Final Rule Adopts Existing Interim Final Rule Definition of Eligible Retained Income

This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations

Federal Register

63423

Vol. 85, No. 196

Thursday, October 8, 2020

1 See 85 FR 15909 (March 20, 2020).

2 See 85 FR 17003 (March 26, 2020).

DEPARTMENT OF TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. OCC–2020–0009]

RIN 1557–AE81

FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulations Q and YY; Docket Nos. R–

1703, 1706; RIN 7100–AF77, 7100–AF80]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 324

RIN 3064–AF40

Regulatory Capital Rule and Total

Loss-Absorbing Capacity Rule:

Eligible Retained Income

AGENCY: Office of the Comptroller of the

Currency (OCC), Board of Governors of

the Federal Reserve System (Board), and

Federal Deposit Insurance Corporation

(FDIC).

ACTION: Final rule.

SUMMARY: The OCC, Board, and FDIC

(together, the agencies) are adopting as

final the revisions to the definition of

eligible retained income made under the

interim final rule published in the

Federal Register on March 20, 2020, for

all depository institutions, bank holding

companies, and savings and loan

holding companies subject to the

agencies’ capital rule. The final rule

revises the definition of eligible retained

income to make more gradual any

automatic limitations on capital

distributions that could apply under the

agencies’ capital rule. Separately, in this

final rule, the Board also is adopting as

final the definition of eligible retained

income made under the interim final

rule published in the Federal Register

on March 26, 2020, for purposes of the

Board’s total loss-absorbing capacity

(TLAC) rule. The final rule adopts these

interim final rules with no changes

butions that could apply under the

agencies’ capital rule. Separately, in this

final rule, the Board also is adopting as

final the definition of eligible retained

income made under the interim final

rule published in the Federal Register

on March 26, 2020, for purposes of the

Board’s total loss-absorbing capacity

(TLAC) rule. The final rule adopts these

interim final rules with no changes.

DATES: The final rule is effective January

1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC: Benjamin Pegg, Risk Expert,

Capital and Regulatory Policy, (202)

649–6370; or Kevin Korzeniewski,

Counsel, or Marta Stewart-Bates, Senior

Attorney, Chief Counsel’s Office, (202)

649–5490, for persons who are deaf or

hearing impaired, TTY, (202) 649–5597,

Office of the Comptroller of the

Currency, 400 7th Street SW,

Washington, DC 20219.

Board: Anna Lee Hewko, Associate

Director, (202) 530–6360, Constance

Horsley, Deputy Associate Director,

(202) 452–5239, Matthew McQueeney,

Senior Financial Institution Policy

Analyst II, (202) 452–2942, or Eusebius

Luk, Senior Financial Institution Policy

Analyst I, (202) 452–2874, Division of

Supervision and Regulation; Benjamin

McDonough, Assistant General Counsel,

(202) 452–2036, Mark Buresh, Senior

Counsel, (202) 452–5270, Asad Kudiya,

Senior Counsel, (202) 475–6358, or

Mary Watkins, Senior Attorney, (202)

452–3722, Legal Division, Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue NW, Washington, DC 20551.

Users of Telecommunication Device for

Deaf (TDD) only, call (202) 263–4869.

FDIC: Bobby R

eneral Counsel,

(202) 452–2036, Mark Buresh, Senior

Counsel, (202) 452–5270, Asad Kudiya,

Senior Counsel, (202) 475–6358, or

Mary Watkins, Senior Attorney, (202)

452–3722, Legal Division, Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue NW, Washington, DC 20551.

Users of Telecommunication Device for

Deaf (TDD) only, call (202) 263–4869.

FDIC: Bobby R. Bean, Associate

Director, bbean@fdic.gov; Benedetto

Bosco, Chief, Capital Policy Section,

bbosco@fdic.gov; Michael Maloney,

Senior Policy Analyst, mmaloney@

fdic.gov; regulatorycapital@fdic.gov;

Capital Markets Branch, Division of Risk

Management Supervision, (202) 898–

6888; or Michael Phillips, Counsel,

mphillips@fdic.gov; Catherine Wood,

Counsel, cawood@fdic.gov; Supervision

and Legislation Branch, Legal Division,

Federal Deposit Insurance Corporation,

550 17th Street NW, Washington, DC

20429. For the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (800) 925–4618.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

A. Capital Rule

B. TLAC Rule

III. Overview of the Interim Final Rules and

Public Comments

A. Capital Interim Final Rule

B. TLAC Interim Final Rule

C. Public Comments

IV. Summary of the Final Rule

V. Impact Assessment

VI. Administrative Law Matters

A. Congressional Review Act

B. Paperwork Reduction Act

C. Regulatory Flexibility Act

D. Riegle Community Development and

Regulatory Improvement Act of 1994

E. Use of Plain Language

F. OCC Unfunded Mandates Reform Act of

1995

I. Introduction

In light of recent disruptions in

economic conditions caused by the

coronavirus disease 2019 (COVID–19)

and current strains in U.S

ive Law Matters

A. Congressional Review Act

B. Paperwork Reduction Act

C. Regulatory Flexibility Act

D. Riegle Community Development and

Regulatory Improvement Act of 1994

E. Use of Plain Language

F. OCC Unfunded Mandates Reform Act of

1995

I. Introduction

In light of recent disruptions in

economic conditions caused by the

coronavirus disease 2019 (COVID–19)

and current strains in U.S. financial

markets, the Office of the Comptroller of

the Currency (OCC), Board of Governors

of the Federal Reserve System (Board),

and Federal Deposit Insurance

Corporation (FDIC) (together, the

agencies) published an interim final rule

in the Federal Register on March 20,

2020 (capital interim final rule) 1 that

revised the definition of eligible

retained income for all depository

institutions, bank holding companies,

and savings and loan holding

companies (together, banking

organizations) subject to the agencies’

capital rule (capital rule). Separately,

the Board published an interim final

rule in the Federal Register on March

26, 2020 (TLAC interim final rule) 2 that

revised the definition of eligible

retained income for the largest and most

systemically important U.S. bank

holding companies (collectively, U.S.

GSIBs) and the U.S. operations of the

largest and most systemically important

foreign banking organizations

(collectively, covered intermediate

holding companies (IHCs) and together

with U.S. GSIBs, TLAC covered

companies), which are subject to the

Board’s total loss-absorbing capacity

(TLAC) rule. These revisions help

strengthen the ability of banking

organizations and TLAC covered

companies to continue lending and

conducting other financial

intermediation activities during stress

periods by making distribution

limitations more gradual, as intended by

the agencies

with U.S. GSIBs, TLAC covered

companies), which are subject to the

Board’s total loss-absorbing capacity

(TLAC) rule. These revisions help

strengthen the ability of banking

organizations and TLAC covered

companies to continue lending and

conducting other financial

intermediation activities during stress

periods by making distribution

limitations more gradual, as intended by

the agencies.

In this final rule, the agencies are

adopting as final and without change

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3 Banking organizations subject to the agencies’

capital rule include national banks, state member

banks, state nonmember banks, savings

associations, and top-tier bank holding companies

and savings and loan holding companies domiciled

in the United States not subject to the Board’s Small

Bank Holding Company and Savings and Loan

Holding Company Policy Statement (12 CFR part

225, Appendix C), but exclude certain savings and

loan holding companies that are substantially

engaged in insurance underwriting or commercial

activities or that are estate trusts and bank holding

companies and savings and loan holding companies

that are employee stock ownership plans.

4 12 CFR 3.10 (OCC); 12 CFR 217.10 (Board); and

12 CFR 324.10 (FDIC). An additional minimum

supplementary leverage ratio of 3 percent applies to

banking organizations subject to Category I, II, and

III standards.

5 See 12 CFR 3.11 (OCC); 12 CFR 217.11 (Board);

and 12 CFR 324.11 (FDIC).

6 Amendments to the Regulatory Capital, Capital

Plan, and Stress Test Rules, March 4, 2020,

available at https://www.federalreserve.gov/

newsevents/pressreleases/files/

bcreg20200304a2.pdf. The SCB final rule applies to

bank holding companies and U.S

anking organizations subject to Category I, II, and

III standards.

5 See 12 CFR 3.11 (OCC); 12 CFR 217.11 (Board);

and 12 CFR 324.11 (FDIC).

6 Amendments to the Regulatory Capital, Capital

Plan, and Stress Test Rules, March 4, 2020,

available at https://www.federalreserve.gov/

newsevents/pressreleases/files/

bcreg20200304a2.pdf. The SCB final rule applies to

bank holding companies and U.S. intermediate

holding companies of foreign banking organizations

subject to the capital plan rule (covered holding

company). 12 CFR 225.8.

7 A covered holding company’s first stress capital

buffer requirement, as determined under the SCB

final rule, will be effective October 1, 2020. See 12

CFR 225.8.

8 Currently, the countercyclical capital buffer is

set at 0 percent.

9 See 12 CFR 6.4(b)(1)(i) (OCC); 12 CFR

208.43(b)(1)(i) (Board); 12 CFR 324.403(b)(1)(ii)

(FDIC).

10 See 78 FR 62018, 62034 (October 11, 2013).

11 A banking organization in or below the bottom

quartile of its capital conservation buffer

requirement may not make any capital distributions

without prior approval from the OCC, Board, or

FDIC, as applicable.

12 For purposes of the stress capital buffer, the

definition of eligible retained income used to

determine restrictions on capital distributions by an

applicable banking organization depended on the

covered holding company’s capital buffer amount

compared to its stress capital buffer requirement.

13 82 FR 8266 (January 27, 2017); 12 CFR part 252,

subparts G and P.

14 See 12 CFR 252.60; 12 CFR 252.160.

15 While the Board capital rule’s requirements are

intended to ensure that a banking organization has

sufficient capital to remain a going concern, the

objective of the TLAC rule is to reduce the financial

stability impact of the failure of a TLAC covered

company by requiring sufficient loss- absorbing

capacity on both a going-concern and a gone-

concern basis

2 CFR 252.60; 12 CFR 252.160.

15 While the Board capital rule’s requirements are

intended to ensure that a banking organization has

sufficient capital to remain a going concern, the

objective of the TLAC rule is to reduce the financial

stability impact of the failure of a TLAC covered

company by requiring sufficient loss- absorbing

capacity on both a going-concern and a gone-

concern basis. A TLAC covered company’s

regulatory capital, and especially its equity capital,

is likely to be significantly or completely depleted

in the events leading to its bankruptcy or

resolution. Thus, if a TLAC covered company is to

re-emerge from resolution with sufficient capital to

successfully operate as a going concern, the firm

must have a source of capital. The TLAC rule

therefore requires TLAC covered companies to

maintain a minimum amount of LTD that can

absorb losses and serve as a source of capital in

resolution.

16 78 FR 62018, 62034 (October 11, 2013).

the revisions to the definition of eligible

retained income made under the capital

interim final rule and TLAC interim

final rule, as detailed further below.

II. Background

A. Capital Rule

Under the capital rule, a banking

organization 3 must maintain minimum

risk-based capital and leverage ratios.4

In addition, a banking organization

under the capital rule must maintain a

buffer of regulatory capital above its

applicable minimum risk-based capital

and leverage ratio requirements, as

applicable, to avoid restrictions on

capital distributions—including in the

form of dividends and share buybacks

and certain discretionary bonus

payments (collectively, capital

distributions).5

Banking organizations under the

capital rule are generally subject to a

fixed capital conservation buffer

requirement, composed solely of

common equity tier 1 capital, of greater

than 2.5 percent of risk-weighted assets

trictions on

capital distributions—including in the

form of dividends and share buybacks

and certain discretionary bonus

payments (collectively, capital

distributions).5

Banking organizations under the

capital rule are generally subject to a

fixed capital conservation buffer

requirement, composed solely of

common equity tier 1 capital, of greater

than 2.5 percent of risk-weighted assets.

On March 4, 2020, the Board adopted a

final rule that simplified the Board’s

regulatory capital framework for large

bank holding companies and U.S.

intermediate holding companies of

foreign banking organizations with the

introduction of a stress capital buffer

requirement (SCB final rule).6 Under the

SCB final rule, a covered holding

company will receive a new stress

capital buffer requirement on an annual

basis, which replaces the static greater

than 2.5 percent capital conservation

buffer requirement.7 Moreover, banking

organizations subject to Category I, II,

and III standards also are subject to a

countercyclical capital buffer

requirement 8 and a minimum

supplementary leverage ratio of 3

percent. U.S. GSIBs are subject to the

GSIB surcharge, an additional capital

buffer requirement based on a measure

of their systemic risk. Further, U.S.

GSIBs are subject to enhanced

supplementary leverage ratio standards,

and must hold an additional leverage

capital buffer of tier 1 capital to avoid

limitations on capital distributions. The

insured depository institution

subsidiaries of U.S

ent. U.S. GSIBs are subject to the

GSIB surcharge, an additional capital

buffer requirement based on a measure

of their systemic risk. Further, U.S.

GSIBs are subject to enhanced

supplementary leverage ratio standards,

and must hold an additional leverage

capital buffer of tier 1 capital to avoid

limitations on capital distributions. The

insured depository institution

subsidiaries of U.S. GSIBs must

maintain a similarly higher

supplementary leverage ratio to be

considered well capitalized under the

agencies’ respective prompt corrective

action frameworks.9

The agencies established the capital

buffer requirements to encourage better

capital conservation by banking

organizations and to enhance the

resilience of the banking system during

stress periods.10 In particular, the

agencies intended for the capital buffer

requirements to limit gradually the

ability of banking organizations to

distribute capital if their capital ratios

fall below certain levels, thereby

strengthening the ability of banking

organizations to continue lending and

conducting other financial

intermediation activities during stress

periods.

Under the capital rule, if a banking

organization’s capital ratios fall within

its applicable minimum-plus-buffer

requirements, the maximum amount of

capital distributions it can make is a

function of its eligible retained

income.11 All of the buffer requirements

in the capital rule use the same

definition of eligible retained income

and the same definition of eligible

retained income applies to depository

institutions and holding companies.

Prior to the issuance of the capital

interim final rule, the capital rule

generally defined eligible retained

income as four quarters of net income,

net of distributions and associated tax

effects not already reflected in net

income.12

B. TLAC Rule

In December 2016, the Board issued a

final rule (TLAC rule) to require U.S

income applies to depository

institutions and holding companies.

Prior to the issuance of the capital

interim final rule, the capital rule

generally defined eligible retained

income as four quarters of net income,

net of distributions and associated tax

effects not already reflected in net

income.12

B. TLAC Rule

In December 2016, the Board issued a

final rule (TLAC rule) to require U.S.

GSIBs and covered IHCs to maintain a

minimum TLAC amount, consisting of

minimum amounts of long-term debt

(LTD) and tier 1 capital.13 In addition,

the TLAC rule prescribed buffer

requirements above the minimum TLAC

amount which a TLAC covered

company must maintain to avoid

restrictions on capital distributions.

The TLAC rule applies to U.S. GSIBs

and covered IHCs because the failure or

material financial distress of these

companies has the greatest potential to

disrupt U.S. financial stability.14 The

requirements in the TLAC rule build on,

and serve as a complement to, the

regulatory capital requirements in the

Board’s capital rule (Board capital

rule).15 As with the Board capital rule,

the TLAC buffer requirements were

established to encourage better capital

conservation by TLAC covered

companies and to enhance the resilience

of the banking system during stress

periods.16 In particular, the Board

intended for the TLAC buffer

requirements to limit gradually the

ability of TLAC covered companies to

make capital distributions under certain

circumstances, thereby strengthening

the ability of TLAC covered companies

to continue lending and conducting

other financial intermediation activities

during stress periods.

A TLAC covered company with a

TLAC level that falls below the

applicable minimum-plus-buffer

requirements faces limitations on

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d companies

to continue lending and conducting

other financial intermediation activities

during stress periods.

A TLAC covered company with a

TLAC level that falls below the

applicable minimum-plus-buffer

requirements faces limitations on

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Federal Register / Vol. 85, No. 196 / Thursday, October 8, 2020 / Rules and Regulations

17 The capital interim final rule also applies to the

U.S. intermediate holding companies of foreign

banking organizations required to be established or

designated under 12 CFR 252.153.

18 FDIC, FIL–40–2014 (July 21, 2014).

19 See Interagency Statement on the Use of Capital

and Liquidity Buffers (March 17, 2020), available

at: https://www.occ.gov/news-issuances/news-

releases/2020/nr-ia-2020-34a.pdf.

20 See, e.g., 12 U.S.C. 56 and 60 (OCC); 12 CFR

5.46, 5.55, and 5.64 (OCC); 12 CFR 208.5 and 12

CFR 225.4(b) (Board); 12 U.S.C. 1828(i) and 12 CFR

303.241 (FDIC).

21 See 12 CFR 6.6 (OCC); 12 CFR 208.40 (Board);

12 CFR 324.405 (FDIC).

22 Under the TLAC rule, a U.S. GSIB is subject to

the external TLAC risk-weighted buffer, which sits

above the minimum risk-based TLAC requirement,

and the external TLAC leverage buffer, which sits

above the minimum total-leverage exposure-based

TLAC requirement. 12 CFR 252.63(c). Similarly, a

covered IHC is subject to covered IHC TLAC buffer,

Continued

capital distributions, in a manner

designed to parallel the restrictions on

capital distributions under the Board

capital rule. In particular, the maximum

amount of capital distributions that a

TLAC covered company can make is

limited as a percentage of its eligible

retained income, as defined in the TLAC

rule

c). Similarly, a

covered IHC is subject to covered IHC TLAC buffer,

Continued

capital distributions, in a manner

designed to parallel the restrictions on

capital distributions under the Board

capital rule. In particular, the maximum

amount of capital distributions that a

TLAC covered company can make is

limited as a percentage of its eligible

retained income, as defined in the TLAC

rule.

Prior to the issuance of TLAC interim

final rule, the TLAC rule used the same

definition of eligible retained income for

purposes of the TLAC buffer as the

definition used under the Board capital

rule prior to the adoption of the capital

interim final rule.

III. Overview of the Interim Final Rules

and Public Comments

The spread of COVID–19 has

disrupted economic activity in the

United States, causing significant

volatility in U.S. financial markets. The

magnitude and persistence of COVID–

19’s overall effect on the economy

remain uncertain. In light of these

developments, banking organizations

may experience a sudden and

unanticipated decline in capital ratios.

A. Capital Interim Final Rule

In March 2020, the agencies issued

the capital interim final rule, which

revised the definition of eligible

retained income to the greater of (1) a

banking organization’s net income for

the four preceding calendar quarters, net

of any distributions and associated tax

effects not already reflected in net

income, and (2) the average of a banking

organization’s net income over the

preceding four quarters.17 This revision

reduces the likelihood that a banking

organization is suddenly subject to

abrupt and restrictive distribution

limitations in a scenario where its ratios

fall within its applicable minimum-

plus-buffer requirements

ons and associated tax

effects not already reflected in net

income, and (2) the average of a banking

organization’s net income over the

preceding four quarters.17 This revision

reduces the likelihood that a banking

organization is suddenly subject to

abrupt and restrictive distribution

limitations in a scenario where its ratios

fall within its applicable minimum-

plus-buffer requirements.

The capital interim final rule’s

changes to the definition of eligible

retained income allow banking

organizations to more freely use their

capital and leverage buffers and

supports banking organizations’ lending

activity and other financial

intermediation activities to avoid

compounding negative impacts on the

financial markets.

The revised definition of eligible

retained income under the capital

interim final rule applies to all of a

banking organization’s buffer

requirements, including the fixed

greater than 2.5 percent capital

conservation buffer and, if applicable,

the countercyclical capital buffer, as

well as, for global systemically

important bank holding companies, the

GSIB surcharge, and enhanced

supplementary leverage ratio buffer.

Once the stress capital buffer

requirements for covered holding

companies under the SCB final rule

apply, the revised definition would also

apply to all parts of a covered holding

company’s buffer requirements. The

agencies believe that having one

definition of eligible retained income for

all banking organizations under the

capital rule simplifies the regulatory

capital framework and ensures fairness

across banking organizations of all sizes.

In addition, the revised definition of

eligible retained income under the

capital interim final rule assists in the

ability of S-corporation banking

organizations to provide dividends to

shareholders in order to meet their pass-

through tax liabilities. S-corporation

banking organizations do not pay

federal income taxes

work and ensures fairness

across banking organizations of all sizes.

In addition, the revised definition of

eligible retained income under the

capital interim final rule assists in the

ability of S-corporation banking

organizations to provide dividends to

shareholders in order to meet their pass-

through tax liabilities. S-corporation

banking organizations do not pay

federal income taxes. Instead, income

and losses of an S-corporation are

attributed to shareholders, potentially

increasing their personal tax liability

when the S-corporation has income and

potentially reducing their personal tax

liability when the S-corporation has

losses. In a situation where the S-

corporation has income but does not

pay dividends, its shareholders are

responsible for meeting their increased

personal tax liability using their own

resources. When an otherwise

adequately capitalized S-corporation

banking organization is restricted from

making dividends because one or more

of its capital ratios breach its buffer

requirements, a situation can arise in

which the banking organization’s

dividends to its shareholders would be

insufficient to pay their share of taxes

on the banking organization’s income.18

The agencies encourage banking

organizations to make prudent decisions

regarding capital distributions.19 The

capital interim final rule was intended

to strengthen the incentives for a

banking organization to use its buffers

in a prudent manner in adverse

conditions and continue to serve as a

financial intermediary and source of

credit to the economy. The capital

interim final rule does not make

changes to any other requirement that

may limit capital distributions.20 For

instance, under the prompt corrective

action requirements, an insured

depository institution that becomes less

than adequately capitalized would be

subject to dividend restrictions.21

B

ontinue to serve as a

financial intermediary and source of

credit to the economy. The capital

interim final rule does not make

changes to any other requirement that

may limit capital distributions.20 For

instance, under the prompt corrective

action requirements, an insured

depository institution that becomes less

than adequately capitalized would be

subject to dividend restrictions.21

B. TLAC Interim Final Rule

The COVID–19 stress period has

presented analogous concerns under the

TLAC rule to those described above

around buffer use and continued

financial intermediation. That is, in

light of developments in connection

with COVID–19, TLAC covered

companies rule may experience a

sudden and unanticipated decline in

TLAC and, prior to the issuance of the

TLAC interim final rule, the Board was

similarly concerned that the mechanics

around buffer requirements set forth in

the TLAC rule did not reflect the

intended gradual manner in which

capital distribution restrictions applied.

A modest reduction in TLAC could

result in sudden and severe limitations

on capital distributions, undermining a

TLAC covered company’s ability to use

its TLAC buffer and creating a strong

incentive to limit lending and other

financial intermediation activities,

thereby deterring the company from

continued lending to creditworthy

businesses and households during a

stress period.

In March 2020, the Board issued the

TLAC interim final rule so that the

definition of eligible retained income

under the TLAC rule paralleled the

definition of the term under the Board

capital rule. Specifically, the TLAC

interim final rule revises the definition

of eligible retained income under the

TLAC rule to mean the greater of (1) a

TLAC covered company’s net income

for the four preceding calendar quarters,

net of any distributions and associated

tax effects not already reflected in net

income, and (2) the average of a TLAC

covered company’s net income over the

preceding four quarters

ally, the TLAC

interim final rule revises the definition

of eligible retained income under the

TLAC rule to mean the greater of (1) a

TLAC covered company’s net income

for the four preceding calendar quarters,

net of any distributions and associated

tax effects not already reflected in net

income, and (2) the average of a TLAC

covered company’s net income over the

preceding four quarters. The Board

adopted this modified definition with

the intent to support TLAC covered

companies’ lending activity and other

financial intermediation activities and

avoid compounding impacts on the

financial markets. The revised

definition applies with respect to all

TLAC buffer requirements under the

TLAC rule.22

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Federal Register / Vol. 85, No. 196 / Thursday, October 8, 2020 / Rules and Regulations

which sits above the minimum risk-based TLAC

requirement. 12 CFR 252.165(d).

23 The Board received a number of comments that

were not specifically responsive to the proposals. In

particular, commenters suggested that the Board

take actions outside of the scope of the Board

capital rule. These comments are not within the

scope of this rulemaking and therefore are not

discussed in this SUPPLEMENTARY INFORMATION.

C. Public Comments

The agencies received five public

comment letters on the capital interim

final rule, and the Board received two

public comments on the TLAC interim

final rule.

Comments on the Capital Interim Final

Rule

Some commenters on the capital

interim final rule supported the change

to the definition of eligible retained

income in the capital rule, indicating

that flexibility provided by the change

will help banking organizations

continue to lend through the COVID–19

crisis

ule, and the Board received two

public comments on the TLAC interim

final rule.

Comments on the Capital Interim Final

Rule

Some commenters on the capital

interim final rule supported the change

to the definition of eligible retained

income in the capital rule, indicating

that flexibility provided by the change

will help banking organizations

continue to lend through the COVID–19

crisis. One commenter indicated that

the capital interim final rule would

assist community banking organizations

organized as S-corporations to meet tax

obligations and still raise capital as

needed. Another commenter was

supportive of the capital interim final

rule’s application of a consistent

definition of eligible retained income

across banking organizations of all sizes

and suggested that the new definition

will add consistency to the capital rule

while balancing the need for banking

organizations to lend to borrowers

affected by COVID–19 and still maintain

general safety and soundness.

Other commenters opposed the

change to the definition of eligible

retained income in the capital interim

final rule and advocated that the

agencies be more prescriptive in

compelling banking organizations to

take actions to conserve capital or

continue lending, such as prohibiting

capital distributions while the COVID–

19 crisis continues.23 One commenter

was supportive of the capital interim

final rule, but asserted that the revised

definition of eligible retained income

should only be used by a banking

organization if the capital distributions

enhance the financial institution’s

ability to contribute to economic

recovery of both the stock market and

main street businesses. The commenter

suggested that capital distributions

should have requirements and

restrictions associated with them, such

as limits on executive bonuses or

payouts and limits on share

repurchases, and should not be

permitted in certain situations

istributions

enhance the financial institution’s

ability to contribute to economic

recovery of both the stock market and

main street businesses. The commenter

suggested that capital distributions

should have requirements and

restrictions associated with them, such

as limits on executive bonuses or

payouts and limits on share

repurchases, and should not be

permitted in certain situations.

The agencies note that the capital

buffer requirements do restrict capital

distributions. As described above, if a

banking organization’s capital or

leverage ratios fall within its applicable

minimum-plus-buffer requirements, the

maximum amount of capital

distributions it can make is limited as a

percentage of its eligible retained

income, as defined in the capital rule.

Accordingly, the capital buffer

requirements compel banking

organizations to increasingly constrain

distributions as their regulatory capital

ratios approach their applicable

minimums. For instance, a banking

organization in or below the bottom

quartile of its buffer requirement may

not make any capital distributions

without prior approval from its primary

Federal regulator.

The revised definition of eligible

retained income under the final rule

facilitates banking organizations’ use of

their buffers as intended by ensuring

that the limits on capital distributions

apply gradually. The revised definition

reduces the incentive for banking

organizations to limit their lending and

other financial intermediation activities

in order to avoid facing abrupt

limitations on capital distributions.

Comments on the TLAC Interim Final

Rule

The comment letters addressing the

TLAC interim final rule generally

opposed the Board’s change to the

definition of eligible retained income

and advocated for additional restrictions

on capital distributions. These

comments closely aligned with similar

comments received in connection with

the capital interim final rule

s on capital distributions.

Comments on the TLAC Interim Final

Rule

The comment letters addressing the

TLAC interim final rule generally

opposed the Board’s change to the

definition of eligible retained income

and advocated for additional restrictions

on capital distributions. These

comments closely aligned with similar

comments received in connection with

the capital interim final rule.

A commenter to the TLAC interim

final rule suggested that TLAC covered

companies that utilize U.S. Treasury or

Federal Reserve lending facilities

should not be able to apply the revised

definition of eligible retained income

since it would potentially allow for

greater distributions while

simultaneously taking advantage of

government support. Additionally, this

commenter suggested that TLAC

covered companies should be subject to

minimum requirements for lending and

limits on executive bonuses and share

repurchases in order to ensure capital

distributions enhance their ability to

contribute to the economic recovery.

Another commenter to the TLAC

interim final rule indicated that, given

the uncertainties surrounding COVID–

19 and potential economic effects,

TLAC covered companies should be

taking actions to conserve capital. This

commenter asserted that the TLAC

interim final rule may pose risks to

safety and soundness because capital

distributed will not be available to

absorb future losses of unknown

severity. Further, the commenter

expressed doubt that the TLAC interim

final rule would achieve the Board’s

intent of promoting lending to the

economy. The commenter concluded

that the best way to promote lending

would be for the Board to prohibit

capital distributions by TLAC covered

companies for the duration of the crisis.

In addition, the commenter requested

that the Board delay implementation of

the revised definition of eligible

retained income until after the crisis has

passed

Board’s

intent of promoting lending to the

economy. The commenter concluded

that the best way to promote lending

would be for the Board to prohibit

capital distributions by TLAC covered

companies for the duration of the crisis.

In addition, the commenter requested

that the Board delay implementation of

the revised definition of eligible

retained income until after the crisis has

passed.

The revised definition of eligible

retained income under the TLAC

interim final rule facilitates TLAC

covered companies’ use of their buffers

as intended by ensuring that the limits

on capital distributions apply gradually.

The revised definition reduces the

incentive for TLAC covered companies

to limit their lending and other financial

intermediation activities in order to

avoid facing abrupt limitations on

capital distributions.

IV. Summary of the Final Rule

For the reasons discussed above, the

final rule adopts the definition of

eligible retained income unchanged

from the capital interim final rule, and

the TLAC interim final rule.

Accordingly, under the final rule,

eligible retained income for purposes of

the agencies’ capital rule and the

Board’s TLAC rule is defined as the

greater of (1) a banking organization’s or

TLAC covered company’s net income

(as applicable) for the four preceding

calendar quarters, net of any

distributions and associated tax effects

not already reflected in net income, and

im final rule.

Accordingly, under the final rule,

eligible retained income for purposes of

the agencies’ capital rule and the

Board’s TLAC rule is defined as the

greater of (1) a banking organization’s or

TLAC covered company’s net income

(as applicable) for the four preceding

calendar quarters, net of any

distributions and associated tax effects

not already reflected in net income, and

(2) the average of a banking

organization’s or TLAC covered

company’s net income (as applicable)

over the preceding four quarters.

V. Impact Assessment

In ordinary economic circumstances,

many banking organizations will

distribute a significant portion of their

net income and retain the rest to

support growth. As banking

organizations enter stress periods, the

restrictions in the capital rule and TLAC

rule, as applicable, limit distributions

and help to preserve capital and support

lending. However, if the limits to

distributions are too restrictive, banking

organizations can face a sharp increase

in their distribution limitations when

their applicable ratios fall to certain

levels. This may create an incentive for

banking organizations to reduce lending

or take other actions to avoid using their

buffers. The revised definition of

eligible net income in the final rule

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en

their applicable ratios fall to certain

levels. This may create an incentive for

banking organizations to reduce lending

or take other actions to avoid using their

buffers. The revised definition of

eligible net income in the final rule

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63427

Federal Register / Vol. 85, No. 196 / Thursday, October 8, 2020 / Rules and Regulations

24 5 U.S.C. 801 et seq.

25 5 U.S.C. 801(a)(3).

26 5 U.S.C. 804(2).

27 See 85 FR 44361 (July 22, 2020).

28 A savings and loans holding company (SLHC)

must file one or more of the FR Y–9 series of reports

unless it is: (1) A unitary SLHC with primarily

commercial assets that meets the requirements of

section 10(c)(9)(c) of the Home Owners’ Loan Act,

for which thrifts make up less than 5 percent of its

consolidated assets; or (2) a SLHC that primarily

holds insurance-related assets and does not

otherwise submit financial reports with the SEC

pursuant to section 13 or 15(d) of the Securities

Exchange Act of 1934.

allows banking organizations to more

gradually reduce distributions as they

enter stress and provides banking

organizations with stronger incentives

to continue to lend in a stressed

scenario. On the other hand, by enabling

banking organizations to gradually

decrease capital distributions in stress

(rather than mandating a sharp

decrease) the rule could incrementally

reduce the banking organization’s loss-

absorption capacity in stress.

The definition of eligible retained

income affects the distributions of

banking organizations operating within

their applicable minimum-plus-buffer

requirements. It does not have an

impact on minimum capital or TLAC

requirements, per se

s in stress

(rather than mandating a sharp

decrease) the rule could incrementally

reduce the banking organization’s loss-

absorption capacity in stress.

The definition of eligible retained

income affects the distributions of

banking organizations operating within

their applicable minimum-plus-buffer

requirements. It does not have an

impact on minimum capital or TLAC

requirements, per se. As such, the

revised definition of eligible retained

income in the final rule is not likely to

have any noticeable effect on the

minimum capital requirements of

banking organizations or the TLAC or

LTD requirements applicable to covered

companies. However, the final rule

could impact actual capital levels given

the additional flexibility of meeting

buffers during times of stress.

VI. Administrative Law Matters

A. Congressional Review Act

For purposes of Congressional Review

Act, the Office of Management and

Budget (OMB) makes a determination as

to whether a final rule constitutes a

‘‘major’’ rule.24 If a rule is deemed a

‘‘major rule’’ by the OMB, the

Congressional Review Act generally

provides that the rule may not take

effect until at least 60 days following its

publication.25

The Congressional Review Act defines

a ‘‘major rule’’ as any rule that the

Administrator of the Office of

Information and Regulatory Affairs of

the OMB finds has resulted in or is

likely to result in (A) an annual effect

on the economy of $100,000,000 or

more; (B) a major increase in costs or

prices for consumers, individual

industries, Federal, State, or local

government agencies or geographic

regions, or (C) significant adverse effects

on competition, employment,

investment, productivity, innovation, or

on the ability of United States-based

enterprises to compete with foreign-

based enterprises in domestic and

export markets.26

As required by the Congressional

Review Act, the agencies will submit

the final rule and other appropriate

reports to Congress and the Government

Accountability Office for r

ant adverse effects

on competition, employment,

investment, productivity, innovation, or

on the ability of United States-based

enterprises to compete with foreign-

based enterprises in domestic and

export markets.26

As required by the Congressional

Review Act, the agencies will submit

the final rule and other appropriate

reports to Congress and the Government

Accountability Office for review.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(44 U.S.C. 3501–3521) (PRA) states that

no agency may conduct or sponsor, nor

is the respondent required to respond

to, an information collection unless it

displays a currently valid OMB control

number. In connection with the capital

interim final rule, the agencies made

revisions to their current information

collections for the Consolidated Reports

of Condition and Income (Call Reports)

(FFIEC 031, FFIEC 041, and FFIEC 051).

The OMB control numbers for the

agencies are: OCC OMB No. 1557–0081;

Board OMB No. 7100–0036; and FDIC

OMB No. 3064–0052. OMB has

approved these revisions and the

agencies are seeking comment in a

separate Federal Register notice.27

There is no change, however, to the Call

Reports or their related instructions in

connection with this final rule.

Also, in connection with the capital

interim final rule, the Board temporarily

revised the Consolidated Financial

Statements for Holding Companies (FR

Y–9; OMB No. 7100–0128) to reflect the

changes made in the capital interim

final rule, and invited comment on a

proposal to extend that collection of

information for three years, with

revision. No comments were received

regarding this proposal under the PRA.

The Board has now extended the FR Y–

9 reports for three years, with revision,

as proposed, to align the reporting

instructions with this final rule. The

Board has reviewed the revisions to the

FR Y–9C pursuant to authority

delegated by the OMB and will submit

information collection burden estimates

to OMB to finalize the revisions

nts were received

regarding this proposal under the PRA.

The Board has now extended the FR Y–

9 reports for three years, with revision,

as proposed, to align the reporting

instructions with this final rule. The

Board has reviewed the revisions to the

FR Y–9C pursuant to authority

delegated by the OMB and will submit

information collection burden estimates

to OMB to finalize the revisions. All of

the updates to the FR Y–9C noted in the

interim final rule should be minimal

and result in zero estimated net change

in hourly burden.

(1) Report title: Financial Statements

for Holding Companies.

Agency form number: FR Y–9C, FR Y–

9LP, FR Y–9SP, FR Y–9ES, and FR Y–

9CS.

OMB control number: 7100–0128.

Effective Date: Currently effective.

Frequency: Quarterly, semiannually,

and annually.

Respondents: Bank holding

companies, savings and loan holding

companies,28 securities holding

companies, and U.S. intermediate

holding companies (collectively, HCs).

Estimated number of respondents:

FR Y–9C (non-advanced approaches

(AA) HCs community bank leverage

ratio (CBLR)) with less than $5 billion

in total assets—71,

FR Y–9C (non AA HCs CBLR) with $5

billion or more in total assets—35,

FR Y–9C (non AA HCs non-CBLR)

with less than $5 billion in total assets—

84,

FR Y–9C (non AA HCs non-CBLR)

with $5 billion or more in total assets—

154,

FR Y–9C (AA HCs)—19,

FR Y–9LP—434,

FR Y–9SP—3,960,

FR Y–9ES—83,

FR Y–9CS—236.

Estimated average hours per response:

Reporting

FR Y–9C (non AA HCs CBLR) with

less than $5 billion in total assets—

29.17,

FR Y–9C (non AA HCs CBLR) with $5

billion or more in total assets—35.14,

FR Y–9C (non AA HCs non-CBLR)

with less than $5 billion in total assets—

41.01,

FR Y–9C (non AA HCs non-CBLR)

with $5 billion or more in total assets—

46.98,

FR Y–9C (AA HCs)—48.80,

FR Y–9LP—5.27,

FR Y–9SP—5.40,

FR Y–9ES—0.50,

FR Y–9CS—0.50

–9C (non AA HCs CBLR) with

less than $5 billion in total assets—

29.17,

FR Y–9C (non AA HCs CBLR) with $5

billion or more in total assets—35.14,

FR Y–9C (non AA HCs non-CBLR)

with less than $5 billion in total assets—

41.01,

FR Y–9C (non AA HCs non-CBLR)

with $5 billion or more in total assets—

46.98,

FR Y–9C (AA HCs)—48.80,

FR Y–9LP—5.27,

FR Y–9SP—5.40,

FR Y–9ES—0.50,

FR Y–9CS—0.50.

Recordkeeping

FR Y–9C (non-advanced approaches

HCs with less than $5 billion in total

assets), FR Y–9C (non-advanced

approaches HCs with $5 billion or more

in total assets), FR Y–9C (advanced

approaches HCs), and FR Y–9LP: 1.00

hour; FR Y–9SP, FR Y–9ES, and FR Y–

9CS: 0.50 hours.

Estimated annual burden hours:

Reporting

FR Y–9C (non AA HCs CBLR) with

less than $5 billion in total assets—

8,284,

FR Y–9C (non AA HCs CBLR) with $5

billion or more in total assets—4,920,

FR Y–9C (non AA HCs non-CBLR)

with less than $5 billion in total assets—

13,779,

FR Y–9C (non AA HCs non-CBLR)

with $5 billion or more in total assets—

28,940,

FR Y–9C (AA HCs)—3,709,

FR Y–9LP—9,149,

FR Y–9SP—42,768,

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Federal Register / Vol. 85, No. 196 / Thursday, October 8, 2020 / Rules and Regulations

29 12 U.S.C. 4802(a).

30 12 U.S.C. 4802.

31 12 U.S.C. 4809.

1 Public Law 92–181, 85 Stat. 583 (1971), 12.

U.S.C. 2001, et seq.

2 Public Law 102–552, 106 Stat. 4131 (1992).

FR Y–9ES—42,

FR Y–9CS—472.

Recordkeeping

FR Y–9C—1,452,

FR Y–9LP—1,736,

FR Y–9SP—3,960,

FR Y–9ES—42,

FR Y–9CS—472.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA)

requires an agency to consider whether

the rules it proposes will have a

significant economic impact on a

substantial number of small entities

. 2001, et seq.

2 Public Law 102–552, 106 Stat. 4131 (1992).

FR Y–9ES—42,

FR Y–9CS—472.

Recordkeeping

FR Y–9C—1,452,

FR Y–9LP—1,736,

FR Y–9SP—3,960,

FR Y–9ES—42,

FR Y–9CS—472.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA)

requires an agency to consider whether

the rules it proposes will have a

significant economic impact on a

substantial number of small entities.

The RFA requires an agency to prepare

a final regulatory flexibility analysis

when it promulgates a final rule after

being required to publish a general

notice of proposed rulemaking. As

discussed previously, the agencies have

decided to adopt, without changes,

revisions to the definition of eligible

retain income made under the capital

interim final rule and the TLAC interim

final rule. There was no general notice

of proposed rulemaking associated with

this final rule. Accordingly, the agencies

have concluded that the RFA’s

requirements relating to initial and final

regulatory flexibility analysis do not

apply to the promulgation of this final

rule.

D. Riegle Community Development and

Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the

Riegle Community Development and

Regulatory Improvement Act

(RCDRIA),29 in determining the effective

date and administrative compliance

requirements for new regulations that

impose additional reporting, disclosure,

or other requirements on insured

depository institutions (IDIs), each

Federal banking agency must consider,

consistent with the principle of safety

and soundness and the public interest,

any administrative burdens that such

regulations would place on IDIs,

including small IDIs, and customers of

IDIs, as well as the benefits of such

regulations

at

impose additional reporting, disclosure,

or other requirements on insured

depository institutions (IDIs), each

Federal banking agency must consider,

consistent with the principle of safety

and soundness and the public interest,

any administrative burdens that such

regulations would place on IDIs,

including small IDIs, and customers of

IDIs, as well as the benefits of such

regulations. In addition, section 302(b)

of RCDRIA requires new regulations and

amendments to regulations that impose

additional reporting, disclosures, or

other new requirements on IDIs

generally to take effect on the first day

of a calendar quarter that begins on or

after the date on which the regulations

are published in final form.30 The

agencies considered the administrative

burdens and benefits of the final rule in

determining its effective date and

administrative compliance

requirements. As such, the final rule

will be effective on January 1, 2021.

E. Use of Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 31 requires the Federal

banking agencies to use plain language

in all proposed and final rules

published after January 1, 2000. The

agencies have sought to present the final

rule in a simple and straightforward

manner and did not receive any

comments on the use of plain language.

F. OCC Unfunded Mandates Reform Act

of 1995

As a general matter, the Unfunded

Mandates Act of 1995 (UMRA), 2 U.S.C.

1531 et seq., requires the preparation of

a budgetary impact statement before

promulgating a rule that includes a

Federal mandate that may result in the

expenditure by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year. However, the UMRA

does not apply to final rules for which

a general notice of proposed rulemaking

was not published. See 2 U.S.C. 1532(a)

of

a budgetary impact statement before

promulgating a rule that includes a

Federal mandate that may result in the

expenditure by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year. However, the UMRA

does not apply to final rules for which

a general notice of proposed rulemaking

was not published. See 2 U.S.C. 1532(a).

Therefore, because the OCC has not

published a general notice of proposed

rulemaking in connection with this

revision, the OCC has not prepared an

economic analysis of the rule under the

UMRA.

Authority and Issuance

■For the reasons set forth in the

preamble, the interim final rules that

were published at 85 FR 15909 on

March 20, 2020, and 85 FR 17003 on

March 26, 2020, are adopted as final

rules by the OCC, Board, and FDIC

without change.

Brian P. Brooks,

Acting Comptroller of the Currency

By order of the Board of Governors of the

Federal Reserve System.

Ann E. Misback,

Secretary of the Board

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on or about

August 21, 2020.

James P. Sheesley,

Acting Assistant Executive Secretary.

[FR Doc. 2020–19829 Filed 10–7–20; 8:45 am]

BILLING CODE 4810–33–P, 6210–01–P; 6714–01–P

FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052–AD37

District Financial Reporting

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA, we, or our) is

amending our regulations governing

how a Farm Credit bank presents

information on its related associations

when preparing annual bank financial

statements on a stand-alone basis. The

final rule provides two presentation

options when disclosing related

association financial information in an

annual bank report: By footnote or

attached in a supplement.

DATES: This regulation will be effective

30 days after publication in the Federal

Register during which either or both

Houses of Congress are in session

paring annual bank financial

statements on a stand-alone basis. The

final rule provides two presentation

options when disclosing related

association financial information in an

annual bank report: By footnote or

attached in a supplement.

DATES: This regulation will be effective

30 days after publication in the Federal

Register during which either or both

Houses of Congress are in session. We

will publish notification of the effective

date in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Technical information: Joi Neal,

Senior Accountant, Office of Regulatory

Policy, (703) 883–4223, TTY (703) 883–

4056.

Legal information: Laura McFarland,

Senior Counsel, Office of General

Counsel, (703) 883–4020, TTY (703)

883–4056.

SUPPLEMENTARY INFORMATION:

I. Objective

The objective of the final rule is to

improve shareholder access to district

financial information by providing an

additional method of presenting

financial information on a bank’s related

associations to those banks preparing

annual financial statements on a stand-

alone basis.

II. Background

The Farm Credit Act of 1971 (Act), as

amended,1 authorizes the FCA to issue

regulations implementing the Act’s

provisions. Our regulations are intended

to ensure the safe and sound operation

of Farm Credit System (System)

institutions and to govern the disclosure

of financial information to shareholders

of, and investors in, the System.

Congress explained in section 514 of the

Farm Credit Banks and Associations

Safety and Soundness Act of 1992 2 that

disclosures of financial information,

among other disclosures, provide

System shareholders with information

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