investors, as well as internally to its foreign GSIB parent. /16/
FOOTNOTE 14 Under a SPOE resolution strategy, the covered IHC would not be expected to enter resolution. In a SPOE resolution of a GSIB, only a single entity--the top-tier holding company of the GSIB--would enter a resolution proceeding. Thus, the effect of losses that led to a GSIB's failure would pass up from the operating subsidiaries that incurred the losses to the holding company and then would be imposed on the equity holders and unsecured creditors of the holding company through resolution. END FOOTNOTE
FOOTNOTE 15 Under a MPOE resolution strategy, the covered IHC may be expected to go through resolution. In a MPOE strategy, entities within the consolidated banking organization may be resolved separately by their local authorities when the entity fails or is approaching failure. Thus, the losses that caused an entity within a consolidated banking organization to fail are passed directly to the equity holders and unsecured creditors of that entity through a separate resolution process. END FOOTNOTE
FOOTNOTE 16 An IHC that is expected to enter into resolution is deemed to be a "resolution covered IHC" under the TLAC Rule upon certification to the Board of the IHC's resolution strategy. See 12 CFR 252.164. END FOOTNOTE
Given the important role of LTD in absorbing the losses of a covered banking organization in bankruptcy or resolution, the Board proposed limitations on investments by Board-regulated banking organizations in LTD issued by covered BHCs in its 2015 proposal, which are discussed in further detail below. /17/ Such limitations already apply to investments in regulatory capital instruments of banking organizations in order to reduce interconnectedness and pro-cyclicality within the financial system in times of stress. The Board did not finalize these limitations when it issued the TLAC Rule because it needed additional time to work with the OCC and
FOOTNOTE 17 The 2015 proposal was issued solely by the Board. Therefore, the proposed regulatory capital deductions in that proposal would have only applied to Board-regulated banking organizations, which include bank holding companies, intermediate holding companies, savings and loan holdings companies, and state member banks. END FOOTNOTE
Accordingly, the agencies are now jointly proposing a regulatory capital treatment for investments in covered debt instruments, as defined below, that would apply to all advanced approaches banking organizations. In addition, this proposal takes into consideration and incorporates public comments from the 2015 proposal.
C. 2015 Proposal and General Summary of Comments
To reduce the potential contagion risk stemming from the failure of a covered BHC, the 2015 proposal would have amended the Board's capital rule to require a Board-regulated banking organization to deduct from its regulatory capital any direct, indirect, or synthetic investment in, or exposure to, LTD issued by a covered BHC as if they were investments intier 2 capital instruments. /18/ The form and amount of the deduction would have depended on the type of investment and various other factors, described below.
FOOTNOTE 18 Unsecured debt issued by a covered BHC may or may not qualify as tier 2 capital, depending on its characteristics. See 12 CFR 217.20(d). Similarly, unsecured debt issued by a covered BHC may or may not qualify as eligible external LTD under the TLAC Rule, depending on its characteristics. See 12 CFR 252.61 and 252.62, 252.161 and 252.162. END FOOTNOTE
The proposed deduction requirement in the 2015 proposal would have substantially reduced the incentive of a Board-regulated banking organization to invest in LTDs issued by a covered BHC, thereby reducing the risk of contagion spreading to other banking organizations in the event of distress or failure of the covered BHC. Analysis conducted by Board staff concurrent with the 2015 proposal did not indicate that Board-regulated banking organizations owned a substantial amount of debt issued by covered BHCs.
The Board received approximately 37 comments on the 2015 proposal from banking and trade organizations, academic institutions, market advocacy groups, and an individual. A few of the commenters addressed the proposed deduction portion of the 2015 proposal. One commenter recommended an expansion of the proposed deductions to TLAC instruments issued by foreign GSIBs, while another commenter urged the Board to address its concerns through a different means than the capital rule. Some commenters supported the proposed deduction, and some suggested amending or abandoning the proposed deduction.
Commenters made a number of recommendations regarding the specific details of how the deductions from regulatory capital should be implemented. The recommendations included increasing the capital rule's deduction thresholds to reflect the increase in the scope of assets subject to deduction. Other commenters requested formal public guidance regarding the proposed deduction requirement to ensure that community banking organizations were aware of the requirement and could undertake the necessary preparations.
One commenter requested that the Board exclude debt instruments that do not qualify as LTD under the TLAC Rule from the scope of the deduction in the capital rule. Another commenter advocated for a less stringent capital deduction for senior debt, relative to the deduction requirement for subordinated debt.
With respect to the mechanics of the capital deduction, several commenters advocated for allowing a banking organization to first deduct any investment in a LTD from the banking organization's own LTD, before deducting such holdings from regulatory capital. Commenters argued that deducting LTD from regulatory capital would impose significant costs on issuers and adversely affect the market for these instruments. Some commenters also suggested that banking organizations be allowed to choose among several different treatments for investments in LTD, including the application of a higher risk weight rather than a capital deduction.
A number of commenters sought an exemption for underwriting and market making positions in LTD. These commenters argued that requiring deduction in these contexts could negatively impact market making activities of GSIBs and increase the cost of market making while reducing liquidity, thereby adversely impacting customers of banking organizations and the global economy. /19/
FOOTNOTE 19 The comments received on the 2015 proposal have been considered in developing this proposal. END FOOTNOTE
D. Overview and Scope of Application of the Proposal
The agencies are issuing this notice of proposed rulemaking (proposal or proposed rule) to recognize, for purposes of the agencies' capital rule, the systemic risks posed by banking organizations' investments in "covered debt instruments," as defined below, and to create an incentive for advanced approaches banking organizations to limit their exposure to GSIBs. Absent the proposal, investments in covered debt instruments issued by covered BHCs, foreign GSIBs, and covered IHCs are generally subject to a risk weight of 100 percent and are not subject to deduction from regulatory capital.
The deductions that would be required under the proposal would affect the capital ratios of advanced approaches banking organizations--that is, the risk-based capital ratios that include "standardized total risk-weighted assets" and "advanced approaches total risk-weighted assets" in the denominator of the ratios, as well as the leverage ratio and the supplementary leverage ratio. The agencies believe such an approach appropriately reduces systemic risks.
The agencies believe the proposed rule will have relatively small effects on advanced approaches banking organizations. It is difficult to calculate TLAC holdings of affected institutions using available data. As noted earlier, Board analysis suggests that debt instruments subject to the proposed rule represent a minimal portion of the total assets of advanced approaches banking organizations. The proposed rule could pose some additional regulatory costs for advanced approaches banking organizations associated with changes to internal systems or processes. The agencies expect that the proposal will have the benefit of improving the resiliency and enhancing resolvability of advanced approaches banking organizations in the event that an entity required to issue LTD or TLAC fails or encounters material financial distress.
While the systemic risk associated with banking organizations' investments in covered debt instruments is greatest for large banking organizations, it is relevant for all banking organizations. Distress at a GSIB and the associated write-down or conversion into equity of its covered debt instruments could have a direct negative impact on the capital of investing banking organizations, potentially at a time when investing banking organizations are already experiencing financial stress. In order to strongly discourage smaller banking organizations from investing in covered debt instruments, the agencies intend to give further consideration on how to address these risks with respect to investments in covered debt instruments, as defined below, by non-advanced approaches banking organizations. The agencies recognize that the proposed approach is relatively complex and, as a result, are only proposing to apply it to advanced approaches banking organizations at this time.
In late 2018, the agencies issued the Interagency Tailoring NPR that would, among other changes, amend the scope of "advanced approaches banking organizations." /20/ Under the Interagency Tailoring NPR, the scope of "advanced approaches banking organizations" would be amended to include only those banking organizations subject to Category I or Category II standards. /21/ For purposes of considering and commenting on this
FOOTNOTE 20 See 83 FR 66024 (
FOOTNOTE 21 Under the Interagency Tailoring NPR, Category I standards would apply to
Question 1: The agencies invite comment on all aspects of the proposed deduction approach for investments in covered debt instruments by advanced approaches banking organizations.
Question 2: To what extent do non-advanced approaches banking organizations have material holdings of covered debt instruments issued by covered BHCs, covered IHCs, and foreign GSIBs? The agencies invite data demonstrating the relative significance of such holdings.
II. Proposed Regulatory Capital Treatment for Advanced Approaches Banking Organizations' Investments in Covered Debt Instruments
Under the existing capital rule, a banking organization must deduct from regulatory capital any investment in its own capital instruments and investments in the capital of other financial institutions that it holds reciprocally. Other investments in the capital of unconsolidated financial institutions are subject to deduction to the extent they exceed certain thresholds.
Under the proposal, an investment in a covered debt instrument by an advanced approaches banking organization generally would be treated as an investment in a tier 2 capital instrument, and therefore, would be subject to deduction from the advanced approaches banking organization's own tier 2 capital. The existing deduction approaches under the capital rule would therefore apply to a banking organization's investments in its own covered debt instruments and to reciprocal cross-holdings of covered debt instruments; that is, an advanced approaches banking organization would deduct from its own tier 2 capital any investments in its own covered debt instruments and reciprocal crossholdings of covered debt instruments with another banking organization. In addition, the existing corresponding deduction approach in the capital rule would apply to any required deduction by advanced approaches banking organizations of an investment in a covered debt instrument that exceeds certain thresholds.
The proposal would revise section ____.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments. Several new definitions would be added to section ___.2 in order to effectuate these deductions. Further, the definition of "investment in the capital of an unconsolidated financial institution" would be amended to correct a typographical error.
A. Amendments to Definitions
Consistent with the Board's 2015 proposal, the proposal would add or amend certain definitions in section &___.2 of the capital rule to implement the proposed deduction approach. Under the proposal, a "covered debt instrument" would be defined to include an unsecured debt instrument that is: (1) Issued by a covered BHC and that is an "eligible debt security" for purposes of the TLAC Rule, /22/ or that is pari passu or subordinated to any "eligible debt security" issued by the covered BHC; or (2) issued by a covered IHC and that is an "eligible Covered IHC debt security" for purposes of the TLAC Rule, /23/ or that is pari passu or subordinated to any "eligible Covered IHC debt security" issued by the covered IHC. A covered debt instrument would not include a debt instrument that qualifies as tier 2 capital under the capital rule.
FOOTNOTE 22 See 12 CFR 252.61. END FOOTNOTE
FOOTNOTE 23 See 12 CFR 252.161. END FOOTNOTE
A "covered debt instrument" also would include any unsecured debt instrument issued by a foreign GSIB or any of its subsidiaries, other than its covered IHC, for the purpose of absorbing losses or recapitalizing 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. Further, covered debt instruments would also include any debt instrument that is pari passu or subordinated to any unsecured debt instrument described above issued by the foreign GSIB or any of its subsidiaries, other than an unsecured debt instrument that is included in the regulatory capital of the issuer.
Question 3: Under the proposed definition of "covered debt instrument," unsecured debt instruments issued by a covered BHC or a covered IHC would be covered debt instruments--and thus potentially subject to deduction--if they were eligible debt securities or eligible Covered IHC debt securities, as applicable, under the TLAC Rule, or if they were pari passu or subordinated to any eligible debt security or eligible Covered IHC debt security. What would be a less burdensome way to include approximately the same debt instruments within the definition of "covered debt instrument?" For example, should "covered debt instrument" include any unsecured debt instrument issued by a covered BHC or a covered IHC, including, for example, debt instruments that are senior to all eligible debt securities or eligible Covered IHC debt securities?
In late 2016, the BCBS published its
FOOTNOTE 24 See https://www.bis.org/bcbs/publ/d387.pdf (
Under the FSB's TLAC Term Sheet, certain "Excluded Liabilities" do not qualify as TLAC and therefore are not subject to deduction under the
In addition, the
FOOTNOTE 25 To ensure that TLAC absorbs losses prior to liabilities that are excluded from TLAC, eligible TLAC instruments must satisfy certain subordination requirements set forth in the FSB TLAC Term Sheet. However, an instrument may qualify as TLAC and not meet the subordination requirements if: (i) The amount of Excluded Liabilities on the balance sheet of the resolution entity that rank pari passu or junior to the TLAC-eligible liabilities does not exceed 5 percent of the GSIB's eligible TLAC; (ii) the resolution authority of the GSIB has authority to differentiate among pari passu creditors in resolution; (iii) differentiation in resolution in favor of such excluded liabilities would not give rise to material risk of successful legal challenge or valid compensation claims; and (iv) this does not have a material adverse impact on resolvability. See section 11 of the FSB TLAC Term Sheet. END FOOTNOTE
FOOTNOTE 26 See [Para.] 66.c of the
The proposed definition of "covered debt instruments" would include all unsecured debt instruments that are pari passu or subordinated to instruments issued by a foreign GSIB for the purpose of satisfying the foreign GSIB's home-country TLAC requirements. This would include instruments that are pari passu to Excluded Liabilities if such instruments are recognized as external TLAC under home-country requirements as a matter of national discretion. In contrast to the BCBS standard, the proposal would not require proportional deduction for these instruments. Instead, the proposal would require deduction using the existing deduction approaches for tier 2 capital instruments under the capital rule. The agencies believe that implementation of the proportional deduction approach would introduce a high degree of complexity and operational burden because it would require a banking organization to track the full or partial recognition of TLAC instruments that may be pari passu to other liabilities in foreign jurisdictions. In addition, given that advanced approaches banking organizations are not expected to hold material investments in "covered debt instruments," use of the existing deduction approaches for tier 2 capital instruments is unlikely to have a meaningful impact on banking organizations' regulatory capital ratios relative to the proportional deduction approach.
The proposal would also add a definition of "excluded covered debt instrument" to the capital rule in order to identify covered debt instruments held for short-term trading purposes that would not be subject to deduction, if below a certain threshold. The definition and prudential treatment of excluded covered debt instruments and their deduction are discussed in more detail in section II.C below.
Question 4: How well does the proposed definition of covered debt instrument capture non-capital debt instruments issued by covered BHCs and covered IHCs for the purposes of meeting their TLAC requirements? The agencies invite comment on all aspects of the definition of covered debt instruments as it relates to instruments issued by covered BHCs and covered IHCs, particularly the scope of instruments that may be subject to deduction under the proposed definition.
Question 5: To what degree does the proposed definition of covered debt instrument capture debt instruments issued by foreign GSIBs or their subsidiaries under foreign implementations of the international TLAC standard? The agencies invite comment on the definition of covered debt instrument, and whether it appropriately captures unsecured debt instruments that do not qualify as regulatory capital and that are issued by a foreign GSIB or any of its subsidiaries. Which method for identifying covered debt instruments would be simpler to apply in practice: (1.) Referring to the purpose of the debt instrument as to absorbing losses or recapitalizing the issuer, as proposed by the agencies, or (2.) referring to home country rules implementing the FSB's TLAC Term Sheet?
Question 6: What are possible alternatives to the definition of "excluded covered debt instrument?" For example, should the agencies consider as an alternative to "held for the purpose of short-term or with the intent of benefiting from actual or expected short-term price movements" a different standard, such as held available-for-sale or classified as a trading asset for accounting purposes?
Similar to the measurement of investments in financial institutions capital instruments, an "investment in a covered debt instrument" would be defined as a net long position in a covered debt instrument, including direct, indirect, and synthetic exposures to such covered debt instrument. Investments in covered debt instruments would exclude underwriting positions held for five business days or less. In addition, the proposal would amend the definitions of "indirect exposure" and "synthetic exposure" in the capital rule to add exposures to covered debt instruments. /27/
FOOTNOTE 27 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2 (FDIC) ("investment in the capital of an unconsolidated financial institution", "investment in the banking organization's own capital instrument", and "synthetic exposure"). END FOOTNOTE
B. Investments in
Under the agencies' capital rule, a banking organization must deduct from regulatory capital an investment in its own capital instruments and investments in the capital of other financial institutions that it holds reciprocally under sections____.22(c)(1) and (3). The proposal would amend sections____.22(c)(1) and (3) to require an advanced approaches banking organization to also deduct from its tier 2 capital investments in its own covered debt instruments and any investment in a covered debt instrument that is held reciprocally with another banking organization.
C. Significant and Non-Significant Investments in Covered Debt Instruments
Under sections___.22(c)(4) and (5) of the capital rule, a banking organization must deduct from regulatory capital certain investments in the capital of unconsolidated financial institutions. The calculation of the deduction depends on whether the banking organization has a "significant" or a "non-significant" investment, with "significant" defined as ownership of more than 10 percent of the common stock of the unconsolidated financial institution. /28/ When a banking organization has a "significant investment" in an unconsolidated financial institution, the banking organization must deduct from regulatory capital any investment in the capital of the unconsolidated financial institution that is not in the form of common stock. /29/ If the banking organization has one or more "non-significant investments" in unconsolidated financial institutions, it must aggregate such investments and deduct from regulatory capital any amount that exceeds 10 percent of the banking organization's common equity tier 1 capital. /30/
FOOTNOTE 28 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) ("significant investment in the capital of an unconsolidated financial institution"). END FOOTNOTE
FOOTNOTE 29See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); and 12 CFR 324.22(c)(5) (FDIC). END FOOTNOTE
FOOTNOTE 30 See 12 CFR 3.22(c)(4) (OCC); 12 CFR 217.22(c)(4) (Board); and 12 CFR 324.2(c)(4) (FDIC). END FOOTNOTE
The proposal would amend section___.22(c)(4) of the capital rule to require an advanced approaches banking organization with a non-significant investment in a covered debt instrument to include such investment in the aggregate amount of non-significant investments in the capital of other unconsolidated financial institutions. As under the existing capital rule, the proposal would require a banking organization to deduct from regulatory capital the amount by which the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions exceeds 10 percent of the advanced approaches banking organization's common equity tier 1 capital. Any investment in a covered debt instrument subject to deduction would be deducted according to the corresponding deduction approach described below in section II.D.
The proposal includes limited exclusions from this approach. The specifics of the applicable exclusion would depend on whether a firm is a covered BHC or is a subsidiary of a GSIB, consistent with the
Consistent with the
The proposal would amend section___.22(c)(5) of the capital rule to require an advanced approaches banking organization with an investment in a covered debt instrument issued by an unconsolidated financial institution to deduct the investment from tier 2 capital, in accordance with the corresponding deduction approach, if the advanced approaches banking organization has a significant investment in the capital of the unconsolidated financial institution.
Question 7: Do the proposed exclusions from deduction for certain investments in covered debt instruments of an unconsolidated financial institution appropriately align with the treatment set forth in the
D. Corresponding Deduction Approach
Under the corresponding deduction approach, a banking organization must apply any required deduction to the component of capital for which the underlying instrument would qualify if it were issued by the banking organization. /31/ If the banking organization does not have enough of the component of capital to give full effect to the deduction, the corresponding deduction approach provides that any amount of the investment that has not already been deducted would be deducted from the next, more subordinated component of capital. /32/ If, for example, a banking organization has insufficient amounts of tier 2 capital and additional tier 1 capital to effect a required deduction, the banking organization would need to deduct from common equity tier 1 capital the amount of the investment that exceeds the tier 2 and additional tier 1 capital of the banking organization. /33/ The proposal would amend the corresponding deduction approach in section ___.22(c)(2) of the capital rule to specify that an investment in a covered debt instrument by an advanced approaches banking organization would be subject to the corresponding deduction approach.
FOOTNOTE 31 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). END FOOTNOTE
FOOTNOTE 32 See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2) and (f) (Board); and 12 CFR 324.(c)(2) and (f) (FDIC). END FOOTNOTE
FOOTNOTE 33 See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12 CFR 324.22(f) (FDIC). END FOOTNOTE
Question 8: Are there simpler alternatives to the proposed deduction approach for investments in covered debt instruments that would achieve the same objectives of reducing both interconnectedness within the financial system and systemic risk?
E. Net Long Position
The proposal would follow the same general approach as currently provided under the agencies' capital rule regarding the calculation of the amount of any deduction and the treatment of guarantees and indirect investments for purposes of the deductions. Under the capital rule, the amount of a banking organization's investment in its own capital instrument or in the capital instrument of an unconsolidated financial institution is the banking organization's net long position in the capital instrument as calculated under section____.22(h) of the capital rule. Under section___.22(h), a banking organization may net certain gross short positions in a capital instrument against a gross long position in the instrument to determine the net long position. The amount of an investment potentially subject to deduction under section ___.22(c) is the net long position.
The proposal would modify section___.22(h) of the capital rule such that an advanced approaches banking organization would determine its net long position in an exposure to its own covered debt instrument or in a covered debt instrument issued by an unconsolidated financial institution in the same manner as currently provided for investments in the capital of an unconsolidated financial institution or investments in an institution's own capital instruments. Consistent with the current capital rule, the calculation of a net long position would take into account direct investments in covered debt instruments as well as indirect exposures to covered debt instruments held through investment funds.
A banking organization has three options under the capital rule to measure its gross long position in a capital instrument held indirectly through an investment fund. /34/ The proposal would amend section___22(h)(2)(ii) of the capital rule to provide the same three options to determine the gross long position in a covered debt instrument held through an investment fund. The first option would be to use the entire carrying value of the investment in the fund. The second option would be, with prior supervisory approval, for the advanced approaches banking organization to use a conservative estimate of the amount of the investment in the covered debt instrument held through the fund. The third option would be to multiply the carrying value of the advanced approaches banking organization's investment in the fund by the exact percentage of the covered debt instrument held by the investment fund or by the highest stated prospectus limit for such an investment. In each case, the amount of the gross long position may be reduced by the advanced approaches banking organization's qualifying short positions to reach the net long position. /35/
FOOTNOTE 34 See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.12(h)(2) (Board); and 12 CFR 324.22(h)(2) (FDIC). END FOOTNOTE
FOOTNOTE 35 See 12 CFR 3.22(h)(1) (OCC); 12 CFR 217.22(h)(1) (Board); and 12 CFR 324.22(h)(1) (FDIC). END FOOTNOTE
For purposes of any deduction required for an advanced approaches banking organization's investment in the capital of an unconsolidated financial institution, the amount of a covered debt instrument would include any contractual obligations the advanced approaches banking organization has to purchase such covered debt instruments.
III.Technical Amendment and Additional Requests for Comment
The agencies are amending the definition of investment in the capital of an unconsolidated financial institution in section___.2 of the capital rule in order to correct a drafting error. The agencies' capital rule currently defines investment in the capital of an unconsolidated financial institution as " . . . an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution and is an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution . . . . " The proposal would change "and is" to "or" to reflect the agencies' original intent.
The agencies invite comment on all aspects of the proposed deduction approaches for investments in covered debt instruments by advanced approaches banking organizations, and the technical amendment to the agencies' capital rule. Comments are requested about the potential advantages of the proposal in ensuring the safety and soundness of advanced approaches banking organizations as well as the stability of the financial system. Comments are also requested about the capital impact of the proposal and the nature and extent of costs and benefits to the affected institutions or the broader economy.
IV.Proposed Changes to Regulatory Reporting
A. Deductions From Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments
The Board is proposing to modify the instructions to the Consolidated Financial Statements for Holding Companies (FR Y-9C), Schedule HC-R, Part I and Part II, to effectuate the deductions from regulatory capital for Board-regulated advanced approaches banking organizations related to investments in covered debt instruments and excluded covered debt instruments as described above.
Specifically, the Board would modify the instructions of the FR Y-9C for Schedule HC-R, Part I, item 33, "Tier 2 capital deductions." On the FR Y-9C, a Board-regulated advanced approaches GSIB banking organization would be required to deduct from tier 2 capital the aggregate amount of its investments in covered debt instruments that, when combined with the banking organization's other non-significant investments in unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. Also, if an excluded covered debt instrument is held by a Board-regulated advanced approaches GSIB banking organization for more than 30 business days, or is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits, the excluded covered debt instrument would be deducted from tier 2 capital.
In addition, for purposes of the deduction requirements related to non-significant investments in unconsolidated financial institutions, Board-regulated advanced approaches non-GSIB banking organizations would be required to deduct from tier 2 capital those investments in covered debt instruments that exceed 5 percent of common equity tier 1 capital, and that also, when combined with the banking organization's other non-significant investments in unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. The Board would also modify the instructions for calculating other deduction-related and risk-weighted asset line items to incorporate investments in covered debt instruments and excluded debt instruments, as applicable, by Board-regulated advanced approaches banking organizations.
The agencies would propose to modify in a future interagency reporting proposal the Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices (
FOOTNOTE 36 The proposed modifications would not affect the Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only and Total Assets Less than
B. Public Disclosure of LTD and TLAC by Covered BHCs and Covered IHCs
The Board is proposing to modify Schedule HC-R, Part I of the FR Y-9C by adding new data items that would publicly disclose: (1) The LTD and TLAC for covered BHCs and covered IHCs; (2) these firms' LTD and TLAC ratios to ensure compliance with the TLAC Rule; (3) TLAC buffers; and (4) amendments to the instructions for the calculation of eligible retained income (item 47), institution-specific capital buffer (items 46.a and 46.b), and distributions and discretionary bonus payments (item 48) for covered BHCs and covered IHCs.
V.Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the proposed rule contain "collection of information" within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently-valid
The proposal would revise sections __.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments. Several new definitions would be added to section __.2 in order to effectuate these deductions. Further, the definition of "investment in the capital of an unconsolidated financial institution" would be amended to correct a typographical error.
The proposal will require changes to the Consolidated Financial Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128). The Board reviewed the proposed rule under the authority delegated to the Board by OMB.
Comments are invited on:
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 or the estimate 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 startup costs and costs of operation, maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer by mail to
Proposed Collection (Board Only)
Title of information collection: Consolidated Financial Statements for Holding Companies.
Agency form number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR Y-9CS.
OMB control number: 7100-0128.
Frequency: Quarterly, semiannually, and annually.
Affected public: Businesses or other for-profit.
Respondents: Bank holding companies (BHCs), savings and loan holding companies (SLHCs), securities holding companies (SHCs), and
Estimated number of respondents: FR Y-9C (non-advanced approaches holding companies): 292; FR Y-9C (advanced approached holding companies): 18; FR Y-9LP: 338; FR Y-9SP: 4,238; FR Y-9ES: 82; FR Y-9CS: 236.
General description of report: The FR
Legal authorization and confidentiality: The FR
FOOTNOTE 37 See 12 U.S.C. 1844(c). END FOOTNOTE
FOOTNOTE 38 See 12 U.S.C. 1467a(b). END FOOTNOTE
FOOTNOTE 39 See 12 U.S.C. 1850a(c)(1). END FOOTNOTE
FOOTNOTE 40 See 12 U.S.C. 5365. END FOOTNOTE
With respect to FR Y-9C, Schedule HI's item 7(g) "
Current actions: To implement the reporting requirements of the proposed rule, the Board proposes to revise the FR Y-9C, Schedule HC-R, Part I, Regulatory Capital Components and Ratios, to amend instructions for line items 11, 17, 24, and 33 to effectuate the deductions from regulatory capital for advanced approaches holding companies related to investments in covered debt instruments and excluded covered debt instruments as described above. Further, the Board proposes to revise the FR Y-9C, Schedule HC-R, Part II, Risk-Weighted Assets, to amend instructions for line items 2(a), 2(b), 7, and 8 to incorporate investments in covered debt instruments and excluded debt instruments, as applicable, by advanced approaches holding companies in their calculation of risk-weighted assets.
In addition, the Board proposes to revise the FR Y-9C, Schedule HC-R, Part I, Regulatory Capital Components and Ratios, to create new line items and instructions to allow the BHCs of
Estimated average hours per response: FR Y-9C (non-advanced approaches holding companies): 46.43; FR Y-9C (advanced approached holding companies): 48.31; FR Y-9LP: 5.27; FR Y-9SP: 5.40; FR Y-9ES: 0.50; FR Y-9CS: 0.50.
Estimated annual burden hours: FR Y-9C (non advanced approaches holding companies): 54,230; FR Y-9C (advanced approached holding companies): 3,478; FR Y-9LP: 7,125; FR Y-9SP: 45,770; FR Y-9ES: 41; FR Y-9CS: 472.
In addition to the collection of information discussed above, the agencies would propose to modify in a future interagency reporting proposal the Consolidated Reports of Condition and Income (Call Reports) (
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C.
As of
FOOTNOTE 41 The OCC calculated the number of small entities using the SBA's size thresholds for commercial banks and savings institutions, and trust companies, which are
As part of our analysis, we consider whether the proposal will have a significant economic impact on a substantial number of small entities, pursuant to the RFA Because the proposal only applies to advanced approaches banking organizations it will not impact any OCC-supervised small entities. Therefore, the proposal will not have a significant economic impact on a substantial number of small entities.
Therefore, the OCC certifies that the proposed rule would not have a significant economic impact on a substantial number of OCC-supervised small entities.
Board: The Board is providing an initial regulatory flexibility analysis with respect to this proposed rule. The Regulatory Flexibility Act, 5 U.S.C.
FOOTNOTE 42 Under regulations issued by the
The Board has considered the potential impact of the proposed rule on small entities in accordance with the RFA. Based on its analysis and for the reasons stated below, the Board believes that this proposed rule will not have a significant economic impact on a substantial number of small entities. Nevertheless, the Board is publishing and inviting comment on this initial regulatory flexibility analysis. A final regulatory flexibility analysis will be conducted after comments received during the public comment period have been considered. The proposal would also make corresponding changes to the Board's reporting forms.
As discussed in detail above, the proposed rule would amend the capital rule. Under the proposed rule, the Board would require advanced approaches banking organizations to deduct investments in and exposures to covered debt instruments issued by covered BHCs, covered IHCs, and foreign GSIBs and their subsidiaries. These deductions may be subject to regulatory thresholds, as described in the Supplemental Information above. Deductions related to investments in and exposures to covered debt instruments would be effectuated by deduction from tier 2 capital according to the corresponding deduction approach, subject to applicable deduction thresholds.
The Board has broad authority under the International Lending Supervision Act (ILSA) /43/ and the PCA provisions of the Federal Deposit Insurance Act /44/ to establish regulatory capital requirements for the institutions it regulates. For example, ILSA directs each Federal banking agency to cause banking institutions to achieve and maintain adequate capital by establishing minimum capital requirements as well as by other means that the agency deems appropriate. /45/ The PCA provisions of the Federal Deposit Insurance Act direct each Federal banking agency to specify, for each relevant capital measure, the level at which an IDI subsidiary is well capitalized, adequately capitalized, undercapitalized, and significantly undercapitalized. /46/ In addition, the Board has broad authority to establish regulatory capital standards for bank holding companies under the Bank Holding Company Act and the Dodd-Frank Reform and Consumer Protection Act (Dodd-Frank Act). /47/
FOOTNOTE 43 12 U.S.C. 3901-3911. END FOOTNOTE
FOOTNOTE 44 12 U.S.C. 1831o. END FOOTNOTE
FOOTNOTE 45 12 U.S.C. 3907(a)(1). END FOOTNOTE
FOOTNOTE 46 12 U.S.C. 1831o(c)(2). END FOOTNOTE
FOOTNOTE 47 See, e.g., sections 165 and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and 12 U.S.C. 5371). Public Law 111-203, 124 Stat. 1376 (2010). END FOOTNOTE
The proposed rule would apply only to an advanced approaches Board-regulated institution. This is a depository institution, bank holding company, savings and loan holding company, or intermediate holding company with at least
The Board welcomes comment on all aspects of its analysis. In particular, the Board requests that commenters describe the nature of any impact on small entities and provide empirical data to illustrate and support the extent of the impact.
The Regulatory Flexibility Act (RFA), 5 U.S.C.
FOOTNOTE 48 5 U.S.C.
FOOTNOTE 49 The SBA defines a small banking organization as having
The
FOOTNOTE 50 Call Report data,
This proposed rule will affect all institutions subject to the advanced approaches regulations and their subsidiaries. The
FOOTNOTE 51 Call Report data,
The
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act /52/ requires the Federal banking agencies to use plain language in all proposed and final rules published after
FOOTNOTE 52 Public Law 106-102, section 722, 113 Stat. 1338, 1471 (1999). END FOOTNOTE
* Have the agencies organized the material to suit your needs? If not, how could they present the proposed rule more clearly?
* Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated?
* Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?
* Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?
* Would more, but shorter, sections be better? If so, which sections should be changed?"
* What other changes can the agencies incorporate to make the regulation easier to understand?
D. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the proposed rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the 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
FOOTNOTE 53 Based on available supervisory information, the OCC determined that no OCC-supervised advanced approaches institutions currently hold TLAC instruments. Thus, there would no cost of capital associated with the implementation of this proposal. The OCC estimates that, if implemented, non-mandated, but anticipated compliance costs associated with activities such as modifying procedures and internal audit would be less than
E.
Pursuant to section 302(a) of the
FOOTNOTE 54 12 U.S.C. 4802(a). END FOOTNOTE
FOOTNOTE 55 12 U.S.C. 4802. END FOOTNOTE
The agencies note that comment on these matters has been solicited in other sections of this Supplementary Information section, and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. In addition, the agencies also invite any other comments that further will inform the agencies' consideration of RCDRIA.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks, Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital adequacy, Savings associations, State non-member banks.
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, and 5412(b)(2)(B).
2. Amend
a. Adding in alphabetical order the definitions of "Covered debt instrument" and "Excluded covered debt instrument;"
b. Revising the definition of "Indirect exposure;"
c. Adding in alphabetical order the definition of "Investment in a covered debt instrument;" and
d. Revising the definitions of "Investment in the capital of an unconsolidated financial institution" and "Synthetic exposure".
The additions and revisions read as follows:
*****
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or,
(3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where,
(i) The instrument has the purpose of absorbing losses or recapitalizing 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; 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 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer.
*****
Excluded covered debt instrument means a covered debt instrument held by a national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, for 30 business days or less for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
*****
Indirect exposure means an exposure that arises from the national bank's or Federal savings association's investment in an investment fund which holds an investment in the national bank's or Federal savings association's own capital instrument, or an investment in the capital of an unconsolidated financial institution. For an advanced approaches national bank or Federal savings association, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument.
*****
Investment in a covered debt instrument means a national bank's or Federal savings association's net long position calculated in accordance with
*****
Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with
*****
Synthetic exposure means an exposure whose value is linked to the value of an investment in the national bank or Federal savings association's own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches national bank or Federal savings association, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument.
*****
3. In
*****
(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 instruments. A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own capital 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; and
(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.
(2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, a national bank or Federal savings association must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the national bank or Federal savings association itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the national bank or Federal savings association does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the national bank or Federal savings association must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under
(A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and
(D) For an advanced approaches national bank or Federal savings association, a tier 2 capital instrument if it is a covered debt instrument.
(iii) If an investment is in the form of a non-qualifying capital instrument (as defined in
(A) An additional tier 1 capital instrument if such instrument was included in the issuer's tier 1 capital prior to
(B) A tier 2 capital instrument if such instrument was included in the issuer's tier 2 capital (but not includable in tier 1 capital) prior to
(3) Reciprocal cross-holdings in the capital of financial institutions. (i) A national bank or Federal savings association must deduct an investment in the capital of another financial institution that the national bank or Federal savings association holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches national bank or Federal savings association must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(4) Non-significant investments in the capital of unconsolidated financial institutions. (i) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in
FOOTNOTE 24 With the prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. END FOOTNOTE
FOOTNOTE 25 Any non-significant investments in the capital of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. END FOOTNOTE
(ii) An advanced approaches national bank or Federal savings association must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in
FOOTNOTE 26 With the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches a national bank or Federal savings association is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. END FOOTNOTE
FOOTNOTE 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. END FOOTNOTE
(iii)(A) The amount to be deducted under this section from a specific capital component by a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association is equal to:
(1) The national bank's or Federal savings association's aggregate non-significant investments in the capital of an unconsolidated financial institution exceeding the 10 percent threshold for non-significant investments, multiplied by
(2) The ratio of the national bank's or Federal savings association's aggregate non-significant investments in the capital of unconsolidated financial institutions (in the form of such capital component) to the national bank's or Federal savings association's total non-significant investments in unconsolidated financial institutions.
(B) For an advanced approaches national bank or Federal savings association, the amount to be deducted under this section from a specific capital component is equal to:
(1) The national bank's or Federal savings association's aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(4), exceeding the 10 percent threshold for non-significant investments, multiplied by
(2) The ratio of the national bank's or Federal savings association's aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the national bank's or Federal savings association's total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose.
(iv) For purposes of applying the deduction under paragraph (c)(4)(ii) of this section, an advanced approaches national bank or Federal savings association that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must only include the amount of investments in covered debt instruments issued by financial institutions in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institutions to the extent that the national bank's or Federal savings association's gross long position, in accordance with
(v) Prior to applying the deduction under paragraph (c)(4)(ii):
(A) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in
(B) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) above, but is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
(C) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, and has been held for more than thirty business days.
(D) A national bank or Federal savings association that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with
(5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If a national bank or Federal savings association has a significant investment in the capital of an unconsolidated financial institution, the national bank or Federal savings association must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the institution other than an investment in the form of common stock by applying the corresponding deduction approach in paragraph (c)(2) of this section. /28/ The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association that underwrites a failed underwriting is not required to deduct a significant investment in the capital of an unconsolidated financial institution or an investment in covered debt instruments pursuant to this paragraph (c) if such investment is related to such failed underwriting.
FOOTNOTE 28 With prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association is not required to deduct a significant investment in the capital instrument of an unconsolidated financial institution under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the OCC. END FOOTNOTE
(ii) If an advanced approaches national bank or Federal savings association has a significant investment in the capital of an unconsolidated financial institution and has an investment in a covered debt instrument issued by the unconsolidated financial institution, the national bank or Federal savings association must also deduct its investment in the covered debt instrument by applying the corresponding deduction approach in paragraph (c)(2) of this section. /29/ The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association that underwrites a failed underwriting is not required to deduct the investment in the covered debt instrument pursuant to this paragraph (c)(5) if such investment is related to such failed underwriting.
FOOTNOTE 29 With prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the OCC. END FOOTNOTE
*****
(f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a national bank or Federal savings association does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the national bank or Federal savings association must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches national bank or Federal savings association in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph when applied to the capital ratio calculations in section 3.10(c).
*****
(h) Net long position. (1) For purposes of calculating the amount of a national bank's or Federal savings association's investment in the national bank's or Federal savings association's own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument, the institution's net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the national bank or Federal savings association in the same instrument subject to paragraph (h)(3) of this section.
(2) Gross long position. A gross long position is determined as follows:
(i) For an equity exposure that is held directly by the national bank or Federal savings association, the adjusted carrying value of the exposure as that term is defined in
(ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in
(iii) For each indirect exposure, the national bank's or Federal savings association's carrying value of its investment in an investment fund or, alternatively:
(A) A national bank or Federal savings association may, with the prior approval of the OCC, use a conservative estimate of the amount of its investment in the national bank's or Federal savings association's own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or
(B) A national bank or Federal savings association may calculate the gross long position for an indirect exposure by multiplying the national bank's or Federal savings association's carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for an investment in the national bank's or Federal savings association's own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or
(2) The investment fund's actual holdings of the investment in the national bank's or Federal savings association's own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in an covered debt instrument, as applicable; and
(iv) For a synthetic exposure, the amount of the national bank's or Federal savings association's loss on the exposure if the reference capital instrument were to have a value of zero.
(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:
(i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the national bank's or Federal savings association's Call Report, if the national bank or Federal savings association has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the national bank or Federal savings association exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and
(iii) For an investment in a national bank's 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), (c)(5), and (d)(1)(iii) of this section, and an investment in a covered debt instrument under paragraphs (c)(4) and (c)(5) 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 under paragraph (c)(1) of this section if the short position involves no counterparty credit risk;
(B) A gross long position in an investment in the national bank's or Federal savings association's own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index;
(C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or synthetic position in an investment in the national bank's or Federal savings association's own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the national bank's or Federal savings association's Call Report, and the hedge is deemed effective by the national bank's or Federal savings association's internal control processes, which have not been found to be inadequate by the OCC.
*****
For the reasons set forth in the joint preamble, the Board proposes to amend part 217 of chapter II of title 12 of the Code of Federal Regulations as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).
1. The authority citation for part 217 continues to read as follows:
Authority:12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 3906-3909, 4808, 5365, 5368, 5371.
2. Amend
a. Adding in alphabetical order the definitions of "Covered debt instrument" and "Excluded covered debt instrument;"
b. Revising the definition of "Indirect exposure;"
c. Adding in alphabetical order the definition of "Investment in a covered debt instrument;" and
d. Revising the definitions of "Investment in the capital of an unconsolidated financial institution" and "Synthetic exposure".
The additions and revisions to read as follows:
*****
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 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 Covered IHC, as defined in 12 CFR 252.161; and where,
(i) The instrument has the purpose of absorbing losses or recapitalizing 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; 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 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer.
*****
Excluded covered debt instrument means a covered debt instrument held by a global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 for 30 business days or less for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
*****
Indirect exposure means an exposure that arises from the Board-regulated institution's investment in an investment fund which holds an investment in the Board-regulated institution's own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches Board-regulated institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument.
*****
Investment in a covered debt instrument means a Board-regulated institution's net long position calculated in accordance with
*****
Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with
*****
Synthetic exposure means an exposure whose value is linked to the value of an investment in the Board-regulated institution's own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches Board-regulated institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument.
*****
3. In
*****
(c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23--(1) Investment in the Board-regulated institution's own capital or covered debt instruments. A Board-regulated institution must deduct an investment in the Board-regulated institution's own capital instruments, and an advanced approaches Board-regulated institution also must deduct an investment in the Board-regulated institution's own covered debt instruments, as follows:
23 The Board-regulated institution 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 [Sec.] 217.20(d)(3).
(i) A Board-regulated institution must deduct an investment in the Board-regulated 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
(ii) A Board-regulated institution must deduct an investment in the Board-regulated institution's own additional tier 1 capital instruments from its additional tier 1 capital elements;
(iii) A Board-regulated institution must deduct an investment in the Board-regulated institution's own tier 2 capital instruments from its tier 2 capital elements; and
(iv) An advanced approaches Board-regulated institution must deduct an investment in the institution's own covered debt instruments from its tier 2 capital elements. If the advanced approaches Board-regulated 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.
(2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, a Board-regulated institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the Board-regulated institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under
(A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and
(D) For an advanced approaches Board-regulated institution, a tier 2 capital instrument if it is a covered debt instrument.
(iii) If an investment is in the form of a non-qualifying capital instrument (as defined inSEC 217.300(c)), the Board-regulated institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was included in the issuer's tier 1 capital prior to
(B) A tier 2 capital instrument if such instrument was included in the issuer's tier 2 capital (but not includable in tier 1 capital) prior to
(3) Reciprocal cross-holdings in the capital of financial institutions.
(i) A Board-regulated institution must deduct an investment in the capital of another financial institution that the Board-regulated institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches Board-regulated institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(4) Non-significant investments in the capital of unconsolidated financial institutions. (i) A Board-regulated institution that is not an advanced approaches Board-regulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in
24 With the prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board.
25 Any non-significant investments in the capital of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable.
(ii) An advanced approaches Board-regulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in
26 With the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Board-regulated institution is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board.
27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable.
(iii)(A) The amount to be deducted under this section from a specific capital component by a Board-regulated institution that is not an advanced approaches Board-regulated institution is equal to:
(1) The Board-regulated institution's aggregate non-significant investments in the capital of an unconsolidated financial institution exceeding the 10 percent threshold for non-significant investments, multiplied by
(2) The ratio of the Board-regulated institution's aggregate non-significant investments in the capital of unconsolidated financial institutions (in the form of such capital component) to the Board-regulated institution's total non-significant investments in unconsolidated financial institutions.
(B) For an advanced approaches Board-regulated institution, the amount to be deducted under this section from a specific capital component is equal to:
(1) The Board-regulated institution's aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(4), exceeding the 10 percent threshold for non-significant investments, multiplied by
(2) The ratio of the Board-regulated institution's aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the Board-regulated institution's total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose.
(iv) For purposes of applying the deduction under paragraph (c)(4)(ii) of this section, an advanced approaches Board-regulated institution that is not a global systemically important BHC or a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must only include the amount of investments in covered debt instruments issued by financial institutions in which the Board-regulated institution does not have a significant investment in the capital of the unconsolidated financial institutions to the extent that the Board-regulated institution's gross long position, in accordance with
(v) Prior to applying the deduction under paragraph (c)(4)(ii) of this section:
(A) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in
(B) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, but is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
(C) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, and has been held for more than thirty business days.
(D) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2 must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with
(5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If a Board-regulated institution has a significant investment in the capital of an unconsolidated financial institution, the Board-regulated institution must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the institution other than an investment in the form of common stock by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution that underwrites a failed underwriting is not required to deduct a significant investment in the capital of an unconsolidated financial institution or an investment in covered debt instruments pursuant to this paragraph (c) if such investment is related to such failed underwriting.
28 With prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution is not required to deduct a significant investment in the capital instrument of an unconsolidated financial institution under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the Board.
(ii) If an advanced approaches Board-regulated institution has a significant investment in the capital of an unconsolidated financial institution and has an investment in a covered debt instrument issued by the unconsolidated financial institution, the Board-regulated institution must also deduct its investment in the covered debt instrument by applying the corresponding deduction approach in paragraph (c)(2) of this section.29 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Board-regulated institution that underwrites a failed underwriting is not required to deduct the investment in the covered debt instrument pursuant to this paragraph (c)(5) if such investment is related to such failed underwriting.
29 With prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Board-regulated institution is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the Board.
*****
(f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the Board-regulated institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches Board-regulated institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph when applied to the capital ratio calculations in section 217.10(c).
*****
(h) Net long position. (1) For purposes of calculating the amount of a Board-regulated institution's investment in the Board regulated institution's own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument, the institution's net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the Board-regulated institution in the same instrument subject to paragraph (h)(3) of this section.
(2) Gross long position. A gross long position is determined as follows:
(i) For an equity exposure that is held directly by the Board-regulated institution, the adjusted carrying value of the exposure as that term is defined in
(ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in
(iii) For each indirect exposure, the Board-regulated institution's carrying value of its investment in an investment fund or, alternatively:
(A) A Board-regulated institution may, with the prior approval of the Board, use a conservative estimate of the amount of its investment in the Board-regulated institution's own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or
(B) A Board-regulated institution may calculate the gross long position for an indirect exposure by multiplying the Board-regulated institution's carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for an investment in the Board-regulated institution's own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or
(2) The investment fund's actual holdings of the investment in the Board-regulated institution's own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in an covered debt instrument, as applicable; and
(iv) For a synthetic exposure, the amount of the Board-regulated institution's loss on the exposure if the reference capital instrument were to have a value of zero.
(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:
(i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the Board-regulated institution's Call Report, for a state member bank, or FR Y-9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, if the Board-regulated institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the Board-regulated institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and
(iii) For an investment in a Board-regulated 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), (c)(5), and (d)(1)(iii) of this section, and an investment in a covered debt instrument under paragraphs (c)(1), (c)(4), and (c)(5) of this section:
(A) The Board-regulated institution may only net a short position against a long position in an investment in the Board-regulated institution'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;
(B) A gross long position in an investment in the Board-regulated institution's own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index;
(C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or synthetic position in an investment in the Board-regulated institution's own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the Board-regulated institution's Call Report, for a state member bank, or FR Y-9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, and the hedge is deemed effective by the Board-regulated institution's internal control processes, which have not been found to be inadequate by the Board.
*****
12 CFR Part 324
For the reasons set out in the joint preamble, the
PART 324--CAPITAL ADEQUACY OF FDIC--SUPERVISED INSTITUTIONS
*****
12 CFR Part 324 Authority and Issuance For the reasons set out in the joint preamble, the
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
1. 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).
2. In
a. Add in alphabetical order the definitions of "Covered debt instrument" and "Excluded covered debt instrument;"
b. Revise the definition of "Indirect exposure";
c. Add in alphabetical order the definition of "Investment in a covered debt instrument";
d. Revise the definitions of "Investment in the capital of an unconsolidated financial institution" and "Synthetic exposure".
The additions and revisions read as follows:
*****
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where,
(i) The instrument has the purpose of absorbing losses or recapitalizing 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; 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 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer.
*****
Excluded covered debt instrument means a covered debt instrument held by an
*****
Indirect exposure means an exposure that arises from the
*****
Investment in a covered debt instrument means an
*****
Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with
*****
Synthetic exposure means an exposure whose value is linked to the value of an investment in the
*****
3. Amend
*****
(c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments /23/ --(1) Investment in the
FOOTNOTE 23 The
(i) An FDIC-supervised institution must deduct an investment in the
(ii) An FDIC-supervised institution must deduct an investment in the
(iii) An FDIC-supervised institution must deduct an investment in the
(2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), non-significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(4) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, an
(i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the
(A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under
(A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and
(D) For an advanced approaches
(iii) If an investment is in the form of a non-qualifying capital instrument (as defined in
(A) An additional tier 1 capital instrument if such instrument was included in the issuer's tier 1 capital prior to
(B) A tier 2 capital instrument if such instrument was included in the issuer's tier 2 capital (but not includable in tier 1 capital) prior to
(3) Reciprocal cross-holdings in the capital of financial institutions. (i) An FDIC-supervised institution must deduct an investment in the capital of another financial institution that the
(ii) An advanced approaches
(4) Non-significant investments in the capital of unconsolidated financial institutions. (i) An FDIC-supervised institution that is not an advanced approaches
FOOTNOTE 24 With the prior written approval of the
FOOTNOTE 25 Any non-significant investments in the captial of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. END FOOTNOTE
(ii) An advanced approaches
FOOTNOTE 26 With the prior written approval of the
FOOTNOTE 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. END FOOTNOTE
(iii)(A) The amount to be deducted under this section from a specific capital component by an
(1) The
(2) The ratio of the
(B) For an advanced approaches
(1) The
(2) The ratio of the
(iv) For purposes of applying the deduction under paragraph (c)(4)(ii), an advanced approaches
(v) Prior to applying the deduction under paragraph (c)(4)(ii):
(A) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in
(B) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) of this section, but is no longer held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
(C) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount of any investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(4)(iv)(A) above, and has been held for more than thirty business days.
(D) An FDIC-supervised institution that is a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach the amount, measured on a gross long basis in accordance with
(5) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. (i) If an
FOOTNOTE 28 With prior written approval of the
(ii) If an advanced approaches
FOOTNOTE 29 With prior written approval of the
*****
(f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if an
*****
(h) Net long position. (1) For purposes of calculating the amount of an
(2) Gross long position. A gross long position is determined as follows:
(i) For an equity exposure that is held directly by the
(ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in
(iii) For each indirect exposure, the
(A) An FDIC-supervised institution may, with the prior approval of the
(B) An FDIC-supervised institution may calculate the gross long position for an indirect exposure by multiplying the
(1) The highest stated investment limit (in percent) for an investment in the
(2) The investment fund's actual holdings of the investment in the
(iv) For a synthetic exposure, the amount of the
(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:
(i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the
(iii) For an investment in an
(A) The
(B) A gross long position in an investment in the
(C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or synthetic position in an investment in the
*****
Dated:
Comptroller of the Currency.
By order of the
Secretary of the Board.
Dated at
By order of the Board of Directors.
Assistant Executive Secretary.
[FR Doc. 2019-06344 Filed 4-5-19;
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P
Hand that’s feeding the world is getting bit.’ Farmers cope with floods, trade war
Best’s Market Segment Report: AM Best Maintains Stable Outlook on Italian Non-Life Market
Advisor News
- The financial advisor’s guide to creating an effective value proposition
- Thrivent survey finds gap between financial fear and action
- Help your clients navigate tax regulations
- CFP Board announces CEO leadership transition
- State Street study looks at why AUM in model portfolios is increasing
More Advisor NewsAnnuity News
Health/Employee Benefits News
- Easy initial Unicam approval for 2nd Jacobson Medicaid bill
- New Texas advocacy group calls for more health insurance transparency
- GOP-led Georgia Senate votes to ban state medical coverage of transgender procedures
- Georgia Senate OKs bill to ban state workers from gender affirming care under state health plan
- Health insurance for millions could vanish as states put Medicaid expansion on chopping block
More Health/Employee Benefits NewsLife Insurance News
- Brighthouse Financial Announces Fourth Quarter and Full Year 2024 Results
- Jackson Recognized for Clear and Compelling Marketing and Communications throughout 2024
- NC yanks incentives for Charlotte-area firms that had pledged $200M investment, 900 jobs
- Symetra Adds New Consumer-Facing Cancer Care Compass (SM) Site During National Cancer Prevention Month
- Trustmark Selects Leading Caregiver Platform Cariloop To Support Customers Facing Long-Term Care Challenges
More Life Insurance News