Risk-Based Capital Standards Final Rule on Advanced Capital Adequacy Framework—Basel II; Establishment of a Risk-Based Capital Floor

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

Docket No. -2010-0009

RIN Number 1557-AD33

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

Regulations H and Y; Docket No. R-1402

RIN No. 7100-AD62

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD58

Risk-Based Capital Standards: Advanced Capital Adequacy Framework—Basel II;

Establishment of a Risk-Based Capital Floor

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors

of the Federal Reserve System; and the Federal Deposit Insurance Corporation.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of

Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance

Corporation (FDIC) (collectively, the agencies) are amending the advanced risk-based

capital adequacy standards (advanced approaches rules) in a manner that is consistent

with certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection

Act (the Act), and the general risk-based capital rules to provide limited flexibility

consistent with section 171(b) of the Act for recognizing the relative risk of certain assets

generally not held by depository institutions.

DATES: This final rule is effective [INSERT DATE 30 DAYS AFTER PUBLICATION

IN THE FEDERAL REGISTER].

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FOR FURTHER INFORMATION CONTACT:

OCC: Mark Ginsberg, Risk Expert, (202) 874-5070, Capital Policy Division; or Carl

Kaminski, Senior Attorney, or Stuart Feldstein, Director, Legislative and Regulatory

Activities, (202) 874-5090.

Board: Anna Lee Hewko, (202) 530–6260, Assistant Director, or Brendan Burke,

ule is effective [INSERT DATE 30 DAYS AFTER PUBLICATION

IN THE FEDERAL REGISTER].

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FOR FURTHER INFORMATION CONTACT:

OCC: Mark Ginsberg, Risk Expert, (202) 874-5070, Capital Policy Division; or Carl

Kaminski, Senior Attorney, or Stuart Feldstein, Director, Legislative and Regulatory

Activities, (202) 874-5090.

Board: Anna Lee Hewko, (202) 530–6260, Assistant Director, or Brendan Burke,

(202) 452–2987 Senior Supervisory Financial Analyst, Division of Banking Supervision

and Regulation, or April C. Snyder, (202) 452–3099, Counsel, or Benjamin W.

McDonough, (202) 452–2036, Counsel, Legal Division. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), (202) 263–4869.

FDIC: George French, Deputy Director, Policy, (202) 898-3929, Nancy Hunt,

Associate Director, Capital Markets Branch, (202) 898-6643, Division of Risk

Management Supervision; or Mark Handzlik, Counsel (202) 898-3990, or Michael

Phillips, Counsel (202) 898-3581, Supervision and Legislation Branch, Legal Division.

SUPPLEMENTARY INFORMATION

I.

Background

A.

Overview of the requirements of the Act

Section 171(b)(2) of the Act1 states that the agencies shall establish minimum

risk-based capital requirements on a consolidated basis for insured depository

institutions, depository institution holding companies, and nonbank financial companies

supervised by the Federal Reserve (covered institutions).2 In particular, and as described

in more detail below, sections 171(b)(1) and (2) specify that the minimum leverage and

1 Pub. L. 111-203, section 171, 124 Stat. 1376, 1435-38 (2010).

2 12 U.S.C. 5371, Pub. L. 111-203, section 171, 124 Stat. 1376, 1435-38 (2010).

k financial companies

supervised by the Federal Reserve (covered institutions).2 In particular, and as described

in more detail below, sections 171(b)(1) and (2) specify that the minimum leverage and

1 Pub. L. 111-203, section 171, 124 Stat. 1376, 1435-38 (2010).

2 12 U.S.C. 5371, Pub. L. 111-203, section 171, 124 Stat. 1376, 1435-38 (2010).

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risk-based capital requirements established under section 171 shall not be less than the

“generally applicable” capital requirements, which shall serve as a floor for any capital

requirements the agencies may require. Moreover, sections 171(b)(1) and (2) specify that

the Federal banking agencies may not establish leverage or risk-based capital

requirements for covered institutions that are quantitatively lower than the generally

applicable leverage or risk-based capital requirements in effect for insured depository

institutions as of the date of enactment of the Act.3

B.

Advanced approaches rules4

On December 7, 2007, the agencies published in the Federal Register a final rule

to implement the advanced approaches rules, which are mandatory for banks and bank

holding companies (collectively, banking organizations) meeting certain thresholds for

total consolidated assets or foreign exposure.5 The advanced approaches rules

incorporate a series of proposals released by the Basel Committee on Banking

Supervision (Basel Committee or BCBS), including the Basel Committee’s

3 On March 8, 2011, in an NPR that paralleled the agencies’ rulemaking, the Office of

Thrift Supervision (OTS) issued a notice in which OTS proposed to amend 12 CFR part

567, which sets forth the capital regulations applicable to savings associations. 45 FR

12,611 (March 8, 2011). OTS received one comment on its proposal

the Basel Committee’s

3 On March 8, 2011, in an NPR that paralleled the agencies’ rulemaking, the Office of

Thrift Supervision (OTS) issued a notice in which OTS proposed to amend 12 CFR part

567, which sets forth the capital regulations applicable to savings associations. 45 FR

12,611 (March 8, 2011). OTS received one comment on its proposal. The Act specifies

that the regulatory authority and other functions of OTS will transfer to OCC on the

transfer date provided in the Act, which is expected to be July 21, 2011. Given that the

OTS’s parallel rulemaking is subject to a 90 day review by the Office of Management

and Budget pursuant to Executive Order 12866, it would be impracticable for OTS to

issue a final rule before the transfer date. The OTS and OCC anticipate that OCC would

issue a final rule to amend the capital regulations applicable to savings associations, after

the transfer date.

4 12 CFR part 3, Appendix C (OCC); 12 CFR part 208, Appendix F and 12 CFR part

225, Appendix G (Board); and 12 CFR part 325 Appendix D (FDIC).

5 72 FR 69288 (December 7, 2007). Subject to prior supervisory approval, other banking

organizations can opt to use the advanced approaches rules. Id. at 69397.

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comprehensive June 2006 release entitled “International Convergence of Capital

Measurement and Capital Standards: A Revised Framework” (New Accord).6

To provide a smooth transition to the advanced approaches rules and to limit

temporarily the amount by which a banking organization’s risk-based capital

requirements could decline relative to the general risk-based capital rules, the advanced

approaches rules established a series of transitional floors over a period of at least three

years following a banking organization’s completion of a satisfactory parallel run.7

During the transitional floor periods, a banking organization’s risk-based capital ratios

are equal to the lesser of (i) the organization’s ratios calculated under the advanc

ral risk-based capital rules, the advanced

approaches rules established a series of transitional floors over a period of at least three

years following a banking organization’s completion of a satisfactory parallel run.7

During the transitional floor periods, a banking organization’s risk-based capital ratios

are equal to the lesser of (i) the organization’s ratios calculated under the advanced

approaches rules and (ii) its ratios calculated under the general risk-based capital rules,

with tier 1 and total risk-weighted assets as calculated under the general risk-based

capital rules multiplied by 95 percent, 90 percent, and 85 percent during the first, second,

and third transitional floor periods, respectively.8 Under this approach, a banking

organization that uses the advanced approaches rules is permitted to operate with lower

minimum risk-based capital requirements during a transitional floor period, and

potentially thereafter, than would be required under the general risk-based capital rules.

6 The BCBS is a committee of banking supervisory authorities established by the central

bank governors of the G-10 countries in 1975. The BCBS issued the New Accord to

modernize its first capital accord (“International Convergence of Capital Measurement

and Capital Standards” or “Basel I”), which was endorsed by the BCBS members in 1988

and implemented by the agencies in 1989. The New Accord, the 1988 Accord, and other

documents issued by the BCBS are available through the Bank for International

Settlements’ Web site at www.bis.org.

7 12 CFR part 3, Appendix A (OCC); 12 CFR parts 208 and 225, Appendix A (Board);

12 CFR part 325, Appendix A (FDIC).

8 Under the advanced approaches rules, the minimum tier 1 risk-based capital ratio is 4

percent and the minimum total risk-based capital ratio is 8 percent

ther

documents issued by the BCBS are available through the Bank for International

Settlements’ Web site at www.bis.org.

7 12 CFR part 3, Appendix A (OCC); 12 CFR parts 208 and 225, Appendix A (Board);

12 CFR part 325, Appendix A (FDIC).

8 Under the advanced approaches rules, the minimum tier 1 risk-based capital ratio is 4

percent and the minimum total risk-based capital ratio is 8 percent. See 12 CFR part 3,

Appendix C (OCC); 12 CFR part 208, Appendix F and 12 CFR part 225, Appendix G

(Board); and 12 CFR part 325 Appendix D (FDIC).

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To date, no U.S.-domiciled banking organization has entered a transitional floor period

and all U.S-domiciled banking organizations are required to compute their risk-based

capital requirements using the general risk-based capital rules.

C.

Requirements of section 171 of the Act

Section 171(a)(2) of the Act defines the term “generally applicable risk-based

capital requirements” to mean: “(A) the risk-based capital requirements, as established by

the appropriate Federal banking agencies to apply to insured depository institutions under

the prompt corrective action regulations implementing section 38 of the Federal Deposit

Insurance Act, regardless of total consolidated asset size or foreign financial exposure;

and (B) includes the regulatory capital components in the numerator of those capital

requirements, the risk-weighted assets in the denominator of those capital requirements,

and the required ratio of the numerator to the denominator.” Section 171(b)(2) of the Act

further provides that “[t]he appropriate Federal banking agencies shall establish minimum

risk-based capital requirements on a consolidated basis for insured depository

institutions, depository institution holding companies, and nonbank financial companies

supervised by the Board of Governors

uirements,

and the required ratio of the numerator to the denominator.” Section 171(b)(2) of the Act

further provides that “[t]he appropriate Federal banking agencies shall establish minimum

risk-based capital requirements on a consolidated basis for insured depository

institutions, depository institution holding companies, and nonbank financial companies

supervised by the Board of Governors. The minimum risk-based capital requirements

established under this paragraph shall not be less than the generally applicable risk-based

capital requirements, which shall serve as a floor for any capital requirements that the

agency may require, nor quantitatively lower than the generally applicable risk-based

capital requirements that were in effect for insured depository institutions as of the date

of enactment of this Act.”

In accordance with section 38 of the Federal Deposit Insurance Act, the Federal

banking agencies established minimum leverage and risk-based capital requirements for

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insured depository institutions for prompt corrective action (PCA) rules.9 All insured

institutions, regardless of their total consolidated assets or foreign exposure, must

compute their minimum risk-based capital requirements for PCA purposes using the

general risk-based capital rules, which currently are the “generally applicable risk-based

capital requirements” defined by Section 171(a)(2) of the Act.

D.

The proposed rule

By notice in the Federal Register dated December 30, 2010, the agencies issued a

notice of proposed rulemaking10 (NPR) to modify the advanced approaches rules

consistent with section 171(b)(2) of the Act. In particular, the agencies proposed to

revise the advanced approaches rules by replacing the transitional floors in section 21(e)

of the advanced approaches rules with a permanent floor equal to the tier 1 and total risk-

based capital requirements of the generally applicable risk-based capital rules

(“permanent floor”)

advanced approaches rules

consistent with section 171(b)(2) of the Act. In particular, the agencies proposed to

revise the advanced approaches rules by replacing the transitional floors in section 21(e)

of the advanced approaches rules with a permanent floor equal to the tier 1 and total risk-

based capital requirements of the generally applicable risk-based capital rules

(“permanent floor”). Under the proposal, each quarter, each banking organization subject

to the advanced approaches rules would be required to calculate and compare its

minimum tier 1 and total risk-based capital ratios as calculated under the general risk-

based capital rules with the same ratios as calculated under the advanced approaches risk-

based capital rules. The banking organization would then compare the lower of the two

tier 1 risk-based capital ratios and the lower of the two total risk-based capital ratios to

the minimum tier 1 ratio requirement of 4 percent and total risk-based capital ratio

9 See 12 U.S.C. 1831o, Pub. L. 102-242, 105 Stat. 2242 (1991); see also 12 CFR part

208, subpart D (Board).

10 75 FR 82317 (December 30, 2010).

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requirement of 8 percent in section 3 of the advanced approaches rules11 to determine

whether it meets its minimum risk-based capital requirements.12

For bank holding companies subject to the advanced approaches rule, the proposal

stated that in calculating their risk-based capital ratios, these organizations must calculate

their floor requirements under the general risk-based capital rules for state member

banks.13 However, in accordance with the Act, they may include certain debt or equity

instruments issued before May 19, 2010 as described in section 171(b)(4)(B) of the

Dodd-Frank Act.

approaches rule, the proposal

stated that in calculating their risk-based capital ratios, these organizations must calculate

their floor requirements under the general risk-based capital rules for state member

banks.13 However, in accordance with the Act, they may include certain debt or equity

instruments issued before May 19, 2010 as described in section 171(b)(4)(B) of the

Dodd-Frank Act.. The agencies also proposed to eliminate the provisions of the

advanced approaches rules relating to transitional floor periods and the interagency study

of any material deficiencies in the rules.14 If the proposed permanent floor were

implemented, these provisions of the advanced approaches rules would no longer serve a

purpose.

The proposal also included a modification to the general risk-based capital rules

to address the appropriate capital requirement for low-risk assets held by depository

11 12 CFR part 3, Appendix C, section 3 (OCC); 12 CFR part 208, Appendix F, section 3

and 12 CFR part 225, Appendix G, section 3 (Board); and 12 CFR part 325, section 3

Appendix D (FDIC).

12 Banking organizations that use the advanced approaches rules are subject to the same

minimum leverage requirements that apply to other banking organizations. That is,

advanced approaches banks calculate only one leverage ratio using the numerator as

calculated under the generally risk-based capital rules. Accordingly, the agencies did not

propose any change to the calculation of the leverage ratio requirements for banking

organizations that use the advanced approaches rules.

13 12 CFR part 208, appendix A.

14 Supra, section 21(e)(6) Interagency study. For any primary Federal supervisor to

authorize any institution to exit the third transitional floor period, the study must

determine that there are no such material deficiencies that cannot be addressed by then-

existing tools, or, if such deficiencies are found, they are first remedied by changes to this

appendix

13 12 CFR part 208, appendix A.

14 Supra, section 21(e)(6) Interagency study. For any primary Federal supervisor to

authorize any institution to exit the third transitional floor period, the study must

determine that there are no such material deficiencies that cannot be addressed by then-

existing tools, or, if such deficiencies are found, they are first remedied by changes to this

appendix.

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institution holding companies15 or by nonbank financial companies supervised by the

Board pursuant to a designation by the Financial Stability Oversight Council (FSOC), in

situations where there is no explicit capital treatment for such exposures under the

general risk-based capital rules. The agencies proposed that such exposures receive the

capital treatment applicable under the capital guidelines for bank holding companies

under limited circumstances. The circumstances are intended to allow for an appropriate

capital requirement for low-risk, nonbanking exposures without creating unintended new

opportunities for depository institutions to engage in capital arbitrage. Accordingly, the

agencies proposed to limit this treatment to cases in which a depository institution is not

authorized to hold the asset under applicable law other than under the authority to hold an

asset in connection with the satisfaction of a debt previously contracted or similar

authority, and the risks associated with the asset are substantially similar to the risks of

assets that otherwise are assigned a risk weight of less than 100 percent under the general

risk-based capital rules.16

II. Comments Received

A.

Overview

The agencies collectively received 16 comments from both domestic and

international trade associations and from individual financial institutions, including

insurance companies

ted with the asset are substantially similar to the risks of

assets that otherwise are assigned a risk weight of less than 100 percent under the general

risk-based capital rules.16

II. Comments Received

A.

Overview

The agencies collectively received 16 comments from both domestic and

international trade associations and from individual financial institutions, including

insurance companies. Groups representing large banking organizations generally argued

15 Section 171 of the Act defines “depository institution holding company” to mean a

bank holding company or a savings and loan holding company (as those terms are

defined in section 3 of the Federal Deposit Insurance Act) that is organized in the United

States, including any bank or savings and loan holding company that is owned or

controlled by a foreign organization, but does not include the foreign organization. See

section 171 of the Act, 12 U.S.C. 5371.

16 See 12 U.S.C. 24(Seventh) and 12 U.S.C. 29 (national banks); 12 U.S.C. § 335; and 12

U.S.C. 1831a(a) (state nonmember banks).

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against the proposed permanent floor. These commenters asserted that it would place

large U.S. banking organizations at a disadvantage relative to their international

competitors, increase their costs, and undermine the risk sensitivity of the advanced

approaches capital rules. In contrast, a trade organization for community banks and a

financial reform advocacy organization supported the proposal.

Commenters representing insurance companies generally supported the proposed

revisions to the general risk-based capital rules for selected nonbank assets, arguing that

insurance companies have different risk profiles and their liabilities and assets are of

different durations compared to banks. These commenters said it would not be

appropriate to mechanically apply bank capital regulations to insurance companies.

B

nsurance companies generally supported the proposed

revisions to the general risk-based capital rules for selected nonbank assets, arguing that

insurance companies have different risk profiles and their liabilities and assets are of

different durations compared to banks. These commenters said it would not be

appropriate to mechanically apply bank capital regulations to insurance companies.

B.

Impact on banking organizations that use the advanced approaches rules

In response to the agencies’ question on how the proposal would affect U.S.

banking organizations that use the advanced approaches rules, several commenters,

mostly representing the largest U.S. financial institutions, expressed strong concerns

about the proposed permanent floor, while acknowledging that the agencies were acting

in response to a statutory requirement.17 These commenters generally asserted that the

proposal exceeds the requirements of the Act, and would undermine the risk sensitivity of

the risk-based capital rules, encourage banking organizations to invest more in higher risk

assets, and distort decisions regarding capital allocation. These commenters also

contended that the proposal would put U.S. banks at a disadvantage relative to their

foreign competitors. Some of these commenters expressed a preference for alternative

17 Id. at 82319.

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approaches to implement section 171 of the Act, including a Pillar 2 supervisory

approach under the New Accord.

Some of the commenters who opposed the permanent floor also criticized the

proposal for retaining two regulatory capital regimes, causing confusion, and diverting

significant resources into developing systems to comply with the advanced rules, without

a corresponding reduction in capital costs due to the imposition of the proposed

permanent floor

supervisory

approach under the New Accord.

Some of the commenters who opposed the permanent floor also criticized the

proposal for retaining two regulatory capital regimes, causing confusion, and diverting

significant resources into developing systems to comply with the advanced rules, without

a corresponding reduction in capital costs due to the imposition of the proposed

permanent floor. These commenters also expressed concern and asked the agencies to

clarify how the proposal would interact with Basel III18 (particularly, the Basel III

leverage ratio and capital conservation buffer), prompt corrective action, and other Dodd-

Frank Act provisions relating to capital adequacy, such as those required by section

165.19 In particular, these commenters expressed concern about what they viewed as

negative consequences of maintaining a Basel I-based floor after full implementation of

Basel III.

In contrast, one commenter representing community banks and another

representing a financial reform advocacy organization expressed strong support for

modifying the advanced approaches rules by replacing the transitional floors with the

permanent floor. These commenters asserted that it is not appropriate for the agencies to

allow large banking organizations to determine their capital requirements based on

internal models because it may allow them to reduce their capital levels and give them a

competitive advantage over community banks, and could also increase negative

procyclical outcomes.

18 The term “Basel III” refers to the new comprehensive set of reform measures

developed by the BCBS to strengthen the regulation, supervision, and risk management

of the banking sector. These releases are available on the BIS website, www.bis.org.

19 See section 165 of the Act; 12 U.S.C. 5365.

also increase negative

procyclical outcomes.

18 The term “Basel III” refers to the new comprehensive set of reform measures

developed by the BCBS to strengthen the regulation, supervision, and risk management

of the banking sector. These releases are available on the BIS website, www.bis.org.

19 See section 165 of the Act; 12 U.S.C. 5365.

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C.

Effect on applications by foreign banking organizations

The preamble to the proposed rule noted that in approving an application by a

foreign banking organization to establish a branch or agency in the United States or to

make a bank or nonbank acquisition, the Board considers, among other factors, whether

the capital of the foreign banking organization is equivalent to the capital that would be

required of a U.S. banking organization.20 In addition, in approving an application by a

foreign banking organization to establish a federal branch or agency, the OCC must make

a similar capital equivalency determination.21 Similarly, in order to make effective a

foreign banking organization’s declaration under the Bank Holding Company Act (BHC

Act) to be treated as a financial holding company (FHC), the Board must apply

comparable capital and management standards to the foreign banking organization

“giving due regard to the principle of national treatment and equality of competitive

opportunity.”22 National treatment generally means treatment that is no less favorable

than that provided to domestic institutions that are in like circumstances. The agencies

have broad discretion to consider relevant factors in making these determinations.

The Board has been making capital equivalency findings for foreign banking

organizations under the International Banking Act and the BHC Act since 1992 pursuant

20 See 12 U.S.C. 1842(c); 1843(j); and 3105(d)(3)(B), (j)(2).

21 See 12 U.S.C. 3103 (a)(3)(B)(i).

22 12 U.S.C. 1843(l)(3)

onsider relevant factors in making these determinations.

The Board has been making capital equivalency findings for foreign banking

organizations under the International Banking Act and the BHC Act since 1992 pursuant

20 See 12 U.S.C. 1842(c); 1843(j); and 3105(d)(3)(B), (j)(2).

21 See 12 U.S.C. 3103 (a)(3)(B)(i).

22 12 U.S.C. 1843(l)(3). A foreign bank that operates a branch, agency or commercial

lending company in the United States and any company that owns such a foreign bank, is

subject to the BHC Act as if it were a bank holding company. The BHC Act, as amended

by the Gramm-Leach Bliley Act, provides that a bank holding company may become an

FHC if its depository institutions meet certain capital and management standards. See 12

U.S.C. 1843(l)(1); 12 CFR 225. Under section 606 of the Act, this requirement will be

modified to require the bank holding company to be well capitalized and well managed.

See the Act, section 606.

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to guidelines developed as part of a joint study by the Board and Treasury on capital

equivalency.23 The study acknowledged the Basel Committee on Banking Supervision’s

1988 Accord (Basel I) as the prevailing capital standard for internationally active banks

and found that implementation of Basel I was broadly equivalent across countries. Until

2007, the agencies had generally accepted as equivalent the capital of foreign banking

organizations from countries adhering to Basel I within the bounds of national discretion

allowed under the Basel I framework. For foreign banking organizations that have begun

operating under the New Accord’s capital standards, the agencies have evaluated the

capital of the foreign banking organization as reported in compliance with the New

Accord, while also taking into account a range of factors including compliance with the

New Accord’s capital requirement floors linked to Basel I, where applicable

l I framework. For foreign banking organizations that have begun

operating under the New Accord’s capital standards, the agencies have evaluated the

capital of the foreign banking organization as reported in compliance with the New

Accord, while also taking into account a range of factors including compliance with the

New Accord’s capital requirement floors linked to Basel I, where applicable. In some

countries, Basel I floors are no longer in effect, or are expected to be phased out in the

near term.

The NPR sought commenters’ views on how the proposed rule should be applied

to foreign banking organizations in evaluating capital equivalency in the context of

applications to establish branches or make bank or nonbank acquisitions in the United

States, and in evaluating capital comparability in the context of foreign banking

organization FHC declarations. In raising this question, the agencies recognized the

challenge of administering capital equivalency determinations where the foreign banking

organization is not subject to the same floor requirement as its U.S. counterpart.

23 ‘‘Capital Equivalency Report,’’ Board of Governors of the Federal Reserve System

and Secretary of the U.S. Department of the Treasury (June 19, 1992). See 12 U.S.C.

3105(j).

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In responding to this question, most commenters asserted that extending U.S.

capital requirements to a foreign banking organization operating outside of the United

States would not be appropriate and would be inconsistent with the Board’s supervisory

practice regarding the recognition of home country capital regulations. Several

commenters noted that subjecting a foreign banking organization to the proposed rule

contradicts the language of the Act, which excludes foreign banking organizations from

the requirements of section 171. Several commenters supported applying the proposed

rule to the U.S

inconsistent with the Board’s supervisory

practice regarding the recognition of home country capital regulations. Several

commenters noted that subjecting a foreign banking organization to the proposed rule

contradicts the language of the Act, which excludes foreign banking organizations from

the requirements of section 171. Several commenters supported applying the proposed

rule to the U.S. operations of foreign banking organizations operating in the United States

to be consistent with requirements for domestic banking organizations.

Some commenters noted that foreign banking organizations operating under the

advanced approaches rules would receive a competitive advantage over U.S. banking

organizations subject to the proposal’s permanent floor requirement. In addition, several

commenters expressed concern that the applying the proposed floor to foreign banking

organizations may incentivize home country supervisors to impose reciprocal

arrangements for U.S. banking organizations operating abroad.

The agencies acknowledge that section 171, by its terms, does not apply to

foreign banking organizations. Rather, the question on capital equivalency and

comparability determinations was intended to seek views on practical ways to administer

such determinations in the context of certain foreign bank organization applications to

enter or expand operations within the United States given the proposal’s requirements

and longstanding supervisory practice. One of the agencies’ supervisory objectives is to

establish a consistent means for making capital equivalency determinations in the context

of foreign banking organization applications to establish branches or to acquire banks or

reign bank organization applications to

enter or expand operations within the United States given the proposal’s requirements

and longstanding supervisory practice. One of the agencies’ supervisory objectives is to

establish a consistent means for making capital equivalency determinations in the context

of foreign banking organization applications to establish branches or to acquire banks or

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nonbanks in the United States, and in evaluating capital comparability in the context of

foreign banking organization FHC declarations. The agencies recognize the challenges

of establishing a consistent process for evaluating capital equivalency in cases where,

among other things, the foreign banking organization applicant operating under advanced

approaches no longer has the Basel I floor in place in its home country, and therefore no

longer produces financial information based on Basel I requirements. The agencies

believe that it is important to take into consideration the competitive issues highlighted

by commenters. The agencies will continue to evaluate equivalency issues on a case-by-

case basis taking into consideration the comments received.

D.

Proposed capital requirements for certain nonbanking exposures

In the NPR, the agencies sought comment on whether the proposed treatment of

nonbanking exposures described above was appropriate, whether this treatment was

sufficiently flexible to address the exposures of depository institution holding companies

and nonbank financial companies supervised by the Board, and, if not, how the treatment

should be modified.24 Most commenters generally supported allowing flexibility for the

capital treatment of nonbanking assets and agreed with the agencies’ observation that

automatically assigning such assets to the 100 percent risk weight category because they

are not explicitly assigned to a lower risk weight category may not always be appropriate

based on the economic substance of the exposure

ld be modified.24 Most commenters generally supported allowing flexibility for the

capital treatment of nonbanking assets and agreed with the agencies’ observation that

automatically assigning such assets to the 100 percent risk weight category because they

are not explicitly assigned to a lower risk weight category may not always be appropriate

based on the economic substance of the exposure. One commenter broadly agreed with

the proposal but stated that the proposed treatment needed further clarification. Another

commenter noted that the rule also should provide for higher capital requirements,

particularly for those exposures that that are impermissible for banks. One commenter

24 Id. at 82320.

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noted that the proposal’s limited flexibility to allow certain assets to receive the capital

treatment applicable under the capital guidelines for bank holding companies should not

include the condition that the asset be held under debt previously contracted or similar

authority. This commenter stated that assignment to a risk category should be based on

the risk of the asset and not on the underlying authority to own the asset.

The agencies received substantial comments from insurance companies about the

capital requirements for these entities in general as well as on the proposed modifications

to the general risk-based capital rules to address certain nonbank assets. These

commenters argued that it would not be appropriate to apply capital requirements

applicable to banking organizations to insurance companies because their risk profiles,

balance sheet characteristics, and business models fundamentally differ

nts for these entities in general as well as on the proposed modifications

to the general risk-based capital rules to address certain nonbank assets. These

commenters argued that it would not be appropriate to apply capital requirements

applicable to banking organizations to insurance companies because their risk profiles,

balance sheet characteristics, and business models fundamentally differ. Several of these

commenters were concerned that applying capital requirements for banking organizations

to insurance companies without taking these differences into account is overly simplistic

and may lead to distorted incentives, undermine efficient use of capital, curtail insurance

underwriting capacity, and negatively impact insurance markets.

Some commenters suggested that significant adjustments to the risk weights

applicable to banking organizations’ exposures would be necessary when considering

applicability to insurance companies’ exposures. Other commenters suggested that

adjustments to risk weights alone would be insufficient. Several commenters suggested

that the agencies recognize and incorporate established insurance capital standards into

any new capital regime that may apply to insurance companies. Some commenters

suggested that the agencies use a principle of equivalence to evaluate insurance

companies’ capital adequacy similar to the practice used by the Board to determine if the

one would be insufficient. Several commenters suggested

that the agencies recognize and incorporate established insurance capital standards into

any new capital regime that may apply to insurance companies. Some commenters

suggested that the agencies use a principle of equivalence to evaluate insurance

companies’ capital adequacy similar to the practice used by the Board to determine if the

16

capital of a foreign bank is equivalent to the capital required of a U.S. banking

organization. Certain insurance industry commenters provided specific examples of

exposures that should be given consideration for a lower risk weight under the general

risk-based capital rules, including non-guaranteed separate accounts based on the

rationale that the insurance policyholder and not the institution bears the investment risk

associated with the contract. Other assets for which commenters suggested consideration

regarding the capital treatment included guaranteed separate accounts, corporate debt,

and private placements.

Some commenters expressed concern that the Board may require insurance

companies to use U.S. generally accepted accounting principles for preparing financial

statements instead of the statutory accounting principles applicable to insurance

companies. These commenters noted the burden and costs associated with using two

accounting systems.

E.

Quantitative methods for comparing capital frameworks

The NPR sought comment on how the agencies should, in the future, evaluate

changes to the general risk-based capital requirements to ensure they are not

quantitatively lower than the “generally applicable capital requirements” in effect as of

the enactment of section 171 of the Act.25 Commenters generally supported looking at

industry-wide aggregate capital levels, in order to conduct the analysis, rather than basing

the calculation on an item-by-item comparison of capital requirements for each class of

exposures

ments to ensure they are not

quantitatively lower than the “generally applicable capital requirements” in effect as of

the enactment of section 171 of the Act.25 Commenters generally supported looking at

industry-wide aggregate capital levels, in order to conduct the analysis, rather than basing

the calculation on an item-by-item comparison of capital requirements for each class of

exposures. These commenters asserted that this approach would allow individual

organizations to adjust their business models appropriately while satisfying the test.

25 75 FR at 82320-21.

17

One commenter suggested that in comparing proposed changes to the generally

applicable capital requirements, the agencies should assume a stable risk profile within

the industry while assessing levels of capital. This commenter points out maintaining

reliable comparative data over time could make quantitative methods for this purpose

difficult. For example, evaluating asset categories with current and historic data would

be difficult if banks have not maintained consistent tracking methods, or common

definitions over time. This commenter also suggested that it would be misguided to

compare future capital requirements without regard to risk.

F.

Costs and benefits and other comments

Several commenters were concerned about the operational expense and burden

associated with determining compliance with two sets of capital rules. One stated that

requiring two sets of capital rules would result in permanently higher operating costs for

banking organizations under the advanced approaches rules. This commenter also

suggested that the proposed risk-based capital floor will reduce the incentive for banking

organizations considering whether to undertake the expense and effort necessary to adopt

the advanced approaches rules if minimum capital levels are determined by a less risk-

sensitive capital framework

r operating costs for

banking organizations under the advanced approaches rules. This commenter also

suggested that the proposed risk-based capital floor will reduce the incentive for banking

organizations considering whether to undertake the expense and effort necessary to adopt

the advanced approaches rules if minimum capital levels are determined by a less risk-

sensitive capital framework. Some commenters also expressed concerns about the cost of

continuing to implement the advanced approaches rules. One said that banks already

have spent hundreds of millions of dollars on implementing the advanced approaches

rules, and the proposal would eliminate the opportunity for banks to realize cost savings

from potentially lower capital requirements under the advanced approaches rules.

Another commenter suggested the agencies consider exempting from the permanent floor

requirement any banking organization whose risk-weighted assets in the trading book

18

exceeded a certain percent of total risk-weighted assets. This commenter also suggested

ways of reducing the cost of compliance under the advanced approaches rules by, for

example, raising the materiality standards to exempt small, relatively low-risk portfolios

to save significant time and money at minimal cost in terms of lessened risk sensitivity.

Commenters generally indicated that keeping track of two sets of capital

regulations (the advanced approaches rules and the generally applicable risk-based capital

rules then in effect) was preferable to tracking three capital rules (the above two capital

regimes and the general risk-based capital rules in effect on July 21, 2010).

Two commenters also suggested that because the FSOC has not designated any

systemically important nonbank financial companies, potential designees were not

provided sufficient notice and opportunity to comment on the proposal.

G

es then in effect) was preferable to tracking three capital rules (the above two capital

regimes and the general risk-based capital rules in effect on July 21, 2010).

Two commenters also suggested that because the FSOC has not designated any

systemically important nonbank financial companies, potential designees were not

provided sufficient notice and opportunity to comment on the proposal.

G.

Analysis of Comments

As described in the preceding section, a number of the commenters expressed

opinions about the appropriateness of the policy underlying section 171 of the Act. The

agencies note that they are required by law to comply with the Act and sought comment

in the NPR on the manner in which the agencies proposed to implement certain

requirements of section 171, and on ways to mitigate banking organizations’ burden in

meeting the proposed requirements.

In response to comments on the burden of maintaining two systems to calculate

capital requirements under both the risk-based capital rules and the advanced approaches

rules, the agencies note that banking organizations in parallel run are currently reporting

their capital requirements under both sets of rules. The agencies recognize that reporting

capital calculations under two capital frameworks beyond the transitional floor

19

arrangement was not expected at the onset of the advanced approaches rules. However,

as discussed above, the agencies are issuing the final rule to be consistent with the

requirements under section 171(b)(2) of the Act.

Generally commenters supported the proposal’s amendment to the general risk-

based capital rules to address the appropriate capital requirement for low risk assets that

non-depository institutions may hold and for which there is no explicit capital treatment

in the general risk-based capital rules

suing the final rule to be consistent with the

requirements under section 171(b)(2) of the Act.

Generally commenters supported the proposal’s amendment to the general risk-

based capital rules to address the appropriate capital requirement for low risk assets that

non-depository institutions may hold and for which there is no explicit capital treatment

in the general risk-based capital rules. This change was focused on providing limited

flexibility for future changes to the risk-based capital rules applicable to bank holding

companies following an evaluation of the exposures of covered institutions that may not

previously have been subject to consolidated risk-based capital requirements applicable

to banking organizations. Several commenters provided specific examples of assets that

warrant consideration for a risk weight lower than 100 percent. The Board will consider

the risk characteristics for such assets on a case-by-case basis as it considers potential

changes to the risk-based capital rules applicable to bank holding companies.

One commenter recommended that the agencies remove from this treatment the

condition that the bank holds the asset in connection with the satisfaction of a debt

previously contracted or similar authority. This commenter suggests that the assignment

to a risk category should be based on the risk of the asset, not an authority to own the

asset. The agencies agree that in the cases where this limited treatment is used, the

assignment of a capital requirement in this situation would be based on an evaluation of

the asset’s risk profile. The condition related to legal authority is intended to limit the

scope for assignments of capital requirements under this provision to assets not typically

asset, not an authority to own the

asset. The agencies agree that in the cases where this limited treatment is used, the

assignment of a capital requirement in this situation would be based on an evaluation of

the asset’s risk profile. The condition related to legal authority is intended to limit the

scope for assignments of capital requirements under this provision to assets not typically

20

held by depository institutions, whose risks and characteristics were not contemplated

when the general risk-based capital rules were developed.

Insurance-related commenters noted that some large insurance companies which

engage predominantly in insurance activities have depository institution subsidiaries or

affiliates that represent a relatively small portion of the consolidated entity. These

commenters highlighted fundamental differences in risk profiles, balance sheet

characteristics, and business models between insurance companies and banking

organizations. In response to these comments, the agencies note that section 171(b)(2) of

the Act does not take into account the size or other differences between a holding

company and its subsidiary depository institution(s). Consistent with this section of the

Act, the “generally applicable” capital requirements serves as a floor for any capital

requirements the agencies may require.

Some commenters suggested that foreign banking organizations operating under

the advanced approaches rules could hold less capital and therefore, receive a competitive

advantage compared to U.S banking organizations. The agencies agree that without the

proposal’s floor requirement, a banking organization that uses the advanced approaches

rules could theoretically operate with lower minimum risk-based capital requirements

than would be required under the general risk-based capital rules

aches rules could hold less capital and therefore, receive a competitive

advantage compared to U.S banking organizations. The agencies agree that without the

proposal’s floor requirement, a banking organization that uses the advanced approaches

rules could theoretically operate with lower minimum risk-based capital requirements

than would be required under the general risk-based capital rules. The agencies will

consider these competitive equity concerns when working with the BCBS and other

supervisory authorities to mitigate potential competitive inequities across jurisdictions, as

appropriate.

In explaining their concern about how the proposal would interact with Basel III,

a number of commenters focused on the proposed rule and future changes to regulatory

21

capital requirements, including those related to U.S. implementation of Basel III. These

commenters stated that it is not possible to understand the consequences of implementing

section 171 without addressing the broader range of changes in capital regulations, such

as changes to the leverage ratio and PCA provisions.

The agencies agree that implementing section 171 will require careful

consideration and diligence over time, as the agencies propose and implement various

enhancements to the regulatory capital rules. Consistent with the joint efforts of the U.S.

banking agencies and the Basel Committee to enhance the regulatory capital rules

applicable to internationally active banking organizations, the agencies anticipate that

their capital requirements will be amended, establishing different minimum and

“generally applicable” capital requirements. These amendments would reflect advances

in risk sensitivity and potentially other substantive changes to international agreements

on capital requirements and capital policy changes generally

le to internationally active banking organizations, the agencies anticipate that

their capital requirements will be amended, establishing different minimum and

“generally applicable” capital requirements. These amendments would reflect advances

in risk sensitivity and potentially other substantive changes to international agreements

on capital requirements and capital policy changes generally.

Thus, the “generally applicable” capital requirements as defined under

section 171 will evolve over time, and as they evolve, continue to serve as a floor for all

banking organizations’ risk-based capital requirements. Section 171 also requires that the

minimum capital requirements established under section 171 not be “quantitatively

lower” than the “generally applicable” capital requirements in effect for insured

depository institutions as of the date of the Act.

The agencies anticipate performing a quantitative analysis of any new capital

framework developed in the future for purposes of ensuring that future changes to the

agencies’ capital requirements result in minimum capital requirements that are not

“quantitatively lower” than the “generally applicable” capital requirements for insured

22

depository institutions in effect as of the date of enactment of the Act. By performing

such an analysis, the agencies would ensure that all minimum capital requirements

established under section 171 meet this requirement, including minimum requirements

that become the new “generally applicable” capital requirements under section 171.

The agencies are currently considering how that analysis may be performed for

anticipated changes to the capital rules. As some commenters noted, comparing capital

requirements on an aggregate basis is an effective way of conducting the “quantitatively

lower” analysis and the agencies expect to propose this method as appropriate in future

rulemakings

capital requirements under section 171.

The agencies are currently considering how that analysis may be performed for

anticipated changes to the capital rules. As some commenters noted, comparing capital

requirements on an aggregate basis is an effective way of conducting the “quantitatively

lower” analysis and the agencies expect to propose this method as appropriate in future

rulemakings. The agencies anticipate that before proposing future changes to their

capital requirements, the agencies will consider the implications for the capital adequacy

of banking organizations, the implementation costs, and the nature of any unintended

consequences or competitive issues. The agencies note that section 171 does not require

a “permanent Basel-I based floor” as some commenters have suggested. The agencies

also note that they do not anticipate proposing to require banking organizations to

compute two sets of generally applicable capital requirements from current and historic

frameworks as the generally applicable requirements are amended over time.

In addition, the agencies agree with commenters that the relationship between the

requirements of section 171 and other aspects of the Act, including section 165, must be

considered carefully and that all aspects of the Act should be implemented so as to avoid

imposing conflicting or inconsistent regulatory capital requirements.

III. Final Rule

A.

Implementation of a risk-based capital floor.

tion, the agencies agree with commenters that the relationship between the

requirements of section 171 and other aspects of the Act, including section 165, must be

considered carefully and that all aspects of the Act should be implemented so as to avoid

imposing conflicting or inconsistent regulatory capital requirements.

III. Final Rule

A.

Implementation of a risk-based capital floor.

23

The agencies have considered the comments received on the NPR, and continue

to believe that the rule as proposed is consistent with the requirements of section 171 of

the Act with respect to risk-based capital requirements. Therefore, the agencies have

decided to implement the rule as proposed, effective [INSERT DATE 30 DAYS AFTER

PUBLICATION IN THE FEDERAL REGISTER].

Thus, each organization implementing the advanced approaches rules will

continue to calculate its risk-based capital requirements under the agencies’ general risk-

based capital rules, and the capital requirement it computes under those rules will serve

as a floor for its risk-based capital requirement computed under the advanced approaches

rules. The agencies note that the effect of this rule on banking organizations is to

preclude certain reductions in capital requirements that might have occurred in the future,

absent the rule and absent any further changes to the capital rules. The agencies also note

that in practice, the rule will not have an immediate effect on banking organizations’

capital requirements because all organizations subject to the advanced approaches rules

are currently computing their capital requirements under the general risk-based capital

rules

ight have occurred in the future,

absent the rule and absent any further changes to the capital rules. The agencies also note

that in practice, the rule will not have an immediate effect on banking organizations’

capital requirements because all organizations subject to the advanced approaches rules

are currently computing their capital requirements under the general risk-based capital

rules.

For bank holding companies subject to the advanced approaches rule, as noted

above, the final rule provides that they must calculate their floor requirement under the

general risk-based capital rules for state member banks.26 However, in accordance with

the Act, these organizations may include certain debt or equity instruments issued before

May 19, 2010 as described in section 171(b)(4)(B) of the Act. The agencies expect the

phase-in of restrictions on the regulatory capital treatment of the debt or equity

26 12 CFR part 208, appendix A.

24

instruments described in section 171(b)(4)(B) of the Act will be addressed in more detail

in a subsequent rule. As indicated in the proposal, other aspects of section 171 are not

addressed in this final rule.

B.

Capital requirements for certain nonbanking exposures.

Commenters generally supported the agencies’ proposed treatment of certain low-

risk, nonbanking exposures. The agencies believe the proposed treatment provides

flexibility to address situations where exposures of a depository institution holding

company or a nonbank financial company supervised by the Board not only do not

wholly fit within the terms of a risk weight category applicable to banking organizations,

but also impose risks that are not commensurate with the risk weight otherwise specified

in the generally applicable risk-based capital requirements. Therefore, the final rule

retains the proposed rule’s treatment for these assets without modification

cial company supervised by the Board not only do not

wholly fit within the terms of a risk weight category applicable to banking organizations,

but also impose risks that are not commensurate with the risk weight otherwise specified

in the generally applicable risk-based capital requirements. Therefore, the final rule

retains the proposed rule’s treatment for these assets without modification.

As a general matter, the Board and the other federal banking agencies retain a

reservation of authority to assign alternate risk-based capital requirements if such action

is warranted.

Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally requires

that an agency prepare and make available for public comment an initial regulatory

flexibility analysis in connection with a notice of proposed rulemaking.27 The regulatory

flexibility analysis otherwise required under section 604 of the RFA is not required if an

agency certifies that the rule will not have a significant economic impact on a substantial

27 See 5 U.S.C. 603(a).

25

number of small entities (defined for purposes of the RFA to include banks with assets

less than or equal to $175 million) and publishes its certification and a short, explanatory

statement in the Federal Register along with its rule.

As discussed in greater detail above, the purpose of the final rule is to establish a

risk-based capital floor for the advanced approaches rules in a manner that is consistent

with section 171 of the Act

s of the RFA to include banks with assets

less than or equal to $175 million) and publishes its certification and a short, explanatory

statement in the Federal Register along with its rule.

As discussed in greater detail above, the purpose of the final rule is to establish a

risk-based capital floor for the advanced approaches rules in a manner that is consistent

with section 171 of the Act. In addition, the final rule also amends the general risk-based

capital rules for depository institutions to provide flexibility consistent with section 171

of the Act for addressing the appropriate capital requirement for low-risk assets held by

depository institution holding companies or by nonbank financial companies supervised

by the Board, in situations where there is no explicit capital treatment for such exposures

under the general risk-based capital rules.

As discussed above, the agencies solicited public comment on the rule in a notice

of proposed rulemaking. The agencies did not receive any comments regarding burden to

small banking organizations. After considering the comments on the proposal, the

agencies decided to issue the proposed rule text as a final rule without change.

The final rule would affect bank holding companies, national banks, state member

banks, and state nonmember banks that use the advanced approaches rules to calculate

their risk-based capital requirements according to certain internal ratings-based and

internal model approaches. A bank holding company or bank must use the advanced

approaches rules only if: (i) it has consolidated total assets (as reported on its most recent

year-end regulatory report) equal to $250 billion or more; (ii) it has consolidated total on-

balance sheet foreign exposures at the most recent year-end equal to $10 billion or more;

certain internal ratings-based and

internal model approaches. A bank holding company or bank must use the advanced

approaches rules only if: (i) it has consolidated total assets (as reported on its most recent

year-end regulatory report) equal to $250 billion or more; (ii) it has consolidated total on-

balance sheet foreign exposures at the most recent year-end equal to $10 billion or more;

26

or (iii) it is a subsidiary of a bank holding company or bank that would be required to use

the advanced approaches rules to calculate its risk-based capital requirements.

With respect to the changes to the general risk-based capital rules, the final rule

has the potential to affect the risk weights applicable only to assets that generally are

impermissible for banks to hold. These changes are, accordingly, unlikely to have a

significant impact on banking organizations. The agencies also note that the changes to

the general risk-based capital rules would not impose any additional obligations,

restrictions, burdens, or reporting, recordkeeping or compliance requirements on banks

including small banking organizations, nor do they duplicate, overlap or conflict with

other Federal rules.

The agencies estimate that zero small bank holding companies (out of a total of

approximately 4,493 small bank holding companies), one small national bank (out of a

total of approximately 664 small national banks), one small state member bank (out of a

total of approximately 398 small state member banks), and one small state nonmember

bank (out of a total of approximately 2,639 small state nonmember banks) are required to

use the advanced approaches rules.28 In addition, each of the small banks that is required

to use the advanced approaches rules is a subsidiary of a bank holding company with

over $250 billion in consolidated total assets or over $10 billion in consolidated total on-

balance sheet foreign exposures

member

bank (out of a total of approximately 2,639 small state nonmember banks) are required to

use the advanced approaches rules.28 In addition, each of the small banks that is required

to use the advanced approaches rules is a subsidiary of a bank holding company with

over $250 billion in consolidated total assets or over $10 billion in consolidated total on-

balance sheet foreign exposures. Therefore, the agencies believe that the final rule will

not result in a significant economic impact on a substantial number of small entities.

28 All totals are as of December 31, 2010.

27

OCC Unfunded Mandates Reform Act of 1995 Determinations

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4

(UMRA) requires that an agency prepare a budgetary impact statement before

promulgating a rule that includes a Federal mandate that may result in the expenditure by

state, local, and tribal governments, in the aggregate, or by the private sector of $100

million or more (adjusted annually for inflation) in any one year. If a budgetary impact

statement is required, section 205 of the UMRA also requires an agency to identify and

consider a reasonable number of regulatory alternatives before promulgating a rule. The

OCC has determined that its final rule will not result in expenditures by state, local, and

tribal governments, or by the private sector, of $100 million or more. Accordingly, the

OCC has not prepared a budgetary impact statement or specifically addressed the

regulatory alternatives considered.

Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act of 1995,29

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 Office of Management

and Budget (OMB) control number

mpact statement or specifically addressed the

regulatory alternatives considered.

Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act of 1995,29

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 Office of Management

and Budget (OMB) control number. Each of the agencies has an established information

collection for the paperwork burden imposed by the advanced approaches rule.30 This

final rule would replace the transitional floors in section 21(e) of the advanced

approaches rule with a permanent floor equal to the tier 1 and total risk-based capital

requirements under the current generally applicable risk-based capital rules. The

29 44 U.S.C. 3501-3521

30 See Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital

Adequacy Framework, FFIEC 101, OCC OMB Number 1557-0239, Federal Reserve

OMB Number 7100-0319, FDIC OMB Number 3064-0159.

28

proposed change to transitional floors would change the basis for calculating a data

element that must be reported to the agencies under an existing requirement. However, it

would have no impact on the frequency or response time for the reporting requirement

and, therefore, does not constitute a substantive or material change subject to OMB

review.

Plain Language

Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat.

1338,1471) requires the agencies to use plain language in all proposed and final rules

published after January 1, 2000. In light of this requirement, the agencies have sought to

present the final rule in a simple and straightforward manner.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Banks, Banking, Capital, National banks,

Reporting and record keeping requirements, Risk

471) requires the agencies to use plain language in all proposed and final rules

published after January 1, 2000. In light of this requirement, the agencies have sought to

present the final rule in a simple and straightforward manner.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Banks, Banking, Capital, National banks,

Reporting and record keeping requirements, Risk.

12 CFR Part 208

Confidential business information, Crime, Currency, Federal Reserve System,

Mortgages, Reporting and record keeping requirements, Risk.

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal Reserve System,

Holding companies, Reporting and record keeping requirements, Securities.

12 CFR Part 325

Administrative practice and procedure, Banks, banking, Capital Adequacy, Reporting and

recordkeeping requirements, Savings associations, State nonmember banks.

29

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons stated in the common preamble, the Office of the Comptroller of

the Currency amends part 3 of chapter I of Title 12, Code of Federal Regulations as

follows:

PART 3- MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835,

3907, and 3909.

2. In Appendix A to part 3, in section 3, add new paragraph (a)(4)(xi) as follows:

APPENDIX A TO PART 3—RISK-BASED CAPITAL GUIDELINES

*

*

*

*

*

Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-Balance Sheet

Items

*

*

*

*

*

tion for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835,

3907, and 3909.

2. In Appendix A to part 3, in section 3, add new paragraph (a)(4)(xi) as follows:

APPENDIX A TO PART 3—RISK-BASED CAPITAL GUIDELINES

*

*

*

*

*

Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-Balance Sheet

Items

*

*

*

*

*

(xi) Subject to the requirements below, a bank may assign an asset not included in the

categories above to the risk weight category applicable under the capital guidelines for

bank holding companies,31 provided that all of the following conditions apply:

31 See 12 CFR part 225, appendix A.

30

(A) The bank is not authorized to hold the asset under applicable law other than debt

previously contracted or similar authority; and

(B) The risks associated with the asset are substantially similar to the risks of assets that

are otherwise assigned to a risk weight category less than 100 percent under this

appendix.

3. In Appendix C to part 3:

a. Revise Part I, section 3 to read as set forth below.

b. Remove section 21(e).

APPENDIX C TO PART 3—CAPITAL ADEQUACY GUIDELINES FOR BANKS: INTERNAL

RATINGS-BASED AND ADVANCED MEASUREMENT APPROACHES

Part I. General Provisions

*

*

*

*

*

Section 3. Minimum Risk-Based Capital Requirements

(a) (1) Except as modified by paragraph (c) of this section or by section 23 of this

appendix, each bank must meet a minimum:

(i) Total risk-based capital ratio of 8.0 percent; and

(ii) Tier 1 risk-based capital ratio of 4.0 percent.

(2) A bank’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets; and

(ii) Its total risk-based capital ratio as calculated under Appendix A of this part.

(3) A bank’s tier 1 risk-based capital ratio is the lower of:

inimum:

(i) Total risk-based capital ratio of 8.0 percent; and

(ii) Tier 1 risk-based capital ratio of 4.0 percent.

(2) A bank’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets; and

(ii) Its total risk-based capital ratio as calculated under Appendix A of this part.

(3) A bank’s tier 1 risk-based capital ratio is the lower of:

(i) Its tier 1 capital to total risk-weighted assets; and

(ii) Its tier 1 risk-based capital ratio as calculated under Appendix A of this part.

31

(b) Each bank must hold capital commensurate with the level and nature of all risks to

which the bank is exposed.

(c) When a bank subject to 12 CFR part 3, Appendix B, calculates its risk-based capital

requirements under this appendix, the bank must also refer to 12 CFR part 3, Appendix

B, for supplemental rules to calculate risk-based capital requirements adjusted for market

risk.

*

*

*

*

*

Federal Reserve System

12 CFR CHAPTER II

Authority and Issuance

For the reasons set forth in the common preamble, parts 208 and 225 of chapter II

of title 12 of the Code of Federal Regulations are amended as follows:

PART 208 – MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

4. The authority citation for part 208 continues to read as follows:

Authority: Subpart A of Regulation H (12 CFR part 208, Subpart A) is issued by

the Board of Governors of the Federal Reserve System (Board) under 12 U.S.C. 24, 36;

sections 9, 11,21,25 and 25A of the Federal Reserve Act (12 U.S.C. 321-338a, 248(a),

248(c), 481-486, 601 and 611); sections 1814, 1816, 1818, 1831o, 1831p-l, 1831r-l and

1835a of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816, 1818,

1831o, 1831p-l, 1831r-l and 1835); and 12 U.S.C. 3906-3909.

5. In Appendix A to part 208, revise section III.C. 4.a and add section III.C. 4.e

to read as follows:

nd 25A of the Federal Reserve Act (12 U.S.C. 321-338a, 248(a),

248(c), 481-486, 601 and 611); sections 1814, 1816, 1818, 1831o, 1831p-l, 1831r-l and

1835a of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816, 1818,

1831o, 1831p-l, 1831r-l and 1835); and 12 U.S.C. 3906-3909.

5. In Appendix A to part 208, revise section III.C. 4.a and add section III.C. 4.e

to read as follows:

32

Appendix A to Part 208—Capital Adequacy Guidelines for State Member Banks:

Risk-Based Measure

*

*

*

*

*

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet Items

*

*

*

*

*

C. Risk Weights

*

*

*

*

*

4. Category 4: 100 percent. a. Except as provided in section III.C. 4.e, all assets not

included in the categories above are assigned to this category, which comprises standard

risk assets. The bulk of the assets typically found in a loan portfolio would be assigned to

the 100 percent category.

*

*

*

*

*

e. Subject to the requirements below, a bank may assign an asset not included in the

categories above to the risk weight category applicable under the capital guidelines for

bank holding companies,32 provided that all of the following conditions apply:

i. The bank is not authorized to hold the asset under applicable law other than under debt

previously contracted or other similar authority; and

ii. The risks associated with the asset are substantially similar to the risks of assets that

are otherwise assigned to a risk weight category of less than 100 percent under this

appendix.

*

*

*

*

*

6. In Appendix F to part 208:

32 See 12 CFR part 225, appendix A.

33

a. Revise section 3 to read as set forth below; and

b. Remove section 21(e).

Appendix F to Part 208—Capital Adequacy Guidelines for Banks: Internal Ratings-

Based and Advanced Measurement Approaches

Part I. General Provisions

*

*

*

*

*

Section 3. Minimum Risk-Based Capital Requirements

08:

32 See 12 CFR part 225, appendix A.

33

a. Revise section 3 to read as set forth below; and

b. Remove section 21(e).

Appendix F to Part 208—Capital Adequacy Guidelines for Banks: Internal Ratings-

Based and Advanced Measurement Approaches

Part I. General Provisions

*

*

*

*

*

Section 3. Minimum Risk-Based Capital Requirements

(a) (1) Except as modified by paragraph (c) of this section or by section 23 of this

appendix, each bank must meet a minimum:

(i) Total risk-based capital ratio of 8.0 percent; and

(ii) Tier 1 risk-based capital ratio of 4.0 percent.

(2) A bank’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets, and

(ii) Its total risk-based capital ratio as calculated under Appendix A of this part.

(3) A bank’s tier 1 risk-based capital ratio is the lower of:

(i) Its tier 1 capital to total risk-weighted assets, and

(ii) Its tier 1 risk-based capital ratio as calculated under Appendix A of this part.

(b) Each bank must hold capital commensurate with the level and nature of all risks to

which the bank is exposed.

(c) When a bank subject to [the market risk rule] calculates its risk-based capital

requirements under this appendix, the bank must also refer to [the market risk rule] for

supplemental rules to calculate risk-based capital requirements adjusted for market risk.

*

*

*

*

*

(b) Each bank must hold capital commensurate with the level and nature of all risks to

which the bank is exposed.

(c) When a bank subject to [the market risk rule] calculates its risk-based capital

requirements under this appendix, the bank must also refer to [the market risk rule] for

supplemental rules to calculate risk-based capital requirements adjusted for market risk.

*

*

*

*

*

34

PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

7. The authority citation for part 225 continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8),

1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909; 15 U.S.C. 6801 and

6805.

8. In Appendix G to part 225:

a. Revise section 3 to read as set forth below; and

b. Remove section 21(e).

Appendix G to Part 225—Capital Adequacy Guidelines for Bank Holding

Companies: Internal Ratings-Based and Advanced Measurement Approaches

Part I. General Provisions

*

*

*

*

*

Section 3. Minimum Risk-Based Capital Requirements

(a)(1) Except as modified by paragraph (c) of this section or by section 23 of this

appendix, each bank holding company must meet a minimum:

(i) Total risk-based capital ratio of 8.0 percent; and

(ii) Tier 1 risk-based capital ratio of 4.0 percent.

(2) A bank holding company’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets, and

(ii) Its total risk-based capital ratio as calculated under 12 CFR part 208, appendix A, as

adjusted to include certain debt or equity instruments issued before May 19, 2010 as

described in section 171(b)(4)(B) of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (Dodd-Frank Act).

35

(3) A bank holding company’s tier 1 risk-based capital ratio is the lower of:

hted assets, and

(ii) Its total risk-based capital ratio as calculated under 12 CFR part 208, appendix A, as

adjusted to include certain debt or equity instruments issued before May 19, 2010 as

described in section 171(b)(4)(B) of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (Dodd-Frank Act).

35

(3) A bank holding company’s tier 1 risk-based capital ratio is the lower of:

(i) Its tier 1 capital to total risk-weighted assets, and

(ii) Its tier 1 risk-based capital ratio as calculated under 12 CFR part 208, appendix A, as

adjusted to include certain debt or equity instruments issued before May 19, 2010 as

described in section 171(b)(4)(B) of the Dodd-Frank Act.

(b) Each bank holding company must hold capital commensurate with the level and

nature of all risks to which the bank holding company is exposed.

(c) When a bank holding company subject to [the market risk rule] calculates its risk-

based capital requirements under this appendix, the bank holding company must also

refer to [the market risk rule] for supplemental rules to calculate risk-based capital

requirements adjusted for market risk.

*

*

*

*

*

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority for Issuance

For the reasons stated in the common preamble, the Federal Deposit Insurance

Corporation amends Part 325 of Chapter III of Title 12, Code of the Federal Regulations

as follows:

PART 325 – CAPITAL MAINTENANCE

9. The authority citation for part 325 continues to read as follows:

isk.

*

*

*

*

*

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority for Issuance

For the reasons stated in the common preamble, the Federal Deposit Insurance

Corporation amends Part 325 of Chapter III of Title 12, Code of the Federal Regulations

as follows:

PART 325 – CAPITAL MAINTENANCE

9. The authority citation for part 325 continues to read as follows:

36

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; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790, (12 U.S.C. 1831n note); Pub. L. 102-

242, 105 Stat. 2236, 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).

10. Amend Appendix A to part 325 as follows:

a. In section II.C, revise the first sentence of the introductory text;

b. In sections II.D, and II.E, redesignate footnotes 45 through 50 as footnotes 46

through 51.

c. In section II.C , Category 4, add new paragraph (d) and a new footnote 45.

APPENDIX A TO PART 325 – STATEMENT OF POLICY ON RISK-BASED CAPITAL

*

*

*

*

*

II. PROCEDURES FOR COMPUTING RISK-WEIGHTED ASSETS

*

*

*

*

*

C. Risk Weights for Balance Sheet Assets (see Table II)

The risk based capital framework contains five risk weight categories—0 percent,

20 percent, 50 percent, 100 percent, and 200 percent. *

*

*

*

*

*

*

*

Category 4 – 100 Percent Risk Weight.

*

*

*

37

TEMENT OF POLICY ON RISK-BASED CAPITAL

*

*

*

*

*

II. PROCEDURES FOR COMPUTING RISK-WEIGHTED ASSETS

*

*

*

*

*

C. Risk Weights for Balance Sheet Assets (see Table II)

The risk based capital framework contains five risk weight categories—0 percent,

20 percent, 50 percent, 100 percent, and 200 percent. *

*

*

*

*

*

*

*

Category 4 – 100 Percent Risk Weight.

*

*

*

37

(d) Subject to the requirements below, a bank may assign an asset not included in the

categories above to the risk weight category applicable under the capital guidelines for

bank holding companies33, provided that all of the following conditions apply:

(1) The bank is not authorized to hold the asset under applicable law other than debt

previously contracted or similar authority; and

(2) The risks associated with the asset are substantially similar to the risks of assets that

are otherwise assigned to a risk weight category less than 100 percent under this

appendix.

*

*

*

*

*

11. In Appendix D to part 325:

a. Revise section 3 to read as set forth below; and

b. Remove section 21(e).

APPENDIX D TO PART 325—CAPITAL ADEQUACY GUIDELINES FOR BANKS: INTERNAL

RATINGS-BASED AND ADVANCED MEASUREMENT APPROACHES

Part I. General Provisions

*

*

*

*

*

Section 3. Minimum Risk-Based Capital Requirements

(a) (1) Except as modified by paragraph (c) of this section or by section 23 of this

appendix, each bank must meet a minimum:

(i) Total risk-based capital ratio of 8.0 percent; and

(ii) Tier 1 risk-based capital ratio of 4.0 percent.

33 See 12 CFR part 225, appendix A.

38

(2) A bank’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets, and

(ii) Its total risk-based capital ratio as calculated under appendix A of this part.

(3) A bank’s tier 1 risk-based capital ratio is the lower of:

l ratio of 4.0 percent.

33 See 12 CFR part 225, appendix A.

38

(2) A bank’s total risk-based capital ratio is the lower of:

(i) Its total qualifying capital to total risk-weighted assets, and

(ii) Its total risk-based capital ratio as calculated under appendix A of this part.

(3) A bank’s tier 1 risk-based capital ratio is the lower of:

(i) Its tier 1 capital to total risk-weighted assets, and

(ii) Its tier 1 risk-based capital ratio as calculated under appendix A of this part.

(b) Each bank must hold capital commensurate with the level and nature of all risks to

which the bank is exposed.

(c) When a bank subject to appendix C of this part calculates its risk-based capital

requirements under this appendix, the bank must also refer to appendix C of this part for

supplemental rules to calculate risk-based capital requirements adjusted for market risk.

*

*

*

*

*

39

[THIS SIGNATURE PAGE RELATES TO THE FINAL RULE TITLED “RISK-

BASED

CAPITAL

STANDARDS:

ADVANCED

CAPITAL

ADEQUACY

FRAMEWORK—BASEL II; REVISIONS TO THE TRANSTIONAL FLOORS”]

Dated: June xx, 2011

John Walsh,

Comptroller of the Currency

40

[THIS SIGNATURE PAGE RELATES TO THE FINAL RULE TITLED “RISK-

BASED

CAPITAL

STANDARDS:

ADVANCED

CAPITAL

ADEQUACY

FRAMEWORK—BASEL II; REVISIONS TO THE TRANSTIONAL FLOORS”]

By order of the Board of Governors of the Federal Reserve System, June xx, 2011

Robert deV. Frierson

Deputy Secretary of the Board.

41

[THIS SIGNATURE PAGE RELATES TO THE FINAL RULE TITLED “RISK-

BASED

CAPITAL

STANDARDS:

ADVANCED

CAPITAL

ADEQUACY

FRAMEWORK—BASEL II; REVISIONS TO THE TRANSTIONAL FLOORS”]

Dated at Washington, D.C., this ___ day of ______ 2011.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary

42

[FR Doc. 10-_____ Filed _____]

Billing Codes 4810-33-P (25%), 6210-01-P (25%), 6714-01-P (25%), 6720-01-P (25%)