Teleconference for Community Banks on the Interim Final Capital Rule

Vol. 78

Tuesday,

No. 175

September 10, 2013

Part II

Federal Deposit Insurance Corporation

12 CFR Parts 303, 308, 324, et al.

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

Capital Adequacy, Transition Provisions, Prompt Corrective Action,

Standardized Approach for Risk-weighted Assets, Market Discipline and

Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule,

and Market Risk Capital Rule; Interim Final Rule

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00001

Fmt 4717

Sfmt 4717

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55340

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Parts 303, 308, 324, 327, 333,

337, 347, 349, 360, 362, 363, 364, 365,

390, and 391

RIN 3064–AD95

Regulatory Capital Rules: Regulatory

Capital, Implementation of Basel III,

Capital Adequacy, Transition

Provisions, Prompt Corrective Action,

Standardized Approach for Risk-

weighted Assets, Market Discipline

and Disclosure Requirements,

Advanced Approaches Risk-Based

Capital Rule, and Market Risk Capital

Rule

AGENCY: Federal Deposit Insurance

Corporation.

ACTION: Interim final rule with request

for comments.

SUMMARY: The Federal Deposit

Insurance Corporation (FDIC) is

adopting an interim final rule that

revises its risk-based and leverage

capital requirements for FDIC-

supervised institutions. This interim

final rule is substantially identical to a

joint final rule issued by the Office of

the Comptroller of the Currency (OCC)

and the Board of Governors of the

Federal Reserve System (Federal

Reserve) (together, with the FDIC, the

agencies). The interim final rule

consolidates three separate notices of

proposed rulemaking that the agencies

jointly published in the Federal

Register on August 30, 2012, with

selected changes

tical to a

joint final rule issued by the Office of

the Comptroller of the Currency (OCC)

and the Board of Governors of the

Federal Reserve System (Federal

Reserve) (together, with the FDIC, the

agencies). The interim final rule

consolidates three separate notices of

proposed rulemaking that the agencies

jointly published in the Federal

Register on August 30, 2012, with

selected changes. The interim final rule

implements a revised definition of

regulatory capital, a new common

equity tier 1 minimum capital

requirement, a higher minimum tier 1

capital requirement, and, for FDIC-

supervised institutions subject to the

advanced approaches risk-based capital

rules, a supplementary leverage ratio

that incorporates a broader set of

exposures in the denominator. The

interim final rule incorporates these

new requirements into the FDIC’s

prompt corrective action (PCA)

framework. In addition, the interim final

rule establishes limits on FDIC-

supervised institutions’ capital

distributions and certain discretionary

bonus payments if the FDIC-supervised

institution 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. The interim final rule

amends the methodologies for

determining risk-weighted assets for all

FDIC-supervised institutions. The

interim final rule also adopts changes to

the FDIC’s regulatory capital

requirements that meet the requirements

of section 171 and section 939A of the

Dodd-Frank Wall Street Reform and

Consumer Protection Act.

The interim final rule also codifies the

FDIC’s regulatory capital rules, which

have previously resided in various

appendices to their respective

regulations, into a harmonized

integrated regulatory framework. In

addition, the FDIC is amending the

market risk capital rule (market risk

rule) to apply to state savings

associations.

The FDIC is issuing these revisions to

its capital regulations as an interim final

rule

ifies the

FDIC’s regulatory capital rules, which

have previously resided in various

appendices to their respective

regulations, into a harmonized

integrated regulatory framework. In

addition, the FDIC is amending the

market risk capital rule (market risk

rule) to apply to state savings

associations.

The FDIC is issuing these revisions to

its capital regulations as an interim final

rule. The FDIC invites comments on the

interaction of this rule with other

proposed leverage ratio requirements

applicable to large, systemically

important banking organizations. This

interim final rule otherwise contains

regulatory text that is identical to the

common rule text adopted as a final rule

by the Federal Reserve and the OCC.

This interim final rule enables the FDIC

to proceed on a unified, expedited basis

with the other federal banking agencies

pending consideration of other issues.

Specifically, the FDIC intends to

evaluate this interim final rule in the

context of the proposed well-capitalized

and buffer levels of the supplementary

leverage ratio applicable to large,

systemically important banking

organizations, as described in a separate

Notice of Proposed Rulemaking (NPR)

published in the Federal Register

August 20, 2013.

The FDIC is seeking commenters’

views on the interaction of this interim

final rule with the proposed rule

regarding the supplementary leverage

ratio for large, systemically important

banking organizations.

DATES: Effective date: January 1, 2014.

Mandatory compliance date: January 1,

2014 for advanced approaches FDIC-

supervised institutions; January 1, 2015

for all other FDIC-supervised

institutions. Comments on the interim

final rule must be received no later than

November 12, 2013.

ADDRESSES: You may submit comments,

identified by RIN 3064–AD95, by any of

the following methods:

• Agency Web site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for

submitting comments on the Agency

Web site

January 1, 2015

for all other FDIC-supervised

institutions. Comments on the interim

final rule must be received no later than

November 12, 2013.

ADDRESSES: You may submit comments,

identified by RIN 3064–AD95, by any of

the following methods:

• Agency Web site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for

submitting comments on the Agency

Web site.

• Email: Comments@fdic.gov. Include

the RIN 3064–AD95 on the subject line

of the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to 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.

Public Inspection: All comments

received must include the agency name

and RIN 3064–AD95 for this

rulemaking. All comments received will

be posted without change to http://

www.fdic.gov/regulations/laws/federal/

propose.html, including any personal

information provided. Paper copies of

public comments may be ordered from

the FDIC Public Information Center,

3501 North Fairfax Drive, Room E–1002,

Arlington, VA 22226 by telephone at

(877) 275–3342 or (703) 562–2200.

FOR FURTHER INFORMATION CONTACT:

Bobby R. Bean, Associate Director,

bbean@fdic.gov; Ryan Billingsley, Chief,

Capital Policy Section, rbillingsley@

fdic.gov; Karl Reitz, Chief, Capital

Markets Strategies Section, kreitz@

fdic.gov; David Riley, Senior Policy

Analyst, dariley@fdic.gov; Benedetto

Bosco, Capital Markets Policy Analyst,

bbosco@fdic.gov, regulatorycapital@

fdic.gov, Capital Markets Branch,

Division of Risk Management

Supervision, (202) 898–6888; or Mark

Handzlik, Counsel, mhandzlik@fdic.gov;

Michael Phillips, Counsel, mphillips@

fdic.gov; Greg Feder, Counsel, gfeder@

fdic.gov; Ryan Clougherty, Senior

Attorney, rclougherty@fdic.gov; or

Rachel Jones, Attorney, racjones@

fdic.gov, Supervision Branch,

Analyst,

bbosco@fdic.gov, regulatorycapital@

fdic.gov, Capital Markets Branch,

Division of Risk Management

Supervision, (202) 898–6888; or Mark

Handzlik, Counsel, mhandzlik@fdic.gov;

Michael Phillips, Counsel, mphillips@

fdic.gov; Greg Feder, Counsel, gfeder@

fdic.gov; Ryan Clougherty, Senior

Attorney, rclougherty@fdic.gov; or

Rachel Jones, Attorney, racjones@

fdic.gov, Supervision Branch, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Summary of the Three Notices of Proposed

Rulemaking

A. The Basel III Notice of Proposed

Rulemaking

B. The Standardized Approach Notice of

Proposed Rulemaking

C. The Advanced Approaches Notice of

Proposed Rulemaking

III. Summary of General Comments on the

Basel III Notice of Proposed Rulemaking

and on the Standardized Approach

Notice of Proposed Rulemaking;

Overview of the Interim Final Rule

A. General Comments on the Basel III

Notice of Proposed Rulemaking and on

the Standardized Approach Notice of

Proposed Rulemaking

1. Applicability and Scope

2. Aggregate Impact

3. Competitive Concerns

4. Costs

B. Comments on Particular Aspects of the

Basel III Notice of Proposed Rulemaking

and on the Standardized Approach

Notice of Proposed Rulemaking

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

Rulemaking

1. Applicability and Scope

2. Aggregate Impact

3. Competitive Concerns

4. Costs

B. Comments on Particular Aspects of the

Basel III Notice of Proposed Rulemaking

and on the Standardized Approach

Notice of Proposed Rulemaking

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55341

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

1. Accumulated Other Comprehensive

Income

2. Residential Mortgages

3. Trust Preferred Securities for Smaller

FDIC-Supervised Institutions

C. Overview of the Interim Final Rule

D. Timeframe for Implementation and

Compliance

IV. Minimum Regulatory Capital Ratios,

Additional Capital Requirements, and

Overall Capital Adequacy

A. Minimum Risk-Based Capital Ratios and

Other Regulatory Capital Provisions

B. Leverage Ratio

C. Supplementary Leverage Ratio for

Advanced Approaches FDIC-Supervised

Institutions

D. Capital Conservation Buffer

E. Countercyclical Capital Buffer

F. Prompt Corrective Action Requirements

G. Supervisory Assessment of Overall

Capital Adequacy

H. Tangible Capital Requirement for State

Savings Associations

V. Definition of Capital

A. Capital Components and Eligibility

Criteria for Regulatory Capital

Instruments

1. Common Equity Tier 1 Capital

2. Additional Tier 1 Capital

3. Tier 2 Capital

4. Capital Instruments of Mutual FDIC-

Supervised Institutions

5. Grandfathering of Certain Capital

Instruments

6. Agency Approval of Capital Elements

7. Addressing the Point of Non-Viability

Requirements Under Basel III

8. Qualifying Capital Instruments Issued by

Consolidated Subsidiaries of an FDIC-

Supervised Institution

9. Real Estate Investment Trust Preferred

Capital

B. Regulatory Adjustments and Deductions

1. Regulatory Deductions from Common

Equity Tier 1 Capital

a. Goodwill and Other Intangibles (other

than Mortgage Servicing Assets)

b

ng the Point of Non-Viability

Requirements Under Basel III

8. Qualifying Capital Instruments Issued by

Consolidated Subsidiaries of an FDIC-

Supervised Institution

9. Real Estate Investment Trust Preferred

Capital

B. Regulatory Adjustments and Deductions

1. Regulatory Deductions from Common

Equity Tier 1 Capital

a. Goodwill and Other Intangibles (other

than Mortgage Servicing Assets)

b. Gain-on-Sale Associated with a

Securitization Exposure

c. Defined Benefit Pension Fund Net Assets

d. Expected Credit Loss That Exceeds

Eligible Credit Reserves

e. Equity Investments in Financial

Subsidiaries

f. Deduction for Subsidiaries of Savings

Associations That Engage in Activities

That Are Not Permissible for National

Banks

g. Identified Losses for State Nonmember

Banks

2. Regulatory Adjustments to Common

Equity Tier 1 Capital

a. Accumulated Net Gains and Losses on

Certain Cash-Flow Hedges

b. Changes in an FDIC-Supervised

Institution’s Own Credit Risk

c. Accumulated Other Comprehensive

Income

d. Investments in Own Regulatory Capital

Instruments

e. Definition of Financial Institution

f. The Corresponding Deduction Approach

g. Reciprocal Crossholdings in the Capital

Instruments of Financial Institutions

h. Investments in the FDIC-Supervised

Institution’s Own Capital Instruments or

in the Capital of Unconsolidated

Financial Institutions

i. Indirect Exposure Calculations

j. Non-Significant Investments in the

Capital of Unconsolidated Financial

Institutions

k. Significant Investments in the Capital of

Unconsolidated Financial Institutions

That Are Not in the Form of Common

Stock

l. Items Subject to the 10 and 15 Percent

Common Equity Tier 1 Capital Threshold

Deductions

m. Netting of Deferred Tax Liabilities

Against Deferred Tax Assets and Other

Deductible Assets

3. Investments in Hedge Funds and Private

Equity Funds Pursuant to Section 13 of

the Bank Holding Company Act

VI. Denominator Changes Related to the

Regulatory Capital Changes

VII. Transition Provisions

A

Items Subject to the 10 and 15 Percent

Common Equity Tier 1 Capital Threshold

Deductions

m. Netting of Deferred Tax Liabilities

Against Deferred Tax Assets and Other

Deductible Assets

3. Investments in Hedge Funds and Private

Equity Funds Pursuant to Section 13 of

the Bank Holding Company Act

VI. Denominator Changes Related to the

Regulatory Capital Changes

VII. Transition Provisions

A. Transitions Provisions for Minimum

Regulatory Capital Ratios

B. Transition Provisions for Capital

Conservation and Countercyclical

Capital Buffers

C. Transition Provisions for Regulatory

Capital Adjustments and Deductions

1. Deductions for Certain Items Under

Section 22(a) of the Interim Final Rule

2. Deductions for Intangibles Other Than

Goodwill and Mortgage Servicing Assets

3. Regulatory Adjustments Under Section

22(b)(1) of the Interim Final Rule

4. Phase-Out of Current Accumulated

Other Comprehensive Income Regulatory

Capital Adjustments

5. Phase-Out of Unrealized Gains on

Available for Sale Equity Securities in

Tier 2 Capital

6. Phase-In of Deductions Related to

Investments in Capital Instruments and

to the Items Subject to the 10 and 15

Percent Common Equity Tier 1 Capital

Deduction Thresholds (Sections 22(c)

and 22(d)) of the Interim Final Rule

D. Transition Provisions for Non-

Qualifying Capital Instruments

VIII. Standardized Approach for Risk-

Weighted Assets

A. Calculation of Standardized Total Risk-

Weighted Assets

B. Risk-Weighted Assets for General Credit

Risk

1. Exposures to Sovereigns

2. Exposures to Certain Supranational

Entities and Multilateral Development

Banks

3. Exposures to Government-Sponsored

Enterprises

4. Exposures to Depository Institutions,

Foreign Banks, and Credit Unions

5. Exposures to Public-Sector Entities

6. Corporate Exposures

7. Residential Mortgage Exposures

8. Pre-Sold Construction Loans and

Statutory Multifamily Mortgages

9. High-Volatility Commercial Real Estate

10. Past-Due Exposures

11. Other Assets

C

evelopment

Banks

3. Exposures to Government-Sponsored

Enterprises

4. Exposures to Depository Institutions,

Foreign Banks, and Credit Unions

5. Exposures to Public-Sector Entities

6. Corporate Exposures

7. Residential Mortgage Exposures

8. Pre-Sold Construction Loans and

Statutory Multifamily Mortgages

9. High-Volatility Commercial Real Estate

10. Past-Due Exposures

11. Other Assets

C. Off-Balance Sheet Items

1. Credit Conversion Factors

2. Credit-Enhancing Representations and

Warranties

D. Over-the-Counter Derivative Contracts

E. Cleared Transactions

1. Definition of Cleared Transaction

2. Exposure Amount Scalar for Calculating

for Client Exposures

3. Risk Weighting for Cleared Transactions

4. Default Fund Contribution Exposures

F. Credit Risk Mitigation

1. Guarantees and Credit Derivatives

a. Eligibility Requirements

b. Substitution Approach

c. Maturity Mismatch Haircut

d. Adjustment for Credit Derivatives

Without Restructuring as a Credit Event

e. Currency Mismatch Adjustment

f. Multiple Credit Risk Mitigants

2. Collateralized Transactions

a. Eligible Collateral

b. Risk-Management Guidance for

Recognizing Collateral

c. Simple Approach

d. Collateral Haircut Approach

e. Standard Supervisory Haircuts

f. Own Estimates of Haircuts

g. Simple Value-at-Risk and Internal

Models Methodology

G. Unsettled Transactions

H. Risk-Weighted Assets for Securitization

Exposures

1. Overview of the Securitization

Framework and Definitions

2. Operational Requirements

a. Due Diligence Requirements

b. Operational Requirements for

Traditional Securitizations

c. Operational Requirements for Synthetic

Securitizations

d. Clean-Up Calls

3. Risk-Weighted Asset Amounts for

Securitization Exposures

a. Exposure Amount of a Securitization

Exposure

b. Gains-on-Sale and Credit-Enhancing

Interest-Only Strips

c. Exceptions Under the Securitization

Framework

d. Overlapping Exposures

e. Servicer Cash Advances

f. Implicit Support

4. Simplified Supervisory Formula

Approach

5

ents for Synthetic

Securitizations

d. Clean-Up Calls

3. Risk-Weighted Asset Amounts for

Securitization Exposures

a. Exposure Amount of a Securitization

Exposure

b. Gains-on-Sale and Credit-Enhancing

Interest-Only Strips

c. Exceptions Under the Securitization

Framework

d. Overlapping Exposures

e. Servicer Cash Advances

f. Implicit Support

4. Simplified Supervisory Formula

Approach

5. Gross-Up Approach

6. Alternative Treatments for Certain Types

of Securitization Exposures

a. Eligible Asset-Backed Commercial Paper

Liquidity Facilities

b. A Securitization Exposure in a Second-

Loss Position or Better to an Asset-

Backed Commercial Paper Program

7. Credit Risk Mitigation for Securitization

Exposures

8. Nth-to-Default Credit Derivatives

IX. Equity Exposures

A. Definition of Equity Exposure and

Exposure Measurement

B. Equity Exposure Risk Weights

C. Non-Significant Equity Exposures

D. Hedged Transactions

E. Measures of Hedge Effectiveness

F. Equity Exposures to Investment Funds

1. Full Look-through Approach

2. Simple Modified Look-through

Approach

3. Alternative Modified Look-Through

Approach

X. Market Discipline and Disclosure

Requirements

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00003

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55342

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

1 77 FR 52792 (August 30, 2012); 77 FR 52888

(August 30, 2012); 77 FR 52978 (August 30, 2012).

2 Basel III was published in December 2010 and

revised in June 2011. The text is available at

http://www.bis.org/publ/bcbs189.htm. The BCBS is

a committee of banking supervisory authorities,

which was established by the central bank

governors of the G–10 countries in 1975. More

information regarding the BCBS and its

membership is available at http://www.bis.org/bcbs/

about.htm

30, 2012).

2 Basel III was published in December 2010 and

revised in June 2011. The text is available at

http://www.bis.org/publ/bcbs189.htm. The BCBS is

a committee of banking supervisory authorities,

which was established by the central bank

governors of the G–10 countries in 1975. More

information regarding the BCBS and its

membership is available at http://www.bis.org/bcbs/

about.htm. Documents issued by the BCBS are

available through the Bank for International

Settlements Web site at http://www.bis.org.

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

(2010).

4 The FDIC’s market risk rule is at 12 CFR part

325, appendix C.

5 77 FR 52792 (August 30, 2012).

6 77 FR 52888 (August 30, 2012).

7 The FDIC’s general risk-based capital rules is at

12 CFR part 325, appendix A, and 12 CFR part 390,

subpart Z . The general risk-based capital rule is

supplemented by the FDIC’s market risk rule in 12

CFR part 325, appendix C.

8 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).

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

U.S.C. 78o–7 note).

10 See 77 FR 52856 (August 30, 2012).

A. Proposed Disclosure Requirements

B. Frequency of Disclosures

C. Location of Disclosures and Audit

Requirements

D. Proprietary and Confidential

Information

E. Specific Public Disclosure Requirements

XI. Risk-Weighted Assets—Modifications to

the Advanced Approaches

A. Counterparty Credit Risk

1. Recognition of Financial Collateral

a. Financial Collateral

b. Revised Supervisory Haircuts

2. Holding Periods and the Margin Period

of Risk

3. Internal Models Methodology

a. Recognition of Wrong-Way Risk

b. Increased Asset Value Correlation Factor

4. Credit Valuation Adjustments

a. Simple Credit Valuation Adjustment

Approach

b. Advanced Credit Valuation Adjustment

Approach

5. Cleared Transactions (Central

Counterparties)

6. Stress Period for Own Estimates

B

visory Haircuts

2. Holding Periods and the Margin Period

of Risk

3. Internal Models Methodology

a. Recognition of Wrong-Way Risk

b. Increased Asset Value Correlation Factor

4. Credit Valuation Adjustments

a. Simple Credit Valuation Adjustment

Approach

b. Advanced Credit Valuation Adjustment

Approach

5. Cleared Transactions (Central

Counterparties)

6. Stress Period for Own Estimates

B. Removal of Credit Ratings

1. Eligible Guarantor

2. Money Market Fund Approach

3. Modified Look-Through Approaches for

Equity Exposures to Investment F

C. Revisions to the Treatment of

Securitization Exposures

1. Definitions

2. Operational Criteria for Recognizing Risk

Transference in Traditional

Securitizations

3. The Hierarchy of Approaches

4. Guarantees and Credit Derivatives

Referencing a Securitization Expo

5. Due Diligence Requirements for

Securitization Exposures

6. Nth-to-Default Credit Derivatives

D. Treatment of Exposures Subject to

Deduction

E. Technical Amendments to the Advanced

Approaches Rule

1. Eligible Guarantees and Contingent U.S.

Government Guarantees

2. Calculation of Foreign Exposures for

Applicability of the Advanced

Approaches—Changes to Federal

Financial Institutions Examination

Council 009

3. Applicability of the Interim Final Rule

4. Change to the Definition of Probability

of Default Related to Seasoning

5. Cash Items in Process of Collection

6. Change to the Definition of Qualifying

Revolving Exposure

7. Trade-Related Letters of Credit

8. Defaulted Exposures That Are

Guaranteed by the U.S. Government

9. Stable Value Wraps

10. Treatment of Pre-Sold Construction

Loans and Multi-Family Residential

Loans

F. Pillar 3 Disclosures

1. Frequency and Timeliness of Disclosures

2. Enhanced Securitization Disclosure

Requirements

3. Equity Holdings That Are Not Covered

Positions

XII. Market Risk Rule

XIII. Abbreviations

XIV. Regulatory Flexibility Act

XV. Paperwork Reduction Act

XVI. Plain Language

XVII

alue Wraps

10. Treatment of Pre-Sold Construction

Loans and Multi-Family Residential

Loans

F. Pillar 3 Disclosures

1. Frequency and Timeliness of Disclosures

2. Enhanced Securitization Disclosure

Requirements

3. Equity Holdings That Are Not Covered

Positions

XII. Market Risk Rule

XIII. Abbreviations

XIV. Regulatory Flexibility Act

XV. Paperwork Reduction Act

XVI. Plain Language

XVII. Small Business Regulatory Enforcement

Fairness Act of 1996

I. Introduction

On August 30, 2012, the agencies

published in the Federal Register three

joint notices of proposed rulemaking

seeking public comment on revisions to

their risk-based and leverage capital

requirements and on methodologies for

calculating risk-weighted assets under

the standardized and advanced

approaches (each, a proposal, and

together, the NPRs, the proposed rules,

or the proposals).1 The proposed rules,

in part, reflected 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), including subsequent

changes to the BCBS’s capital standards

and recent BCBS consultative papers.2

Basel III is intended to improve both the

quality and quantity of banking

organizations’ capital, as well as to

strengthen various aspects of the

international capital standards for

calculating regulatory capital. The

proposed rules also reflect aspects of the

Basel II Standardized Approach and

other Basel Committee standards.

The proposals also included changes

consistent with the Dodd-Frank Wall

Street Reform and Consumer Protection

Act (the Dodd-Frank Act); 3 would apply

the risk-based and leverage capital rules

to top-tier savings and loan holding

companies (SLHCs) domiciled in the

United States; and would apply the

market risk capital rule (the market risk

rule) 4 to Federal and state savings

associations (as appropriate based on

trading activity)

ent with the Dodd-Frank Wall

Street Reform and Consumer Protection

Act (the Dodd-Frank Act); 3 would apply

the risk-based and leverage capital rules

to top-tier savings and loan holding

companies (SLHCs) domiciled in the

United States; and would apply the

market risk capital rule (the market risk

rule) 4 to Federal and state savings

associations (as appropriate based on

trading activity).

The NPR titled ‘‘Regulatory Capital

Rules: Regulatory Capital,

Implementation of Basel III, Minimum

Regulatory Capital Ratios, Capital

Adequacy, Transition Provisions, and

Prompt Corrective Action’’ 5 (the Basel

III NPR), provided for the

implementation of the Basel III revisions

to international capital standards related

to minimum capital requirements,

regulatory capital, and additional

capital ‘‘buffer’’ standards to enhance

the resilience of FDIC-supervised

institutions to withstand periods of

financial stress. FDIC-supervised

institutions include state nonmember

banks and state savings associations.

The term banking organizations

includes 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 Federal Reserve’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, except certain savings

and loan holding companies that are

substantially engaged in insurance

underwriting or commercial activities.

The proposal included transition

periods for many of the requirements,

consistent with Basel III and the Dodd-

Frank Act

Policy

Statement (12 CFR part 225, appendix

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

holding companies domiciled in the

United States, except certain savings

and loan holding companies that are

substantially engaged in insurance

underwriting or commercial activities.

The proposal included transition

periods for many of the requirements,

consistent with Basel III and the Dodd-

Frank Act. The NPR titled ‘‘Regulatory

Capital Rules: Standardized Approach

for Risk-weighted Assets; Market

Discipline and Disclosure

Requirements’’ 6 (the Standardized

Approach NPR), would revise the

methodologies for calculating risk-

weighted assets in the agencies’ general

risk-based capital rules 7 (the general

risk-based capital rules), incorporating

aspects of the Basel II standardized

approach,8 and establish alternative

standards of creditworthiness in place

of credit ratings, consistent with section

939A of the Dodd-Frank Act.9 The

proposed minimum capital

requirements in section 10(a) of the

Basel III NPR, as determined using the

standardized capital ratio calculations

in section 10(b), would establish

minimum capital requirements that

would be the ‘‘generally applicable’’

capital requirements for purpose of

section 171 of the Dodd-Frank Act (Pub.

L. 111–203, 124 Stat. 1376, 1435–38

(2010).10

The NPR titled ‘‘Regulatory Capital

Rules: Advanced Approaches Risk-

Based Capital Rule; Market Risk Capital

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00004

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

ble’’

capital requirements for purpose of

section 171 of the Dodd-Frank Act (Pub.

L. 111–203, 124 Stat. 1376, 1435–38

(2010).10

The NPR titled ‘‘Regulatory Capital

Rules: Advanced Approaches Risk-

Based Capital Rule; Market Risk Capital

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00004

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55343

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

11 77 FR 52978 (August 30, 2012).

12 The FDIC’s advanced approaches rules is at 12

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

subpart Z, appendix A. The advanced approaches

rule is supplemented by the market risk rule.

13 See ‘‘Enhancements to the Basel II framework’’

(July 2009), available at http://www.bis.org/publ/

bcbs157.htm.

14 The FDIC’s tier 1 leverage rules are at 12 CFR

325.3 (state nonmember banks) and 390.467 (state

savings associations).

15 See note 14, supra. Risk-weighted assets

calculated under the market risk framework in

subpart F of the interim final rule are included in

calculations of risk-weighted assets both under the

standardized approach and the advanced

approaches.

16 An advanced approaches FDIC-supervised

institution must also use its advanced-approaches-

adjusted total to determine its total risk-based

capital ratio.

17 See section 10(c) of the interim final rule.

Rule’’ 11 (the Advanced Approaches

NPR) included proposed changes to the

agencies’ current advanced approaches

risk-based capital rules (the advanced

approaches rule) 12 to incorporate

applicable provisions of Basel III and

the ‘‘Enhancements to the Basel II

framework’’ (2009 Enhancements)

published in July 2009 13 and

subsequent consultative papers, to

remove references to credit ratings, to

apply the market risk rule to savings

associations and SLHCs, and to apply

the advanced approaches rule to SLHCs

meeting the scope of application of

those rules

12 to incorporate

applicable provisions of Basel III and

the ‘‘Enhancements to the Basel II

framework’’ (2009 Enhancements)

published in July 2009 13 and

subsequent consultative papers, to

remove references to credit ratings, to

apply the market risk rule to savings

associations and SLHCs, and to apply

the advanced approaches rule to SLHCs

meeting the scope of application of

those rules. Taken together, the three

proposals also would have restructured

the agencies’ regulatory capital rules

(the general risk-based capital rules,

leverage rules,14 market risk rule, and

advanced approaches rule) into a

harmonized, codified regulatory capital

framework.

The FDIC is finalizing the Basel III

NPR, Standardized Approach NPR, and

Advanced Approaches NPR in this

interim final rule, with certain changes

to the proposals, as described further

below. The OCC and Federal Reserve

are jointly finalizing the Basel III NPR,

Standardized Approach NPR, and

Advanced Approaches NPR as a final

rule, with identical changes to the

proposals as the FDIC. This interim final

rule applies to FDIC-supervised

institutions.

Certain aspects of this interim final

rule apply only to FDIC-supervised

institutions subject to the advanced

approaches rule (advanced approaches

FDIC-supervised institutions) or to

FDIC-supervised institutions with

significant trading activities, as further

described below.

Likewise, the enhanced disclosure

requirements in the interim final rule

apply only to FDIC-supervised

institutions with $50 billion or more in

total consolidated assets

FDIC-supervised

institutions subject to the advanced

approaches rule (advanced approaches

FDIC-supervised institutions) or to

FDIC-supervised institutions with

significant trading activities, as further

described below.

Likewise, the enhanced disclosure

requirements in the interim final rule

apply only to FDIC-supervised

institutions with $50 billion or more in

total consolidated assets.

As under the proposal, the minimum

capital requirements in section 10(a) of

the interim final rule, as determined

using the standardized capital ratio

calculations in section 10(b), which

apply to all FDIC-supervised

institutions, establish the ‘‘generally

applicable’’ capital requirements under

section 171 of the Dodd-Frank Act.15

Under the interim final rule, as under

the proposal, in order to determine its

minimum risk-based capital

requirements, an advanced approaches

FDIC-supervised institution that has

completed the parallel run process and

that has received notification from its

primary Federal supervisor pursuant to

section 324.121(d) of subpart E must

determine its minimum risk-based

capital requirements by calculating the

three risk-based capital ratios using total

risk-weighted assets under the

standardized approach and, separately,

total risk-weighted assets under the

advanced approaches.16 The lower ratio

for each risk-based capital requirement

is the ratio the FDIC-supervised

institution must use to determine its

compliance with the minimum capital

requirement.17 These enhanced

prudential standards help ensure that

advanced approaches FDIC-supervised

institutions, which are among the

largest and most complex FDIC-

supervised institutions, have capital

adequate to address their more complex

operations and risks.

II. Summary of the Three Notices of

Proposed Rulemaking

A

must use to determine its

compliance with the minimum capital

requirement.17 These enhanced

prudential standards help ensure that

advanced approaches FDIC-supervised

institutions, which are among the

largest and most complex FDIC-

supervised institutions, have capital

adequate to address their more complex

operations and risks.

II. Summary of the Three Notices of

Proposed Rulemaking

A. The Basel III Notice of Proposed

Rulemaking

As discussed in the proposals, the

recent financial crisis demonstrated that

the amount of high-quality capital held

by banking organizations was

insufficient to absorb the losses

generated over 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 characteristics of regulatory capital

instruments, as well as inconsistencies

in the definition of capital across

jurisdictions, contributed to difficulties

in evaluating a banking organization’s

capital strength. Accordingly, the BCBS

assessed the international capital

framework and, in 2010, published

Basel III, a comprehensive reform

package designed to improve the quality

and quantity of regulatory capital and

build additional capacity into the

banking system to absorb losses in times

of market and economic stress. On

August 30, 2012, the agencies published

the NPRs in the Federal Register to

revise regulatory capital requirements,

as discussed above. As proposed, the

Basel III NPR generally would have

applied to all U.S. banking

organizations

he quality

and quantity of regulatory capital and

build additional capacity into the

banking system to absorb losses in times

of market and economic stress. On

August 30, 2012, the agencies published

the NPRs in the Federal Register to

revise regulatory capital requirements,

as discussed above. As proposed, the

Basel III NPR generally would have

applied to all U.S. banking

organizations.

Consistent with Basel III, the Basel III

NPR would have required banking

organizations to comply with the

following minimum capital ratios: (i) A

new requirement for a ratio of common

equity tier 1 capital to risk-weighted

assets (common equity tier 1 capital

ratio) of 4.5 percent; (ii) a ratio of tier

1 capital to risk-weighted assets (tier 1

capital ratio) of 6 percent, increased

from 4 percent; (iii) a ratio of total

capital to risk-weighted assets (total

capital ratio) of 8 percent; (iv) a ratio of

tier 1 capital to average total

consolidated assets (leverage ratio) of 4

percent; and (v) for advanced

approaches banking organizations only,

an additional requirement that the ratio

of tier 1 capital to total leverage

exposure (supplementary leverage ratio)

be at least 3 percent.

The Basel III NPR also proposed

implementation of a capital

conservation buffer equal to 2.5 percent

of risk-weighted assets above the

minimum risk-based capital ratio

requirements, which could be expanded

by a countercyclical capital buffer for

advanced approaches banking

organizations under certain

circumstances. If a banking organization

failed to hold capital above the

minimum capital ratios and proposed

capital conservation buffer (as

potentially expanded by the

countercyclical capital buffer), it would

be subject to certain restrictions on

capital distributions and discretionary

bonus payments. The proposed

countercyclical capital buffer was

designed to take into account the macro-

financial environment in which large,

internationally active banking

organizations function

and proposed

capital conservation buffer (as

potentially expanded by the

countercyclical capital buffer), it would

be subject to certain restrictions on

capital distributions and discretionary

bonus payments. The proposed

countercyclical capital buffer was

designed to take into account the macro-

financial environment in which large,

internationally active banking

organizations function. The

countercyclical capital buffer could be

implemented if the agencies determined

that credit growth in the economy

became excessive. As proposed, the

countercyclical capital buffer would

initially be set at zero, and could

expand to as much as 2.5 percent of

risk-weighted assets.

The Basel III NPR proposed to apply

a 4 percent minimum leverage ratio

requirement to all banking organizations

(computed using the new definition of

capital), and to eliminate the exceptions

for banking organizations with strong

supervisory ratings or subject to the

market risk rule. The Basel III NPR also

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00005

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55344

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

18 See section 939A of Dodd-Frank Act (15 U.S.C.

78o–7 note).

proposed to require advanced

approaches banking organizations to

satisfy a minimum supplementary

leverage ratio requirement of 3 percent,

measured in a manner consistent with

the international leverage ratio set forth

in Basel III. Unlike the FDIC’s current

leverage ratio requirement, the proposed

supplementary leverage ratio

incorporates certain off-balance sheet

exposures in the denominator.

To strengthen the quality of capital,

the Basel III NPR proposed more

conservative eligibility criteria for

regulatory capital instruments

d in a manner consistent with

the international leverage ratio set forth

in Basel III. Unlike the FDIC’s current

leverage ratio requirement, the proposed

supplementary leverage ratio

incorporates certain off-balance sheet

exposures in the denominator.

To strengthen the quality of capital,

the Basel III NPR proposed more

conservative eligibility criteria for

regulatory capital instruments. For

example, the Basel III NPR proposed

that trust preferred securities (TruPS)

and cumulative perpetual preferred

securities, which were tier-1-eligible

instruments (subject to limits) at the

BHC level, would no longer be

includable in tier 1 capital under the

proposal and would be gradually

phased out from tier 1 capital. The

proposal also eliminated the existing

limitations on the amount of tier 2

capital that could be recognized in total

capital, as well as the limitations on the

amount of certain capital instruments

(for example, term subordinated debt)

that could be included in tier 2 capital.

In addition, the proposal would have

required banking organizations to

include in common equity tier 1 capital

accumulated other comprehensive

income (AOCI) (with the exception of

gains and losses on cash-flow hedges

related to items that are not fair-valued

on the balance sheet), and also would

have established new limits on the

amount of minority interest a banking

organization could include in regulatory

capital. The proposal also would have

established more stringent requirements

for several deductions from and

adjustments to regulatory capital,

including with respect to deferred tax

assets (DTAs), investments in a banking

organization’s own capital instruments

and the capital instruments of other

financial institutions, and mortgage

servicing assets (MSAs). The proposed

revisions would have been incorporated

into the regulatory capital ratios in the

prompt corrective action (PCA)

framework for depository institutions.

B

pital,

including with respect to deferred tax

assets (DTAs), investments in a banking

organization’s own capital instruments

and the capital instruments of other

financial institutions, and mortgage

servicing assets (MSAs). The proposed

revisions would have been incorporated

into the regulatory capital ratios in the

prompt corrective action (PCA)

framework for depository institutions.

B. The Standardized Approach Notice

of Proposed Rulemaking

The Standardized Approach NPR

proposed changes to the agencies’

general risk-based capital rules for

determining risk-weighted assets (that

is, the calculation of the denominator of

a banking organization’s risk-based

capital ratios). The proposed changes

were intended to revise and harmonize

the agencies’ rules for calculating risk-

weighted assets, enhance risk

sensitivity, and address weaknesses in

the regulatory capital framework

identified over recent years, including

by strengthening the risk sensitivity of

the regulatory capital treatment for,

among other items, credit derivatives,

central counterparties (CCPs), high-

volatility commercial real estate, and

collateral and guarantees.

In the Standardized Approach NPR,

the agencies also proposed alternatives

to credit ratings for calculating risk-

weighted assets for certain assets,

consistent with section 939A of the

Dodd-Frank Act. These alternatives

included methodologies for determining

risk-weighted assets for exposures to

sovereigns, foreign banks, and public

sector entities, securitization exposures,

and counterparty credit risk. The

Standardized Approach NPR also

proposed to include a framework for

risk weighting residential mortgages

based on underwriting and product

features, as well as loan-to-value (LTV)

ratios, and disclosure requirements for

top-tier banking organizations

domiciled in the United States with $50

billion or more in total assets, including

disclosures related to regulatory capital

instruments.

C

Standardized Approach NPR also

proposed to include a framework for

risk weighting residential mortgages

based on underwriting and product

features, as well as loan-to-value (LTV)

ratios, and disclosure requirements for

top-tier banking organizations

domiciled in the United States with $50

billion or more in total assets, including

disclosures related to regulatory capital

instruments.

C. The Advanced Approaches Notice of

Proposed Rulemaking

The Advanced Approaches NPR

proposed revisions to the advanced

approaches rule to incorporate certain

aspects of Basel III, the 2009

Enhancements, and subsequent

consultative papers. The proposal also

would have implemented relevant

provisions of the Dodd-Frank Act,

including section 939A (regarding the

use of credit ratings in agency

regulations),18 and incorporated certain

technical amendments to the existing

requirements. In addition, the Advanced

Approaches NPR proposed to codify the

market risk rule in a manner similar to

the codification of the other regulatory

capital rules under the proposals.

Consistent with Basel III and the 2009

Enhancements, under the Advanced

Approaches NPR, the agencies proposed

further steps to strengthen capital

requirements for internationally active

banking organizations. This NPR would

have required advanced approaches

banking organizations to hold more

appropriate levels of capital for

counterparty credit risk, credit valuation

adjustments (CVA), and wrong-way risk;

would have strengthened the risk-based

capital requirements for certain

securitization exposures by requiring

advanced approaches banking

organizations to conduct more rigorous

credit analysis of securitization

exposures; and would have enhanced

the disclosure requirements related to

those exposures.

The agencies proposed to apply the

market risk rule to SLHCs and to state

and Federal savings associations.

III

he risk-based

capital requirements for certain

securitization exposures by requiring

advanced approaches banking

organizations to conduct more rigorous

credit analysis of securitization

exposures; and would have enhanced

the disclosure requirements related to

those exposures.

The agencies proposed to apply the

market risk rule to SLHCs and to state

and Federal savings associations.

III. Summary of General Comments on

the Basel III Notice of Proposed

Rulemaking and on the Standardized

Approach Notice of Proposed

Rulemaking; Overview of the Interim

Final Rule

A. General Comments on the Basel III

Notice of Proposed Rulemaking and on

the Standardized Approach Notice of

Proposed Rulemaking

Each agency received over 2,500

public comments on the proposals from

banking organizations, trade

associations, supervisory authorities,

consumer advocacy groups, public

officials (including members of the U.S.

Congress), private individuals, and

other interested parties. Overall, while

most commenters supported more

robust capital standards and the

agencies’ efforts to improve the

resilience of the banking system, many

commenters expressed concerns about

the potential costs and burdens of

various aspects of the proposals,

particularly for smaller banking

organizations. A substantial number of

commenters also requested withdrawal

of, or significant revisions to, the

proposals. A few commenters argued

that new capital rules were not

necessary at this time. Some

commenters requested that the agencies

perform additional studies of the

economic impact of part or all of the

proposed rules. Many commenters

asked for additional time to transition to

the new requirements. A more detailed

discussion of the comments provided on

particular aspects of the proposals is

provided in the remainder of this

preamble.

1

es were not

necessary at this time. Some

commenters requested that the agencies

perform additional studies of the

economic impact of part or all of the

proposed rules. Many commenters

asked for additional time to transition to

the new requirements. A more detailed

discussion of the comments provided on

particular aspects of the proposals is

provided in the remainder of this

preamble.

1. Applicability and Scope

The agencies received a significant

number of comments regarding the

proposed scope and applicability of the

Basel III NPR and the Standardized

Approach NPR. The majority of

comments submitted by or on behalf of

community banking organizations

requested an exemption from the

proposals. These commenters suggested

basing such an exemption on a banking

organization’s asset size—for example,

total assets of less than $500 million, $1

billion, $10 billion, $15 billion, or $50

billion—or on its risk profile or business

model. Under the latter approach, the

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00006

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55345

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

commenters suggested providing an

exemption for banking organizations

with balance sheets that rely less on

leverage, short-term funding, or

complex derivative transactions.

In support of an exemption from the

proposed rule for community banking

organizations, a number of commenters

argued that the proposed revisions to

the definition of capital would be overly

conservative and would prohibit some

of the instruments relied on by

community banking organizations from

satisfying regulatory capital

requirements. Many of these

commenters stated that, in general,

community banking organizations have

less access to the capital markets

relative to larger banking organizations

and could increase capital only by

accumulating retained earnings

be overly

conservative and would prohibit some

of the instruments relied on by

community banking organizations from

satisfying regulatory capital

requirements. Many of these

commenters stated that, in general,

community banking organizations have

less access to the capital markets

relative to larger banking organizations

and could increase capital only by

accumulating retained earnings. Owing

to slow economic growth and relatively

low earnings among community

banking organizations, the commenters

asserted that implementation of the

proposal would be detrimental to their

ability to serve local communities while

providing reasonable returns to

shareholders. Other commenters

requested exemptions from particular

sections of the proposed rules, such as

maintaining capital against transactions

with particular counterparties, or based

on transaction types that they

considered lower-risk, such as

derivative transactions hedging interest

rate risk.

The commenters also argued that

application of the Basel III NPR and

Standardized Approach NPR to

community banking organizations

would be unnecessary and

inappropriate for the business model

and risk profile of such organizations.

These commenters asserted that Basel III

was designed for large, internationally-

active banking organizations in response

to a financial crisis attributable

primarily to those institutions.

Accordingly, the commenters were of

the view that community banking

organizations require a different capital

framework with less stringent capital

requirements, or should be allowed to

continue to use the general risk-based

capital rules. In addition, many

commenters, in particular minority

depository institutions (MDIs), mutual

banking organizations, and community

development financial institutions

(CDFIs), expressed concern regarding

their ability to raise capital to meet the

increased minimum requirements in the

current environment and upon

implementation of the proposed

definition of capital

risk-based

capital rules. In addition, many

commenters, in particular minority

depository institutions (MDIs), mutual

banking organizations, and community

development financial institutions

(CDFIs), expressed concern regarding

their ability to raise capital to meet the

increased minimum requirements in the

current environment and upon

implementation of the proposed

definition of capital. One commenter

asked for an exemption from all or part

of the proposed rules for CDFIs,

indicating that the proposal would

significantly reduce the availability of

capital for low- and moderate-income

communities. Another commenter

stated that the U.S. Congress has a

policy of encouraging the creation of

MDIs and expressed concern that the

proposed rules contradicted this

purpose.

In contrast, however, a few

commenters supported the proposed

application of the Basel III NPR to all

banking organizations. For example, one

commenter stated that increasing the

quality and quantity of capital at all

banking organizations would create a

more resilient financial system and

discourage inappropriate risk-taking by

forcing banking organizations to put

more of their own ‘‘skin in the game.’’

This commenter also asserted that the

proposed scope of the Basel III NPR

would reduce the probability and

impact of future financial crises and

support the objectives of sustained

growth and high employment. Another

commenter favored application of the

Basel III NPR to all banking

organizations to ensure a level playing

field among banking organizations

within the same competitive market.

2. Aggregate Impact

A majority of the commenters

expressed concern regarding the

potential aggregate impact of the

proposals, together with other

provisions of the Dodd-Frank Act. Some

of these commenters urged the agencies

to withdraw the proposals and to

conduct a quantitative impact study

(QIS) to assess the potential aggregate

impact of the proposals on banking

organizations and the overall U.S.

economy

majority of the commenters

expressed concern regarding the

potential aggregate impact of the

proposals, together with other

provisions of the Dodd-Frank Act. Some

of these commenters urged the agencies

to withdraw the proposals and to

conduct a quantitative impact study

(QIS) to assess the potential aggregate

impact of the proposals on banking

organizations and the overall U.S.

economy. Many commenters argued that

the proposals would have significant

negative consequences for the financial

services industry. According to the

commenters, by requiring banking

organizations to hold more capital and

increase risk weighting on some of their

assets, as well as to meet higher risk-

based and leverage capital measures for

certain PCA categories, the proposals

would negatively affect the banking

sector. Commenters cited, among other

potential consequences of the proposals:

restricted job growth; reduced lending

or higher-cost lending, including to

small businesses and low-income or

minority communities; limited

availability of certain types of financial

products; reduced investor demand for

banking organizations’ equity; higher

compliance costs; increased mergers

and consolidation activity, specifically

in rural markets, because banking

organizations would need to spread

compliance costs among a larger

customer base; and diminished access to

the capital markets resulting from

reduced profit and from dividend

restrictions associated with the capital

buffers. The commenters also asserted

that the recovery of the U.S. economy

would be impaired by the proposals as

a result of reduced lending by banking

organizations that the commenters

believed would be attributable to the

higher costs of regulatory compliance.

In particular, the commenters expressed

concern that a contraction in small-

business lending would adversely affect

job growth and employment.

3

ers also asserted

that the recovery of the U.S. economy

would be impaired by the proposals as

a result of reduced lending by banking

organizations that the commenters

believed would be attributable to the

higher costs of regulatory compliance.

In particular, the commenters expressed

concern that a contraction in small-

business lending would adversely affect

job growth and employment.

3. Competitive Concerns

Many commenters raised concerns

that implementation of the proposals

would create an unlevel playing field

between banking organizations and

other financial services providers. For

example, a number of commenters

expressed concern that credit unions

would be able to gain market share from

banking organizations by offering

similar products at substantially lower

costs because of differences in taxation

combined with potential costs from the

proposals. The commenters also argued

that other financial service providers,

such as foreign banks with significant

U.S. operations, members of the Federal

Farm Credit System, and entities in the

shadow banking industry, would not be

subject to the proposed rule and,

therefore, would have a competitive

advantage over banking organizations.

These commenters also asserted that the

proposals could cause more consumers

to choose lower-cost financial products

from the unregulated, nonbank financial

sector.

4. Costs

Commenters representing all types of

banking organizations expressed

concern that the complexity and

implementation cost of the proposals

would exceed their expected benefits.

According to these commenters,

implementation of the proposals would

require software upgrades for new

internal reporting systems, increased

employee training, and the hiring of

additional employees for compliance

purposes. Some commenters urged the

agencies to recognize that compliance

costs have increased significantly over

recent years due to other regulatory

changes and to take these costs into

consideration

ers,

implementation of the proposals would

require software upgrades for new

internal reporting systems, increased

employee training, and the hiring of

additional employees for compliance

purposes. Some commenters urged the

agencies to recognize that compliance

costs have increased significantly over

recent years due to other regulatory

changes and to take these costs into

consideration. As an alternative, some

commenters encouraged the agencies to

consider a simple increase in the

minimum regulatory capital

requirements, suggesting that such an

approach would provide increased

protection to the Deposit Insurance

Fund and increase safety and soundness

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00007

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55346

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

19 See, e.g., the definition of ‘‘qualified mortgage’’

in section 1412 of the Dodd-Frank Act (15 U.S.C.

129C) and ‘‘qualified residential mortgage’’ in

section 941(e)(4) of the Dodd-Frank Act (15 U.S.C.

78o–11(e)(4)).

20 Specifically, section 171 provides that

deductions of instruments ‘‘that would be required’’

under the section are not required for depository

institution holding companies with total

consolidated assets of less than $15 billion as of

December 31, 2009 and 2010 MHCs. See 12 U.S.C.

5371(b)(4)(C).

21 See 12 U.S.C. 5371(b)(5)(A). While section 171

of the Dodd-Frank Act requires the agencies to

establish minimum risk-based and leverage capital

requirements subject to certain limitations, the

agencies retain their general authority to establish

capital requirements under other laws and

regulations, including under the National Bank Act,

12 U.S.C. 1, et seq., Federal Reserve Act, Federal

Deposit Insurance Act, Bank Holding Company Act,

International Lending Supervision Act, 12 U.S.C.

3901, et seq., and Home Owners Loan Act, 12

U.S.C. 1461, et seq

ject to certain limitations, the

agencies retain their general authority to establish

capital requirements under other laws and

regulations, including under the National Bank Act,

12 U.S.C. 1, et seq., Federal Reserve Act, Federal

Deposit Insurance Act, Bank Holding Company Act,

International Lending Supervision Act, 12 U.S.C.

3901, et seq., and Home Owners Loan Act, 12

U.S.C. 1461, et seq.

without adding complexity to the

regulatory capital framework.

B. Comments on Particular Aspects of

the Basel III Notice of Proposed

Rulemaking and on the Standardized

Approach Notice of Proposed

Rulemaking

In addition to the general comments

described above, the agencies received a

significant number of comments on four

particular elements of the proposals: the

requirement to include most elements of

AOCI in regulatory capital; the new

framework for risk weighting residential

mortgages; and the requirement to phase

out TruPS from tier 1 capital for all

banking organizations.

1. Accumulated Other Comprehensive

Income

AOCI generally includes accumulated

unrealized gains and losses on certain

assets and liabilities that have not been

included in net income, yet are

included in equity under U.S. generally

accepted accounting principles (GAAP)

(for example, unrealized gains and

losses on securities designated as

available-for-sale (AFS)). Under the

agencies’ general risk-based capital

rules, most components of AOCI are not

reflected in a banking organization’s

regulatory capital. In the proposed rule,

consistent with Basel III, the agencies

proposed to require banking

organizations to include the majority of

AOCI components in common equity

tier 1 capital.

The agencies received a significant

number of comments on the proposal to

require banking organizations to

recognize AOCI in common equity tier

1 capital

flected in a banking organization’s

regulatory capital. In the proposed rule,

consistent with Basel III, the agencies

proposed to require banking

organizations to include the majority of

AOCI components in common equity

tier 1 capital.

The agencies received a significant

number of comments on the proposal to

require banking organizations to

recognize AOCI in common equity tier

1 capital. Generally, the commenters

asserted that the proposal would

introduce significant volatility in

banking organizations’ capital ratios due

in large part to fluctuations in

benchmark interest rates, and would

result in many banking organizations

moving AFS securities into a held-to-

maturity (HTM) portfolio or holding

additional regulatory capital solely to

mitigate the volatility resulting from

temporary unrealized gains and losses

in the AFS securities portfolio. The

commenters also asserted that the

proposed rules would likely impair

lending and negatively affect banking

organizations’ ability to manage

liquidity and interest rate risk and to

maintain compliance with legal lending

limits. Commenters representing

community banking organizations in

particular asserted that they lack the

sophistication of larger banking

organizations to use certain risk-

management techniques for hedging

interest rate risk, such as the use of

derivative instruments.

2. Residential Mortgages

The Standardized Approach NPR

would have required banking

organizations to place residential

mortgage exposures into one of two

categories to determine the applicable

risk weight

that they lack the

sophistication of larger banking

organizations to use certain risk-

management techniques for hedging

interest rate risk, such as the use of

derivative instruments.

2. Residential Mortgages

The Standardized Approach NPR

would have required banking

organizations to place residential

mortgage exposures into one of two

categories to determine the applicable

risk weight. Category 1 residential

mortgage exposures were defined to

include mortgage products with

underwriting and product features that

have demonstrated a lower risk of

default, such as consideration and

documentation of a borrower’s ability to

repay, and generally excluded mortgage

products that included terms or other

characteristics that the agencies have

found to be indicative of higher credit

risk, such as deferral of repayment of

principal. Residential mortgage

exposures with higher risk

characteristics were defined as category

2 residential mortgage exposures. The

agencies proposed to apply relatively

lower risk weights to category 1

residential mortgage exposures, and

higher risk weights to category 2

residential mortgage exposures. The

proposal provided that the risk weight

assigned to a residential mortgage

exposure also depended on its LTV

ratio.

The agencies received a significant

number of comments objecting to the

proposed treatment for one-to-four

family residential mortgages and

requesting retention of the mortgage

treatment in the agencies’ general risk-

based capital rules. Commenters

generally expressed concern that the

proposed treatment would inhibit

lending to creditworthy borrowers and

could jeopardize the recovery of a still-

fragile housing market

nt

number of comments objecting to the

proposed treatment for one-to-four

family residential mortgages and

requesting retention of the mortgage

treatment in the agencies’ general risk-

based capital rules. Commenters

generally expressed concern that the

proposed treatment would inhibit

lending to creditworthy borrowers and

could jeopardize the recovery of a still-

fragile housing market. Commenters

also criticized the distinction between

category 1 and category 2 mortgages,

asserting that the characteristics

proposed for each category did not

appropriately distinguish between

lower- and higher-risk products and

would adversely impact certain loan

products that performed relatively well

even during the recent crisis.

Commenters also highlighted concerns

regarding regulatory burden and the

uncertainty of other regulatory

initiatives involving residential

mortgages. In particular, these

commenters expressed considerable

concern regarding the potential

cumulative impact of the proposed new

mortgage requirements combined with

the Dodd-Frank Act’s requirements

relating to the definitions of qualified

mortgage and qualified residential

mortgage 19 and asserted that when

considered together with the proposed

mortgage treatment, the combined effect

could have an adverse impact on the

mortgage industry.

3. Trust Preferred Securities for Smaller

FDIC-Supervised Institutions

The proposed rules would have

required all banking organizations to

phase-out TruPS from tier 1 capital

under either a 3- or 10-year transition

period based on the organization’s total

consolidated assets. The proposal would

have required banking organizations

with more than $15 billion in total

consolidated assets (as of December 31,

2009) to phase-out of tier 1 capital any

non-qualifying capital instruments

(such as TruPS and cumulative

preferred shares) issued before May 19,

2010

pital

under either a 3- or 10-year transition

period based on the organization’s total

consolidated assets. The proposal would

have required banking organizations

with more than $15 billion in total

consolidated assets (as of December 31,

2009) to phase-out of tier 1 capital any

non-qualifying capital instruments

(such as TruPS and cumulative

preferred shares) issued before May 19,

2010. The exclusion of non-qualifying

capital instruments would have taken

place incrementally over a three-year

period beginning on January 1, 2013.

Section 171 provides an exception that

permits banking organizations with total

consolidated assets of less than $15

billion as of December 31, 2009, and

banking organizations that were mutual

holding companies as of May 19, 2010

(2010 MHCs), to include in tier 1 capital

all TruPS (and other instruments that

could no longer be included in tier 1

capital pursuant to the requirements of

section 171) that were issued prior to

May 19, 2010.20 However, consistent

with Basel III and the general policy

purpose of the proposed revisions to

regulatory capital, the agencies

proposed to require banking

organizations with total consolidated

assets less than $15 billion as of

December 31, 2009 and 2010 MHCs to

phase out their non-qualifying capital

instruments from regulatory capital over

ten years.21

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00008

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

gencies

proposed to require banking

organizations with total consolidated

assets less than $15 billion as of

December 31, 2009 and 2010 MHCs to

phase out their non-qualifying capital

instruments from regulatory capital over

ten years.21

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00008

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55347

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

22 See ‘‘Assessing the macroeconomic impact of

the transition to stronger capital and liquidity

requirements’’ (MAG Analysis), Attachment E, also

available at: http://www.bis.orpublIothp12.pdf. See

also ‘‘Results of the comprehensive quantitative

impact study,’’ Attachment F, also available at:

http://www.bis.org/publ/bcbs186.pdf.

23 See ‘‘An assessment of the long-term economic

impact of stronger capital and liquidity

requirements,’’ Executive Summary, pg. 1,

Attachment G.

Many commenters representing

community banking organizations

criticized the proposal’s phase-out

schedule for TruPS and encouraged the

agencies to grandfather TruPS in tier 1

capital to the extent permitted by

section 171 of the Dodd-Frank Act.

Commenters asserted that this was the

intent of the U.S. Congress, including

this provision in the statute. These

commenters also asserted that this

aspect of the proposal would unduly

burden community banking

organizations that have limited ability to

raise capital, potentially impairing the

lending capacity of these banking

organizations.

C. Overview of the Interim Final Rule

The interim final rule will replace the

FDIC’s general risk-based capital rules,

advanced approaches rule, market risk

rule, and leverage rules in accordance

with the transition provisions described

below

unity banking

organizations that have limited ability to

raise capital, potentially impairing the

lending capacity of these banking

organizations.

C. Overview of the Interim Final Rule

The interim final rule will replace the

FDIC’s general risk-based capital rules,

advanced approaches rule, market risk

rule, and leverage rules in accordance

with the transition provisions described

below. After considering the comments

received, the FDIC has made substantial

modifications in the interim final rule to

address specific concerns raised by

commenters regarding the cost,

complexity, and burden of the

proposals.

During the recent financial crisis, lack

of confidence in the banking sector

increased banking organizations’ cost of

funding, impaired banking

organizations’ access to short-term

funding, depressed values of banking

organizations’ equities, and required

many banking organizations to seek

government assistance. Concerns about

banking organizations arose not only

because market participants expected

steep losses on banking organizations’

assets, but also because of substantial

uncertainty surrounding estimated loss

rates, and thus future earnings. Further,

heightened systemic risks, falling asset

values, and reduced credit availability

had an adverse impact on business and

consumer confidence, significantly

affecting the overall economy. The

interim final rule addresses these

weaknesses by helping to ensure a

banking and financial system that will

be better able to absorb losses and

continue to lend in future periods of

economic stress. This important benefit

in the form of a safer, more resilient,

and more stable banking system is

expected to substantially outweigh any

short-term costs that might result from

the interim final rule.

In this context, the FDIC is adopting

most aspects of the proposals, including

the minimum risk-based capital

requirements, the capital conservation

and countercyclical capital buffers, and

many of the proposed risk weights

m of a safer, more resilient,

and more stable banking system is

expected to substantially outweigh any

short-term costs that might result from

the interim final rule.

In this context, the FDIC is adopting

most aspects of the proposals, including

the minimum risk-based capital

requirements, the capital conservation

and countercyclical capital buffers, and

many of the proposed risk weights. The

FDIC has also decided to apply most

aspects of the Basel III NPR and

Standardized Approach NPR to all

banking organizations, with some

significant changes. Implementing the

interim final rule in a consistent fashion

across the banking system will improve

the quality and increase the level of

regulatory capital, leading to a more

stable and resilient system for banking

organizations of all sizes and risk

profiles. The improved resilience will

enhance their ability to continue

functioning as financial intermediaries,

including during periods of financial

stress and reduce risk to the deposit

insurance fund and to the financial

system. The FDIC believes that,

together, the revisions to the proposals

meaningfully address the commenters’

concerns regarding the potential

implementation burden of the

proposals.

The FDIC has considered the concerns

raised by commenters and believe that

it is important to take into account and

address regulatory costs (and their

potential effect on FDIC-supervised

institutions’ role as financial

intermediaries in the economy) when

the FDIC establishes or revises

regulatory requirements. In developing

regulatory capital requirements, these

concerns are considered in the context

of the FDIC’s broad goals—to enhance

the safety and soundness of FDIC-

supervised institutions and promote

financial stability through robust capital

standards for the entire banking system

le as financial

intermediaries in the economy) when

the FDIC establishes or revises

regulatory requirements. In developing

regulatory capital requirements, these

concerns are considered in the context

of the FDIC’s broad goals—to enhance

the safety and soundness of FDIC-

supervised institutions and promote

financial stability through robust capital

standards for the entire banking system.

The agencies participated in the

development of a number of studies to

assess the potential impact of the

revised capital requirements, including

participating in the BCBS’s

Macroeconomic Assessment Group as

well as its QIS, the results of which

were made publicly available by the

BCBS upon their completion.22 The

BCBS analysis suggested that stronger

capital requirements help reduce the

likelihood of banking crises while

yielding positive net economic

benefits.23 To evaluate the potential

reduction in economic output resulting

from the new framework, the analysis

assumed that banking organizations

replaced debt with higher-cost equity to

the extent needed to comply with the

new requirements, that there was no

reduction in the cost of equity despite

the reduction in the riskiness of banking

organizations’ funding mix, and that the

increase in funding cost was entirely

passed on to borrowers. Given these

assumptions, the analysis concluded

there would be a slight increase in the

cost of borrowing and a slight decrease

in the growth of gross domestic product.

The analysis concluded that this cost

would be more than offset by the benefit

to gross domestic product resulting from

a reduced likelihood of prolonged

economic downturns associated with a

banking system whose lending capacity

is highly vulnerable to economic

shocks.

The agencies’ analysis also indicates

that the overwhelming majority of

banking organizations already have

sufficient capital to comply with the

new capital rules

be more than offset by the benefit

to gross domestic product resulting from

a reduced likelihood of prolonged

economic downturns associated with a

banking system whose lending capacity

is highly vulnerable to economic

shocks.

The agencies’ analysis also indicates

that the overwhelming majority of

banking organizations already have

sufficient capital to comply with the

new capital rules. In particular, the

agencies estimate that over 95 percent of

all insured depository institutions

would be in compliance with the

minimums and buffers established

under the interim final rule if it were

fully effective immediately. The interim

final rule will help to ensure that these

FDIC-supervised institutions maintain

their capacity to absorb losses in the

future. Some FDIC-supervised

institutions may need to take advantage

of the transition period in the interim

final rule to accumulate retained

earnings, raise additional external

regulatory capital, or both. As noted

above, however, the overwhelming

majority of banking organizations have

sufficient capital to comply with the

revised capital rules, and the FDIC

believes that the resulting

improvements to the stability and

resilience of the banking system

outweigh any costs associated with its

implementation.

The interim final rule includes some

significant revisions from the proposals

in response to commenters’ concerns,

particularly with respect to the

treatment of AOCI; residential

mortgages; tier 1 non-qualifying capital

instruments; and the implementation

timeframes. The timeframes for

compliance are described in the next

section and more detailed discussions of

modifications to the proposals are

provided in the remainder of the

preamble

isions from the proposals

in response to commenters’ concerns,

particularly with respect to the

treatment of AOCI; residential

mortgages; tier 1 non-qualifying capital

instruments; and the implementation

timeframes. The timeframes for

compliance are described in the next

section and more detailed discussions of

modifications to the proposals are

provided in the remainder of the

preamble.

Consistent with the proposed rules,

the interim final rule requires all FDIC-

supervised institutions to recognize in

regulatory capital all components of

AOCI, excluding accumulated net gains

and losses on cash-flow hedges that

relate to the hedging of items that are

not recognized at fair value on the

balance sheet. However, while the FDIC

believes that the proposed AOCI

treatment results in a regulatory capital

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00009

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55348

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

measure that better reflects FDIC-

supervised institutions’ actual loss

absorption capacity at a specific point in

time, the FDIC recognizes that for many

FDIC-supervised institutions, the

volatility in regulatory capital that could

result from the proposals could lead to

significant difficulties in capital

planning and asset-liability

management. The FDIC also recognizes

that the tools used by larger, more

complex FDIC-supervised institutions

for managing interest rate risk are not

necessarily readily available for all

FDIC-supervised institutions

rvised institutions, the

volatility in regulatory capital that could

result from the proposals could lead to

significant difficulties in capital

planning and asset-liability

management. The FDIC also recognizes

that the tools used by larger, more

complex FDIC-supervised institutions

for managing interest rate risk are not

necessarily readily available for all

FDIC-supervised institutions.

Accordingly, under the interim final

rule, and as discussed in more detail in

section V.B of this preamble, an FDIC-

supervised institution that is not subject

to the advanced approaches rule may

make a one-time election not to include

most elements of AOCI in regulatory

capital under the interim final rule and

instead effectively use the existing

treatment under the general risk-based

capital rules that excludes most AOCI

elements from regulatory capital (AOCI

opt-out election). Such an FDIC-

supervised institution must make its

AOCI opt-out election in its

Consolidated Reports of Condition and

Income (Call Report) filed for the first

reporting period after it becomes subject

to the interim final rule. Consistent with

regulatory capital calculations under the

FDIC’s general risk-based capital rules,

an FDIC-supervised institution that

makes an AOCI opt-out election under

the interim final rule must adjust

common equity tier 1 capital by: (1)

Subtracting any net unrealized gains

and adding any net unrealized losses on

AFS securities; (2) subtracting any

unrealized losses on AFS preferred

stock classified as an equity security

under GAAP and AFS equity exposures;

based capital rules,

an FDIC-supervised institution that

makes an AOCI opt-out election under

the interim final rule must adjust

common equity tier 1 capital by: (1)

Subtracting any net unrealized gains

and adding any net unrealized losses on

AFS securities; (2) subtracting any

unrealized losses on AFS preferred

stock classified as an equity security

under GAAP and AFS equity exposures;

(3) subtracting any accumulated net

gains and adding any accumulated net

losses on cash-flow hedges; (4)

subtracting amounts recorded in AOCI

attributed to defined benefit

postretirement plans resulting from the

initial and subsequent application of the

relevant GAAP standards that pertain to

such plans (excluding, at the FDIC-

supervised institution’s option, the

portion relating to pension assets

deducted under section 22(a)(5) of the

interim final rule); and (5) subtracting

any net unrealized gains and adding any

net unrealized losses on held-to-

maturity securities that are included in

AOCI. Consistent with the general risk-

based capital rules, common equity tier

1 capital includes any net unrealized

losses on AFS equity securities and any

foreign currency translation adjustment.

An FDIC-supervised institution that

makes an AOCI opt-out election may

incorporate up to 45 percent of any net

unrealized gains on AFS preferred stock

classified as an equity security under

GAAP and AFS equity exposures into

its tier 2 capital

l rules, common equity tier

1 capital includes any net unrealized

losses on AFS equity securities and any

foreign currency translation adjustment.

An FDIC-supervised institution that

makes an AOCI opt-out election may

incorporate up to 45 percent of any net

unrealized gains on AFS preferred stock

classified as an equity security under

GAAP and AFS equity exposures into

its tier 2 capital.

An FDIC-supervised institution that

does not make an AOCI opt-out election

on the Call Report filed for the first

reporting period after the FDIC-

supervised institution becomes subject

to the interim final rule will be required

to recognize AOCI (excluding

accumulated net gains and losses on

cash-flow hedges that relate to the

hedging of items that are not recognized

at fair value on the balance sheet) in

regulatory capital as of the first quarter

in which it calculates its regulatory

capital requirements under the interim

final rule and continuing thereafter.

The FDIC has decided not to adopt

the proposed treatment of residential

mortgages. The FDIC has considered the

commenters’ observations about the

burden of calculating the risk weights

for FDIC-supervised institutions’

existing mortgage portfolios, and has

taken into account the commenters’

concerns that the proposal did not

properly assess the use of different

mortgage products across different types

of markets in establishing the proposed

risk weights. The FDIC is also

particularly mindful of comments

regarding the potential effect of the

proposal and other mortgage-related

rulemakings on credit availability. In

light of these considerations, as well as

others raised by commenters, the FDIC

has decided to retain in the interim final

rule the current treatment for residential

mortgage exposures under the general

risk-based capital rules.

Consistent with the general risk-based

capital rules, the interim final rule

assigns a 50 or 100 percent risk weight

to exposures secured by one-to-four

family residential properties

erations, as well as

others raised by commenters, the FDIC

has decided to retain in the interim final

rule the current treatment for residential

mortgage exposures under the general

risk-based capital rules.

Consistent with the general risk-based

capital rules, the interim final rule

assigns a 50 or 100 percent risk weight

to exposures secured by one-to-four

family residential properties. Generally,

residential mortgage exposures secured

by a first lien on a one-to-four family

residential property that are prudently

underwritten and that are performing

according to their original terms receive

a 50 percent risk weight. All other one-

to four-family residential mortgage

loans, including exposures secured by a

junior lien on residential property, are

assigned a 100 percent risk weight. If an

FDIC-supervised institution holds the

first and junior lien(s) on a residential

property and no other party holds an

intervening lien, the FDIC-supervised

institution must treat the combined

exposure as a single loan secured by a

first lien for purposes of assigning a risk

weight.

The agencies also considered

comments on the proposal to require

certain depository institution holding

companies to phase out their non-

qualifying tier 1 capital instruments

from regulatory capital over ten years.

Although the agencies continue to

believe that non-qualifying instruments

do not absorb losses sufficiently to be

included in tier 1 capital as a general

matter, the agencies are also sensitive to

the difficulties community banking

organizations often face when issuing

new capital instruments and are aware

of the importance their capacity to lend

can play in local economies

er ten years.

Although the agencies continue to

believe that non-qualifying instruments

do not absorb losses sufficiently to be

included in tier 1 capital as a general

matter, the agencies are also sensitive to

the difficulties community banking

organizations often face when issuing

new capital instruments and are aware

of the importance their capacity to lend

can play in local economies. Therefore,

the final rule adopted by the Federal

Reserve allows certain depository

institution holding companies to

include in regulatory capital debt or

equity instruments issued prior to

September 12, 2010 that do not meet the

criteria for additional tier 1 or tier 2

capital instruments but that were

included in tier 1 or tier 2 capital

respectively as of September 12, 2010

up to the percentage of the outstanding

principal amount of such non-qualifying

capital instruments.

D. Timeframe for Implementation and

Compliance

In order to give non-internationally

active FDIC-supervised institutions

more time to comply with the interim

final rule and simplify their transition to

the new regime, the interim final rule

will require compliance from different

types of organizations at different times.

Generally, and as described in further

detail below, FDIC-supervised

institutions that are not subject to the

advanced approaches rule must begin

complying with the interim final rule on

January 1, 2015, whereas advanced

approaches FDIC-supervised

institutions must begin complying with

the interim final rule on January 1,

2014. The FDIC believes that advanced

approaches FDIC-supervised

institutions have the sophistication,

infrastructure, and capital markets

access to implement the interim final

rule earlier than either FDIC-supervised

institutions that do not meet the asset

size or foreign exposure threshold for

application of those rules

ons must begin complying with

the interim final rule on January 1,

2014. The FDIC believes that advanced

approaches FDIC-supervised

institutions have the sophistication,

infrastructure, and capital markets

access to implement the interim final

rule earlier than either FDIC-supervised

institutions that do not meet the asset

size or foreign exposure threshold for

application of those rules.

A number of commenters requested

that the agencies clarify the point at

which a banking organization that meets

the asset size or foreign exposure

threshold for application of the

advanced approaches rule becomes

subject to subpart E of the proposed

rule, and thus all of the provisions that

apply to an advanced approaches

banking organization. In particular,

commenters requested that the agencies

clarify whether subpart E of the

proposed rule only applies to those

banking organizations that have

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00010

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55349

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

24 Prior to January 1, 2015, such FDIC-supervised

institutions must continue to use the FDIC’s general

risk-based capital rules and tier 1 leverage rules.

25 The revised PCA thresholds, discussed further

in section IV.E. of this preamble, become effective

for all insured depository institutions on January 1,

2015.

completed the parallel run process and

that have received notification from

their primary Federal supervisor

pursuant to section 324.121(d) of

subpart E, or whether subpart E would

apply to all banking organizations that

meet the relevant thresholds without

reference to completion of the parallel

run process

e, become effective

for all insured depository institutions on January 1,

2015.

completed the parallel run process and

that have received notification from

their primary Federal supervisor

pursuant to section 324.121(d) of

subpart E, or whether subpart E would

apply to all banking organizations that

meet the relevant thresholds without

reference to completion of the parallel

run process.

The interim final rule provides that an

advanced approaches FDIC-supervised

institution is one that meets the asset

size or foreign exposure thresholds for

or has opted to apply the advanced

approaches rule, without reference to

whether that FDIC-supervised

institution has completed the parallel

run process and has received

notification from its primary Federal

supervisor pursuant to section

324.121(d) of subpart E of the interim

final rule. The FDIC has also clarified in

the interim final rule when completion

of the parallel run process and receipt

of notification from the primary Federal

supervisor pursuant to section

324.121(d) of subpart E is necessary for

an advanced approaches FDIC-

supervised institution to comply with a

particular aspect of the rules. For

example, only an advanced approaches

FDIC-supervised institution that has

completed parallel run and received

notification from its primary Federal

supervisor under Section 324.121(d) of

subpart E must make the disclosures set

forth under subpart E of the interim

final rule. However, an advanced

approaches FDIC-supervised institution

must recognize most components of

AOCI in common equity tier 1 capital

and must meet the supplementary

leverage ratio when applicable without

reference to whether the FDIC-

supervised institution has completed its

parallel run process

d) of

subpart E must make the disclosures set

forth under subpart E of the interim

final rule. However, an advanced

approaches FDIC-supervised institution

must recognize most components of

AOCI in common equity tier 1 capital

and must meet the supplementary

leverage ratio when applicable without

reference to whether the FDIC-

supervised institution has completed its

parallel run process.

Beginning on January 1, 2015, FDIC-

supervised institutions that are not

subject to the advanced approaches rule

become subject to the revised

definitions of regulatory capital, the

new minimum regulatory capital ratios,

and the regulatory capital adjustments

and deductions according to the

transition provisions.24 All FDIC-

supervised institutions must begin

calculating standardized total risk-

weighted assets in accordance with

subpart D of the interim final rule, and

if applicable, the revised market risk

rule under subpart F, on January 1,

2015.25

Beginning on January 1, 2014,

advanced approaches FDIC-supervised

institutions must begin the transition

period for the revised minimum

regulatory capital ratios, definitions of

regulatory capital, and regulatory capital

adjustments and deductions established

under the interim final rule. The

revisions to the advanced approaches

risk-weighted asset calculations will

become effective on January 1, 2014.

From January 1, 2014 to December 31,

2014, an advanced approaches FDIC-

supervised institution that is on parallel

run must calculate risk-weighted assets

using the general risk-based capital

rules and substitute such risk-weighted

assets for its standardized total risk-

weighted assets for purposes of

determining its risk-based capital ratios

ns will

become effective on January 1, 2014.

From January 1, 2014 to December 31,

2014, an advanced approaches FDIC-

supervised institution that is on parallel

run must calculate risk-weighted assets

using the general risk-based capital

rules and substitute such risk-weighted

assets for its standardized total risk-

weighted assets for purposes of

determining its risk-based capital ratios.

An advanced approaches FDIC-

supervised institution on parallel run

must also calculate advanced

approaches total risk-weighted assets

using the advanced approaches rule in

subpart E of the interim final rule for

purposes of confidential reporting to its

primary Federal supervisor on the

Federal Financial Institutions

Examination Council’s (FFIEC) 101

report. An advanced approaches FDIC-

supervised institution that has

completed the parallel run process and

that has received notification from its

primary Federal supervisor pursuant to

section 121(d) of subpart E will

calculate its risk-weighted assets using

the general risk-based capital rules and

substitute such risk-weighted assets for

its standardized total risk-weighted

assets and also calculate advanced

approaches total risk-weighted assets

using the advanced approaches rule in

subpart E of the interim final rule for

purposes of determining its risk-based

capital ratios from January 1, 2014 to

December 31, 2014. Regardless of an

advanced approaches FDIC-supervised

institution’s parallel run status, on

January 1, 2015, the FDIC-supervised

institution must begin to apply subpart

D, and if applicable, subpart F, of the

interim final rule to determine its

standardized total risk-weighted assets.

The transition period for the capital

conservation and countercyclical capital

buffers for all FDIC-supervised

institutions will begin on January 1,

2016

sed

institution’s parallel run status, on

January 1, 2015, the FDIC-supervised

institution must begin to apply subpart

D, and if applicable, subpart F, of the

interim final rule to determine its

standardized total risk-weighted assets.

The transition period for the capital

conservation and countercyclical capital

buffers for all FDIC-supervised

institutions will begin on January 1,

2016.

An FDIC-supervised institution that is

required to comply with the market risk

rule must comply with the revised

market risk rule (subpart F) as of the

same date that it must comply with

other aspects of the rule for determining

its total risk-weighted assets.

Date

FDIC-Supervised institutions not subject to the advanced approaches rule*

January 1, 2015 ...................

Begin compliance with the revised minimum regulatory capital ratios and begin the transition period for the re-

vised definitions of regulatory capital and the revised regulatory capital adjustments and deductions.

Begin compliance with the standardized approach for determining risk-weighted assets.

January 1, 2016 ...................

Begin the transition period for the capital conservation and countercyclical capital buffers.

Date

Advanced approaches FDIC-supervised institutions*

January 1, 2014 ...................

Begin the transition period for the revised minimum regulatory capital ratios, definitions of regulatory capital, and

regulatory capital adjustments and deductions.

Begin compliance with the revised advanced approaches rule for determining risk-weighted assets.

January 1, 2015 ...................

Begin compliance with the standardized approach for determining risk-weighted assets.

January 1, 2016 ...................

Begin the transition period for the capital conservation and countercyclical capital buffers

d

regulatory capital adjustments and deductions.

Begin compliance with the revised advanced approaches rule for determining risk-weighted assets.

January 1, 2015 ...................

Begin compliance with the standardized approach for determining risk-weighted assets.

January 1, 2016 ...................

Begin the transition period for the capital conservation and countercyclical capital buffers.

*If applicable, FDIC-supervised institutions must use the calculations in subpart F of the interim final rule (market risk) concurrently with the

calculation of risk-weighted assets according either to subpart D (standardized approach) or subpart E (advanced approaches) of the interim final

rule.

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55350

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

26 12 U.S.C. 1463 note.

IV. 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

proposed rule would have required

banking organizations to comply with

the following minimum capital ratios: a

common equity tier 1 capital to risk-

weighted assets ratio of 4.5 percent; a

tier 1 capital to risk-weighted assets

ratio of 6 percent; a total capital to risk-

weighted assets ratio of 8 percent; a

leverage ratio of 4 percent; and for

advanced approaches banking

organizations only, a supplementary

leverage ratio of 3 percent. The common

equity tier 1 capital ratio is a new

minimum requirement designed to

ensure that banking organizations hold

sufficient high-quality regulatory capital

that is available to absorb losses on a

going-concern basis. The proposed

capital ratios would apply to a banking

organization on a consolidated basis

ches banking

organizations only, a supplementary

leverage ratio of 3 percent. The common

equity tier 1 capital ratio is a new

minimum requirement designed to

ensure that banking organizations hold

sufficient high-quality regulatory capital

that is available to absorb losses on a

going-concern basis. The proposed

capital ratios would apply to a banking

organization on a consolidated basis.

The agencies received a substantial

number of comments on the proposed

minimum risk-based capital

requirements. Several commenters

supported the proposal to increase the

minimum tier 1 risk-based capital

requirement. Other commenters

commended the agencies for proposing

to implement a minimum capital

requirement that focuses primarily on

common equity. These commenters

argued that common equity is the

strongest form of capital and that the

proposed minimum common equity tier

1 capital ratio of 4.5 percent would

promote the safety and soundness of the

banking industry.

Other commenters provided general

support for the proposed increases in

minimum risk-based capital

requirements, but expressed concern

that the proposals could present unique

challenges to mutual institutions

because they can only raise common

equity through retained earnings. A

number of commenters asserted that the

objectives of the proposal could be

achieved through regulatory

mechanisms other than the proposed

risk-based capital requirements,

including enhanced safety and

soundness examinations, more stringent

underwriting standards, and alternative

measures of capital.

Other commenters objected to the

proposed increase in the minimum tier

1 capital ratio and the implementation

of a common equity tier 1 capital ratio.

One commenter indicated that increases

in regulatory capital ratios would

severely limit growth at many

community banking organizations and

could encourage consolidation through

mergers and acquisitions

nd alternative

measures of capital.

Other commenters objected to the

proposed increase in the minimum tier

1 capital ratio and the implementation

of a common equity tier 1 capital ratio.

One commenter indicated that increases

in regulatory capital ratios would

severely limit growth at many

community banking organizations and

could encourage consolidation through

mergers and acquisitions. Other

commenters stated that for banks under

$750 million in total assets, increased

compliance costs would not allow them

to provide a reasonable return to

shareholders, and thus would force

them to consolidate. Several

commenters urged the agencies to

recognize community banking

organizations’ limited access to the

capital markets and related difficulties

raising capital to comply with the

proposal.

One banking organization indicated

that implementation of the common

equity tier 1 capital ratio would

significantly reduce its capacity to grow

and recommended that the proposal

recognize differences in the risk and

complexity of banking organizations

and provide favorable, less stringent

requirements for smaller and non-

complex institutions. Another

commenter suggested that the proposed

implementation of an additional risk-

based capital ratio would confuse

market observers and recommended that

the agencies implement a regulatory

capital framework that allows investors

and the market to ascertain regulatory

capital from measures of equity derived

from a banking organization’s balance

sheet.

Other commenters expressed concern

that the proposed common equity tier 1

capital ratio would disadvantage MDIs

relative to other banking organizations.

According to the commenters, in order

to retain their minority-owned status,

MDIs historically maintain a relatively

high percentage of non-voting preferred

stockholders that provide long-term,

stable sources of capital

s balance

sheet.

Other commenters expressed concern

that the proposed common equity tier 1

capital ratio would disadvantage MDIs

relative to other banking organizations.

According to the commenters, in order

to retain their minority-owned status,

MDIs historically maintain a relatively

high percentage of non-voting preferred

stockholders that provide long-term,

stable sources of capital. Any public

offering to increase common equity tier

1 capital levels would dilute the

minority investors owning the common

equity of the MDI and could potentially

compromise the minority-owned status

of such institutions. One commenter

asserted that, for this reason, the

implementation of the Basel III NPR

would be contrary to the statutory

mandate of section 308 of the Financial

Institutions, Reform, Recovery and

Enforcement Act (FIRREA).26

Accordingly, the commenters

encouraged the agencies to exempt

MDIs from the proposed common equity

tier 1 capital ratio requirement.

The FDIC believes that all FDIC-

supervised institutions must have an

adequate amount of loss-absorbing

capital to continue to lend to their

communities during times of economic

stress, and therefore have decided to

implement the regulatory capital

requirements, including the minimum

common equity tier 1 capital

requirement, as proposed. For the

reasons described in the NPR, including

the experience during the crisis with

lower quality capital instruments, the

FDIC does not believe it is appropriate

to maintain the general risk-based

capital rules or to rely on the

supervisory process or underwriting

standards alone. Accordingly, the

interim final rule maintains the

minimum common equity tier 1 capital

to total risk-weighted assets ratio of 4.5

percent

NPR, including

the experience during the crisis with

lower quality capital instruments, the

FDIC does not believe it is appropriate

to maintain the general risk-based

capital rules or to rely on the

supervisory process or underwriting

standards alone. Accordingly, the

interim final rule maintains the

minimum common equity tier 1 capital

to total risk-weighted assets ratio of 4.5

percent. The FDIC has decided not to

pursue the alternative regulatory

mechanisms suggested by commenters,

as such alternatives would be difficult

to implement consistently across FDIC-

supervised institutions and would not

necessarily fulfill the objective of

increasing the amount and quality of

regulatory capital for all FDIC-

supervised institutions.

In view of the concerns expressed by

commenters with respect to MDIs, the

FDIC evaluated the risk-based and

leverage capital levels of MDIs to

determine whether the interim final rule

would disproportionately impact such

institutions. This analysis found that of

the 178 MDIs in existence as of March

31, 2013, 12 currently are not well

capitalized for PCA purposes, whereas

(according to the FDIC’s estimates) 14

would not be considered well

capitalized for PCA purposes under the

interim final rule if it were fully

implemented without transition today.

Accordingly, the FDIC does not believe

that the interim final rule would

disproportionately impact MDIs and are

not adopting any exemptions or special

provisions for these institutions. While

the FDIC recognizes MDIs may face

impediments in meeting the common

equity tier 1 capital ratio, the FDIC

believes that the improvements to the

safety and soundness of these

institutions through higher capital

standards are warranted and consistent

with their obligations under section 308

of FIRREA

s and are

not adopting any exemptions or special

provisions for these institutions. While

the FDIC recognizes MDIs may face

impediments in meeting the common

equity tier 1 capital ratio, the FDIC

believes that the improvements to the

safety and soundness of these

institutions through higher capital

standards are warranted and consistent

with their obligations under section 308

of FIRREA. As a prudential matter, the

FDIC has a long-established regulatory

policy that FDIC-supervised institutions

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 FDIC-

supervised institution’s activities and

risk profile. Section IV.G of this

preamble describes the requirement for

overall capital adequacy of FDIC-

supervised institutions and the

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55351

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

supervisory assessment of capital

adequacy.

Furthermore, consistent with the

FDIC’s authority under the general risk-

based capital rules and the proposals,

section 1(d) of the interim final rule

includes a reservation of authority that

allows FDIC to require the FDIC-

supervised institution to hold a greater

amount of regulatory capital than

otherwise is required under the interim

final rule, if the FDIC determines that

the regulatory capital held by the FDIC-

supervised institution is not

commensurate with its credit, market,

operational, or other risks

f the interim final rule

includes a reservation of authority that

allows FDIC to require the FDIC-

supervised institution to hold a greater

amount of regulatory capital than

otherwise is required under the interim

final rule, if the FDIC determines that

the regulatory capital held by the FDIC-

supervised institution is not

commensurate with its credit, market,

operational, or other risks. In exercising

reservation of authority under the rule,

the FDIC expects to consider the size,

complexity, risk profile, and scope of

operations of the FDIC-supervised

institution; and whether any public

benefits would be outweighed by risk to

an insured depository institution or to

the financial system.

B. Leverage Ratio

The proposals would require a

banking organization to satisfy a

leverage ratio of 4 percent, calculated

using the proposed definition of tier 1

capital and the banking organization’s

average total consolidated assets, minus

amounts deducted from tier 1 capital.

The agencies also proposed to eliminate

the exception in the agencies’ leverage

rules that provides for a minimum

leverage ratio of 3 percent for banking

organizations with strong supervisory

ratings.

The agencies received a number of

comments on the proposed leverage

ratio applicable to all banking

organizations. Several of these

commenters supported the proposed

leverage ratio, stating that it serves as a

simple regulatory standard that

constrains the ability of a banking

organization to leverage its equity

capital base. Some of the commenters

encouraged the agencies to consider an

alternative leverage ratio measure of

tangible common equity to tangible

assets, which would exclude non-

common stock elements from the

numerator and intangible assets from

the denominator of the ratio and thus,

according to these commenters, provide

a more reliable measure of a banking

organization’s viability in a crisis

e. Some of the commenters

encouraged the agencies to consider an

alternative leverage ratio measure of

tangible common equity to tangible

assets, which would exclude non-

common stock elements from the

numerator and intangible assets from

the denominator of the ratio and thus,

according to these commenters, provide

a more reliable measure of a banking

organization’s viability in a crisis.

A number of commenters criticized

the proposed removal of the 3 percent

exception to the minimum leverage ratio

requirement for certain banking

organizations. One of these commenters

argued that removal of this exception is

unwarranted in view of the cumulative

impact of the proposals and that raising

the minimum leverage ratio requirement

for the strongest banking organizations

may lead to a deleveraging by the

institutions most able to extend credit in

a safe and sound manner. In addition,

the commenters cautioned the agencies

that a restrictive leverage measure,

together with more stringent risk-based

capital requirements, could magnify the

potential impact of an economic

downturn.

Several commenters suggested

modifications to the minimum leverage

ratio requirement. One commenter

suggested increasing the minimum

leverage ratio requirement for all

banking organizations to 6 percent,

whereas another commenter

recommended a leverage ratio

requirement as high as 20 percent.

Another commenter suggested a tiered

approach, with minimum leverage ratio

requirements of 6.25 percent and 8.5

percent for community banking

organizations and large banking

organizations, respectively. According

to this commenter, such an approach

could be based on the risk

characteristics of a banking

organization, including liquidity, asset

quality, and local deposit levels, as well

as its supervisory rating. Another

commenter suggested a fluid leverage

ratio requirement that would adjust

based on certain macroeconomic

variables

zations and large banking

organizations, respectively. According

to this commenter, such an approach

could be based on the risk

characteristics of a banking

organization, including liquidity, asset

quality, and local deposit levels, as well

as its supervisory rating. Another

commenter suggested a fluid leverage

ratio requirement that would adjust

based on certain macroeconomic

variables. Under such an approach, the

agencies could require banking

organizations to meet a minimum

leverage ratio of 10 percent under

favorable economic conditions and a 6

percent leverage ratio during an

economic contraction.

The FDIC continues to believe that a

minimum leverage ratio requirement of

4 percent for all FDIC-supervised

institutions is appropriate in light of its

role as a complement to the risk-based

capital ratios. The proposed leverage

ratio is more conservative than the

current leverage ratio because it

incorporates a more stringent definition

of tier 1 capital. In addition, the FDIC

believes that it is appropriate for all

FDIC-supervised institutions, regardless

of their supervisory rating or trading

activities, to meet the same minimum

leverage ratio requirements. As a

practical matter, the FDIC generally has

found a leverage ratio of less than 4

percent to be inconsistent with a

supervisory composite rating of ‘‘1.’’

Modifying the scope of the leverage

ratio measure or implementing a fluid or

tiered approach for the minimum

leverage ratio requirement would create

additional operational complexity and

variability in a minimum ratio

requirement that is intended to place a

constraint on the maximum degree to

which an FDIC-supervised institution

can leverage its equity base

ory composite rating of ‘‘1.’’

Modifying the scope of the leverage

ratio measure or implementing a fluid or

tiered approach for the minimum

leverage ratio requirement would create

additional operational complexity and

variability in a minimum ratio

requirement that is intended to place a

constraint on the maximum degree to

which an FDIC-supervised institution

can leverage its equity base.

Accordingly, the interim final rule

retains the existing minimum leverage

ratio requirement of 4 percent and

removes the 3 percent leverage ratio

exception as of January 1, 2014 for

advanced approaches FDIC-supervised

institutions and as of January 1, 2015 for

all other FDIC-supervised institutions.

C. Supplementary Leverage Ratio for

Advanced Approaches FDIC-Supervised

Institutions

As part of Basel III, the BCBS

introduced a minimum leverage ratio

requirement of 3 percent (the Basel III

leverage ratio) as a backstop measure to

the risk-based capital requirements,

designed to improve the resilience of

the banking system worldwide by

limiting the amount of leverage that a

banking organization may incur. The

Basel III leverage ratio is defined as the

ratio of tier 1 capital to a combination

of on- and off-balance sheet exposures.

As discussed in the Basel III NPR, the

agencies proposed the supplementary

leverage ratio only 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. Under the proposal, consistent

with Basel III, advanced approaches

banking organizations would be

required to maintain a minimum

supplementary leverage ratio of 3

percent of tier 1 capital to on- and off-

balance sheet exposures (total leverage

exposure).

The agencies received a number of

comments on the proposed

supplementary leverage ratio

not captured by the current leverage

ratio. Under the proposal, consistent

with Basel III, advanced approaches

banking organizations would be

required to maintain a minimum

supplementary leverage ratio of 3

percent of tier 1 capital to on- and off-

balance sheet exposures (total leverage

exposure).

The agencies received a number of

comments on the proposed

supplementary leverage ratio. Several

commenters stated that the proposed

supplementary leverage ratio is

unnecessary in light of the minimum

leverage ratio requirement applicable to

all banking organizations. These

commenters stated that the

implementation of the supplementary

leverage ratio requirement would create

market confusion as to the inter-

relationships among the ratios and as to

which ratio serves as the binding

constraint for an individual banking

organization. One commenter noted that

an advanced approaches banking

organization would be required to

calculate eight distinct regulatory

capital ratios (common equity tier 1, tier

1, and total capital to risk-weighted

assets under the advanced approaches

and the standardized approach, as well

as two leverage ratios) and encouraged

the agencies to streamline the

application of regulatory capital ratios.

In addition, commenters suggested that

the agencies postpone the

implementation of the supplementary

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

rdized approach, as well

as two leverage ratios) and encouraged

the agencies to streamline the

application of regulatory capital ratios.

In addition, commenters suggested that

the agencies postpone the

implementation of the supplementary

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55352

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

27 See section 165 of the Dodd-Frank Act, 12

U.S.C. 5365.

leverage ratio until January 1, 2018, after

the international supervisory

monitoring process is complete, and to

collect supplementary leverage ratio

information on a confidential basis until

then.

At least one commenter encouraged

the agencies to consider extending the

application of the proposed

supplementary leverage ratio on a case-

by-case basis to banking organizations

with total assets of between $50 billion

and $250 billion, stating that such

institutions may have significant off-

balance sheet exposures and engage in

a substantial amount of repo-style

transactions. Other commenters

suggested increasing the proposed

supplementary leverage ratio

requirement to at least 8 percent for

BHCs, under the Federal Reserve’s

authority in section 165 of the Dodd-

Frank Act to implement enhanced

capital requirements for systemically

important financial institutions.27

With respect to specific aspects of the

supplementary leverage ratio, some

commenters criticized the methodology

for the total leverage exposure.

Specifically, one commenter expressed

concern that using GAAP as the basis

for determining a banking organization’s

total leverage exposure would exclude a

wide range of off-balance sheet

exposures, including derivatives and

securities lending transactions, as well

as permit extensive netting

tary leverage ratio, some

commenters criticized the methodology

for the total leverage exposure.

Specifically, one commenter expressed

concern that using GAAP as the basis

for determining a banking organization’s

total leverage exposure would exclude a

wide range of off-balance sheet

exposures, including derivatives and

securities lending transactions, as well

as permit extensive netting. To address

these issues, the commenter suggested

requiring advanced approaches banking

organizations to determine their total

leverage exposure using International

Financial Reporting Standards (IFRS),

asserting that it restricts netting and,

relative to GAAP, requires the

recognition of more off-balance sheet

securities lending transactions.

Several commenters criticized the

proposed incorporation of off-balance

sheet exposures into the total leverage

exposure. One commenter argued that

including unfunded commitments in

the total leverage exposure runs counter

to the purpose of the supplementary

leverage ratio as an on-balance sheet

measure of capital that complements the

risk-based capital ratios. This

commenter was concerned that the

proposed inclusion of unfunded

commitments would result in a

duplicative assessment against banking

organizations when the forthcoming

liquidity ratio requirements are

implemented in the United States. The

commenter noted that the proposed 100

percent credit conversion factor for all

unfunded commitments is not

appropriately calibrated to the vastly

different types of commitments that

exist across the industry. If the

supplementary leverage ratio is retained

in the interim final rule, the commenter

requested that the agencies align the

credit conversion factors for unfunded

commitments under the supplementary

leverage ratio and any forthcoming

liquidity ratio requirements

ded commitments is not

appropriately calibrated to the vastly

different types of commitments that

exist across the industry. If the

supplementary leverage ratio is retained

in the interim final rule, the commenter

requested that the agencies align the

credit conversion factors for unfunded

commitments under the supplementary

leverage ratio and any forthcoming

liquidity ratio requirements.

Another commenter encouraged the

agencies to allow advanced approaches

banking organizations to exclude from

total leverage exposure the notional

amount of any unconditionally

cancellable commitment. According to

this commenter, unconditionally

cancellable commitments are not credit

exposures because they can be

extinguished at any time at the sole

discretion of the issuing entity.

Therefore, the commenter argued, the

inclusion of these commitments could

potentially distort a banking

organization’s measure of total leverage

exposure.

A few commenters requested that the

agencies exclude off-balance sheet trade

finance instruments from the total

leverage exposure, asserting that such

instruments are based on underlying

client transactions (for example, a

shipment of goods) and are generally

short-term. The commenters argued that

trade finance instruments do not create

excessive systemic leverage and that

they are liquidated by fulfillment of the

underlying transaction and payment at

maturity. Another commenter requested

that the agencies apply the same credit

conversion factors to trade finance

instruments as under the general risk-

based capital rules—that is, 20 percent

of the notional value for trade-related

contingent items that arise from the

movement of goods, and 50 percent of

the notional value for transaction-

related contingent items, including

performance bonds, bid bonds,

warranties, and performance standby

letters of credit

edit

conversion factors to trade finance

instruments as under the general risk-

based capital rules—that is, 20 percent

of the notional value for trade-related

contingent items that arise from the

movement of goods, and 50 percent of

the notional value for transaction-

related contingent items, including

performance bonds, bid bonds,

warranties, and performance standby

letters of credit. According to this

commenter, such an approach would

appropriately consider the low-risk

characteristics of these instruments and

ensure price stability in trade finance.

Several commenters supported the

proposed treatment for repo-style

transactions (including repurchase

agreements, securities lending and

borrowing transactions, and reverse

repos). These commenters stated that

securities lending transactions are fully

collateralized and marked to market

daily and, therefore, the on-balance

sheet amounts generated by these

transactions appropriately capture the

exposure for purposes of the

supplementary leverage ratio. These

commenters also supported the

proposed treatment for indemnified

securities lending transactions and

encouraged the agencies to retain this

treatment in the interim final rule. Other

commenters stated that the proposed

measurement of repo-style transactions

is not sufficiently conservative and

recommended that the agencies

implement a methodology that includes

in total leverage exposure the notional

amounts of these transactions.

A few commenters raised concerns

about the proposed methodology for

determining the exposure amount of

derivative contracts. Some commenters

criticized the agencies for not allowing

advanced approaches banking

organizations to use the internal models

methodology to calculate the exposure

amount for derivative contracts

n total leverage exposure the notional

amounts of these transactions.

A few commenters raised concerns

about the proposed methodology for

determining the exposure amount of

derivative contracts. Some commenters

criticized the agencies for not allowing

advanced approaches banking

organizations to use the internal models

methodology to calculate the exposure

amount for derivative contracts.

According to these commenters, the

agencies should align the methods for

calculating exposure for derivative

contracts for purposes of the

supplementary leverage ratio and the

advanced approaches risk-based capital

ratios to more appropriately reflect the

risk-management activities of advanced

approaches banking organizations and

to measure these exposures consistently

across the regulatory capital ratios. At

least one commenter requested

clarification of the proposed treatment

of collateral received in connection with

derivative contracts. This commenter

also encouraged the agencies to permit

recognition of eligible collateral for

purposes of reducing total leverage

exposure, consistent with proposed

legislation in other BCBS member

jurisdictions.

The introduction of an international

leverage ratio requirement in the Basel

III capital framework is an important

development that would provide a

consistent leverage ratio measure across

internationally-active institutions.

Furthermore, the supplementary

leverage ratio is reflective of the on- and

off-balance sheet activities of large,

internationally active banking

organizations. Accordingly, consistent

with Basel III, the interim final rule

implements for reporting purposes the

proposed supplementary leverage ratio

for advanced approaches FDIC-

supervised institutions starting on

January 1, 2015 and requires advanced

approaches FDIC-supervised

institutions to comply with the

minimum supplementary leverage ratio

requirement starting on January 1, 2018

anizations. Accordingly, consistent

with Basel III, the interim final rule

implements for reporting purposes the

proposed supplementary leverage ratio

for advanced approaches FDIC-

supervised institutions starting on

January 1, 2015 and requires advanced

approaches FDIC-supervised

institutions to comply with the

minimum supplementary leverage ratio

requirement starting on January 1, 2018.

Public reporting of the supplementary

leverage ratio during the international

supervisory monitoring period is

consistent with the international

implementation timeline and enables

transparency and comparability of

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00014

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55353

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

28 See 12 U.S.C. 1831n(a)(2).

reporting the leverage ratio requirement

across jurisdictions.

The FDIC is not applying the

supplementary leverage ratio

requirement to FDIC-supervised

institutions that are not subject to the

advanced approaches rule in the interim

final rule. Applying the supplementary

leverage ratio routinely could create

operational complexity for smaller

FDIC-supervised institutions that are

not internationally active, and that

generally do not have off-balance sheet

activities that are as extensive as FDIC-

supervised institutions that are subject

to the advanced approaches rule. The

FDIC notes that the interim final rule

imposes risk-based capital requirements

on all repo-style transactions and

otherwise imposes constraints on all

FDIC-supervised institutions’ off-

balance sheet exposures

lly active, and that

generally do not have off-balance sheet

activities that are as extensive as FDIC-

supervised institutions that are subject

to the advanced approaches rule. The

FDIC notes that the interim final rule

imposes risk-based capital requirements

on all repo-style transactions and

otherwise imposes constraints on all

FDIC-supervised institutions’ off-

balance sheet exposures.

With regard to the commenters’ views

to require the use of IFRS for purposes

of the supplementary leverage ratio, the

FDIC notes that the use of GAAP in the

interim final rule as a starting point to

measure exposure of certain derivatives

and repo-style transactions, has the

advantage of maintaining consistency

between regulatory capital calculations

and regulatory reporting, the latter of

which must be consistent with GAAP

or, if another accounting principle is

used, no less stringent than GAAP.28

In response to the commenters’ views

regarding the scope of the total leverage

exposure, the FDIC notes that the

supplementary leverage ratio is

intended to capture on- and off-balance

sheet exposures of an FDIC-supervised

institution. Commitments represent an

agreement to extend credit and thus

including commitments (both funded

and unfunded) in the supplementary

leverage ratio is consistent with its

purpose to measure the on- and off-

balance sheet leverage of an FDIC-

supervised institution, as well as with

safety and soundness principles.

Accordingly, the FDIC believes that total

leverage exposure should include FDIC-

supervised institutions’ off-balance

sheet exposures, including all loan

commitments that are not

unconditionally cancellable, financial

standby letters of credit, performance

standby letters of credit, and

commercial and other similar letters of

credit.

The proposal to include

unconditionally cancellable

commitments in the total leverage

exposure recognizes that a banking

organization may extend credit under

the commitment before it is cancelled

g all loan

commitments that are not

unconditionally cancellable, financial

standby letters of credit, performance

standby letters of credit, and

commercial and other similar letters of

credit.

The proposal to include

unconditionally cancellable

commitments in the total leverage

exposure recognizes that a banking

organization may extend credit under

the commitment before it is cancelled.

If the banking organization exercises its

option to cancel the commitment, its

total leverage exposure amount with

respect to the commitment will be

limited to any extension of credit prior

to cancellation. The proposal

considered banking organizations’

ability to cancel such commitments and,

therefore, limited the amount of

unconditionally cancellable

commitments included in total leverage

exposure to 10 percent of the notional

amount of such commitments.

The FDIC notes that the credit

conversion factors used in the

supplementary leverage ratio and in any

forthcoming liquidity ratio requirements

have been developed to serve the

purposes of the respective frameworks

and may not be identical. Similarly, the

commenters’ proposed modifications to

credit conversion factors for trade

finance transactions would be

inconsistent with the purpose of the

supplementary leverage ratio—to

capture all off-balance sheet exposures

of banking organizations in a primarily

non-risk-based manner.

For purposes of incorporating

derivative contracts in the total leverage

exposure, the proposal would require all

advanced approaches banking

organizations to use the same

methodology to measure such

exposures. The proposed approach

provides a uniform measure of exposure

for derivative contracts across banking

organizations, without regard to their

models. Accordingly, the FDIC does not

believe an FDIC-supervised institution

should be permitted to use internal

models to measure the exposure amount

of derivative contracts for purposes of

the supplementary leverage ratio

o measure such

exposures. The proposed approach

provides a uniform measure of exposure

for derivative contracts across banking

organizations, without regard to their

models. Accordingly, the FDIC does not

believe an FDIC-supervised institution

should be permitted to use internal

models to measure the exposure amount

of derivative contracts for purposes of

the supplementary leverage ratio.

With regard to commenters requesting

a modification of the proposed

treatment for repo-style transactions, the

FDIC does not believe that the proposed

modifications are warranted at this time

because international discussions and

quantitative analysis of the exposure

measure for repo-style transactions are

still ongoing.

The FDIC is continuing to work with

the BCBS to assess the Basel III leverage

ratio, including its calibration and

design, as well as the impact of any

differences in national accounting

frameworks material to the denominator

of the Basel III leverage ratio. The FDIC

will consider any changes to the

supplementary leverage ratio as the

BCBS revises the Basel III leverage ratio.

Therefore, the FDIC has adopted the

proposed supplementary leverage ratio

in the interim final rule without

modification. An advanced approaches

FDIC-supervised institution must

calculate the supplementary leverage

ratio as the simple arithmetic mean of

the ratio of the FDIC-supervised

institution’s tier 1 capital to total

leverage exposure as of the last day of

each month in the reporting quarter.

The FDIC also notes that collateral may

not be applied to reduce the potential

future exposure (PFE) amount for

derivative contracts.

Under the interim final rule, total

leverage exposure equals the sum of the

following:

(1) The balance sheet carrying value

of all of the FDIC-supervised

institution’s on-balance sheet assets less

amounts deducted from tier 1 capital

under section 22(a), (c), and (d) of the

interim final rule;

not be applied to reduce the potential

future exposure (PFE) amount for

derivative contracts.

Under the interim final rule, total

leverage exposure equals the sum of the

following:

(1) The balance sheet carrying value

of all of the FDIC-supervised

institution’s on-balance sheet assets less

amounts deducted from tier 1 capital

under section 22(a), (c), and (d) of the

interim final rule;

(2) The PFE amount for each

derivative contract to which the FDIC-

supervised institution is a counterparty

(or each single-product netting set of

such transactions) determined in

accordance with section 34 of the

interim final rule, but without regard to

section 34(b);

(3) 10 percent of the notional amount

of unconditionally cancellable

commitments made by the FDIC-

supervised institution; and

(4) The notional amount of all other

off-balance sheet exposures of the FDIC-

supervised institution (excluding

securities lending, securities borrowing,

reverse repurchase transactions,

derivatives and unconditionally

cancellable commitments).

Advanced approaches FDIC-

supervised institutions must maintain a

minimum supplementary leverage ratio

of 3 percent beginning on January 1,

2018, consistent with Basel III.

However, as noted above, beginning on

January 1, 2015, advanced approaches

FDIC-supervised institutions must

calculate and report their

supplementary leverage ratio.

The FDIC is seeking commenters’

views on the interaction of this interim

final rule with the proposed rule

regarding the supplementary leverage

ratio for large, systemically important

banking organizations.

D. Capital Conservation Buffer

During the recent financial crisis,

some banking organizations continued

to pay dividends and substantial

discretionary bonuses even as their

financial condition weakened. Such

capital distributions had a significant

negative impact on the overall strength

of the banking sector

mentary leverage

ratio for large, systemically important

banking organizations.

D. Capital Conservation Buffer

During the recent financial crisis,

some banking organizations continued

to pay dividends and substantial

discretionary bonuses even as their

financial condition weakened. 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 enhance the

resilience of the banking system, the

proposed rule would have limited

capital distributions and discretionary

bonus payments for banking

organizations that do not hold a

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55354

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

29 ‘‘Calibrating regulatory capital requirements

and buffers: A top-down approach.’’ Basel

Committee on Banking Supervision, October, 2010,

available at www.bis.org.

specified amount of common equity tier

1 capital in addition to the amount of

regulatory capital necessary to meet the

minimum risk-based capital

requirements (capital conservation

buffer), consistent with Basel III. In this

way, the capital conservation buffer is

intended to provide incentives for

banking organizations to hold sufficient

capital to reduce the risk that their

capital levels would fall below their

minimum requirements during a period

of financial stress.

The proposed rules incorporated a

capital conservation buffer composed of

common equity tier 1 capital in addition

to the minimum risk-based capital

requirements

rvation buffer is

intended to provide incentives for

banking organizations to hold sufficient

capital to reduce the risk that their

capital levels would fall below their

minimum requirements during a period

of financial stress.

The proposed rules incorporated a

capital conservation buffer composed of

common equity tier 1 capital in addition

to the minimum risk-based capital

requirements. 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 limitations on capital

distributions and discretionary bonus

payments to executive officers, as

defined in the proposal. The proposal

provided that the maximum dollar

amount that a banking organization

could pay out in the form of capital

distributions or discretionary bonus

payments during the current calendar

quarter (the maximum payout amount)

would be equal to a maximum payout

ratio, multiplied by the banking

organization’s eligible retained income,

as discussed below. The proposal

provided that a banking organization

with a buffer of more than 2.5 percent

of total risk-weighted assets (plus, for an

advanced approaches banking

organization, 100 percent of any

applicable countercyclical capital

buffer), would not be subject to a

maximum payout amount. The proposal

clarified that the agencies reserved the

ability to restrict capital distributions

under other authorities and that

restrictions on capital distributions and

discretionary bonus payments

associated with the capital conservation

buffer would not be part of the PCA

framework. The calibration of the buffer

is supported by an evaluation of the loss

experience of U.S. banking

organizations as part of an analysis

conducted by the BCBS, as well as by

evaluation of historical levels of capital

at U.S

nd that

restrictions on capital distributions and

discretionary bonus payments

associated with the capital conservation

buffer would not be part of the PCA

framework. The calibration of the buffer

is supported by an evaluation of the loss

experience of U.S. banking

organizations as part of an analysis

conducted by the BCBS, as well as by

evaluation of historical levels of capital

at U.S. banking organizations.29

The agencies received a significant

number of comments on the proposed

capital conservation buffer. In general,

the commenters characterized the

capital conservation buffer as overly

conservative, and stated that the

aggregate amount of capital that would

be required for a banking organization to

avoid restrictions on dividends and

discretionary bonus payments under the

proposed rule exceeded the amount

required for a safe and prudent banking

system. Commenters expressed concern

that the capital conservation buffer

could disrupt the priority of payments

in a banking organization’s capital

structure, as any restrictions on

dividends would apply to both common

and preferred stock. Commenters also

questioned the appropriateness of

restricting a banking organization that

fails to comply with the capital

conservation buffer from paying

dividends or bonus payments if it has

established and maintained cash

reserves to cover future uncertainty.

One commenter supported the

establishment of a formal mechanism

for banking organizations to request

agency approval to make capital

distributions even if doing so would

otherwise be restricted under the capital

conservation buffer.

Other commenters recommended an

exemption from the proposed capital

conservation buffer for certain types of

banking organizations, such as

community banking organizations,

banking organizations organized in

mutual form, and rural BHCs that rely

heavily on bank stock loans for growth

and expansion purposes

if doing so would

otherwise be restricted under the capital

conservation buffer.

Other commenters recommended an

exemption from the proposed capital

conservation buffer for certain types of

banking organizations, such as

community banking organizations,

banking organizations organized in

mutual form, and rural BHCs that rely

heavily on bank stock loans for growth

and expansion purposes. Commenters

also recommended a wide range of

institutions that should be excluded

from the buffer based on a potential size

threshold, such as banking

organizations with total consolidated

assets of less than $250 billion.

Commenters also recommended that S-

corporations be exempt from the

proposed capital conservation buffer

because under the U.S. Internal Revenue

Code, S-corporations are not subject to

a corporate-level tax; instead, S-

corporation shareholders must report

income and pay income taxes based on

their share of the corporation’s profit or

loss. An S-corporation generally

declares a dividend to help shareholders

pay their tax liabilities that arise from

reporting their share of the corporation’s

profits. According to some commenters,

the proposal disadvantaged S-

corporations because shareholders of S-

corporations would be liable for tax on

the S-corporation’s net income, and the

S-corporation may be prohibited from

making a dividend to these shareholders

to fund the tax payment.

One commenter criticized the

proposed composition of the capital

conservation buffer (which must consist

solely of common equity tier 1 capital)

and encouraged the agencies to allow

banking organizations to include

noncumulative perpetual preferred

stock and other tier 1 capital

instruments. Several commenters

questioned the empirical basis for a

capital conservation buffer of 2.5

percent, and encouraged the agencies to

provide a quantitative analysis for the

proposal

r (which must consist

solely of common equity tier 1 capital)

and encouraged the agencies to allow

banking organizations to include

noncumulative perpetual preferred

stock and other tier 1 capital

instruments. Several commenters

questioned the empirical basis for a

capital conservation buffer of 2.5

percent, and encouraged the agencies to

provide a quantitative analysis for the

proposal. One commenter suggested

application of the capital conservation

buffer only during economic downturn

scenarios, consistent with the agencies’

objective to restrict dividends and

discretionary bonus payments during

these periods. According to this

commenter, a banking organization that

fails to maintain a sufficient capital

conservation buffer during periods of

economic stress also could be required

to submit a plan to increase its capital.

After considering these comments, the

FDIC has decided to maintain common

equity tier 1 capital as the basis of the

capital conservation buffer and to apply

the capital conservation buffer to all

types of FDIC-supervised institutions at

all times. Application of the buffer to all

types of FDIC-supervised institutions

and maintenance of a capital buffer

during periods of market and economic

stability is appropriate to encourage

sound capital management and help

ensure that FDIC-supervised institutions

will maintain adequate amounts of loss-

absorbing capital going forward,

strengthening the ability of the banking

system to continue serving as a source

of credit to the economy in times of

stress. A buffer framework that restricts

dividends and discretionary bonus

payments only for certain types of FDIC-

supervised institutions or only during

an economic contraction would not

achieve these objectives

adequate amounts of loss-

absorbing capital going forward,

strengthening the ability of the banking

system to continue serving as a source

of credit to the economy in times of

stress. A buffer framework that restricts

dividends and discretionary bonus

payments only for certain types of FDIC-

supervised institutions or only during

an economic contraction would not

achieve these objectives. Similarly,

basing the capital conservation buffer on

the most loss-absorbent form of capital

is most consistent with the purpose of

the capital conservation buffer as it

helps to ensure that the buffer can be

used effectively by FDIC-supervised

institutions at a time when they are

experiencing losses.

The FDIC recognizes that S-

corporation FDIC-supervised

institutions structure their tax payments

differently from C corporations.

However, the FDIC notes that this

distinction results from S-corporations’

pass-through taxation, in which profits

are not subject to taxation at the

corporate level, but rather at the

shareholder level. The FDIC is charged

with evaluating the capital levels and

safety and soundness of the FDIC-

supervised institution. At the point

where a decrease in the organization’s

capital triggers dividend restrictions, the

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00016

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55355

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

30 See 12 CFR part 208.

31 See 12 CFR 225.8.

FDIC believes that capital should stay

within the FDIC-supervised institution.

S-corporation shareholders may receive

a benefit from pass-through taxation, but

with that benefit comes the risk that the

corporation has no obligation to make

dividend distributions to help

shareholders pay their tax liabilities.

Therefore, the interim final rule does

not exempt S-corporations from the

capital conservation buffer

ital should stay

within the FDIC-supervised institution.

S-corporation shareholders may receive

a benefit from pass-through taxation, but

with that benefit comes the risk that the

corporation has no obligation to make

dividend distributions to help

shareholders pay their tax liabilities.

Therefore, the interim final rule does

not exempt S-corporations from the

capital conservation buffer.

Accordingly, under the interim final

rule an FDIC-supervised institution

must maintain a capital conservation

buffer of common equity tier 1 capital

in an amount greater than 2.5 percent of

total risk-weighted assets (plus, for an

advanced approaches FDIC-supervised

institution, 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.

The proposal defined eligible retained

income 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 and

associated tax effects not already

reflected in net income. The agencies

received a number of comments

regarding the proposed definition of

eligible retained income, which is used

to calculate the maximum payout

amount. Some commenters suggested

that the agencies limit capital

distributions based on retained earnings

instead of eligible retained income,

citing the Federal Reserve’s Regulation

H as an example of this regulatory

practice.30 Several commenters

representing banking organizations

organized as S-corporations

recommended revisions to the

definition of eligible retained income so

that it would be net of pass-through tax

distributions to shareholders that have

made a pass-through election for tax

purposes, allowing S-corporation

shareholders to pay their tax liability

notwithstanding any dividend

restrictions resulting from failure to

comply with

king organizations

organized as S-corporations

recommended revisions to the

definition of eligible retained income so

that it would be net of pass-through tax

distributions to shareholders that have

made a pass-through election for tax

purposes, allowing S-corporation

shareholders to pay their tax liability

notwithstanding any dividend

restrictions resulting from failure to

comply with the capital conservation

buffer. Some commenters suggested that

the definition of eligible retained

income be adjusted for items such as

goodwill impairment that are captured

in the definition of ‘‘net income’’ for

regulatory reporting purposes but which

do not affect regulatory capital.

The interim final rule adopts the

proposed definition of eligible retained

income without change. The FDIC

believes the commenters’ suggested

modifications to the definition of

eligible retained income would add

complexity to the interim final rule and

in some cases may be counter-

productive by weakening the incentives

of the capital conservation buffer. The

FDIC notes that the definition of eligible

retained income appropriately accounts

for impairment charges, which reduce

eligible retained income but also

reduces the balance sheet amount of

goodwill that is deducted from

regulatory capital. Further, the proposed

definition of eligible retained income,

which is based on net income as

reported in the banking organization’s

quarterly regulatory reports, reflects a

simple measure of a banking

organization’s recent performance upon

which to base restrictions on capital

distributions and discretionary

payments to executive officers. For the

same reasons as described above

regarding the application of the capital

conservation buffer to S-corporations

generally, the FDIC has determined that

the definition of eligible retained

income should not be modified to

address the tax-related concerns raised

by commenters writing on behalf of S-

corporations

apital

distributions and discretionary

payments to executive officers. For the

same reasons as described above

regarding the application of the capital

conservation buffer to S-corporations

generally, the FDIC has determined that

the definition of eligible retained

income should not be modified to

address the tax-related concerns raised

by commenters writing on behalf of S-

corporations.

The proposed rule generally defined a

capital distribution as a reduction of tier

1 or tier 2 capital through the

repurchase or redemption of a capital

instrument or by other means; a

dividend declaration or payment on any

tier 1 or tier 2 capital instrument if the

banking organization has full discretion

to permanently or temporarily suspend

such payments without triggering an

event of default; or any similar

transaction that the primary Federal

supervisor determines to be in

substance a distribution of capital.

Commenters provided suggestions on

the definition of ‘‘capital distribution.’’

One commenter requested that a

‘‘capital distribution’’ be defined to

exclude any repurchase or redemption

to the extent the capital repurchased or

redeemed was replaced in a

contemporaneous transaction by the

issuance of capital of an equal or higher

quality tier. The commenter maintained

that the proposal would unnecessarily

penalize banking organizations that

redeem capital but contemporaneously

replace such capital with an equal or

greater amount of capital of an

equivalent or higher quality

the extent the capital repurchased or

redeemed was replaced in a

contemporaneous transaction by the

issuance of capital of an equal or higher

quality tier. The commenter maintained

that the proposal would unnecessarily

penalize banking organizations that

redeem capital but contemporaneously

replace such capital with an equal or

greater amount of capital of an

equivalent or higher quality. In response

to comments, and recognizing that

redeeming capital instruments that are

replaced with instruments of the same

or similar quality does not weaken a

banking organization’s overall capital

position, the interim final rule provides

that a redemption or repurchase of a

capital instrument is not a distribution

provided that the banking organization

fully replaces that capital instrument by

issuing another capital instrument of the

same or better quality (that is, more

subordinate) based on the interim final

rule’s eligibility criteria for capital

instruments, and provided that such

issuance is completed within the same

calendar quarter the banking

organization announces the repurchase

or redemption. For purposes of this

definition, a capital instrument is issued

at the time that it is fully paid in. For

purposes of the interim final rule, the

FDIC changed the defined term from

‘‘capital distribution’’ to ‘‘distribution’’

to avoid confusion with the term

‘‘capital distribution’’ used in the

Federal Reserve’s capital plan rule.31

The proposed rule defined

discretionary bonus payment as a

payment made to an executive officer of

a banking organization (as defined

below) that meets the following

conditions: The banking organization

retains discretion as to the fact of the

payment and as to the amount of the

payment until the payment is awarded

to the executive officer; the amount paid

is determined by the banking

organization without prior promise to,

or agreement with, the executive officer;

and the executive officer has no

contractual right, express or implied, to

the bonu

ng

conditions: The banking organization

retains discretion as to the fact of the

payment and as to the amount of the

payment until the payment is awarded

to the executive officer; the amount paid

is determined by the banking

organization without prior promise to,

or agreement with, the executive officer;

and the executive officer has no

contractual right, express or implied, to

the bonus payment.

The agencies received a number of

comments on the proposed definition of

discretionary bonus payments to

executive officers. One commenter

expressed concern that the proposed

definition of discretionary bonus

payment may not be effective unless the

agencies provided clarification as to the

type of payments covered, as well as the

timing of such payments. This

commenter asked whether the proposed

rule would prohibit the establishment of

a pre-funded bonus pool with

mandatory distributions and sought

clarification as to whether non-cash

compensation payments, such as stock

options, would be considered a

discretionary bonus payment.

The interim final rule’s definition of

discretionary bonus payment is

unchanged from the proposal. The FDIC

notes that if an FDIC-supervised

institution prefunds a pool for bonuses

payable under a contract, the bonus

pool is not discretionary and, therefore,

is not subject to the capital conservation

buffer limitations. In addition, the

definition of discretionary bonus

payment does not include non-cash

compensation payments that do not

affect capital or earnings such as, in

some cases, stock options.

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00017

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

ject to the capital conservation

buffer limitations. In addition, the

definition of discretionary bonus

payment does not include non-cash

compensation payments that do not

affect capital or earnings such as, in

some cases, stock options.

VerDate Mar<15>2010

17:14 Sep 09, 2013

Jkt 229001

PO 00000

Frm 00017

Fmt 4701

Sfmt 4700

E:\FR\FM\10SER2.SGM

10SER2

emcdonald on DSK67QTVN1PROD with RULES2

55356

Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations

32 See 76 FR 21170 (April 14, 2011) for a

comparable definition of ‘‘executive officer.’’

33 See 12 CFR part 215.

Commenters representing community

banking organizations maintained that

the proposed restrictions on

discretionary bonus payments would

disproportionately impact such

institutions’ ability to attract and retain

qualified employees. One commenter

suggested revising the proposed rule so

that a banking organization that fails to

satisfy the capital conservation buffer

would be restricted from making a

discretionary bonus payment only to the

extent it exceeds 15 percent of the

employee’s salary, asserting that this

would prevent excessive bonus

payments while allowing community

banking organizations flexibility to

compensate key employees. The interim

final rule does not incorporate this

suggestion. The FDIC notes that the

potential limitations and restrictions

under the capital conservation buffer

framework do not automatically

translate into a prohibition on

discretionary bonus payments. Instead,

the overall dollar amount of dividends

and bonuses to executive officers is

capped based on how close the banking

organization’s regulatory capital ratios

are to its minimum capital ratios and on

the earnings of the banking organization

that are available for distribution

ervation buffer

framework do not automatically

translate into a prohibition on

discretionary bonus payments. Instead,

the overall dollar amount of dividends

and bonuses to executive officers is

capped based on how close the banking

organization’s regulatory capital ratios

are to its minimum capital ratios and on

the earnings of the banking organization

that are available for distribution. This

approach provides appropriate

incentives for capital conservation

while preserving flexibility for

institutions to decide how to al

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