Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions

FederalAgency guidance

Ask Donna

How this section applies to your facts.

FDIC Financial Institution Letters › Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions

This text was captured on Aug 14, 2026. It is a snapshot, not a live feed, so check the official code before relying on it.

Text

Vol. 77

Thursday,

No. 169

August 30, 2012

Part II

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Parts 3, 5, 6, et al.

Federal Reserve System

12 CFR Parts 208, 217, and 225

Federal Deposit Insurance Corporation

12 CFR Parts 324, 325, and 362

Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III,

Minimum Regulatory Capital Ratios, Capital Adequacy, Transition

Provisions, and Prompt Corrective Action; Proposed Rule

VerDate Mar<15>2010

22:41 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00001

Fmt 4717

Sfmt 4717

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52792

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Parts 3, 5, 6, 165, and 167

[Docket ID OCC–2012–0008]

RIN 1557–AD46

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 217, and 225

Regulations H, Q, and Y

[Docket No. R–1442]

RIN 7100–AD87

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Parts 324, 325, and 362

RIN 3064–AD95

Regulatory Capital Rules: Regulatory

Capital, Implementation of Basel III,

Minimum Regulatory Capital Ratios,

Capital Adequacy, Transition

Provisions, and Prompt Corrective

Action

AGENCIES: Office of the Comptroller of

the Currency, Treasury; the Board of

Governors of the Federal Reserve

System; and the Federal Deposit

Insurance Corporation.

ACTION: Joint notice of proposed

rulemaking.

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 seeking

comment on three Notices of Proposed

Rulemaking (NPR) that would revise

and replace the agencies’ current capital

rules

poration.

ACTION: Joint notice of proposed

rulemaking.

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 seeking

comment on three Notices of Proposed

Rulemaking (NPR) that would revise

and replace the agencies’ current capital

rules. In this NPR, the agencies are

proposing to revise their risk-based and

leverage capital requirements consistent

with agreements reached by the Basel

Committee on Banking Supervision

(BCBS) in ‘‘Basel III: A Global

Regulatory Framework for More

Resilient Banks and Banking Systems’’

(Basel III). The proposed revisions

would include implementation of a new

common equity tier 1 minimum capital

requirement, a higher minimum tier 1

capital requirement, and, for banking

organizations subject to the advanced

approaches capital rules, a

supplementary leverage ratio that

incorporates a broader set of exposures

in the denominator measure.

Additionally, consistent with Basel III,

the agencies are proposing to apply

limits on a banking organization’s

capital distributions and certain

discretionary bonus payments if the

banking organization does not hold a

specified amount of common equity tier

1 capital in addition to the amount

necessary to meet its minimum risk-

based capital requirements. This NPR

also would establish more conservative

standards for including an instrument in

regulatory capital. As discussed in the

proposal, the revisions set forth in this

NPR are consistent with section 171 of

the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank

Act), which requires the agencies to

establish minimum risk-based and

leverage capital requirements.

In connection with the proposed

changes to the agencies’ capital rules in

this NPR, the agencies are also seeking

comment on the two related NPRs

published elsewhere in today’s Federal

with section 171 of

the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank

Act), which requires the agencies to

establish minimum risk-based and

leverage capital requirements.

In connection with the proposed

changes to the agencies’ capital rules in

this NPR, the agencies are also seeking

comment on the two related NPRs

published elsewhere in today’s Federal

discussed further in the SUPPLEMENTARY

INFORMATION.

DATES: Comments must be submitted on

or before October 22, 2012.

ADDRESSES: Comments should be

directed to:

OCC: Because paper mail in the

Washington, DC area and at the OCC is

subject to delay, commenters are

encouraged to submit comments by the

Federal eRulemaking Portal or email, if

possible. Please use the title ‘‘Regulatory

Capital Rules: Regulatory Capital,

Implementation of Basel III, Minimum

Regulatory Capital Ratios, Capital

Adequacy, Transition Provisions, and

Prompt Corrective Action’’ to facilitate

the organization and distribution of the

comments. You may submit comments

by any of the following methods:

Federal eRulemaking Portal—

‘‘regulations.gov’’: Go to http://

www.regulations.gov. Click ‘‘Advanced

Search’’. Select ‘‘Document Type’’ of

‘‘Proposed Rule’’, and in ‘‘By Keyword

or ID’’ box, enter Docket ID ‘‘OCC–

2012–0008,’’ and click ‘‘Search’’. If

proposed rules for more than one

agency are listed, in the ‘‘Agency’’

column, locate the notice of proposed

rulemaking for the OCC. Comments can

be filtered by agency using the filtering

tools on the left side of the screen. In the

‘‘Actions’’ column, click on ‘‘Submit a

Comment’’ or ‘‘Open Docket Folder’’ to

submit or view public comments and to

view supporting and related materials

for this rulemaking action

than one

agency are listed, in the ‘‘Agency’’

column, locate the notice of proposed

rulemaking for the OCC. Comments can

be filtered by agency using the filtering

tools on the left side of the screen. In the

‘‘Actions’’ column, click on ‘‘Submit a

Comment’’ or ‘‘Open Docket Folder’’ to

submit or view public comments and to

view supporting and related materials

for this rulemaking action.

• Click on the ‘‘Help’’ tab on the

Regulations.gov home page to get

information on using Regulations.gov,

including instructions for submitting or

viewing public comments, viewing

other supporting and related materials,

and viewing the docket after the close

of the comment period.

• Email:

regs.comments@occ.treas.gov.

• Mail: Office of the Comptroller of

the Currency, 250 E Street SW., Mail

Stop 2–3, Washington, DC 20219.

• Fax: (202) 874–5274.

• Hand Delivery/Courier: 250 E Street

SW., Mail Stop 2–3, Washington, DC

20219.

Instructions: You must include

‘‘OCC’’ as the agency name and ‘‘Docket

ID OCC–2012–0008’’ in your comment.

In general, the OCC will enter all

comments received into the docket and

publish them on Regulations.gov

without change, including any business

or personal information that you

provide 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

enclose 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

notice by any of the following methods:

• Viewing Comments Electronically:

Go to http://www.regulations.gov. Click

‘‘Advanced Search’’

ecord

and subject to public disclosure. Do not

enclose 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

notice by any of the following methods:

• Viewing Comments Electronically:

Go to http://www.regulations.gov. Click

‘‘Advanced Search’’. Select ‘‘Document

Type’’ of ‘‘Public Submission’’ and in

‘‘By Keyword or ID’’ box enter Docket ID

‘‘OCC–2012–0008,’’ and click ‘‘Search.’’

If comments from more than one agency

are listed, the ‘‘Agency’’ column will

indicate which comments were received

by the OCC. Comments can be filtered

by Agency using the filtering tools on

the left side of the screen.

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC, 250 E Street SW.,

Washington, DC 20219. For security

reasons, the OCC requires that visitors

make an appointment to inspect

comments. You may do so by calling

(202) 874–4700. Upon arrival, visitors

will be required to present valid

government-issued photo identification

and to submit to security screening in

order to inspect and photocopy

comments.

• Docket: You may also view or

request available background

documents and project summaries using

the methods described previously.

Board: When submitting comments,

please consider submitting your

comments by email or fax because paper

mail in the Washington, DC, area and at

the Board may be subject to delay. You

may submit comments, identified by

Docket No. R–1430; RIN No. 7100–

AD87, by any of the following methods:

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00002

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

g your

comments by email or fax because paper

mail in the Washington, DC, area and at

the Board may be subject to delay. You

may submit comments, identified by

Docket No. R–1430; RIN No. 7100–

AD87, by any of the following methods:

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00002

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52793

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

• Agency Web Site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments at

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Email: regs.comments@

federalreserve.gov. Include docket

number in the subject line of the

message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Jennifer J. Johnson, Secretary,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons.

Accordingly, your comments will not be

edited to remove any identifying or

contact information. Public comments

may also be viewed electronically or in

paper form in Room MP–500 of the

Board’s Martin Building (20th and C

Street NW., Washington, DC 20551)

between 9 a.m. and 5 p.m. on weekdays.

FDIC: You may submit comments by

any of the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://

www.FDIC.gov/regulations/laws/

federal/propose.html.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments/Legal

ESS, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429

omments by

any of the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://

www.FDIC.gov/regulations/laws/

federal/propose.html.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments/Legal

ESS, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

• Hand Delivered/Courier: The guard

station at the rear of the 550 17th Street

building (located on F Street), on

business days between 7:00 a.m. and

5:00 p.m.

• Email: comments@FDIC.gov.

• Instructions: Comments submitted

must include ‘‘FDIC’’ and ‘‘RIN 3064–

AD95.’’ Comments received will be

posted without change to http://

www.FDIC.gov/regulations/laws/

federal/propose.html, including any

personal information provided.

FOR FURTHER INFORMATION CONTACT:

OCC: Margot Schwadron, Senior Risk

Expert, (202) 874–6022; David Elkes,

Risk Expert, (202) 874–3846; Mark

Ginsberg, Risk Expert, (202) 927–4580;

or Ron Shimabukuro, Senior Counsel,

Patrick Tierney, Counsel, or Carl

Kaminski, Senior Attorney, Legislative

and Regulatory Activities Division,

(202) 874–5090, Office of the

Comptroller of the Currency, 250 E

Street SW., Washington, DC 20219.

Board: Anna Lee Hewko, Assistant

Director, (202) 530–6260, Thomas

Boemio, Manager, (202) 452–2982,

Constance M. Horsley, Manager, (202)

452–5239, or Juan C. Climent, Senior

Supervisory Financial Analyst, (202)

872–7526, Capital and Regulatory

Policy, Division of Banking Supervision

and Regulation; or Benjamin

McDonough, Senior Counsel, (202) 452–

2036, April C. Snyder, Senior Counsel,

Board: Anna Lee Hewko, Assistant

Director, (202) 530–6260, Thomas

Boemio, Manager, (202) 452–2982,

Constance M. Horsley, Manager, (202)

452–5239, or Juan C. Climent, Senior

Supervisory Financial Analyst, (202)

872–7526, Capital and Regulatory

Policy, Division of Banking Supervision

and Regulation; or Benjamin

McDonough, Senior Counsel, (202) 452–

2036, April C. Snyder, Senior Counsel,

(202) 452–3099, or Christine Graham,

Senior Attorney, (202) 452–3005, Legal

Division, Board of Governors of the

Federal Reserve System, 20th and C

Streets NW., Washington, DC 20551. For

the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (202) 263–4869.

FDIC: Bobby R. Bean, Associate

Director, bbean@fdic.gov; Ryan

Billingsley, Senior Policy Analyst,

rbillingsley@fdic.gov; Karl Reitz, Senior

Policy Analyst, kreitz@fdic.gov, Division

of Risk Management Supervision; David

Riley, Senior Policy Analyst,

dariley@fdic.gov, Division of Risk

Management Supervision, Capital

Markets Branch, (202) 898–6888; or

Mark Handzlik, Counsel,

mhandzlik@fdic.gov, Michael Phillips,

Counsel, mphillips@fdic.gov, Greg

Feder, Counsel, gfeder@fdic.gov, or

Ryan Clougherty, Senior Attorney,

rclougherty@fdic.gov; Supervision

Branch, Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: In

connection with the proposed changes

to the agencies’ capital rules in this

NPR, the agencies are also seeking

comment on the two related NPRs

published elsewhere in today’s Federal

Clougherty, Senior Attorney,

rclougherty@fdic.gov; Supervision

Branch, Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: In

connection with the proposed changes

to the agencies’ capital rules in this

NPR, the agencies are also seeking

comment on the two related NPRs

published elsewhere in today’s Federal

Capital Rules: Standardized Approach

for Risk-Weighted Assets; Market

Discipline and Disclosure

Requirements’’ (Standardized Approach

NPR), the agencies are proposing to

revise and harmonize their rules for

calculating risk-weighted assets to

enhance risk sensitivity and address

weaknesses identified over recent years,

including by incorporating aspects of

the BCBS’s Basel II standardized

framework in the ‘‘International

Convergence of Capital Measurement

and Capital Standards: A Revised

Framework,’’ including subsequent

amendments to that standard, and

recent BCBS consultative papers. The

Standardized Approach NPR also

includes alternatives to credit ratings,

consistent with section 939A of the

Dodd-Frank Act. The revisions include

methodologies for determining risk-

weighted assets for residential

mortgages, securitization exposures, and

counterparty credit risk. The

Standardized Approach NPR also would

introduce disclosure requirements that

would apply to top-tier banking

organizations domiciled in the United

States with $50 billion or more in total

assets, including disclosures related to

regulatory capital instruments

logies for determining risk-

weighted assets for residential

mortgages, securitization exposures, and

counterparty credit risk. The

Standardized Approach NPR also would

introduce disclosure requirements that

would apply to top-tier banking

organizations domiciled in the United

States with $50 billion or more in total

assets, including disclosures related to

regulatory capital instruments.

The proposals in this NPR and the

Standardized Approach NPR would

apply to all banking organizations that

are currently subject to minimum

capital requirements (including national

banks, state member banks, state

nonmember banks, state and federal

savings associations, and top-tier bank

holding companies domiciled in the

United States not subject to the Board’s

Small Bank Holding Company Policy

Statement (12 CFR part 225, appendix

C)), as well as top-tier savings and loan

holding companies domiciled in the

United States (together, banking

organizations).

In the notice titled ‘‘Regulatory

Capital Rules: Advanced Approaches

Risk-Based Capital Rule; Market Risk

Capital Rule,’’ (Advanced Approaches

and Market Risk NPR) the agencies are

proposing to revise the advanced

approaches risk-based capital rules

consistent with Basel III and other

changes to the BCBS’s capital standards.

The agencies also propose to revise the

advanced approaches risk-based capital

rules to be consistent with section 939A

and section 171 of the Dodd-Frank Act.

Additionally, in the Advanced

Approaches and Market Risk NPR, the

OCC and FDIC are proposing that the

market risk capital rules be applicable to

federal and state savings associations

and the Board is proposing that the

advanced approaches and market risk

capital rules apply to top-tier savings

and loan holding companies domiciled

in the United States, in each case, if

stated thresholds for trading activity are

met

Approaches and Market Risk NPR, the

OCC and FDIC are proposing that the

market risk capital rules be applicable to

federal and state savings associations

and the Board is proposing that the

advanced approaches and market risk

capital rules apply to top-tier savings

and loan holding companies domiciled

in the United States, in each case, if

stated thresholds for trading activity are

met.

As described in this NPR, the agencies

also propose to codify their regulatory

capital rules, which currently reside in

various appendixes to their respective

regulations. The proposals are

published in three separate NPRs to

reflect the distinct objectives of each

proposal, to allow interested parties to

better understand the various aspects of

the overall capital framework, including

which aspects of the rules would apply

to which banking organizations, and to

help interested parties better focus their

comments on areas of particular

interest.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00003

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52794

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

1 Sections marked with an asterisk generally

would not apply to less-complex banking

organizations.

2 The agencies’ general risk-based capital rules are

at 12 CFR part 3, appendix A, 12 CFR part 167

(OCC); 12 CFR parts 208 and 225, appendix A

(Board); and 12 CFR part 325, appendix A, and 12

CFR part 390, subpart Z (FDIC). The agencies’

Table of Contents 1

I. Introduction

A. Overview of the Proposed Changes to

the Agencies’ Current Capital

Framework. A summary of the proposed

changes to the agencies’ current capital

framework through three concurrent

notices of proposed rulemaking,

including comparison of key provisions

of the proposals to the agencies’ general

risk-based and leverage capital rules.

B. Background

ies’

Table of Contents 1

I. Introduction

A. Overview of the Proposed Changes to

the Agencies’ Current Capital

Framework. A summary of the proposed

changes to the agencies’ current capital

framework through three concurrent

notices of proposed rulemaking,

including comparison of key provisions

of the proposals to the agencies’ general

risk-based and leverage capital rules.

B. Background. A brief review of the

evolution of the agencies’ capital rules

and the Basel capital framework,

including an overview of the rationale

for certain revisions in the Basel capital

framework.

II. Minimum Capital Requirements,

Regulatory Capital Buffer, and

Requirements for Overall Capital

Adequacy

A. Minimum Capital Requirements and

Regulatory Capital Buffer. A short

description of the minimum capital

ratios and their incorporation in the

agencies’ Prompt Corrective Action

(PCA) framework; introduction of a

regulatory capital buffer.

B. Leverage Ratio

1. Minimum Tier 1 Leverage Ratio. A

description of the minimum tier 1

leverage ratio, including the calculation

of the numerator and the denominator.

2. Supplementary Leverage Ratio for

Advanced Approaches Banking

Organizations.* A description of the new

supplementary leverage ratio for

advanced approaches banking

organizations, including the calculation

of the total leverage exposure.

C. Capital Conservation Buffer. A

description of the capital conservation

buffer, which is designed to limit capital

distributions and certain discretionary

bonus payments if a banking

organization does not hold a certain

amount of common equity tier 1 capital

in additional to the minimum risk-based

capital ratios.

D. Countercyclical Capital Buffer.* A

description of the countercyclical buffer

applicable to advanced approaches

banking organizations, which would

serve as an extension of the capital

conservation buffer.

E. Prompt Corrective Action Requirements

a banking

organization does not hold a certain

amount of common equity tier 1 capital

in additional to the minimum risk-based

capital ratios.

D. Countercyclical Capital Buffer.* A

description of the countercyclical buffer

applicable to advanced approaches

banking organizations, which would

serve as an extension of the capital

conservation buffer.

E. Prompt Corrective Action Requirements.

A description of the proposed revisions

to the agencies’ prompt corrective action

requirements, including incorporation of

a common equity tier 1 capital ratio, an

updated definition of tangible common

equity, and, for advanced approaches

banking organizations only, a

supplementary leverage ratio.

F. Supervisory Assessment of Overall

Capital Adequacy. A brief overview of

the capital adequacy requirements and

supervisory assessment of a banking

organization’s capital adequacy.

G. Tangible Capital Requirement for

Federal Savings Associations. A

discussion of a statutory capital

requirement unique to federal savings

associations.

III. Definition of Capital

A. Capital Components and Eligibility

Criteria for Regulatory Capital

Instruments

1. Common Equity Tier 1 Capital. A

description of the common equity tier 1

capital elements and a description of the

eligibility criteria for common equity tier

1 capital instruments.

2. Additional Tier 1 Capital. A description

of the additional tier 1 capital elements

and a description of the eligibility

criteria for additional tier 1 capital

instruments.

3. Tier 2 Capital. A description of the tier

2 capital elements and a description of

the eligibility criteria for tier 2 capital

instruments.

4. Capital Instruments of Mutual Banking

Organizations. A discussion of potential

issues related to capital instruments

specific to mutual banking organizations.

5. Grandfathering of Certain Capital

Instruments. A discussion of the

recognition within regulatory capital of

instruments specifically related to

certain U.S. government programs.

ity criteria for tier 2 capital

instruments.

4. Capital Instruments of Mutual Banking

Organizations. A discussion of potential

issues related to capital instruments

specific to mutual banking organizations.

5. Grandfathering of Certain Capital

Instruments. A discussion of the

recognition within regulatory capital of

instruments specifically related to

certain U.S. government programs.

6. Agency Approval of Capital Elements. A

description of the approval process for

new capital instruments.

7. Addressing the Point of Non-viability

Requirements under Basel III.* A

discussion of disclosure requirements for

advanced approaches banking

organizations for regulatory capital

instruments addressing the point of non-

viability requirements in Basel III.

8. Qualifying Capital Instruments Issued by

Consolidated Subsidiaries of a Banking

Organization. A description of limits on

the inclusion of minority interest in

regulatory capital, including a discussion

of Real Estate Investment Trust (REIT)

preferred securities.

B. Regulatory Adjustments and Deductions

1. Regulatory Deductions from Common

Equity Tier 1 Capital. A discussion of the

treatment of goodwill and certain other

intangible assets and certain deferred tax

assets.

2. Regulatory Adjustments to Common

Equity Tier 1 Capital. A discussion of the

adjustments to common equity tier 1 for

certain cash flow hedges and changes in

a banking organization’s own

creditworthiness.

3. Regulatory Deductions Related to

Investments in Capital Instruments. A

discussion of the treatment for capital

investments in other financial

institutions.

4. Items subject to the 10 and 15 Percent

Common Equity Tier 1 Capital Threshold

Deductions. A discussion of the

treatment of mortgage servicing assets,

certain capital investments in other

financial institutions and certain

deferred tax assets.

5. Netting of Deferred Tax Liabilities

against Deferred Tax Assets and Other

Deductible Assets

investments in other financial

institutions.

4. Items subject to the 10 and 15 Percent

Common Equity Tier 1 Capital Threshold

Deductions. A discussion of the

treatment of mortgage servicing assets,

certain capital investments in other

financial institutions and certain

deferred tax assets.

5. Netting of Deferred Tax Liabilities

against Deferred Tax Assets and Other

Deductible Assets. A discussion of a

banking organization’s option to net

deferred tax liabilities against deferred

tax assets if certain conditions are met

under the proposal.

6. Deduction from Tier 1 Capital of

Investments in Hedge Funds and Private

Equity Funds Pursuant to section 619 of

the Dodd-Frank Act.* A description of

the deduction from tier 1 capital for

investments in hedge funds and private

equity funds pursuant to section 619 of

the Dodd-Frank Act.

IV. Denominator Changes. A description of

the changes to the calculation of risk-

weighted asset amounts related to the

Basel III regulatory capital requirements.

V. Transition Provisions

A. Minimum Regulatory Capital Ratios. A

description of the transition provisions

for minimum regulatory capital ratios.

B. Capital Conservation and

Countercyclical Capital Buffer. A

description of the transition provisions

for the capital conservation buffer, and

for advanced approaches banking

organizations, the countercyclical capital

buffer.

C. Regulatory Capital Adjustments and

Deductions. A description of the

transition provisions for regulatory

capital adjustments and deductions.

D. Non-qualifying Capital Instruments. A

description of the transition provisions

for non-qualifying capital instruments.

E. Leverage Ratio.* A description of the

transition provisions for the new

supplementary leverage ratio for

advanced approaches banking

organizations.

VI. Additional OCC Technical Amendments.

A description of additional technical and

conforming amendments to the OCC’s

current capital framework in 12 CFR part

VII. Abbreviations

VIII

provisions

for non-qualifying capital instruments.

E. Leverage Ratio.* A description of the

transition provisions for the new

supplementary leverage ratio for

advanced approaches banking

organizations.

VI. Additional OCC Technical Amendments.

A description of additional technical and

conforming amendments to the OCC’s

current capital framework in 12 CFR part

VII. Abbreviations

VIII. Regulatory Flexibility Act Analysis

IX. Paperwork Reduction Act

X. Plain Language

XI. OCC Unfunded Mandates Reform Act of

1995 Determination

Addendum 1: Summary of This NPR for

Community Banking Organizations

I. Introduction

A. Overview of the Proposed Changes to

the Agencies’ Current Capital

Framework

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 proposing comprehensive

revisions to their regulatory capital

framework through three concurrent

notices of proposed rulemaking (NPR).

These proposals would revise the

agencies’ current general risk-based

rules, advanced approaches risk-based

capital rules (advanced approaches),

and leverage capital rules (collectively,

the current capital rules).2 The proposed

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00004

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

These proposals would revise the

agencies’ current general risk-based

rules, advanced approaches risk-based

capital rules (advanced approaches),

and leverage capital rules (collectively,

the current capital rules).2 The proposed

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00004

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52795

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

current leverage rules are at 12 CFR 3.6(b), 3.6(c),

and 167.6 (OCC); 12 CFR part 208, appendix B, and

12 CFR part 225, appendix D (Board); and 12 CFR

325.3, and 390.467 (FDIC) (general risk-based

capital rules). For banks and bank holding

companies with significant trading activity, the

general risk-based capital rules are supplemented

by the agencies’ market risk rules, which appear at

12 CFR part 3, appendix B (OCC); 12 CFR part 208,

appendix E, and 12 CFR part 225, appendix E

(Board); and 12 CFR part 325, appendix C (FDIC)

(market risk rules).

The agencies’ advanced approaches rules are at

12 CFR part 3, appendix C, 12 CFR part 167,

appendix C, (OCC); 12 CFR part 208, appendix F,

and 12 CFR part 225, appendix G (Board); 12 CFR

part 325, appendix D, and 12 CFR part 390, subpart

Z, Appendix A (FDIC) (advanced approaches rules).

The advanced approaches rules are generally

mandatory for banking organizations and their

subsidiaries that have $250 billion or more in total

consolidated assets or that have consolidated total

on-balance sheet foreign exposure at the most

recent year-end equal to $10 billion or more. Other

banking organizations may use the advanced

approaches rules with the approval of their primary

federal supervisor

pproaches rules are generally

mandatory for banking organizations and their

subsidiaries that have $250 billion or more in total

consolidated assets or that have consolidated total

on-balance sheet foreign exposure at the most

recent year-end equal to $10 billion or more. Other

banking organizations may use the advanced

approaches rules with the approval of their primary

federal supervisor. See 12 CFR part 3, appendix C,

section 1(b) (national banks); 12 CFR part 167,

appendix C (federal savings associations); 12 CFR

part 208, appendix F, section 1(b) (state member

banks); 12 CFR part 225, appendix G, section 1(b)

(bank holding companies); 12 CFR part 325,

appendix D, section 1(b) (state nonmember banks);

and 12 CFR part 390, subpart Z, appendix A,

section 1(b) (state savings associations).

The market risk capital rules apply to a banking

organization if its total trading assets and liabilities

is 10 percent or more of total assets or exceeds $1

billion. See 12 CFR part 3, appendix B, section 1(b)

(national banks); 12 CFR parts 208 and 225,

appendix E, section 1(b) (state member banks and

bank holding companies, respectively); and 12 CFR

part 325, appendix C, section 1(b) (state nonmember

banks).

3 The BCBS is a committee of banking supervisory

authorities, which was established by the central

bank governors of the G–10 countries in 1975. It

currently consists of senior representatives of bank

supervisory authorities and central banks from

Argentina, Australia, Belgium, Brazil, Canada,

China, France, Germany, Hong Kong SAR, India,

Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,

the Netherlands, Russia, Saudi Arabia, Singapore,

South Africa, Sweden, Switzerland, Turkey, the

United Kingdom, and the United States. Documents

issued by the BCBS are available through the Bank

for International Settlements Web site at http://

www.bis.org.

4 Public Law 111–203, 124 Stat. 1376, 1435–38

ce, Germany, Hong Kong SAR, India,

Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,

the Netherlands, Russia, Saudi Arabia, Singapore,

South Africa, Sweden, Switzerland, Turkey, the

United Kingdom, and the United States. Documents

issued by the BCBS are available through the Bank

for International Settlements Web site at http://

www.bis.org.

4 Public Law 111–203, 124 Stat. 1376, 1435–38

(2010) (Dodd-Frank Act).

5 See BCBS, ‘‘International Convergence of

Capital Measurement and Capital Standards: A

Revised Framework,’’ (June 2006), available at

http://www.bis.org/publ/bcbs128.htm (Basel II).

6 See section 939A of the Dodd-Frank Act (15

U.S.C. 78o–7 note).

7 12 CFR part 225, appendix C (Small Bank

Holding Company Policy Statement).

8 Small bank holding companies would continue

to be subject to the Small Bank Holding Company

Policy Statement. Application of the proposals to

all savings and loan holding companies (including

small savings and loan holding companies) is

consistent with the transfer of supervisory

responsibilities to the Board and the requirements

of section 171 of the Dodd-Frank Act. Section 171

of the Dodd-Frank Act by its terms does not apply

to small bank holding companies, but there is no

exemption from the requirements of section 171 for

small savings and loan holding companies. See 12

U.S.C. 5371.

9 See section 171(b)(4)(E) of the Dodd-Frank Act

(12 U.S.C. 5371(b)(4)(E)); see also SR letter 01–1

(January 5, 2001), available at http://www.federal

reserve.gov/boarddocs/srletters/2001/sr0101.htm

Act by its terms does not apply

to small bank holding companies, but there is no

exemption from the requirements of section 171 for

small savings and loan holding companies. See 12

U.S.C. 5371.

9 See section 171(b)(4)(E) of the Dodd-Frank Act

(12 U.S.C. 5371(b)(4)(E)); see also SR letter 01–1

(January 5, 2001), available at http://www.federal

reserve.gov/boarddocs/srletters/2001/sr0101.htm.

revisions incorporate changes made by

the Basel Committee on Banking

Supervision (BCBS) to the Basel capital

framework, including those in ‘‘Basel

III: A Global Regulatory Framework for

More Resilient Banks and Banking

Systems’’ (Basel III).3 The proposed

revisions also would implement

relevant provisions of the Dodd-Frank

Act and restructure the agencies’ capital

rules into a harmonized, codified

regulatory capital framework.4

This notice (Basel III NPR) proposes

the Basel III revisions to international

capital standards related to minimum

requirements, regulatory capital, and

additional capital ‘‘buffers’’ to enhance

the resiliency of banking organizations,

particularly during periods of financial

stress. It also proposes transition

periods for many of the proposed

requirements, consistent with Basel III

and the Dodd-Frank Act. A second NPR

(Standardized Approach NPR) would

revise the methodologies for calculating

risk-weighted assets in the general risk-

based capital rules, incorporating

aspects of the Basel II Standardized

Approach and other changes.5 The

Standardized Approach NPR also

proposes alternative standards of

creditworthiness (to credit ratings)

consistent with section 939A of the

Dodd-Frank Act.6 A third NPR

(Advanced Approaches and Market Risk

NPR) proposes changes to the advanced

approaches rules to incorporate

applicable provisions of Basel III and

other agreements reached by the BCBS

since 2009, proposes to apply the

market risk capital rule (market risk

rule) to savings associations and savings

and loan holding companies and to

apply the advanced approach

Dodd-Frank Act.6 A third NPR

(Advanced Approaches and Market Risk

NPR) proposes changes to the advanced

approaches rules to incorporate

applicable provisions of Basel III and

other agreements reached by the BCBS

since 2009, proposes to apply the

market risk capital rule (market risk

rule) to savings associations and savings

and loan holding companies and to

apply the advanced approaches rule to

savings and loan holding companies,

and also removes references to credit

ratings.

Other than bank holding companies

subject to the Board’s Small Bank

Holding Company Policy Statement 7

(small bank holding companies), the

proposals in the Basel III NPR and the

Standardized Approach NPR would

apply to all banking organizations

currently subject to minimum capital

requirements, including national banks,

state member banks, state nonmember

banks, state and federal savings

associations, top-tier bank holding

companies domiciled in the United

States that are not small bank holding

companies, as well as top-tier savings

and loan holding companies domiciled

in the United States (together, banking

organizations).8 Certain aspects of these

proposals would apply only to

advanced approaches banking

organizations or banking organizations

with total consolidated assets of more

than $50 billion. Consistent with the

Dodd-Frank Act, a bank holding

company subsidiary of a foreign banking

organization that is currently relying on

the Board’s Supervision and Regulation

Letter (SR) 01–1 would not be required

to comply with the proposed capital

requirements under any of these NPRs

until July 21, 2015.9 In addition, the

Board is proposing for all three NPRs to

apply on a consolidated basis to top-tier

savings and loan holding companies

domiciled in the United States, subject

to the applicable thresholds of the

advanced approaches rules and the

market risk rules

(SR) 01–1 would not be required

to comply with the proposed capital

requirements under any of these NPRs

until July 21, 2015.9 In addition, the

Board is proposing for all three NPRs to

apply on a consolidated basis to top-tier

savings and loan holding companies

domiciled in the United States, subject

to the applicable thresholds of the

advanced approaches rules and the

market risk rules.

The agencies are publishing all the

proposed changes to the agencies’

current capital rules at the same time in

these three NPRs so that banking

organizations can read the three NPRs

together and assess the potential

cumulative impact of the proposals on

their operations and plan appropriately.

The overall proposal is being divided

into three separate NPRs to reflect the

distinct objectives of each proposal and

to allow interested parties to better

understand the various aspects of the

overall capital framework, including

which aspects of the rules will apply to

which banking organizations, and to

help interested parties better focus their

comments on areas of particular

interest. The agencies believe that

separating the proposals into three NPRs

makes it easier for banking

organizations of all sizes to more easily

understand which proposed changes are

related to the agencies’ objective to

improve the quality and increase the

quantity of capital (Basel III NPR) and

which are related to the agencies’

objective to enhance the overall risk-

sensitivity of the calculation of a

banking organization’s total risk-

weighted assets (Standardized

Approach NPR).

The agencies believe that the

proposals would result in capital

requirements that better reflect banking

organizations’ risk profiles and enhance

their ability to continue functioning as

financial intermediaries, including

during periods of financial stress,

thereby improving the overall resiliency

of the banking system

nization’s total risk-

weighted assets (Standardized

Approach NPR).

The agencies believe that the

proposals would result in capital

requirements that better reflect banking

organizations’ risk profiles and enhance

their ability to continue functioning as

financial intermediaries, including

during periods of financial stress,

thereby improving the overall resiliency

of the banking system. The agencies

have carefully considered the potential

impact of the three NPRs on all banking

organizations, including community

banking organizations, and sought to

minimize the potential burden of these

changes where consistent with

applicable law and the agencies’ goals of

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00005

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52796

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

10 The Standardized Approach NPR also contains

a second addendum to the preamble, which

contains the definitions proposed under the Basel

III NPR. Many of the proposed definitions also are

applicable to the Standardized Approach NPR,

which is published elsewhere in today’s Federal

11 BCBS published Basel III in December 2010

and revised it in June 2011. The text is available

at http://www.bis.org/publ/bcbs189.htm. This NPR

does not incorporate the Basel III reforms related to

liquidity risk management, published in December

2010, ‘‘Basel III: International Framework for

Liquidity Risk Measurement, Standards and

Monitoring.’’ The agencies expect to propose rules

to implement the Basel III liquidity provisions in

a separate rulemaking.

12 Selected aspects of Basel III that would apply

only to advanced approaches banking organizations

are proposed in the Advanced Approaches and

Market Risk NPR.

13 12 CFR part 6, 12 CFR 165 (OCC); 12 CFR part

208, subpart E (Board); 12 CFR part 325 and part

390, subpart Y (FDIC)

The agencies expect to propose rules

to implement the Basel III liquidity provisions in

a separate rulemaking.

12 Selected aspects of Basel III that would apply

only to advanced approaches banking organizations

are proposed in the Advanced Approaches and

Market Risk NPR.

13 12 CFR part 6, 12 CFR 165 (OCC); 12 CFR part

208, subpart E (Board); 12 CFR part 325 and part

390, subpart Y (FDIC).

14 See BCBS, ‘‘Enhancements to the Basel II

Framework’’ (July 2009), available at http://

www.bis.org/publ/bcbs157.htm (2009

Enhancements). See also BCBS, ‘‘International

Convergence of Capital Measurement and Capital

Standards: A Revised Framework,’’ (June 2006),

available at http://www.bis.org/publ/bcbs128.htm

(Basel II).

15 The agencies’ market risk rules are revised by

a final rule published elsewhere today in the

Federal Register.

establishing a robust and

comprehensive capital framework.

In developing each of the three NPRs,

wherever possible and appropriate, the

agencies have tailored the proposed

requirements to the size and complexity

of a banking organization. The agencies

believe that most banking organizations

already hold sufficient capital to meet

the proposed requirements, but

recognize that the proposals entail

significant changes with respect to

certain aspects of the agencies’ capital

requirements. The agencies are

proposing transition arrangements or

delayed effective dates for aspects of the

revised capital requirements consistent

with Basel III and the Dodd-Frank Act.

The agencies anticipate that they

separately would seek comment on

regulatory reporting instructions to

harmonize regulatory reports with these

proposals in a subsequent Federal

Many of the proposed requirements in

the three NPRs are not applicable to

smaller, less complex banking

organizations

vised capital requirements consistent

with Basel III and the Dodd-Frank Act.

The agencies anticipate that they

separately would seek comment on

regulatory reporting instructions to

harmonize regulatory reports with these

proposals in a subsequent Federal

Many of the proposed requirements in

the three NPRs are not applicable to

smaller, less complex banking

organizations. To assist these banking

organizations in rapidly identifying the

elements of these proposals that would

apply to them, this NPR and the

Standardized Approach NPR provide, as

addenda to the corresponding

preambles, a summary of the various

aspects of each NPR designed to clearly

and succinctly describe the two NPRs as

they would typically apply to smaller,

less complex banking organizations.10

Basel III NPR

In 2010, the BCBS published Basel III,

a comprehensive reform package that is

designed to improve the quality and the

quantity of regulatory capital and to

build additional capacity into the

banking system to absorb losses in times

of future market and economic stress.11

This NPR proposes the majority of the

revisions to international capital

standards in Basel III, including a more

restrictive definition of regulatory

capital, higher minimum regulatory

capital requirements, and a capital

conservation and a countercyclical

capital buffer, to enhance the ability of

banking organizations to absorb losses

and continue to operate as financial

intermediaries during periods of

economic stress.12 The proposal would

place limits on banking organizations’

capital distributions and certain

discretionary bonuses if they do not

hold specified ‘‘buffers’’ of common

equity tier 1 capital in excess of the new

minimum capital requirements.

This NPR also includes a leverage

ratio contained in Basel III that

incorporates certain off-balance sheet

assets in the denominator

(supplementary leverage ratio)

would

place limits on banking organizations’

capital distributions and certain

discretionary bonuses if they do not

hold specified ‘‘buffers’’ of common

equity tier 1 capital in excess of the new

minimum capital requirements.

This NPR also includes a leverage

ratio contained in Basel III that

incorporates certain off-balance sheet

assets in the denominator

(supplementary leverage ratio). The

supplementary leverage ratio would

apply only to banking organizations that

use the advanced approaches rules

(advanced approaches banking

organizations). The current leverage

ratio requirement (computed using the

proposed new definition of capital)

would continue to apply to all banking

organizations, including advanced

approaches banking organizations.

In this NPR, the agencies also propose

revisions to the agencies’ prompt

corrective action (PCA) rules to

incorporate the proposed revisions to

the minimum regulatory capital ratios.13

Standardized Approach NPR

The Standardized Approach NPR

aims to enhance the risk-sensitivity of

the agencies’ capital requirements by

revising the calculation of risk-weighted

assets. It would do this by incorporating

aspects of the Basel II Standardized

Approach, including aspects of the 2009

‘‘Enhancements to the Basel II

Framework’’ (2009 Enhancements), and

other changes designed to improve the

risk-sensitivity of the general risk-based

capital requirements. The proposed

changes are described in further detail

in the preamble to the Standardized

Approach NPR.14 As compared to the

general risk-based capital rules, the

Standardized Approach NPR includes a

greater number of exposure categories

for purposes of calculating total risk-

weighted assets, provides for greater

recognition of financial collateral, and

permits a wider range of eligible

guarantors

changes are described in further detail

in the preamble to the Standardized

Approach NPR.14 As compared to the

general risk-based capital rules, the

Standardized Approach NPR includes a

greater number of exposure categories

for purposes of calculating total risk-

weighted assets, provides for greater

recognition of financial collateral, and

permits a wider range of eligible

guarantors. In addition, to increase

transparency in the derivatives market,

the Standardized Approach NPR would

provide a more favorable capital

treatment for derivative and repo-style

transactions cleared through central

counterparties (as compared to the

treatment for bilateral transactions) in

order to create an incentive for banking

organizations to enter into cleared

transactions. Further, to promote

transparency and market discipline, the

Standardized Approach NPR proposes

disclosure requirements that would

apply to top-tier banking organizations

domiciled in the United States with $50

billion or more in total assets that are

not subject to disclosure requirements

under the advanced approaches rule.

In the Standardized Approach NPR,

the agencies also propose to revise the

calculation of risk-weighted assets for

certain exposures, consistent with the

requirements of section 939A of the

Dodd-Frank Act by using standards of

creditworthiness that are alternatives to

credit ratings. These alternative

standards would be used to assign risk

weights to several categories of

exposures, including sovereigns, public

sector entities, depository institutions,

and securitization exposures. These

alternative standards and risk-based

capital requirements have been

designed to result in capital

requirements that are consistent with

safety and soundness, while also

exhibiting risk sensitivity to the extent

possible. Furthermore, these capital

requirements are intended to be similar

to those generated under the Basel

capital framework

nstitutions,

and securitization exposures. These

alternative standards and risk-based

capital requirements have been

designed to result in capital

requirements that are consistent with

safety and soundness, while also

exhibiting risk sensitivity to the extent

possible. Furthermore, these capital

requirements are intended to be similar

to those generated under the Basel

capital framework.

The Standardized Approach NPR

would require banking organizations to

implement the revisions contained in

that NPR on January 1, 2015; however,

the proposal would also allow banking

organizations to early adopt the

Standardized Approach revisions.

Advanced Approaches and Market Risk

NPR

The proposals in the Advanced

Approaches and Market Risk NPR

would amend the advanced approaches

rules and integrate the agencies’ revised

market risk rules into the codified

regulatory capital rules.15 The

Advanced Approaches and Market Risk

NPR would incorporate revisions to the

Basel capital framework published by

the BCBS in a series of documents

between 2009 and 2011, including the

2009 Enhancements and Basel III. The

proposals would also revise the

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00006

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52797

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

16 See 12 U.S.C. 5371.

advanced approaches rules to achieve

consistency with relevant provisions of

the Dodd-Frank Act.

Significant proposed revisions to the

advanced approaches rules include the

treatment of counterparty credit risk, the

methodology for computing risk-

weighted assets for securitization

exposures, and risk weights for

exposures to central counterparties

Proposed Rules

16 See 12 U.S.C. 5371.

advanced approaches rules to achieve

consistency with relevant provisions of

the Dodd-Frank Act.

Significant proposed revisions to the

advanced approaches rules include the

treatment of counterparty credit risk, the

methodology for computing risk-

weighted assets for securitization

exposures, and risk weights for

exposures to central counterparties. For

example, the Advanced Approaches and

Market Risk NPR proposes capital

requirements to account for credit

valuation adjustments (CVA), wrong-

way risk, cleared derivative and repo-

style transactions (similar to proposals

in the Standardized Approach NPR) and

default fund contributions to central

counterparties. The Advanced

Approaches and Market Risk NPR

would also require banking

organizations subject to the advanced

approaches rules (advanced approaches

banking organizations) to conduct more

rigorous credit analysis of securitization

exposures and implement certain

disclosure requirements.

The Advanced Approaches and

Market Risk NPR additionally proposes

to remove the ratings-based approach

and the internal assessment approach

from the current advanced approaches

rules’ securitization hierarchy

consistent with section 939A of the

Dodd-Frank Act, and to include in the

hierarchy the simplified supervisory

formula approach (SSFA) as a

methodology to calculate risk-weighted

assets for securitization exposures. The

SSFA methodology is also proposed in

the Standardized Approach NPR and is

included in the market risk rule. The

agencies also are proposing to remove

references to credit ratings from certain

defined terms under the advanced

approaches rules and replace them with

alternative standards of

creditworthiness.

Banking organizations currently

subject to the advanced approaches rule

would continue to be subject to the

advanced approaches rules

ed Approach NPR and is

included in the market risk rule. The

agencies also are proposing to remove

references to credit ratings from certain

defined terms under the advanced

approaches rules and replace them with

alternative standards of

creditworthiness.

Banking organizations currently

subject to the advanced approaches rule

would continue to be subject to the

advanced approaches rules. In addition,

the Board proposes to apply the

advanced approaches and market risk

rules to savings and loan holding

companies, and the OCC and FDIC

propose to apply the market risk rules

to federal and state savings associations

that meet the scope of application of

those rules, respectively.

For advanced approaches banking

organizations, the regulatory capital

requirements proposed in this NPR and

the Standardized Approach NPR would

be ‘‘generally applicable’’ capital

requirements for purposes of section

171 of the Dodd-Frank Act.16

Proposed Structure of the Agencies’

Regulatory Capital Framework and Key

Provisions of the Three Proposals

In connection with the changes

proposed in the three NPRs, the

agencies intend to codify their current

regulatory capital requirements under

applicable statutory authority. Under

the revised structure, each agency’s

capital regulations would include

definitions in subpart A. The minimum

risk-based and leverage capital

requirements and buffers would be

contained in Subpart B and the

definition of regulatory capital would be

included in subpart C. Subpart D would

include the risk-weighted asset

calculations required of all banking

organizations; these proposed risk-

weighted asset calculations are

described in the Standardized Approach

NPR. Subpart E would contain the

advanced approaches rules, including

changes made pursuant to the advanced

approach NPR. The market risk rule

would be contained in subpart F.

Transition provisions would be in

subpart G

e the risk-weighted asset

calculations required of all banking

organizations; these proposed risk-

weighted asset calculations are

described in the Standardized Approach

NPR. Subpart E would contain the

advanced approaches rules, including

changes made pursuant to the advanced

approach NPR. The market risk rule

would be contained in subpart F.

Transition provisions would be in

subpart G. The agencies believe that this

revision would reduce the burden

associated with multiple reference

points for applicable capital

requirements, promote consistency of

capital rules across the banking

agencies, and reduce repetition of

certain features, such as definitions,

across the rules.

Table 1 outlines the proposed

structure of the agencies’ capital rules,

as well as references to the proposed

revisions to the PCA rules.

TABLE 1—PROPOSED STRUCTURE OF THE AGENCIES’ CAPITAL RULES AND PROPOSED REVISIONS TO THE PCA

FRAMEWORK

Subpart or regulation

Description of content

Subpart A (included in the Basel III NPR) ...............................................

Purpose; applicability; reservation of authority; definitions.

Subpart B (included in the Basel III NPR) ...............................................

Minimum capital requirements; minimum leverage capital requirements;

capital buffers.

Subpart C (included in the Basel III NPR) ...............................................

Regulatory capital: Eligibility criteria, minority interest, adjustments and

deductions.

Subpart D (included in the Standardized Approach NPR) ......................

Calculation of standardized total risk-weighted assets for general credit

risk, off-balance sheet items, over the counter (OTC) derivative con-

tracts, cleared transactions and default fund contributions, unsettled

transactions, securitization exposures, and equity exposures. De-

scription of credit risk mitigation.

Subpart E (included in the Advanced Approaches and Market Risk

NPR).

Calculation of advanced approaches total risk-weighted assets

ts for general credit

risk, off-balance sheet items, over the counter (OTC) derivative con-

tracts, cleared transactions and default fund contributions, unsettled

transactions, securitization exposures, and equity exposures. De-

scription of credit risk mitigation.

Subpart E (included in the Advanced Approaches and Market Risk

NPR).

Calculation of advanced approaches total risk-weighted assets.

Subpart F (included in the Advanced Approaches and Market Risk

NPR).

Calculation of market risk-weighted assets.

Subpart G (included in the Basel III NPR) ...............................................

Transition provisions.

Subpart D of Regulation H (Board), 12 CFR part 6 (OCC), Subpart H

of part 324 (FDIC).

Revised PCA capital framework, including introduction of a common

equity tier 1 capital threshold; revision of the current PCA thresholds

to incorporate the proposed regulatory capital minimums; an update

of the definition of tangible common equity, and, for advanced ap-

proaches organizations only, a supplementary leverage ratio.

While the agencies are mindful that

the proposal will result in higher capital

requirements and costs associated with

changing systems to calculate capital

requirements, the agencies believe that

the proposed changes are necessary to

address identified weaknesses in the

agencies’ current capital rules;

strengthen the banking sector and help

reduce risk to the deposit insurance

fund and the financial system; and

revise the agencies’ capital rules

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00007

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

re necessary to

address identified weaknesses in the

agencies’ current capital rules;

strengthen the banking sector and help

reduce risk to the deposit insurance

fund and the financial system; and

revise the agencies’ capital rules

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00007

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52798

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

17 See ‘‘Assessing the Macroeconomic Impact of

the Transition to Stronger Capital and Liquidity

Requirements’’ (August 2010), available at http://

www.bis.org/publ/othp10.pdf; ‘‘An assessment of

the long-term economic impact of stronger capital

and liquidity requirements’’ (August 2010),

available at http://www.bis.org/publ/bcbs173.pdf.

consistent with the international

agreements and U.S. law. Accordingly,

this NPR includes transition

arrangements that aim to provide

banking organizations sufficient time to

adjust to the proposed new rules and

that are generally consistent with the

transitional arrangements of the Basel

capital framework.

In December 2010, the BCBS

conducted a quantitative impact study

of internationally active banks to assess

the impact of the capital adequacy

standards announced in July 2009 and

the Basel III proposal published in

December 2009. Overall, the BCBS

found that as a result of the proposed

changes, banking organizations

surveyed will need to hold more capital

to meet the new minimum

requirements

cember 2010, the BCBS

conducted a quantitative impact study

of internationally active banks to assess

the impact of the capital adequacy

standards announced in July 2009 and

the Basel III proposal published in

December 2009. Overall, the BCBS

found that as a result of the proposed

changes, banking organizations

surveyed will need to hold more capital

to meet the new minimum

requirements. In addition, quantitative

analysis by the Macroeconomic

Assessment Group, a working group of

the BCBS, found that the stronger Basel

capital requirements would lower the

probability of banking crises and their

associated output losses while having

only a modest negative impact on gross

domestic product and lending costs, and

that the negative impact could be

mitigated by phasing the requirements

in over time.17 The agencies believe that

the benefits of these changes to the U.S.

financial system, in terms of the

reduction of risk to the deposit

insurance fund and the financial

system, ultimately outweigh the burden

on banking organizations of compliance

with the new standards.

As part of developing this proposal,

the agencies conducted an impact

analysis using depository institution

and bank holding company regulatory

reporting data to estimate the change in

capital that banking organizations

would be required to hold to meet the

proposed minimum capital

requirements. The impact analysis

assumed the proposed definition of

capital for purposes of the numerator

and the proposed standardized risk-

weights for purposes of the

denominator, and made stylized

assumptions in cases where necessary

input data were unavailable from

regulatory reports. Based on the

agencies’ analysis, the vast majority of

banking organizations currently would

meet the fully phased-in minimum

capital requirements as of March 31,

2012, and those organizations that

would not meet the proposed minimum

requirements should have ample time to

adjust their capital levels by the end of

the transition period

input data were unavailable from

regulatory reports. Based on the

agencies’ analysis, the vast majority of

banking organizations currently would

meet the fully phased-in minimum

capital requirements as of March 31,

2012, and those organizations that

would not meet the proposed minimum

requirements should have ample time to

adjust their capital levels by the end of

the transition period.

Table 2 summarizes key changes

proposed in the Basel III and

Standardized Approach NPRs and how

these changes compare with the

agencies’ general risk-based and

leverage capital rules.

TABLE 2—KEY PROVISIONS OF THE BASEL III AND STANDARDIZED APPROACH NPRS AS COMPARED WITH THE CURRENT

RISK-BASED AND LEVERAGE CAPITAL RULES

Aspect of proposed requirements

Proposed treatment

Basel III NPR

Minimum Capital Ratios:

Common equity tier 1 capital ratio (section 10) ................................

Introduces a minimum requirement of 4.5 percent.

Tier 1 capital ratio (section 10) .........................................................

Increases the minimum requirement from 4.0 percent to 6.0 percent.

Total capital ratio (section 10) ...........................................................

Minimum unchanged (remains at 8.0 percent).

Leverage ratio (section 10) ...............................................................

Modifies the minimum leverage ratio requirement based on the new

definition of tier 1 capital. Introduces a supplementary leverage ratio

requirement for advanced approaches banking organizations.

Components of Capital and Eligibility Criteria for Regulatory Capital In-

struments (sections 20–22).

Enhances the eligibility criteria for regulatory capital instruments and

adds certain adjustments to and deductions from regulatory capital,

including increased deductions for mortgage servicing assets (MSAs)

and deferred tax assets (DTAs) and new limits on the inclusion of

minority interests in capital

of Capital and Eligibility Criteria for Regulatory Capital In-

struments (sections 20–22).

Enhances the eligibility criteria for regulatory capital instruments and

adds certain adjustments to and deductions from regulatory capital,

including increased deductions for mortgage servicing assets (MSAs)

and deferred tax assets (DTAs) and new limits on the inclusion of

minority interests in capital. Provides that unrealized gains and

losses on all available for sale (AFS) securities and gains and losses

associated with certain cash flow hedges flow through to common

equity tier 1 capital.

Capital Conservation Buffer (section 11) .................................................

Introduces a capital conservation buffer of common equity tier 1 capital

above the minimum risk-based capital requirements, which must be

maintained to avoid restrictions on capital distributions and certain

discretionary bonus payments.

Countercyclical Capital Buffer (section 11) ..............................................

Introduces for advanced approaches banking organizations a mecha-

nism to increase the capital conservation buffer during times of ex-

cessive credit growth.

Standardized Approach NPR Risk-Weighted Assets

Credit exposures to:

Unchanged.

U.S. government and its agencies.

U.S. government-sponsored entities.

U.S. depository institutions and credit unions.

U.S. public sector entities, such as states and municipalities (sec-

tion 32).

Credit exposures to:

Foreign sovereigns

Foreign banks

Foreign public sector entities (section 32)

Introduces a more risk-sensitive treatment using the Country Risk Clas-

sification measure produced by the Organization for Economic Co-

operation and Development.

Corporate exposures (section 32) ............................................................

Assigns a 100 percent risk weight to corporate exposures, including

exposures to securities firms

reign public sector entities (section 32)

Introduces a more risk-sensitive treatment using the Country Risk Clas-

sification measure produced by the Organization for Economic Co-

operation and Development.

Corporate exposures (section 32) ............................................................

Assigns a 100 percent risk weight to corporate exposures, including

exposures to securities firms.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00008

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52799

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

18 See section 165 of the Dodd-Frank Act (12

U.S.C. 5365).

19 77 FR 594 (January 5, 2012).

20 See ‘‘Global Systemically Important Banks:

Assessment Methodology and the Additional Loss

Absorbency Requirement’’ (July 2011), available at

http://www.bis.org/publ/bcbs201.pdf.

21 See 54 FR 4186 (January 27, 1989) (Board); 54

FR 4168 (January 27, 1989) (OCC); 54 FR 11500

(March 21, 1989).

22 BCBS, ‘‘International Convergence of Capital

Measurement and Capital Standards’’ (July 1988),

available at http://www.bis.org/publ/bcbs04a.htm.

TABLE 2—KEY PROVISIONS OF THE BASEL III AND STANDARDIZED APPROACH NPRS AS COMPARED WITH THE CURRENT

RISK-BASED AND LEVERAGE CAPITAL RULES—Continued

Aspect of proposed requirements

Proposed treatment

Residential mortgage exposures (section 32) ..........................................

Introduces a more risk-sensitive treatment based on several criteria, in-

cluding certain loan characteristics and the loan-to-value-ratio of the

exposure.

High volatility commercial real estate exposures (section 32) .................

Applies a 150 percent risk weight to certain credit facilities that finance

the acquisition, development or construction of real property.

Past due exposures (section 32) ............................................................

cluding certain loan characteristics and the loan-to-value-ratio of the

exposure.

High volatility commercial real estate exposures (section 32) .................

Applies a 150 percent risk weight to certain credit facilities that finance

the acquisition, development or construction of real property.

Past due exposures (section 32) .............................................................

Applies a 150 percent risk weight to exposures that are not sovereign

exposures or residential mortgage exposures and that are more than

90 days past due or on nonaccrual.

Securitization exposures (sections 41–45) ..............................................

Maintains the gross-up approach for securitization exposures.

Replaces the current ratings-based approach with a formula-based ap-

proach for determining a securitization exposure’s risk weight based

on the underlying assets and exposure’s relative position in the

securitization’s structure.

Equity exposures (sections 51–53) ..........................................................

Introduces more risk-sensitive treatment for equity exposures.

Off-balance Sheet Items (sections 33) .....................................................

Revises the measure of the counterparty credit risk of repo-style trans-

actions. Raises the credit conversion factor for most short-term com-

mitments from zero percent to 20 percent.

Derivative Contracts (section 34) .............................................................

Removes the 50 percent risk weight cap for derivative contracts.

Cleared Transactions (section 35) ...........................................................

Provides preferential capital requirements for cleared derivative and

repo-style transactions (as compared to requirements for non-cleared

transactions) with central counterparties that meet specified stand-

ards. Also requires that a clearing member of a central counterparty

calculate a capital requirement for its default fund contributions to

that central counterparty

.......................

Provides preferential capital requirements for cleared derivative and

repo-style transactions (as compared to requirements for non-cleared

transactions) with central counterparties that meet specified stand-

ards. Also requires that a clearing member of a central counterparty

calculate a capital requirement for its default fund contributions to

that central counterparty.

Credit Risk Mitigation (section 36) ...........................................................

Provides a more comprehensive recognition of collateral and guaran-

tees.

Disclosure Requirements (sections 61–63) .............................................

Introduces qualitative and quantitative disclosure requirements, includ-

ing regarding regulatory capital instruments, for banking organiza-

tions with total consolidated assets of $50 billion or more that are not

subject to the separate advanced approaches disclosure require-

ments.

Under section 165 of the Dodd-Frank

Act, the Board is required to establish

the enhanced risk-based and leverage

capital requirements for bank holding

companies with total consolidated

assets of $50 billion or more and

nonbank financial companies that the

Financial Stability Oversight Council

has designated for supervision by the

Board (collectively, covered

companies).18 The Board published for

comment in the Federal Register on

January 5, 2012, a proposal regarding

the enhanced prudential standards and

early remediation requirements

companies with total consolidated

assets of $50 billion or more and

nonbank financial companies that the

Financial Stability Oversight Council

has designated for supervision by the

Board (collectively, covered

companies).18 The Board published for

comment in the Federal Register on

January 5, 2012, a proposal regarding

the enhanced prudential standards and

early remediation requirements. The

capital requirements as proposed in the

three NPRs would become a key part of

the Board’s overall approach to

enhancing the risk-based capital and

leverage standards applicable to covered

companies in accordance with section

165 of the Dodd-Frank Act.19 In

addition, the Board intends to

supplement the enhanced risk-based

capital and leverage requirements

included in its January 2012 proposal

with a subsequent proposal to

implement a quantitative risk-based

capital surcharge for covered companies

or a subset of covered companies. The

BCBS is calibrating a methodology for

assessing an additional capital

surcharge for global systemically

important banks (G–SIBs).20 The Board

intends to propose a quantitative risk-

based capital surcharge in the United

States based on the BCBS approach and

consistent with the BCBS’s

implementation time frame. The

forthcoming proposal would

contemplate adopting implementing

rules in 2014, and requiring G–SIBs to

meet the capital surcharges on a phased-

in basis from 2016–2019. The OCC also

is reviewing the BCBS proposal and is

considering whether to propose to apply

a similar surcharge for globally

significant national banks.

Question 1: The agencies solicit

comment on all aspects of the proposals

including comment on the specific

issues raised throughout this preamble.

Commenters are requested to provide a

detailed qualitative or quantitative

analysis, as appropriate, as well as any

relevant data and impact analysis to

support their positions.

B. Background

In 1989, the agencies established a

risk-based capital framework for U.S

es solicit

comment on all aspects of the proposals

including comment on the specific

issues raised throughout this preamble.

Commenters are requested to provide a

detailed qualitative or quantitative

analysis, as appropriate, as well as any

relevant data and impact analysis to

support their positions.

B. Background

In 1989, the agencies established a

risk-based capital framework for U.S.

national banks, state member and

nonmember banks, and bank holding

companies with the general risk-based

capital rules.21 The agencies based the

framework on the ‘‘International

Convergence of Capital Measurement

and Capital Standards’’ (Basel I),

released by the BCBS in 1988.22 The

general risk-based capital rules

instituted a uniform risk-based capital

system that was more risk-sensitive

than, and addressed several

shortcomings in, the regulatory capital

rules in effect prior to 1989. The

agencies’ capital rules also included a

minimum leverage measure of capital to

total assets, established in the early

1980s, to place a constraint on the

maximum degree to which a banking

organization can leverage its capital

base.

In 2004, the BCBS introduced a new

international capital adequacy

framework (Basel II) that was intended

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00009

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52800

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

23 See ‘‘International Convergence of Capital

Measurement and Capital Standards: A Revised

Framework’’ (June 2006), available at http://www.

bis.org/publ/bcbs128.htm.

24 See 72 FR 69288 (December 7, 2007).

25 In July 2009, the BCBS also issued ‘‘Revisions

to the Basel II Market Risk Framework,’’ available

at http://www.bis.org/publ/bcbs193.htm. The

agencies issued an NPR in January 2011 and a

supplement in December 2011, that included

provisions to implement the market-risk related

provisions

une 2006), available at http://www.

bis.org/publ/bcbs128.htm.

24 See 72 FR 69288 (December 7, 2007).

25 In July 2009, the BCBS also issued ‘‘Revisions

to the Basel II Market Risk Framework,’’ available

at http://www.bis.org/publ/bcbs193.htm. The

agencies issued an NPR in January 2011 and a

supplement in December 2011, that included

provisions to implement the market-risk related

provisions. 76 FR 1890 (January 11, 2011); 76 FR

79380 (December 21, 2011).

to improve risk measurement and

management processes and to better

align minimum risk-based capital

requirements with risk of the underlying

exposures.23 Basel II is designed as a

‘‘three pillar’’ framework encompassing

risk-based capital requirements for

credit risk, market risk, and operational

risk (Pillar 1); supervisory review of

capital adequacy (Pillar 2); and market

discipline through enhanced public

disclosures (Pillar 3). To calculate risk-

based capital requirements for credit

risk, Basel II provides three approaches:

the standardized approach (Basel II

standardized approach), the foundation

internal ratings-based approach, and the

advanced internal ratings-based

approach. Basel II also introduces an

explicit capital requirement for

operational risk, which may be

calculated using one of three

approaches: the basic indicator

approach, the standardized approach, or

the advanced measurement approaches.

On December 7, 2007, the agencies

implemented the advanced approaches

rules that incorporated Basel II

advanced internal ratings-based

approach for credit risk and the

advanced measurement approaches for

operational risk.24

To address some of the shortcomings

in the international capital standards

exposed during the crisis, the BCBS

issued the ‘‘2009 Enhancements’’ in July

2009 to enhance certain risk-based

capital requirements and to encourage

stronger management of credit and

market risk

vanced internal ratings-based

approach for credit risk and the

advanced measurement approaches for

operational risk.24

To address some of the shortcomings

in the international capital standards

exposed during the crisis, the BCBS

issued the ‘‘2009 Enhancements’’ in July

2009 to enhance certain risk-based

capital requirements and to encourage

stronger management of credit and

market risk. The ‘‘2009 Enhancements’’

strengthen the risk-based capital

requirements for certain securitization

exposures to better reflect their risk,

increase the credit conversion factors for

certain short-term liquidity facilities,

and require that banking organizations

conduct more rigorous credit analysis of

their exposures.25

In 2010, the BCBS published a

comprehensive reform package, Basel

III, which is designed to improve the

quality and the quantity of regulatory

capital and to build additional capacity

into the banking system to absorb losses

in times of future market and economic

stress. Basel III introduces or enhances

a number of capital standards, including

a stricter definition of regulatory capital,

a minimum tier 1 common equity ratio,

the addition of a regulatory capital

buffer, a leverage ratio, and a disclosure

requirement for regulatory capital

instruments. Implementing Basel III is

the focus of this NPR, as described

below. Certain elements of Basel III are

also proposed in the Standardized

Approach NPR and the Advanced

Approaches and Market Risk NPR, as

discussed in those notices.

Quality and Quantity of Capital

The recent financial crisis

demonstrated that the amount of high-

quality capital held by banks globally

was insufficient to absorb losses during

that period. In addition, some non-

common stock capital instruments

included in tier 1 capital did not absorb

losses to the extent previously expected

proaches and Market Risk NPR, as

discussed in those notices.

Quality and Quantity of Capital

The recent financial crisis

demonstrated that the amount of high-

quality capital held by banks globally

was insufficient to absorb losses during

that period. In addition, some non-

common stock capital instruments

included in tier 1 capital did not absorb

losses to the extent previously expected.

A lack of clear and easily understood

disclosures regarding the amount of

high-quality regulatory capital and

characteristics of regulatory capital

instruments, as well as inconsistencies

in the definition of capital across

jurisdictions, contributed to the

difficulties in evaluating a bank’s capital

strength. To evaluate banks’

creditworthiness and overall stability

more accurately, market participants

increasingly focused on the amount of

banks’ tangible common equity, the

most loss-absorbing form of capital.

The crisis also raised questions about

banks’ ability to conserve capital during

a stressful period or to cancel or defer

interest payments on tier 1 capital

instruments. For example, in some

jurisdictions banks exercised call

options on hybrid tier 1 capital

instruments, even when it became

apparent that the banks’ capital

positions would suffer as a result.

Consistent with Basel III, the

proposals in this NPR would address

these deficiencies by imposing, among

other requirements, stricter eligibility

criteria for regulatory capital

instruments and increasing the

minimum tier 1 capital ratio from 4 to

6 percent. To help ensure that a banking

organization holds truly loss-absorbing

capital, the proposal also introduces a

minimum common equity tier 1 capital

to total risk-weighted assets ratio of 4.5

percent

these deficiencies by imposing, among

other requirements, stricter eligibility

criteria for regulatory capital

instruments and increasing the

minimum tier 1 capital ratio from 4 to

6 percent. To help ensure that a banking

organization holds truly loss-absorbing

capital, the proposal also introduces a

minimum common equity tier 1 capital

to total risk-weighted assets ratio of 4.5

percent. In addition, the proposals

would require that most regulatory

deductions from, and adjustments to,

regulatory capital (for example, the

deductions related to mortgage servicing

assets (MSAs) and deferred tax assets

(DTAs) be applied to common equity

tier 1 capital. The proposals would also

eliminate certain features of the current

risk-based capital rules, such as

adjustments to regulatory capital to

neutralize the effect on the capital

account of unrealized gains and losses

on AFS debt securities. To reduce the

double counting of regulatory capital,

Basel III also limits investments in the

capital of unconsolidated financial

institutions that would be included in

regulatory capital and requires

deduction from capital if a banking

organization has exposures to these

institutions that go beyond certain

percentages of its common equity tier 1

capital. Basel III also revises risk-

weights associated with certain items

that are subject to deduction from

regulatory capital.

Finally, to promote transparency and

comparability of regulatory capital

across jurisdictions, Basel III introduces

public disclosure requirements,

including those for regulatory capital

instruments, that are designed to help

market participants assess and compare

the overall stability and resiliency of

banking organizations across

jurisdictions

ect to deduction from

regulatory capital.

Finally, to promote transparency and

comparability of regulatory capital

across jurisdictions, Basel III introduces

public disclosure requirements,

including those for regulatory capital

instruments, that are designed to help

market participants assess and compare

the overall stability and resiliency of

banking organizations across

jurisdictions.

Capital Conservation and

Countercyclical Capital Buffer

As noted previously, some banking

organizations continued to pay

dividends and substantial discretionary

bonuses even as their financial

condition weakened as a result of the

recent financial crisis and economic

downturn. Such capital distributions

had a significant negative impact on the

overall strength of the banking sector.

To encourage better capital conservation

by banking organizations and to

improve the resiliency of the banking

system, Basel III and this proposal

include limits on capital distributions

and discretionary bonuses for banking

organizations that do not hold a

specified amount of common equity tier

1 capital in addition to the common

equity necessary to meet the minimum

risk-based capital requirements (capital

conservation buffer).

Under this proposal, for advanced

approaches banking organizations, the

capital conservation buffer may be

expanded by up to 2.5 percent of risk-

weighted assets if the relevant national

authority determines that financial

markets in its jurisdiction are

experiencing a period of excessive

aggregate credit growth that is

associated with an increase in system-

wide risk. The countercyclical capital

buffer is designed to take into account

the macro-financial environment in

which banking organizations function

and help protect the banking system

from the systemic vulnerabilities.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00010

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

n system-

wide risk. The countercyclical capital

buffer is designed to take into account

the macro-financial environment in

which banking organizations function

and help protect the banking system

from the systemic vulnerabilities.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00010

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52801

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

26 See, e.g., ‘‘Basel III FAQs answered by the Basel

Committee’’ (July, October, December 2011),

available at http://www.bis.org/list/press_releases/

index.htm.

27 The BCBS left unchanged the treatment of

exposures to CCPs for settlement of cash

transactions such as equities, fixed income, spot

foreign exchange and spot commodities. See

‘‘Capitalization of Banking Organization Exposures

to Central Counterparties’’ (December 2010, revised

November 2011) (CCP consultative release),

available at http://www.bis.org/publ/bcbs206.pdf.

28 Advanced approaches banking organizations

should refer to section 10 of the proposed rule text

and to the Advanced Approaches and Market Risk

NPR for a more detailed discussion of the

applicable minimum capital ratios.

29 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part

165 (OCC); 12 CFR 208.45 (Board); 12 CFR 325.105,

12 CFR 390.455 (FDIC).

Basel III Leverage Ratio

Since the early 1980s, U.S. banking

organizations have been subject to a

minimum leverage measure of capital to

total assets designed to place a

constraint on the maximum degree to

which a banking organization can

leverage its equity capital base.

However, prior to the adoption of Basel

III, the Basel capital framework did not

include a leverage ratio requirement. It

became apparent during the crisis that

some banks built up excessive on- and

off-balance sheet leverage while

continuing to present strong risk-based

capital ratios

constraint on the maximum degree to

which a banking organization can

leverage its equity capital base.

However, prior to the adoption of Basel

III, the Basel capital framework did not

include a leverage ratio requirement. It

became apparent during the crisis that

some banks built up excessive on- and

off-balance sheet leverage while

continuing to present strong risk-based

capital ratios. In many instances, banks

were forced by the markets to reduce

their leverage and exposures in a

manner that increased downward

pressure on asset prices and further

exacerbated overall losses in the

financial sector.

The BCBS introduced a leverage ratio

(the Basel III leverage ratio) to

discourage the acquisition of excess

leverage and to act as a backstop to the

risk-based capital requirements. The

Basel III leverage ratio is defined as the

ratio of tier 1 capital to a combination

of on- and off-balance sheet assets; the

minimum ratio is 3 percent. The

introduction of the leverage requirement

in the Basel capital framework should

improve the resiliency of the banking

system worldwide by providing an

ultimate limit on the amount of leverage

a banking organization may incur.

As described in section II.B of this

preamble, the agencies are proposing to

apply the Basel III leverage ratio only to

advanced approaches banking

organizations as an additional leverage

requirement (supplementary leverage

ratio). For all banking organizations, the

agencies are proposing to update and

maintain the current leverage

requirement, as revised to reflect the

proposed definition of tier 1 capital

ion II.B of this

preamble, the agencies are proposing to

apply the Basel III leverage ratio only to

advanced approaches banking

organizations as an additional leverage

requirement (supplementary leverage

ratio). For all banking organizations, the

agencies are proposing to update and

maintain the current leverage

requirement, as revised to reflect the

proposed definition of tier 1 capital.

Additional Revisions to the Basel

Capital Framework

To facilitate the implementation of

Basel III, the BCBS issued a series of

releases in 2011 in the form of

frequently asked questions.26 In

addition, in 2011, the BCBS proposed to

revise the treatment of counterparty

credit risk and specific capital

requirements for derivative and repo-

style transaction exposures to central

counterparties (CCP) to address

concerns related to the

interconnectedness and complexity of

the derivatives markets.27 The proposed

revisions provide incentives for banking

organizations to clear derivatives and

repo-style transactions through

qualifying central counterparties (QCCP)

to help promote market transparency

and improve the ability of market

participants to unwind their positions

quickly and efficiently. The agencies

have incorporated these provisions in

the Standardized Approach NPR and

the Advanced Approaches and Market

Risk NPR.

II. Minimum Regulatory Capital Ratios,

Additional Capital Requirements, and

Overall Capital Adequacy

A. Minimum Risk-Based Capital Ratios

and Other Regulatory Capital Provisions

Consistent with Basel III, the agencies

are proposing to require that banking

organizations comply with the following

minimum capital ratios: (1) A common

equity tier 1 capital ratio of 4.5 percent;

Risk NPR.

II. Minimum Regulatory Capital Ratios,

Additional Capital Requirements, and

Overall Capital Adequacy

A. Minimum Risk-Based Capital Ratios

and Other Regulatory Capital Provisions

Consistent with Basel III, the agencies

are proposing to require that banking

organizations comply with the following

minimum capital ratios: (1) A common

equity tier 1 capital ratio of 4.5 percent;

(2) a tier 1 capital ratio of 6 percent; (3)

a total capital ratio of 8 percent; and (4)

a tier 1 capital to average consolidated

assets of 4 percent and, for advanced

approaches banking organizations only,

an additional requirement tier 1 capital

to total leverage exposure ratio of 3

percent.28 As noted above, the common

equity tier 1 capital ratio would be a

new minimum requirement. It is

designed to ensure that banking

organizations hold high-quality

regulatory capital that is available to

absorb losses. The proposed capital

ratios would apply to a banking

organization on a consolidated basis.

Under this NPR, tier 1 capital would

equal the sum of common equity tier 1

capital and additional tier 1 capital.

Total capital would consist of three

capital components: common equity tier

1, additional tier 1, and tier 2 capital.

The definitions of each of these

categories of regulatory capital are

discussed below in section III of this

preamble. To align the proposed

regulatory capital requirements with the

agencies’ current PCA rules, this NPR

also would incorporate the proposed

revisions to the minimum capital

requirements into the agencies’ PCA

framework, as further discussed in

section II.E of this preamble.

In addition, a banking organization

would be subject to a capital

conservation buffer in excess of the risk-

based capital requirements that would

impose limitations on its capital

distributions and certain discretionary

bonuses, as described in sections II.C

and II.D of this preamble

requirements into the agencies’ PCA

framework, as further discussed in

section II.E of this preamble.

In addition, a banking organization

would be subject to a capital

conservation buffer in excess of the risk-

based capital requirements that would

impose limitations on its capital

distributions and certain discretionary

bonuses, as described in sections II.C

and II.D of this preamble. Because the

regulatory capital buffer would apply in

addition to the regulatory minimum

requirements, the restrictions on capital

distributions and discretionary bonus

payments associated with the regulatory

capital buffer would not give rise to any

applicable restrictions under section 38

of the Federal Deposit Insurance Act

and the agencies’ implementing PCA

rules, which apply when an insured

institution’s capital levels drop below

certain regulatory thresholds.29

As a prudential matter, the agencies

have a long-established policy that

banking organizations should hold

capital commensurate with the level

and nature of the risks to which they are

exposed, which may entail holding

capital significantly above the minimum

requirements, depending on the nature

of the banking organization’s activities

and risk profile. Section II.F of this

preamble describes the requirement for

overall capital adequacy of banking

organizations and the supervisory

assessment of an entity’s capital

adequacy.

Furthermore, consistent with the

agencies’ authority under the current

capital rules, section 10(d) of the

proposal includes a reservation of

authority that would allow a banking

organization’s primary federal

supervisor to require a banking

organization to hold a different amount

of regulatory capital than otherwise

would be required under the proposal,

if the supervisor determines that the

regulatory capital held by the banking

organization is not commensurate with

a banking organization’s credit, market,

operational, or other risks.

B. Leverage Ratio

nking

organization’s primary federal

supervisor to require a banking

organization to hold a different amount

of regulatory capital than otherwise

would be required under the proposal,

if the supervisor determines that the

regulatory capital held by the banking

organization is not commensurate with

a banking organization’s credit, market,

operational, or other risks.

B. Leverage Ratio

1. Minimum Tier 1 Leverage Ratio

Under the proposal, all banking

organizations would remain subject to a

4 percent tier 1 leverage ratio, which

would be calculated by dividing an

organization’s tier 1 capital by its

average consolidated assets, minus

amounts deducted from tier 1 capital.

The numerator for this ratio would be a

banking organization’s tier 1 capital as

defined in section 2 of the proposal. The

denominator would be its average total

on-balance sheet assets as reported on

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00011

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52802

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

30 Specifically, to determine average total on-

balance sheet assets, bank holding companies and

savings and loan holding companies would use the

Consolidated Financial Statements for Bank

Holding Companies (FR Y–9C); national banks,

state member banks, state nonmember banks, and

savings associations would use On-balance sheet

Reports of Condition and Income (Call Report).

31 Under the agencies’ current rules, the

minimum ratio of tier 1 capital to total assets for

strong banking organizations (that is, rated

composite ‘‘1’’ under the CAMELS system for state

nonmember and national banks, ‘‘1’’ under UFIRS

for state member banks, and ‘‘1’’ under RFI/CD for

bank holding companies) not experiencing or

anticipating significant growth is 3 percent

(Call Report).

31 Under the agencies’ current rules, the

minimum ratio of tier 1 capital to total assets for

strong banking organizations (that is, rated

composite ‘‘1’’ under the CAMELS system for state

nonmember and national banks, ‘‘1’’ under UFIRS

for state member banks, and ‘‘1’’ under RFI/CD for

bank holding companies) not experiencing or

anticipating significant growth is 3 percent. See 12

CFR 3.6, 12 CFR 167.8 (OCC); 12 CFR 208.43, 12

CFR part 225, Appendix D (Board); 12 CFR 325.3,

12 CFR 390.467 (FDIC).

32 See 12 CFR 3.6 (OCC); 12 CFR part 208,

Appendix B and 12 CFR part 225, Appendix D

(Board); and 12 CFR part 325.3 (FDIC).

the banking organization’s regulatory

report, net of amounts deducted from

tier 1 capital.30

In this NPR, the agencies are

proposing to remove the tier 1 leverage

ratio exception for banking

organizations with a supervisory

composite rating of 1 that exists under

the current leverage rules.31 This

exception provides for a 3 percent tier

1 leverage measure for such

institutions.32 The current exception

would also be eliminated for bank

holding companies with a supervisory

composite rating of 1 and subject to the

market risk rule. Accordingly, as

proposed, all banking organizations

would be subject to a 4 percent

minimum tier 1 leverage ratio.

2. Supplementary Leverage Ratio for

Advanced Approaches Banking

Organizations

Advanced approaches banking

organizations would also be required to

maintain the supplementary leverage

ratio of tier 1 capital to total leverage

exposure of 3 percent. The

supplementary leverage ratio

incorporates the Basel III definition of

tier 1 capital as the numerator and uses

a broader exposure base, including

certain off-balance sheet exposures

(total leverage exposure), for the

denominator

roaches banking

organizations would also be required to

maintain the supplementary leverage

ratio of tier 1 capital to total leverage

exposure of 3 percent. The

supplementary leverage ratio

incorporates the Basel III definition of

tier 1 capital as the numerator and uses

a broader exposure base, including

certain off-balance sheet exposures

(total leverage exposure), for the

denominator.

The agencies believe that the

supplementary leverage ratio is most

appropriate for advanced approaches

banking organizations because these

banking organizations tend to have more

significant amounts of off-balance sheet

exposures that are not captured by the

current leverage ratio. Applying the

supplementary leverage ratio rather than

the current tier 1 leverage ratio to other

banking organizations would increase

the complexity of their leverage ratio

calculation, and in many cases could

result in a reduced leverage capital

requirement. The agencies believe that,

along with the 5 percent ‘‘well-

capitalized’’ PCA leverage threshold

described in section II.E of this

preamble, the proposed leverage

requirements are, for the majority of

banking organizations that are not

subject to the advanced approaches rule,

both more conservative and simpler

than the supplementary leverage ratio.

An advanced approaches banking

organization would calculate the

supplementary leverage ratio, including

each of the ratio components, at the end

of every month and then calculate a

quarterly leverage ratio as the simple

arithmetic mean of the three monthly

leverage ratios over the reporting

quarter. As proposed, total leverage

exposure would equal the sum of the

following exposures:

(1) The balance sheet carrying value

of all of the banking organization’s on-

balance sheet assets minus amounts

deducted from tier 1 capital;

end

of every month and then calculate a

quarterly leverage ratio as the simple

arithmetic mean of the three monthly

leverage ratios over the reporting

quarter. As proposed, total leverage

exposure would equal the sum of the

following exposures:

(1) The balance sheet carrying value

of all of the banking organization’s on-

balance sheet assets minus amounts

deducted from tier 1 capital;

(2) The potential future exposure

amount for each derivative contract to

which the banking organization is a

counterparty (or each single-product

netting set for such transactions)

determined in accordance with section

34 of the proposal;

(3) 10 percent of the notional amount

of unconditionally cancellable

commitments made by the banking

organization; and

(4) The notional amount of all other

off-balance sheet exposures of the

banking organization (excluding

securities lending, securities borrowing,

reverse repurchase transactions,

derivatives and unconditionally

cancellable commitments).

The BCBS continues to assess the

Basel III leverage ratio, including

through supervisory monitoring during

a parallel run period in which the

proposed design and calibration of the

Basel III leverage ratio will be evaluated,

and the impact of any differences in

national accounting frameworks

material to the definition of the leverage

ratio will be considered. A final

decision by the BCBS on the measure of

exposure for certain transactions and

calibration of the leverage ratio is not

expected until closer to 2018.

Due to these ongoing observations and

international discussions on the most

appropriate measurement of exposure

for repo-style transactions, the agencies

are proposing to maintain the current

on-balance sheet measurement of repo-

style transactions for purposes of

calculating total leverage exposure

transactions and

calibration of the leverage ratio is not

expected until closer to 2018.

Due to these ongoing observations and

international discussions on the most

appropriate measurement of exposure

for repo-style transactions, the agencies

are proposing to maintain the current

on-balance sheet measurement of repo-

style transactions for purposes of

calculating total leverage exposure.

Under this NPR, a banking organization

would measure exposure as the value of

repo-style transactions (including

repurchase agreements, securities

lending and borrowing transactions, and

reverse repos) carried as an asset on the

balance sheet, consistent with the

measure of exposure used in the

agencies’ current leverage measure. The

agencies are participating in

international discussions and ongoing

quantitative analysis of the exposure

measure for repo-style transactions, and

will consider modifying in the future

the measurement of repo-style

transactions in the calculation of total

leverage exposure to reflect results of

these international efforts.

The agencies are proposing to apply

the supplementary leverage ratio as a

requirement for advanced approaches

banking organizations beginning in

2018, consistent with Basel III.

However, beginning on January 1, 2015,

advanced approaches banking

organizations would be required to

calculate and report their

supplementary leverage ratio.

Question 2: The agencies solicit

comments on all aspects of this

proposal, including regulatory burden

and competitive impact

requirement for advanced approaches

banking organizations beginning in

2018, consistent with Basel III.

However, beginning on January 1, 2015,

advanced approaches banking

organizations would be required to

calculate and report their

supplementary leverage ratio.

Question 2: The agencies solicit

comments on all aspects of this

proposal, including regulatory burden

and competitive impact. Should all

banking organizations, banking

organizations with total consolidated

assets above a certain threshold, or

banking organizations with certain risk

profiles (for example, concentrations in

derivatives) be required to comply with

the supplementary leverage ratio, and

why? What are the advantages and

disadvantages of the application of two

leverage ratio requirements to advanced

approaches banking organizations?

Question 3: What modifications to the

proposed supplementary leverage ratio

should be considered and why? Are

there alternative measures of exposure

for repo-style transactions that should

be considered by the agencies? What

alternative measures should be used in

cases in which the use of the current

exposure method may overstate leverage

(for example, in certain cases of

calculating derivative exposure) or

understate leverage (for example, in the

case of credit protection sold)? The

agencies request data and

supplementary analysis that would

support consideration of such

alternative measures.

Question 4: Given differences in

international accounting, particularly

the difference in how International

Financial Reporting Standards and

GAAP treat securities for securities

lending, the agencies solicit comments

on the adjustments that should be

contemplated to mitigate or offset such

differences.

Question 5: The agencies solicit

comments on the advantages and

disadvantages of including off-balance

sheet exposures in the supplementary

leverage ratio

the difference in how International

Financial Reporting Standards and

GAAP treat securities for securities

lending, the agencies solicit comments

on the adjustments that should be

contemplated to mitigate or offset such

differences.

Question 5: The agencies solicit

comments on the advantages and

disadvantages of including off-balance

sheet exposures in the supplementary

leverage ratio. The agencies seek

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00012

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52803

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

33 For purposes of the capital conservation buffer

calculations, a banking organization would be

required to use standardized total risk weighted

assets if it is a standardized approach banking

organization and it would be required to use

advanced total risk weighted assets if it is an

advanced approaches banking organization.

34 See 12 CFR 225.8.

detailed comments, with supporting

data, on the proposed method of

calculating exposures and estimates of

burden, particularly for off-balance

sheet exposures.

C. Capital Conservation Buffer

Consistent with Basel III, the proposal

incorporates a capital conservation

buffer that is designed to bolster the

resilience of banking organizations

throughout financial cycles. The buffer

would provide incentives for banking

organizations to hold sufficient capital

to reduce the risk that their capital

levels would fall below their minimum

requirements during stressful

conditions. The capital conservation

buffer would be composed of common

equity tier 1 capital and would be

separate from the minimum risk-based

capital requirements

throughout financial cycles. The buffer

would provide incentives for banking

organizations to hold sufficient capital

to reduce the risk that their capital

levels would fall below their minimum

requirements during stressful

conditions. The capital conservation

buffer would be composed of common

equity tier 1 capital and would be

separate from the minimum risk-based

capital requirements.

As proposed, a banking organization’s

capital conservation buffer would be the

lowest of the following measures: (1)

The banking organization’s common

equity tier 1 capital ratio minus its

minimum common equity tier 1 capital

ratio; (2) the banking organization’s tier

1 capital ratio minus its minimum tier

1 capital ratio; and (3) the banking

organization’s total capital ratio minus

its minimum total capital ratio.33 If the

banking organization’s common equity

tier 1, tier 1 or total capital ratio were

less than or equal to its minimum

common equity tier 1, tier 1 or total

capital ratio, respectively, the banking

organization’s capital conservation

buffer would be zero. For example, if a

banking organization’s common equity

tier 1, tier 1, and total capital ratios are

7.5, 9.0, and 10 percent, respectively,

and the banking organization’s

minimum common equity tier 1, tier 1,

and total capital ratio requirements are

4.5, 6, and 8, respectively, the banking

organization’s applicable capital

conservation buffer would be 2 percent

for purposes of establishing a 60 percent

maximum payout ratio under table 3.

Under the proposal, a banking

organization would need to hold a

capital conservation buffer in an amount

greater than 2.5 percent of total risk-

weighted assets (plus, for an advanced

approaches banking organization, 100

percent of any applicable

countercyclical capital buffer amount)

to avoid being subject to limitations on

capital distributions and discretionary

bonus payments to executive officers, as

defined under the proposal

ould need to hold a

capital conservation buffer in an amount

greater than 2.5 percent of total risk-

weighted assets (plus, for an advanced

approaches banking organization, 100

percent of any applicable

countercyclical capital buffer amount)

to avoid being subject to limitations on

capital distributions and discretionary

bonus payments to executive officers, as

defined under the proposal. The

maximum payout ratio would be the

percentage of eligible retained income

that a banking organization would be

allowed to pay out in the form of capital

distributions and certain discretionary

bonus payments during the current

calendar quarter and would be

determined by the amount of the capital

conservation buffer held by the banking

organization during the previous

calendar quarter. Under the proposal,

eligible retained income would be

defined as a banking organization’s net

income (as reported in the banking

organization’s quarterly regulatory

reports) for the four calendar quarters

preceding the current calendar quarter,

net of any capital distributions, certain

discretionary bonus payments, and

associated tax effects not already

reflected in net income.

A banking organization’s maximum

payout amount for the current calendar

quarter would be equal to the banking

organization’s eligible retained income,

multiplied by the applicable maximum

payout ratio in accordance with table 3.

A banking organization with a capital

conservation buffer that is greater than

2.5 percent (plus, for an advanced

approaches banking organization, 100

percent of any applicable

countercyclical buffer) would not be

subject to a maximum payout amount as

a result of the application of this

provision (but the agencies’ authority to

restrict capital distributions for other

reasons remains undiminished)

organization with a capital

conservation buffer that is greater than

2.5 percent (plus, for an advanced

approaches banking organization, 100

percent of any applicable

countercyclical buffer) would not be

subject to a maximum payout amount as

a result of the application of this

provision (but the agencies’ authority to

restrict capital distributions for other

reasons remains undiminished).

In a scenario where a banking

organization’s risk-based capital ratios

fall below its minimum risk-based

capital ratios plus 2.5 percent of total

risk-weighted assets, the maximum

payout ratio would also decline, in

accordance with table 3. A banking

organization that becomes subject to a

maximum payout ratio would remain

subject to restrictions on capital

distributions and certain discretionary

bonus payments until it is able to build

up its capital conservation buffer

through retained earnings, raising

additional capital, or reducing its risk-

weighted assets. In addition, as a

general matter, a banking organization

would not be able to make capital

distributions or certain discretionary

bonus payments during the current

calendar quarter if the banking

organization’s eligible retained income

is negative and its capital conservation

buffer is less than 2.5 percent as of the

end of the previous quarter.

As illustrated in table 3, the capital

conservation buffer is divided into equal

quartiles, each associated with

increasingly stringent limitations on

capital distributions and discretionary

bonus payments to executive officers as

the capital conservation buffer falls

closer to zero percent. As described in

more detail in the next section, each

quartile, associated with a certain

maximum payout ratio in table 3, would

expand proportionately for advanced

approaches banking organizations when

the countercyclical capital buffer

amount is greater than zero

ions and discretionary

bonus payments to executive officers as

the capital conservation buffer falls

closer to zero percent. As described in

more detail in the next section, each

quartile, associated with a certain

maximum payout ratio in table 3, would

expand proportionately for advanced

approaches banking organizations when

the countercyclical capital buffer

amount is greater than zero.

The agencies propose to define a

capital distribution as: (1) A reduction

of tier 1 capital through the repurchase

of a tier 1 capital instrument or by other

means; (2) a reduction of tier 2 capital

through the repurchase, or redemption

prior to maturity, of a tier 2 capital

instrument or by other means; (3) a

dividend declaration on any tier 1

capital instrument; (4) a dividend

declaration or interest payment on any

tier 2 capital instrument if such

dividend declaration or interest

payment may be temporarily or

permanently suspended at the

discretion of the banking organization;

or (5) any similar transaction that the

agencies determine to be in substance a

distribution of capital. The proposed

definition is similar in effect to the

definition of capital distribution in the

Board’s rule requiring annual capital

plan submissions for bank holding

companies with $50 billion or more in

total assets.34

The agencies propose to define a

discretionary bonus payment as a

payment made to an executive officer of

a banking organization or an individual

with commensurate responsibilities

within the organization, such as a head

of a business line, where: (1) The

banking organization retains discretion

as to the fact of the payment and as to

the amount of the payment until the

discretionary bonus is paid to the

executive officer; (2) the amount paid is

determined by the banking organization

without prior promise to, or agreement

with, the executive officer; and (3) the

executive officer has no contract right,

express or implied, to the bonus

payment

king organization retains discretion

as to the fact of the payment and as to

the amount of the payment until the

discretionary bonus is paid to the

executive officer; (2) the amount paid is

determined by the banking organization

without prior promise to, or agreement

with, the executive officer; and (3) the

executive officer has no contract right,

express or implied, to the bonus

payment.

An executive officer would be defined

as a person who holds the title or,

without regard to title, salary, or

compensation, performs the function of

one or more of the following positions:

president, chief executive officer,

executive chairman, chief operating

officer, chief financial officer, chief

investment officer, chief legal officer,

chief lending officer, chief risk officer,

or head of a major business line, and

other staff that the board of directors of

the banking organization deems to have

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00013

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52804

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

35 See 76 FR 21170 (April 14, 2011).

36 See 12 U.S.C. 56, 60, and 1831o(d)(1); 12 CFR

1467a(f); see also 12 CFR 225.8.

37 Calculations in this table are based on the

assumption that the countercyclical buffer amount

is zero.

equivalent responsibility.35 The purpose

of limiting restrictions on discretionary

bonus payments to executive officers is

to focus these measures on the

individuals within a banking

organization who could expose the

organization to the greatest risk. The

agencies note that a banking

organization may otherwise be subject

to limitations on capital distributions

under other laws or regulations.36

Table 3 shows the relationship

between the capital conservation buffer

and the maximum payout ratio

ve officers is

to focus these measures on the

individuals within a banking

organization who could expose the

organization to the greatest risk. The

agencies note that a banking

organization may otherwise be subject

to limitations on capital distributions

under other laws or regulations.36

Table 3 shows the relationship

between the capital conservation buffer

and the maximum payout ratio. The

maximum dollar amount that a banking

organization would be permitted to pay

out in the form of capital distributions

or discretionary bonus payments during

the current calendar quarter would be

equal to the maximum payout ratio

multiplied by the banking organization’s

eligible retained income. The

calculation of the maximum payout

amount would be made as of the last

day of the previous calendar quarter and

any resulting restrictions would apply

during the current calendar quarter.

TABLE 3—CAPITAL CONSERVATION BUFFER AND MAXIMUM PAYOUT RATIO 37

Capital conservation buffer

(as a percentage of total risk-weighted assets)

Maximum payout ratio

(as a percentage of eligible retained

income)

Greater than 2.5 percent ..............................................................................................................................

No payout ratio limitation applies.

Less than or equal to 2.5 percent, and greater than 1.875 percent ............................................................

60 percent.

Less than or equal to 1.875 percent, and greater than 1.25 percent ..........................................................

40 percent.

Less than or equal to 1.25 percent, and greater than 0.625 percent ..........................................................

20 percent.

Less than or equal to 0.625 percent ............................................................................................................

0 percent

ent, and greater than 1.25 percent ..........................................................

40 percent.

Less than or equal to 1.25 percent, and greater than 0.625 percent ..........................................................

20 percent.

Less than or equal to 0.625 percent ............................................................................................................

0 percent.

For example, a banking organization

with a capital conservation buffer

between 1.875 and 2.5 percent (for

example, a common equity tier 1 capital

ratio of 6.5 percent, a tier 1 capital ratio

of 8 percent, or a total capital ratio of

10 percent) as of the end of the previous

calendar quarter would be allowed to

distribute no more than 60 percent of its

eligible retained income in the form of

capital distributions or discretionary

bonus payments during the current

calendar quarter. That is, the banking

organization would need to conserve at

least 40 percent of its eligible retained

income during the current calendar

quarter.

A banking organization with a capital

conservation buffer of less than or equal

to 0.625 percent (for example, a banking

organization with a common equity tier

1 capital ratio of 5.0 percent, a tier 1

capital ratio of 6.5 percent, or a total

capital ratio of 8.5 percent) as of the end

of the previous calendar quarter would

not be permitted to make any capital

distributions or discretionary bonus

payments during the current calendar

quarter.

In contrast, a banking organization

with a capital conservation buffer of

more than 2.5 percent (for example, a

banking organization with a common

equity tier 1 capital ratio of 7.5 percent,

a tier 1 capital ratio of 9.0 percent, and

a total capital ratio of 11.0 percent) as

of the end of the previous calendar

quarter would not be subject to

restrictions on the amount of capital

distributions and discretionary bonus

payments that could be made during the

current calendar quarter

nt (for example, a

banking organization with a common

equity tier 1 capital ratio of 7.5 percent,

a tier 1 capital ratio of 9.0 percent, and

a total capital ratio of 11.0 percent) as

of the end of the previous calendar

quarter would not be subject to

restrictions on the amount of capital

distributions and discretionary bonus

payments that could be made during the

current calendar quarter. Consistent

with the agencies’ current practice with

respect to regulatory restrictions on

dividend payments and other capital

distributions, each agency would retain

its authority to permit a banking

organization supervised by that agency

to make a capital distribution or a

discretionary bonus payment, if the

agency determines that the capital

distribution or discretionary bonus

payment would not be contrary to the

purposes of the capital conservation

buffer or the safety and soundness of the

banking institution. In making such a

determination, the agency would

consider the nature and extent of the

request and the particular circumstances

giving rise to the request.

The agencies are proposing that

banking organizations that are not

subject to the advanced approaches rule

would calculate their capital

conservation buffer using total risk-

weighted assets as calculated by all

banking organizations, and that banking

organizations subject to the advanced

approaches rule would calculate the

buffer using advanced approaches total

risk-weighted assets. Under the

proposed approach, internationally

active U.S. banking organizations using

the advanced approaches would face

capital conservation buffers determined

in a manner comparable to those of their

foreign competitors

ng organizations, and that banking

organizations subject to the advanced

approaches rule would calculate the

buffer using advanced approaches total

risk-weighted assets. Under the

proposed approach, internationally

active U.S. banking organizations using

the advanced approaches would face

capital conservation buffers determined

in a manner comparable to those of their

foreign competitors. Depending on the

difference in risk-weighted assets

calculated under the two approaches,

capital distributions and bonus

restrictions applied to an advanced

approaches banking organization could

be more or less stringent than if its

capital conservation buffer were based

on risk-weighted assets as calculated by

all banking organizations.

Question 6: The agencies seek

comment on all aspects of the proposed

capital buffer framework, including

issues of domestic and international

competitive equity, and the adequacy of

the proposed buffer to provide

incentives for banking organizations to

hold sufficient capital to withstand a

stress event and still remain above

regulatory minimum capital levels.

What are the advantages and

disadvantages of requiring advanced

approaches banking organizations to

calculate their capital buffers using total

risk-weighted assets that are the greater

of standardized total risk-weighted

assets and advanced total risk-weighted

assets? What is the potential effect of the

proposal on banking organizations’

processes for planning and executing

capital distributions and utilization of

discretionary bonus payments to retain

key staff? What modifications, if any,

should the agencies consider?

Question 7: The agencies solicit

comments on the scope of the definition

of executive officer for purposes of the

limitations on discretionary bonus

payments under the proposal

l on banking organizations’

processes for planning and executing

capital distributions and utilization of

discretionary bonus payments to retain

key staff? What modifications, if any,

should the agencies consider?

Question 7: The agencies solicit

comments on the scope of the definition

of executive officer for purposes of the

limitations on discretionary bonus

payments under the proposal. Is the

scope too broad or too narrow? Should

other categories of employees who

could expose the institution to material

risk be included within the scope of

employees whose discretionary bonuses

could be subject to the restriction? If so,

how should such a class of employees

be defined? What are the potential

implications for a banking organization

of restricting discretionary bonus

payments for executive officers or for

broader classes of employees? Please

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00014

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52805

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

38 The proposed operation of the countercyclical

capital buffer is also consistent with section 616(c)

of the Dodd-Frank Act. See 12 U.S.C. 3907(a)(1).

39 As described in the discussion of the capital

conservation buffer, an advanced approaches

banking organization would calculate its total risk-

weighted assets using the advanced approaches

rules for purposes of determining the capital

conservation buffer amount. An advanced

approaches banking organizations may also be

subject to the capital plan rule and its stress testing

provisions, which may have a separate effect on a

banking organization’s capital distributions. See 12

CFR 225.8.

provide data and analysis to support

your views

ghted assets using the advanced approaches

rules for purposes of determining the capital

conservation buffer amount. An advanced

approaches banking organizations may also be

subject to the capital plan rule and its stress testing

provisions, which may have a separate effect on a

banking organization’s capital distributions. See 12

CFR 225.8.

provide data and analysis to support

your views.

Question 8: What are the pros and

cons of the proposed definition for

eligible retained income in the context

of the proposed quarterly limitations on

capital distributions and discretionary

bonus payments?

Question 9: What would be the

impact, if any, in terms of the cost of

raising new capital, of not allowing a

banking organization that is subject to a

maximum payout ratio of zero percent

to make a penny dividend to common

stockholders? Please provide data to

support any responses.

D. Countercyclical Capital Buffer

Under Basel III, the countercyclical

capital buffer is designed to take into

account the macro-financial

environment in which banking

organizations function and to protect

the banking system from the systemic

vulnerabilities that may build-up during

periods of excessive credit growth, then

potentially unwind in a disorderly way

that may cause disruptions to financial

institutions and ultimately economic

activity. As proposed and consistent

with Basel III, the countercyclical

capital buffer would serve as an

extension of the capital conservation

buffer.

The agencies propose to apply the

countercyclical capital buffer only to

advanced approaches banking

organizations, because large banking

organizations generally are more

interconnected with other institutions

in the financial system. Therefore, the

marginal benefits to financial stability

from a countercyclical buffer function

should be greater with respect to such

institutions

buffer.

The agencies propose to apply the

countercyclical capital buffer only to

advanced approaches banking

organizations, because large banking

organizations generally are more

interconnected with other institutions

in the financial system. Therefore, the

marginal benefits to financial stability

from a countercyclical buffer function

should be greater with respect to such

institutions. Application of the

countercyclical buffer to advanced

approaches banking organizations also

reflects the fact that making cyclical

adjustments to capital requirements is

costly for institutions to implement and

the marginal costs are higher for smaller

institutions.

The countercyclical capital buffer

aims to protect the banking system and

reduce systemic vulnerabilities in two

ways. First, the accumulation of a

capital buffer during an expansionary

phase could increase the resilience of

the banking system to declines in asset

prices and consequent losses that may

occur when the credit conditions

weaken. Specifically, when the credit

cycle turns following a period of

excessive credit growth, accumulated

capital buffers would act to absorb the

above-normal losses that a banking

organization would likely face.

Consequently, even after these losses are

realized, banking organizations would

remain healthy and able to access

funding, meet obligations, and continue

to serve as credit intermediaries.

Countercyclical capital buffers may also

reduce systemic vulnerabilities and

protect the banking system by mitigating

excessive credit growth and increases in

asset prices that are not supported by

fundamental factors. By increasing the

amount of capital required for further

credit extensions, countercyclical

capital buffers may limit excessive

credit extension.

Consistent with Basel III, the agencies

propose a countercyclical capital buffer

that would augment the capital

conservation buffer under certain

circumstances, upon a determination by

the agencies

hat are not supported by

fundamental factors. By increasing the

amount of capital required for further

credit extensions, countercyclical

capital buffers may limit excessive

credit extension.

Consistent with Basel III, the agencies

propose a countercyclical capital buffer

that would augment the capital

conservation buffer under certain

circumstances, upon a determination by

the agencies.

The countercyclical capital buffer

amount in the U.S. would initially be

set to zero, but it could increase if the

agencies determine that there is

excessive credit in the markets, possibly

leading to subsequent wide-spread

market failures.38 The agencies expect

to consider a range of macroeconomic,

financial, and supervisory information

indicating an increase in systemic risk

including, but not limited to, the ratio

of credit to gross domestic product, a

variety of asset prices, other factors

indicative of relative credit and

liquidity expansion or contraction,

funding spreads, credit condition

surveys, indices based on credit default

swap spreads, options implied

volatility, and measures of systemic

risk. The agencies anticipate making

such determinations jointly. Because the

countercyclical capital buffer amount

would be linked to the condition of the

overall U.S. financial system and not the

characteristics of an individual banking

organization, the agencies expect that

the countercyclical capital buffer

amount would be the same at the

depository institution and holding

company levels.

To provide banking organizations

with time to adjust to any changes, the

agencies expect to announce an increase

in the countercyclical capital buffer

amount up to12 months prior to

implementation. If the agencies

determine that a more immediate

implementation would be necessary

based on economic conditions, the

agencies may announce implementation

of a countercyclical capital buffer in less

than 12 months

rganizations

with time to adjust to any changes, the

agencies expect to announce an increase

in the countercyclical capital buffer

amount up to12 months prior to

implementation. If the agencies

determine that a more immediate

implementation would be necessary

based on economic conditions, the

agencies may announce implementation

of a countercyclical capital buffer in less

than 12 months. The agencies would

make their determination and

announcement in accordance with any

applicable legal requirements. The

agencies would follow the same

procedures in adjusting the

countercyclical capital buffer applicable

for exposures located in foreign

jurisdictions.

A decrease in the countercyclical

capital buffer amount would become

effective the day following

announcement or the earliest date

permitted by applicable law or

regulation. In addition, the

countercyclical capital buffer amount

would return to zero percent 12 months

after its effective date, unless an agency

announces a decision to maintain the

adjusted countercyclical capital buffer

amount or adjust it again before the

expiration of the 12-month period.

In the United States, the

countercyclical capital buffer would

augment the capital conservation buffer

by up to 2.5 percent of a banking

organization’s total risk-weighted assets.

For other jurisdictions, an advanced

approaches banking organization would

determine its countercyclical capital

buffer amount by calculating the

weighted average of the countercyclical

capital buffer amounts established for

the national jurisdictions where the

banking organization has private sector

credit exposures, as defined below in

this section

ization’s total risk-weighted assets.

For other jurisdictions, an advanced

approaches banking organization would

determine its countercyclical capital

buffer amount by calculating the

weighted average of the countercyclical

capital buffer amounts established for

the national jurisdictions where the

banking organization has private sector

credit exposures, as defined below in

this section. The contributing weight

assigned to a jurisdiction’s

countercyclical capital buffer amount

would be calculated by dividing the

total risk-weighted assets for the

banking organization’s private sector

credit exposures located in the

jurisdiction by the total risk-weighted

assets for all of the banking

organization’s private sector credit

exposures.39

As proposed, a private sector credit

exposure would be defined as an

exposure to a company or an individual

that is included in credit risk-weighted

assets, not including an exposure to a

sovereign, the Bank for International

Settlements, the European Central Bank,

the European Commission, the

International Monetary Fund, a

multilateral development bank (MDB), a

public sector entity (PSE), or a

government sponsored entity (GSE).

The geographic location of a private

sector credit exposure (that is not a

securitization exposure) would be the

national jurisdiction where the borrower

is located (that is, where the borrower

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00015

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

government sponsored entity (GSE).

The geographic location of a private

sector credit exposure (that is not a

securitization exposure) would be the

national jurisdiction where the borrower

is located (that is, where the borrower

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00015

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52806

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

40 12 U.S.C. 1831o.

41 12 U.S.C. 1831o(e)–(i). See 12 CFR part 6

(OCC); 12 CFR part 208, subpart D (Board); 12 CFR

part 325, subpart B (FDIC).

is incorporated, chartered, or similarly

established or, if it is an individual,

where the borrower resides). If,

however, the decision to issue the

private sector credit exposure is based

primarily on the creditworthiness of the

protection provider, the location of the

non-securitization exposure would be

the location of the protection provider.

The location of a securitization

exposure would be the location of the

borrowers of the underlying exposures.

If the borrowers on the underlying

exposures are located in multiple

jurisdictions, the location of a

securitization exposure would be the

location of the borrowers of the

underlying exposures in one

jurisdiction with the largest proportion

of the aggregate unpaid principal

balance of the underlying exposures.

Table 4 illustrates how an advanced

approaches banking organization would

calculate the weighted average

countercyclical capital buffer. In the

following example, the countercyclical

capital buffer established in the various

jurisdictions in which the banking

organization has private sector credit

exposures is reported in column A.

Column B contains the banking

organization’s risk-weighted asset

amounts for the private sector credit

exposures in each jurisdiction

culate the weighted average

countercyclical capital buffer. In the

following example, the countercyclical

capital buffer established in the various

jurisdictions in which the banking

organization has private sector credit

exposures is reported in column A.

Column B contains the banking

organization’s risk-weighted asset

amounts for the private sector credit

exposures in each jurisdiction. Column

C shows the contributing weight for

each countercyclical buffer amount,

which is calculated by dividing each of

the rows in column B by the total for

column B. Column D shows the

contributing weight applied to each

countercyclical capital buffer amount,

calculated as the product of the

corresponding contributing weight

(column C) and the countercyclical

capital buffer set by each jurisdiction’s

national supervisor (column A). The

sum of the rows in column D shows the

banking organization’s weighted average

countercyclical capital buffer, which is

1.4 percent of risk-weighted assets.

TABLE 4—EXAMPLE OF WEIGHTED AVERAGE COUNTERCYCLICAL CAPITAL BUFFER CALCULATION FOR ADVANCED

APPROACHES BANKING ORGANIZATIONS

(A)

(B)

(C)

(D)

Countercyclical buffer

amount set by national

supervisor

(percent)

Banking organization’s

risk-weighted assets

(RWA) for private sector

credit exposures

($b)

Contributing weight (col-

umn B/column B total)

Contributing weight ap-

plied to each counter-

cyclical capital buffer

amount

(column A * column C)

Non-U.S. jurisdiction 1 .....................

2.0

250

0.29

0.6

Non-U.S. jurisdiction 2 .....................

1.5

100

0.12

0.2

U.S. ..................................................

500

0.59

0.6

Total ..........................................

........................................

850

1.00

1.4

A banking organization’s maximum

payout ratio for purposes of its capital

conservation buffer would vary

depending on its countercyclical buffer

amount

-U.S. jurisdiction 2 .....................

1.5

100

0.12

0.2

U.S. ..................................................

500

0.59

0.6

Total ..........................................

........................................

850

1.00

1.4

A banking organization’s maximum

payout ratio for purposes of its capital

conservation buffer would vary

depending on its countercyclical buffer

amount. For instance, if its

countercyclical capital buffer amount is

equal to zero percent of total risk-

weighted assets, the banking

organization that held only U.S. credit

exposures would need to hold a

combined capital conservation buffer of

at least 2.5 percent to avoid restrictions

on its capital distributions and certain

discretionary bonus payments.

However, if its countercyclical capital

buffer amount is equal to 2.5 percent of

total risk-weighted assets, the banking

organization whose assets consist of

only U.S. credit exposures would need

to hold a combined capital conservation

and countercyclical buffer of at least 5

percent to avoid restrictions on its

capital distributions and discretionary

bonus payments.

Question 10: The agencies solicit

comment on potential inputs used in

determining whether excessive credit

growth is occurring and whether a

formula-based approach might be useful

in determining the appropriate level of

the countercyclical capital buffer. What

additional factors, if any, should the

agencies consider when determining the

countercyclical capital buffer amount?

What are the pros and cons of using a

formula-based approach and what

factors might be incorporated in the

formula to determine the level of the

countercyclical capital buffer amount?

Question 11: The agencies recognize

that a banking organization’s risk-

weighted assets for private sector credit

exposures should include relevant

covered positions under the market risk

capital rule and solicit comment

regarding appropriate methodologies for

incorporating these positions;

specifically, what positio

la to determine the level of the

countercyclical capital buffer amount?

Question 11: The agencies recognize

that a banking organization’s risk-

weighted assets for private sector credit

exposures should include relevant

covered positions under the market risk

capital rule and solicit comment

regarding appropriate methodologies for

incorporating these positions;

specifically, what position-specific or

portfolio-specific methodologies should

be used for covered positions with

specific risk and particularly those for

which a banking organization uses

models to measure specific risk?

Question 12: The agencies solicit

comment on the appropriateness of the

proposed 12-month prior notification

period to adjust to a newly implemented

or adjusted countercyclical capital

buffer amount.

E. Prompt Corrective Action

Requirements

Section 38 of the Federal Deposit

Insurance Act directs the federal

banking agencies to take prompt

corrective action (PCA) to resolve the

problems of insured depository

institutions at the least cost to the

Deposit Insurance Fund.40 To facilitate

this purpose, the agencies have

established five regulatory capital

categories in the current PCA

regulations that include capital

thresholds for the leverage ratio, tier 1

risk-based capital ratio, and the total

risk-based capital ratio for insured

depository institutions. These five PCA

categories under section 38 of the Act

and the PCA regulations are: ‘‘Well

capitalized,’’ ‘‘adequately capitalized,’’

‘‘undercapitalized,’’ ‘‘significantly

undercapitalized,’’ and ‘‘critically

undercapitalized.’’ Insured depository

institutions that fail to meet these

capital measures are subject to

increasingly strict limits on their

activities, including their ability to

make capital distributions, pay

management fees, grow their balance

sheet, and take other actions.41 Insured

depository institutions are expected to

be closed within 90 days of becoming

‘‘critically undercapitalized,’’ unless

their primary federal reg

tutions that fail to meet these

capital measures are subject to

increasingly strict limits on their

activities, including their ability to

make capital distributions, pay

management fees, grow their balance

sheet, and take other actions.41 Insured

depository institutions are expected to

be closed within 90 days of becoming

‘‘critically undercapitalized,’’ unless

their primary federal regulator takes

such other action as the agency

determines, with the concurrence of the

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00016

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52807

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

42 12 U.S.C. 1831o(g)(3).

43 See 12 U.S.C. 1831o(c)(1)(B)(i).

44 The minimum ratio of tier 1 capital to total

assets for strong depository institutions (rated

composite ‘‘1’’ under the CAMELS system and not

experiencing or anticipating significant growth) is

3 percent.

FDIC, would better achieve the purpose

of PCA.42

All insured depository institutions,

regardless of total asset size or foreign

exposure, are required to compute PCA

capital levels using the agencies’ general

risk-based capital rules, as

supplemented by the market risk capital

rule. Under this NPR, the agencies are

proposing to augment the PCA capital

categories by introducing a common

equity tier 1 capital measure for four of

the five PCA categories (excluding the

critically undercapitalized PCA

category).43 In addition, the agencies are

proposing to amend the current PCA

leverage measure to include in the

leverage measure for the ‘‘adequately

capitalized’’ and ‘‘undercapitalized’’

capital categories for advanced

approaches depository institutions an

additional leverage ratio based on the

leverage ratio in Basel III

e PCA categories (excluding the

critically undercapitalized PCA

category).43 In addition, the agencies are

proposing to amend the current PCA

leverage measure to include in the

leverage measure for the ‘‘adequately

capitalized’’ and ‘‘undercapitalized’’

capital categories for advanced

approaches depository institutions an

additional leverage ratio based on the

leverage ratio in Basel III. All banking

organizations would continue to be

subject to leverage measure thresholds

using the current tier 1, or ‘‘standard’’

leverage ratio in the form of tier 1

capital to total assets. In addition, the

agencies are proposing to revise the

three current capital measures for the

five PCA categories to reflect the

changes to the definition of capital, as

provided in the proposed revisions to

the agencies’ PCA regulations.

The proposed changes to the current

minimum PCA thresholds and the

introduction of a new common equity

tier 1 capital measure would take effect

January 1, 2015. Consistent with

transition provisions in Basel III, the

proposed amendments to the current

PCA leverage measure for advanced

approaches depository institutions

would take effect on January 1, 2018. In

contrast, changes to the definitions of

the individual capital components that

are used to calculate the relevant capital

measures under PCA would coincide

with the transition arrangements

discussed in section V of the preamble,

or with the transition provisions of

other capital regulations, as applicable.

Thus, the changes to these definitions,

including any deductions or

modifications to capital, automatically

would flow through to the definitions in

the PCA framework.

Table 5 sets forth the current risk-

based and leverage capital thresholds

for each of the PCA capital categories for

insured depository institutions

h the transition provisions of

other capital regulations, as applicable.

Thus, the changes to these definitions,

including any deductions or

modifications to capital, automatically

would flow through to the definitions in

the PCA framework.

Table 5 sets forth the current risk-

based and leverage capital thresholds

for each of the PCA capital categories for

insured depository institutions.

TABLE 5—CURRENT PCA LEVELS

Requirement

Total Risk-

Based Capital

(RBC) measure

(total RBC

ratio—percent)

Tier 1 RBC

measure

(tier 1 RBC

ratio—percent)

Leverage

measure

(tier 1 (stand-

ard) leverage

ratio—percent)

PCA requirements

Well Capitalized ....................

≥10

≥6

≥5 None.

Adequately Capitalized .........

≥8

≥4

44 ≥4 (or ≥3)

May limit nonbanking activities at DI’s FHC and includes

limits on brokered deposits.

Undercapitalized ...................

<4 (or <3) Includes adequately capitalized restrictions, and also in-

cludes restrictions on asset growth; dividends; requires

a capital plan.

Significantly undercapitalized

<3 Includes undercapitalized restrictions, and also includes

restrictions on sub-debt payments.

Critically undercapitalized .....

Tangible Equity to Total Assets ≤2

Generally receivership/conservatorship within 90 days.

Table 6 sets forth the proposed risk-

based and leverage capital thresholds

for each of the PCA capital categories for

insured depository institutions that are

not advanced approaches banks. For

each PCA category except critically

undercapitalized, an insured depository

institution would be required to meet a

minimum common equity tier 1 capital

ratio, in addition to a minimum tier 1

risk-based capital ratio, total risk-based

capital ratio, and leverage ratio

for each of the PCA capital categories for

insured depository institutions that are

not advanced approaches banks. For

each PCA category except critically

undercapitalized, an insured depository

institution would be required to meet a

minimum common equity tier 1 capital

ratio, in addition to a minimum tier 1

risk-based capital ratio, total risk-based

capital ratio, and leverage ratio.

TABLE 6—PROPOSED PCA LEVELS FOR INSURED DEPOSITORY INSTITUTIONS NOT SUBJECT TO THE ADVANCED

APPROACHES RULE

Requirement

Total RBC

measure

(total RBC

ratio—percent)

Tier 1 RBC

measure

(tier 1 RBC

ratio—percent)

Common equity

tier 1 RBC

measure

(common equity

tier 1 RBC ratio

(percent)

Leverage

Measure

(leverage

ratio—percent)

PCA requirements

Well Capitalized ............................

≥10

≥8

≥6.5

≥5 Unchanged from current rules *.

Adequately Capitalized .................

≥8

≥6

≥4.5

≥4

Do.

Undercapitalized ...........................

<4.5

Do.

Significantly undercapitalized ........

Do.

Critically undercapitalized .............

Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual

preferred stock) to Total Assets ≤2

Do.

* Additional restrictions on capital distributions that are not reflected in the agencies’ proposed revisions to the PCA regulations are described

in section II.C of this preamble.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00017

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

1 perpetual

preferred stock) to Total Assets ≤2

Do.

* Additional restrictions on capital distributions that are not reflected in the agencies’ proposed revisions to the PCA regulations are described

in section II.C of this preamble.

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00017

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52808

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules

45 An insured depository institution is considered

adequately capitalized if it meets the qualifications

for the adequately capitalized capital category and

does not qualify as well capitalized.

46 Under current PCA standards, in order to

qualify as well capitalized, an insured depository

institution must not be subject to any written

agreement, order, capital directive, or prompt

corrective action directive issued by the Board

pursuant to section 8 of the Federal Deposit

Insurance Act, the International Lending

Supervision Act of 1983, or section 38 of the

Federal Deposit Insurance Act, or any regulation

thereunder, to meet a maintain a specific capital

level for any capital measure. See 12 CFR

6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(iv) (Board);

12 CFR 325.103(b)(1)(iv) (FDIC). The agencies are

not proposing any changes to this requirement.

To be well capitalized, an insured

depository institution would be

required to maintain a total risk-based

capital ratio equal to or greater than 10

percent; a tier 1 capital ratio equal to or

greater than 8 percent; a common equity

tier 1 capital ratio equal to or greater

than 6.5 percent; and a leverage ratio

equal to or greater than 5 percent

proposing any changes to this requirement.

To be well capitalized, an insured

depository institution would be

required to maintain a total risk-based

capital ratio equal to or greater than 10

percent; a tier 1 capital ratio equal to or

greater than 8 percent; a common equity

tier 1 capital ratio equal to or greater

than 6.5 percent; and a leverage ratio

equal to or greater than 5 percent. An

adequately capitalized depository

institution would be required to

maintain a total risk-based capital ratio

equal to or greater than 8 percent; a tier

1 capital ratio equal to or greater than

6 percent; common equity tier 1 capital

ratio equal to or greater than 4.5 percent;

and a leverage ratio equal to or greater

than 4 percent.45

An insured depository institution

would be considered undercapitalized

under the proposal if its total capital

ratio were less than 8 percent, or if its

tier 1 capital ratio were less than 6

percent, if its common equity tier 1 ratio

were less than 4.5 percent, or if its

leverage ratio were less than 4 percent.

If an institution’s tier 1 capital ratio

were less than 4 percent, or if its

common equity tier 1 ratio were less

than 3 percent, it would be considered

significantly undercapitalized. The

other numerical capital ratio thresholds

for being significantly undercapitalized

would be unchanged.46

Table 7 sets forth the proposed risk-

based and leverage thresholds for

advanced approaches depository

institutions. As indicated in the table, in

addition to the PCA requirements and

categories described above, the leverage

measure for advanced approaches

depository institutions in the adequately

capitalized and undercapitalized PCA

capital categories would include a

supplementary leverage ratio based on

the Basel III leverage ratio

leverage thresholds for

advanced approaches depository

institutions. As indicated in the table, in

addition to the PCA requirements and

categories described above, the leverage

measure for advanced approaches

depository institutions in the adequately

capitalized and undercapitalized PCA

capital categories would include a

supplementary leverage ratio based on

the Basel III leverage ratio.

TABLE 7—PROPOSED PCA LEVELS FOR INSURED DEPOSITORY INSTITUTIONS SUBJECT TO THE ADVANCED APPROACHES

RULE

Requirement

Total RBC

measure (total

RBC ratio—

percent)

Tier 1 RBC

measure (tier 1

RBC ratio—

percent)

Common Equity

tier 1 RBC

measure

(common equity

tier 1 RBC ratio

percent)

Leverage measure

PCA requirements

Leverage ratio

(percent)

Supplementary

leverage ratio

(percent)

Well Capitalized ........

≥10

≥8

≥6.5

≥5 Not applicable ...........

Unchanged from cur-

rent rule *.

Adequately Capital-

ized.

≥8

≥6

≥4.5

≥4 ≥3 ..............................

Do.

Undercapitalized .......

<4.5

<4 <3 ..............................

Do.

Significantly under-

capitalized.

<3 Not applicable ...........

Do.

Critically undercapital-

ized.

Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual

preferred stock) to Total Assets ™2

Not applicable ...........

Do.

* Additional restrictions on capital distributions that are not reflected in the agencies’ proposed revisions to the PCA regulations are described

in section II.C of this preamble.

As discussed above, the agencies

believe that the supplementary leverage

ratio is an important measure of an

advanced approaches depository

institution’s ability to support its on-and

off-balance sheet exposures, and

advanced approaches institutions tend

to have significant amounts of off-

balance sheet exposures that are not

captured by the current leverage ratio

II.C of this preamble.

As discussed above, the agencies

believe that the supplementary leverage

ratio is an important measure of an

advanced approaches depository

institution’s ability to support its on-and

off-balance sheet exposures, and

advanced approaches institutions tend

to have significant amounts of off-

balance sheet exposures that are not

captured by the current leverage ratio.

Consistent with other minimum ratio

requirements, the agencies propose that

the minimum requirement for the

supplementary leverage ratio in section

10 of the proposal would be the

minimum supplementary leverage ratio

a banking organization would need to

maintain in order to be adequately

capitalized. With respect to the other

PCA categories (other than critically

undercapitalized), the agencies are

proposing ranges of minimum

thresholds for comment. The agencies

intend to specify the minimum

threshold for each of those categories

when the proposed PCA requirements

are finalized.

Under the proposed PCA framework,

for each measure other than the leverage

measure, an advanced approaches

depository institution would be well

capitalized, adequately capitalized,

undercapitalized, significantly

undercapitalized, or critically

undercapitalized on the same basis as

all other insured depository institutions.

An advanced approaches bank would

also be subject to the same thresholds

with respect to the leverage ratio on the

same basis as other insured depository

institutions. In addition, with respect to

the supplementary leverage ratio, in

order to be adequately capitalized, an

advanced approaches depository

institution would be required to

maintain a supplementary leverage ratio

of greater than or equal to 3 percent. An

advanced approaches depository

institution would be undercapitalized if

its supplementary leverage ratio were

less than 3 percent

itutions. In addition, with respect to

the supplementary leverage ratio, in

order to be adequately capitalized, an

advanced approaches depository

institution would be required to

maintain a supplementary leverage ratio

of greater than or equal to 3 percent. An

advanced approaches depository

institution would be undercapitalized if

its supplementary leverage ratio were

less than 3 percent.

Question 13: The agencies seek

comment regarding the proposed

incorporation of the supplementary

leverage ratio into the PCA framework,

as well as the proposed ranges of PCA

categories for the supplementary

leverage ratio. Within the proposed

ranges, what is the appropriate

percentage for each PCA category?

Please provide data to support your

answer.

As discussed in section II of this

preamble, the current PCA framework

permits an insured depository

institution that is rated composite 1

under the CAMELS rating system and

not experiencing or anticipating

significant growth to maintain a 3

percent ratio of tier 1 capital to average

total consolidated assets (leverage ratio)

rather than the 4.0 percent minimum

VerDate Mar<15>2010

18:36 Aug 29, 2012

Jkt 226001

PO 00000

Frm 00018

Fmt 4701

Sfmt 4702

E:\FR\FM\30AUP2.SGM

30AUP2

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

52809

Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Ru

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.