Final Rule: Total Loss Absorbing Capital (TLAC) Holdings

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1 See 84 FR 13814 (April 8, 2019).

2 When the proposal was issued, a banking

organization was an ‘‘advanced approaches banking

organization’’ if it had total assets of at least $250

billion, or if it had consolidated on-balance sheet

foreign exposures of at least $10 billion, or if it was

a subsidiary of a depository institution, bank

holding company, savings and loan holding

company or intermediate holding company that was

an advanced approaches banking organization. See

78 FR 62018, 62204 (October 11, 2013), 78 FR

55340, 55523 (September 10, 2013). See also 12

CFR part 3 (OCC); 12 CFR part 217 (Board); and 12

CFR part 324 (FDIC). In November 2019, the

agencies issued a final rule to revise the criteria for

determining the applicability of regulatory capital

and liquidity requirements for large U.S. banking

organizations and the U.S. intermediate holding

companies of certain foreign banking organizations,

including the application of the advanced

approaches (interagency tailoring final rule). Under

this final rule, advanced approaches banking

organizations include those banking organizations

subject to Category I standards (those banking

organizations that qualify as U.S. GSIBs) or

Category II standards (banking organizations with

(1) at least $700 billion in total consolidated assets

or (2) at least $75 billion in cross-jurisdictional

activity and more than $100 billion in total

consolidated assets), and a subsidiary depository

institution of such a banking organization. See 84

FR 59230 (November 1, 2019).

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket ID OCC–2018–0019]

RIN 1557–AE38

FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulation Q; Docket No

s-jurisdictional

activity and more than $100 billion in total

consolidated assets), and a subsidiary depository

institution of such a banking organization. See 84

FR 59230 (November 1, 2019).

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket ID OCC–2018–0019]

RIN 1557–AE38

FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulation Q; Docket No. R–1655]

RIN 7100–AF43

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 324

RIN 3064–AE79

Regulatory Capital Treatment for

Investments in Certain Unsecured Debt

Instruments of Global Systemically

Important U.S. Bank Holding

Companies, Certain Intermediate

Holding Companies, and Global

Systemically Important Foreign

Banking Organizations; Total Loss-

Absorbing Capacity Requirements

AGENCY: Office of the Comptroller of the

Currency, Treasury (OCC); the Board of

Governors of the Federal Reserve

System (Board); and the Federal Deposit

Insurance Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The OCC, Board, and FDIC

(collectively, the agencies) are adopting

a final rule that applies to advanced

approaches banking organizations with

the aim of reducing both

interconnectedness within the financial

system and systemic risks. The final

rule requires deduction from a banking

organization’s regulatory capital for

certain investments in unsecured debt

instruments issued by foreign or U.S.

global systemically important banking

organizations (GSIBs) for the purposes

of meeting minimum total loss-

absorbing capacity (TLAC) requirements

and, where applicable, long-term debt

requirements, or for investments in

unsecured debt instruments issued by

GSIBs that are pari passu or

subordinated to such debt instruments.

In addition, the Board is adopting

changes to its TLAC rules to clarify

requirements and correct drafting errors.

DATES: The final rule is effective on

April 1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC: Andrew Tschirhart, Risk Expert

g-term debt

requirements, or for investments in

unsecured debt instruments issued by

GSIBs that are pari passu or

subordinated to such debt instruments.

In addition, the Board is adopting

changes to its TLAC rules to clarify

requirements and correct drafting errors.

DATES: The final rule is effective on

April 1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC: Andrew Tschirhart, Risk Expert

(202) 649–6370, Capital and Regulatory

Policy; or Carl Kaminski, Special

Counsel, or Jean Xiao, 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: Constance M. Horsley, Deputy

Associate Director, (202) 452–5239; Juan

Climent, Assistant Director, (202) 872–

7526; Mark Handzlik, Manager, (202)

475–6636; Sean Healey, Lead Financial

Institution Policy Analyst, (202) 912–

4611; Division of Supervision and

Regulation; or Benjamin McDonough,

Assistant General Counsel (202) 452–

2036; or Mark Buresh, Senior Counsel

(202) 452–5270, Legal Division, Board of

Governors of the Federal Reserve

System, 20th and C Streets NW,

Washington, DC 20551. For the hearing

impaired only, Telecommunication

Device for the Deaf (TDD), (202) 263–

4869.

FDIC: Benedetto Bosco, Chief, Capital

Policy Section; bbosco@fdic.gov;

Richard Smith, Capital Markets Policy

Analyst, rismith@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; or Ryan

Rappa, Counsel, rrappa@fdic.gov, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

A. Capital Requirements

B. TLAC Rule

III. Overview of the Notice of Proposed

Rulemaking and Comments

IV. Summary of the Final Rule

V

herine Wood,

Counsel, cawood@fdic.gov; or Ryan

Rappa, Counsel, rrappa@fdic.gov, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

A. Capital Requirements

B. TLAC Rule

III. Overview of the Notice of Proposed

Rulemaking and Comments

IV. Summary of the Final Rule

V. Regulatory Capital Treatment for

Advanced Approaches Banking

Organizations’ Investments in Covered

Debt Instruments

A. Scope of Application

B. Deduction From Tier 2 Capital

C. Amendments to Definitions

D. Investments in Covered Banking

Organizations’ Own Covered Debt

Instruments and Reciprocal Cross

Holdings

E. Significant and Non-Significant

Investments in Covered Debt Instruments

F. Corresponding Deduction Approach

G. Net Long Position Calculation

VI. Technical Amendment and Other

Comments

VII. Amendments to the Board’s TLAC Rule

VIII. Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital Related

to Investments in Covered Debt

Instruments and Excluded Covered Debt

Instruments

B. Public Disclosure of Long-Term Debt

and TLAC by Covered BHCs and

Covered IHCs

IX. Regulatory Analyses

A. Paperwork Reduction Act

B. Regulatory Flexibility Act Analysis

C. Plain Language

D. OCC Unfunded Mandates Reform Act of

1995 Determination

E. Riegle Community Development and

Regulatory Improvement Act of 1994

F. Congressional Review Act

I. Introduction

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) are

issuing a final rule to revise the

regulatory capital rule in a manner

substantially consistent with a proposed

rule issued in April 2019 (proposal).1

The final rule addresses the regulatory

capital treatment of investments by

advanced approaches banking

organizations in unsecured debt

instruments issued by foreign or U.S

Deposit Insurance Corporation

(FDIC) (together, the agencies) are

issuing a final rule to revise the

regulatory capital rule in a manner

substantially consistent with a proposed

rule issued in April 2019 (proposal).1

The final rule addresses the regulatory

capital treatment of investments by

advanced approaches banking

organizations in unsecured debt

instruments issued by foreign or U.S.

global systemically important banking

organizations (GSIBs) for the purposes

of meeting minimum total loss-

absorbing capacity (TLAC) requirements

and, as applicable, long-term debt

requirements, or of investments in

unsecured debt instruments issued by

GSIBs that are pari passu or

subordinated to such debt instruments

(covered debt instruments).2 Consistent

with the proposal, the exposures of an

advanced approaches banking

organization to covered debt

instruments generally are subject to

deduction from the banking

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3 Banking organizations subject to the agencies’

capital rule include national banks, state member

banks, insured state nonmember banks, savings

associations, and top-tier bank holding companies,

intermediate holding companies, and savings and

loan holding companies domiciled in the United

States, but exclude banking organizations subject to

the Board’s Small Bank Holding Company and

Savings and Loan Holding Company Policy

Statement (12 CFR part 225, appendix C), qualifying

community banking organizations that elect to

comply with the agencies’ community bank

leverage ratio framework, and 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 ownershi

appendix C), qualifying

community banking organizations that elect to

comply with the agencies’ community bank

leverage ratio framework, and 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 See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a)

(Board); and 12 CFR 324.10(a) (FDIC). In addition

to the generally applicable leverage ratio, advanced

approaches banking organizations are subject to a

supplementary leverage ratio, which measures a

banking organization’s tier 1 capital relative to its

on-balance sheet and certain off-balance sheet

exposures.

5 A different deduction framework applies to non-

advanced approaches banking organizations. See 84

FR 35234 (July 22, 2019).

6 See 12 CFR 3.22(c)(1) (OCC); 12 CFR

217.22(c)(1) (Board); and 12 CFR 324.22(c)(1)

(FDIC).

7 See 12 CFR 3.22(c)(2) (OCC); 12 CFR

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2)

(FDIC).

8 See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC);

12 CFR 217.22(c)(3), (c)(5), and (c)(6) (Board); and

12 CFR 324.22(c)(3), (c)(5), and (c)(6) (FDIC).

9 See 12 CFR part 3, subparts D, E, or F, as

applicable (OCC); 12 CFR part 217, subparts D, E,

and F, as applicable (Board); and 12 CFR part 324,

subparts D, E, or F, as applicable (FDIC).

10 See 12 CFR part 3, subparts D, E, or F, as

applicable (OCC); 12 CFR part 217, subparts D, E,

and F, as applicable (Board); and 12 CFR part 324,

subparts D, E, or F, as applicable (FDIC).

11 See 82 FR 8266 (January 24, 2017); 12 CFR part

252, subparts G and P. The TLAC rule’s TLAC and

long-term debt requirements took effect on January

1, 2019.

12 See 12 CFR 252.62 and 252.63; 12 CFR 252.162

and 252.165. The requirements applicable under

the TLAC rule to covered BHCs and covered IHCs

are similar but not identical

d 12 CFR part 324,

subparts D, E, or F, as applicable (FDIC).

11 See 82 FR 8266 (January 24, 2017); 12 CFR part

252, subparts G and P. The TLAC rule’s TLAC and

long-term debt requirements took effect on January

1, 2019.

12 See 12 CFR 252.62 and 252.63; 12 CFR 252.162

and 252.165. The requirements applicable under

the TLAC rule to covered BHCs and covered IHCs

are similar but not identical.

13 Long-term debt issued by a covered IHC to

affiliates of the covered IHC is subject to notable

additional requirements, including the inclusion of

a provision allowing the Board to order the

conversion of the debt into common equity tier 1

capital of the covered IHC. See 12 CFR 252.163.

14 The internal debt conversion provision

included in covered IHC long-term debt issued to

affiliates performs a similar function outside of a

resolution proceeding.

organization’s regulatory capital. The

final rule includes certain adjustments

to the proposal in response to

comments. The final rule aims to reduce

both interconnectedness within the

financial system and systemic risks.

II. Background

A. Capital Requirements

The agencies’ regulatory capital rule

(capital rule) imposes minimum capital

requirements on banking organizations

measured through risk-based and

leverage capital ratios.3 These regulatory

capital ratios consist of regulatory

capital measures relative to risk-

weighted assets and total assets,

respectively.4 The numerators of the

regulatory capital ratios include various

adjustments and deductions to balance-

sheet-based regulatory capital

components

um capital

requirements on banking organizations

measured through risk-based and

leverage capital ratios.3 These regulatory

capital ratios consist of regulatory

capital measures relative to risk-

weighted assets and total assets,

respectively.4 The numerators of the

regulatory capital ratios include various

adjustments and deductions to balance-

sheet-based regulatory capital

components.

The capital rule includes two broad

categories of deductions from regulatory

capital related to investments in the

capital instruments of financial

institutions by advanced approaches

banking organizations.5 First, it requires

a banking organization to deduct any

investment in its own regulatory capital

instruments and any investment in

regulatory capital instruments held

reciprocally with another financial

institution (reciprocal cross holding).6

Second, it requires a banking

organization to deduct investments in

capital instruments issued by

unconsolidated financial institutions

that would qualify as regulatory capital

if issued by the banking organization

itself.7 For the purpose of the latter

deduction, a banking organization may

be required to deduct the entire amount

of the investment, or it may be required

to deduct only the portion of the

investment that exceeds a certain

threshold.8 These deductions are

intended to reduce interconnectedness

and contagion risk among financial

institutions by discouraging banking

organizations from investing in the

capital of other financial institutions

nking organization may

be required to deduct the entire amount

of the investment, or it may be required

to deduct only the portion of the

investment that exceeds a certain

threshold.8 These deductions are

intended to reduce interconnectedness

and contagion risk among financial

institutions by discouraging banking

organizations from investing in the

capital of other financial institutions.

For deductions related to investments

in the capital of unconsolidated

financial institutions, a banking

organization must deduct from the

component of regulatory capital for

which the instrument qualifies or would

qualify if it were issued by the banking

organization that is holding the

exposure.9 For example, an advanced

approaches banking organization that

owns 10 percent or less of the common

stock of an unconsolidated financial

institution is said to have a ‘‘non-

significant investment’’ in the capital of

the unconsolidated financial institution.

If the advanced approaches banking

organization invests in tier 2

instruments issued by the

unconsolidated financial institution,

then it must deduct from its own tier 2

capital the amount, if any, by which the

investment, combined with other non-

significant investments in the capital of

other unconsolidated financial

institutions, exceeds 10 percent of the

sum of the banking organization’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under section

__.22(a) through __.22(c)(3), net of

associated deferred tax liabilities (DTLs)

(10 percent threshold for non-significant

investments). Any non-significant

investments in the capital of

unconsolidated financial institutions

that are not deducted from regulatory

capital are risk-weighted in accordance

with the capital rule.10

B

common equity tier 1

capital elements required under section

__.22(a) through __.22(c)(3), net of

associated deferred tax liabilities (DTLs)

(10 percent threshold for non-significant

investments). Any non-significant

investments in the capital of

unconsolidated financial institutions

that are not deducted from regulatory

capital are risk-weighted in accordance

with the capital rule.10

B. TLAC Rule

In December 2016, the Board issued a

final rule to require the largest domestic

and foreign banking organizations

operating in the United States to

maintain a minimum amount of total

loss-absorbing capacity (TLAC),

consisting of tier 1 capital (excluding

minority interest) and certain long-term

debt instruments (TLAC rule).11 The

TLAC rule applies to a U.S. top-tier

bank holding company identified under

the Board’s rules as a global

systemically important bank holding

company (covered BHC) or a top-tier

U.S. intermediate holding company

subsidiary of a global systemically

important foreign banking organization

(foreign GSIB) with $50 billion or more

in U.S. non-branch assets (covered IHC)

(collectively, covered banking

organizations).

The objective of the TLAC rule is to

enhance financial stability by reducing

the impact of the failure of covered

banking organizations by requiring such

organizations to have sufficient loss-

absorbing capacity on both a going-

concern and a gone-concern basis. The

TLAC rule includes requirements that a

covered banking organization maintain

outstanding minimum levels of TLAC

and long-term debt.12 TLAC is the sum

of the tier 1 capital instruments issued

directly by the covered banking

organization (excluding minority

interest) and the long-term debt issued

directly by the covered banking

organization

h a going-

concern and a gone-concern basis. The

TLAC rule includes requirements that a

covered banking organization maintain

outstanding minimum levels of TLAC

and long-term debt.12 TLAC is the sum

of the tier 1 capital instruments issued

directly by the covered banking

organization (excluding minority

interest) and the long-term debt issued

directly by the covered banking

organization. Under the TLAC rule,

long-term debt is generally unsecured

debt that is issued directly by a covered

banking organization, has no features

that would interfere with an orderly

resolution proceeding, has a remaining

maturity of at least one year, and is

governed by U.S. law, among other

provisions.13

Long-term debt instruments under the

TLAC rule are capable of absorbing

losses in resolution (i.e., on a gone-

concern basis). This is because the debt

holders’ claim on a banking

organization’s assets may not receive

full payment in a resolution,

receivership, insolvency, or similar

proceeding.14 This potential loss-

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15 Long-term debt under the TLAC rule may also

qualify as tier 2 capital under the capital rule, if it

satisfies the eligibility criteria for tier 2 capital.

16 The proposal of the TLAC rule in 2015 was

issued solely by the Board. Therefore, the proposed

regulatory capital deductions in that proposal

would have only applied to Board-regulated

banking organizations, which include bank holding

companies, intermediate holding companies,

savings and loan holdings companies, and state

member banks.

17 As discussed further in section V.C.2 below,

the final rule excludes certain unsecured debt

instruments issued by foreign GSIBs from the scope

of the final rule

al deductions in that proposal

would have only applied to Board-regulated

banking organizations, which include bank holding

companies, intermediate holding companies,

savings and loan holdings companies, and state

member banks.

17 As discussed further in section V.C.2 below,

the final rule excludes certain unsecured debt

instruments issued by foreign GSIBs from the scope

of the final rule. Specifically, the final rule

generally excludes from the definition of covered

debt instrument an unsecured debt instrument that

cannot be written down or converted into equity

(i.e., bailed in) under a special resolution regime.

absorbing capacity of long-term debt is

part of the rationale for the deduction

approach for investments in such debt

instruments under this final rule.15

Given the ability of long-term debt to

absorb the losses of a covered banking

organization in a resolution,

receivership, insolvency, or similar

proceeding, the Board proposed

regulatory capital deductions for

investments by Board-regulated banking

organizations in long-term debt issued

under the TLAC rule when it initially

proposed the TLAC rule in 2015.16 The

Board did not finalize these limitations

when it issued the final TLAC rule

because it needed additional time to

work with the OCC and the FDIC to

develop a proposed interagency

approach regarding the regulatory

capital treatment for investments in

certain debt instruments issued by

covered banking organizations.

III. Overview of Notice of Proposed

Rulemaking and Comments

In April 2019, the agencies issued a

proposal to address, for purposes of the

capital rule, the systemic risks posed by

an advanced approaches banking

organization’s investments in covered

debt instruments and to create an

incentive for advanced approaches

banking organizations to limit their

exposure to GSIBs. The deductions

required under the proposal would have

affected the capital ratios of advanced

approaches banking organizations

address, for purposes of the

capital rule, the systemic risks posed by

an advanced approaches banking

organization’s investments in covered

debt instruments and to create an

incentive for advanced approaches

banking organizations to limit their

exposure to GSIBs. The deductions

required under the proposal would have

affected the capital ratios of advanced

approaches banking organizations.

Without the proposed changes,

investments in covered debt

instruments issued by covered BHCs,

foreign GSIBs, and covered IHCs are

generally not subject to deduction and

would generally be subject to a risk

weight of 100 percent.

An investment in a covered debt

instrument, as defined in the proposal,

by an advanced approaches banking

organization would have been treated as

an investment in a tier 2 capital

instrument for purposes of the existing

deduction framework. As a result, an

investment in a covered debt instrument

would have been subject to deduction

from the advanced approaches banking

organization’s own tier 2 capital.

The existing corresponding deduction

approach in the capital rule would have

been amended to apply any required

deduction by advanced approaches

banking organizations of an investment

in a covered debt instrument that

exceeded certain thresholds, consistent

with the deduction framework for

investments in the capital of

unconsolidated financial institutions. In

addition, the existing deduction

approaches under the capital rule would

have been amended to apply to an

advanced approaches banking

organization’s reciprocal cross holdings

of covered debt instruments; that is, an

advanced approaches banking

organization would have deducted from

its own tier 2 capital any reciprocal

cross holdings of covered debt

instruments with another banking

organization. The existing deduction

approaches under the capital rule would

have also been amended to apply to a

covered BHC’s investments in its own

covered debt instruments

ings

of covered debt instruments; that is, an

advanced approaches banking

organization would have deducted from

its own tier 2 capital any reciprocal

cross holdings of covered debt

instruments with another banking

organization. The existing deduction

approaches under the capital rule would

have also been amended to apply to a

covered BHC’s investments in its own

covered debt instruments. Similarly, the

existing deduction approaches under

the capital rule would have also been

amended to apply to a covered IHC

subject to the advanced approaches

(advanced approaches covered IHC) and

its investments in its own covered debt

instruments.

The proposal also included certain

exclusions from deduction. Importantly,

the proposal would have allowed

advanced approaches banking

organizations to exclude from deduction

investments in covered debt

instruments, subject to certain

qualifying and measurement criteria,

that are five percent or less of the sum

of advanced approaches banking

organization’s common equity tier 1

capital elements minus all deductions

from and adjustments to common equity

tier 1 capital elements required under

section __.22(a) through __.22(c)(3), net

of associated DTLs (five percent

exclusion). As discussed in the

preamble to the proposal, the agencies

designed the exclusion from deduction

to support deep and liquid markets for

covered debt instruments issued by

GSIBs. In the case of a U.S. GSIB, it

would have applied the proposed

exclusion only to ‘‘excluded covered

debt instruments,’’ which were defined

in the proposal as covered debt

instruments held for 30 business days or

less and held for the purpose of short-

term resale or with the intent of

benefiting from actual or expected short-

term price movements, or to lock in

arbitrage profits. This provision was

intended to limit the five percent

exclusion for U.S. GSIBs to covered debt

instruments held in connection with

market making activities

oposal as covered debt

instruments held for 30 business days or

less and held for the purpose of short-

term resale or with the intent of

benefiting from actual or expected short-

term price movements, or to lock in

arbitrage profits. This provision was

intended to limit the five percent

exclusion for U.S. GSIBs to covered debt

instruments held in connection with

market making activities. Advanced

approaches banking organizations that

are not U.S. GSIBs would not have been

subject to this limit on the use of the

five percent exclusion. Under the

proposal’s five percent exclusion, all

advanced approaches banking

organizations could exclude covered

debt instruments measured on a gross

long basis from the deduction

framework up to a cap of five percent

of the banking organization’s common

equity tier 1 capital.

The proposal would have revised

section __.22(c), (f), and (h) of the

capital rule to incorporate the proposed

deduction approach for investments in

covered debt instruments, and added

several new definitions to section __.2

to effectuate these deductions. Further,

the definition of ‘‘investment in the

capital of an unconsolidated financial

institution’’ would have been amended

to correct a typographical error.

Collectively, the agencies received ten

public comment letters from trade

associations, public interest groups,

private individuals, and other interested

parties. As further detailed below,

commenters generally supported the

overarching goal of the proposal to

reduce interconnectedness by creating

an incentive for advanced approaches

banking organizations to limit their

exposure to GSIBs. However,

commenters also expressed certain

general concerns with the proposal and

noted specific concerns with certain

technical aspects of it.

The agencies are jointly finalizing a

regulatory capital treatment for

investments in covered debt

instruments that applies to advanced

approaches banking organizations

advanced approaches

banking organizations to limit their

exposure to GSIBs. However,

commenters also expressed certain

general concerns with the proposal and

noted specific concerns with certain

technical aspects of it.

The agencies are jointly finalizing a

regulatory capital treatment for

investments in covered debt

instruments that applies to advanced

approaches banking organizations. The

final rule is substantially consistent

with the proposal, with certain

modifications in response to comments

as well as some technical clarifications.

IV. Summary of the Final Rule

The final rule applies to advanced

approaches banking organizations and

generally requires deductions from

capital for direct, indirect, and synthetic

exposures to covered debt instruments

and any other unsecured debt

instruments pari passu or subordinated

to covered debt instruments.17 Under

the final rule, an advanced approaches

banking organization treats investments

in covered debt instruments as

investments in tier 2 capital instruments

for purposes of applying the

corresponding deduction approach in

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18 See 12 CFR 3.22(h)(2) (OCC); 12 CFR

217.22(h)(2) (Board); 12 CFR 324.2(h)(2) (FDIC).

19 See 84 FR 59230 (November 1, 2019).

20 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC).

the capital rule

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18 See 12 CFR 3.22(h)(2) (OCC); 12 CFR

217.22(h)(2) (Board); 12 CFR 324.2(h)(2) (FDIC).

19 See 84 FR 59230 (November 1, 2019).

20 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC).

the capital rule. Deduction from capital

is required for:

• Investments in a covered BHC’s or

advanced approaches covered IHC’s

own covered debt instruments, as

applicable;

• Reciprocal cross holdings with

another financial institution of covered

debt instruments;

• Investments in covered debt

instruments of a financial institution

while also holding 10 percent or more

of the financial institution’s common

stock; and

• Investments in covered debt

instruments that, together with

investments in the capital of

unconsolidated financial institutions,

exceed 10 percent of the investing

advanced approaches banking

organization’s common equity tier 1

capital.

• Under the final rule, an advanced

approaches banking organization may

exclude from deduction investments in

certain covered debt instruments up to

five percent of its common equity tier 1

capital, as measured on a gross long

basis.18 Usage of the five percent

exclusion is tailored, depending on

whether the advanced approaches

banking organization is a U.S. GSIB.

For U.S. GSIBs, only ‘‘excluded

covered debt instruments’’ are eligible

for the five percent exclusion in the

final rule. Generally, ‘‘excluded covered

debt instruments’’ in the final rule are

investments in covered debt

instruments that are held in accordance

with market making activities, as

identified using criteria from the

regulations implementing section 13 of

the Bank Holding Company Act

(commonly known as the Volcker Rule)

as discussed in more detail in section

V.E. below. A U.S

in the

final rule. Generally, ‘‘excluded covered

debt instruments’’ in the final rule are

investments in covered debt

instruments that are held in accordance

with market making activities, as

identified using criteria from the

regulations implementing section 13 of

the Bank Holding Company Act

(commonly known as the Volcker Rule)

as discussed in more detail in section

V.E. below. A U.S. GSIB’s direct or

indirect exposure to a covered debt

instrument is an excluded covered debt

instrument if the exposure is held for 30

or fewer business days and held in

connection with market making-related

activities. A U.S. GSIB’s holding of a

synthetic exposure to a covered debt

instrument is not limited to 30 business

days in order to qualify as an excluded

covered debt instrument.

For advanced approaches banking

organizations that are not U.S. GSIBs,

any direct, indirect, or synthetic

exposure to a covered debt instrument

issued by an unconsolidated financial

institution that is a non-significant

investment is eligible for the five

percent exclusion in the final rule.

The final rule revises section __.22(c),

(f), and (h) of the capital rule to

incorporate the deduction approach for

investments in covered debt

instruments. As with the proposal,

several new definitions are added to

section __.2 in the final rule to

effectuate these deductions. More

information on these specific revisions

to the capital rule are provided below.

V. Regulatory Capital Treatment for

Advanced Approaches Banking

Organizations’ Investments in Covered

Debt Instruments

A. Scope of Application

The proposal would have applied the

deduction framework for covered debt

instruments to advanced approaches

banking organizations

o

effectuate these deductions. More

information on these specific revisions

to the capital rule are provided below.

V. Regulatory Capital Treatment for

Advanced Approaches Banking

Organizations’ Investments in Covered

Debt Instruments

A. Scope of Application

The proposal would have applied the

deduction framework for covered debt

instruments to advanced approaches

banking organizations. Since the

proposal was issued, the agencies issued

the interagency tailoring final rule that

included revisions to the scope of

advanced approaches banking

organizations.19 As a result of the

interagency tailoring final rule,

‘‘advanced approaches banking

organizations’’ include those banking

organizations subject to Category I

standards (i.e., those banking

organizations that qualify as U.S.

GSIBs), Category II standards (i.e.,

banking organizations with (1) at least

$700 billion in total consolidated assets

or (2) at least $75 billion in cross-

jurisdictional activity and at least $100

billion in total consolidated assets), or a

subsidiary depository institution of a

banking organization subject to Category

I or II standards. Some commenters

suggested that the agencies should

apply the proposal to all banking

organizations subject to the capital rule.

Other commenters suggested the

agencies apply the proposal to all

banking organizations subject to

Category I through IV standards, as

defined in the interagency tailoring final

rule.20

After considering the comments, the

agencies are continuing to limit the

scope of this rule to advanced

approaches banking organizations, as

revised by the interagency tailoring final

rule. As explained in the proposal, the

systemic risks associated with banking

organizations’ investments in covered

debt instruments is greatest for the

banking organizations covered by the

proposal

le.20

After considering the comments, the

agencies are continuing to limit the

scope of this rule to advanced

approaches banking organizations, as

revised by the interagency tailoring final

rule. As explained in the proposal, the

systemic risks associated with banking

organizations’ investments in covered

debt instruments is greatest for the

banking organizations covered by the

proposal. However, the agencies

acknowledge the possibility of potential

systemic risks associated with other

banking organizations’ investments in

covered debt instruments and will

continue to evaluate whether additional

steps are warranted to address such

risks.

B. Deduction From Tier 2 Capital

Under the agencies’ capital rule, a

banking organization must deduct from

regulatory capital any investments in its

own capital instruments and in the

capital of other financial institutions

that it holds reciprocally. Other

investments in the capital of

unconsolidated financial institutions are

subject to deduction to the extent they

exceed certain thresholds.

Under the proposal, an investment in

a covered debt instrument by an

advanced approaches banking

organization would have been treated as

an investment in a tier 2 capital

instrument for purposes of the

deduction framework, and therefore,

would have been subject to deduction

from the advanced approaches banking

organization’s own tier 2 capital. The

existing corresponding deduction

approach in the capital rule would have

been amended to apply to any

deduction by advanced approaches

banking organizations of an investment

in a covered debt instrument that

exceeded certain thresholds, as if the

covered debt instrument were a tier 2

capital instrument

deduction

from the advanced approaches banking

organization’s own tier 2 capital. The

existing corresponding deduction

approach in the capital rule would have

been amended to apply to any

deduction by advanced approaches

banking organizations of an investment

in a covered debt instrument that

exceeded certain thresholds, as if the

covered debt instrument were a tier 2

capital instrument. In addition, the

existing deduction approaches under

the capital rule would have been

amended to apply to a covered BHC’s or

advanced approaches covered IHC’s

investments in its own covered debt

instruments, and to advanced

approaches banking organizations’

reciprocal cross holdings of covered

debt instruments with other financial

institutions. Such investments and cross

holdings would be deducted from an

advanced approaches banking

organization’s own tier 2 capital, as

applicable.

Some commenters expressed concerns

that deducting a covered debt

instrument from an advanced

approaches banking organization’s own

tier 2 capital is insufficiently restrictive.

As an alternative, these commenters

recommended that advanced

approaches banking organizations

deduct investments in covered debt

instruments from their own common

equity tier 1 capital. Some commenters

suggested that the prohibition of all

holdings of covered debt instruments by

advanced approaches banking

organizations would be more

appropriate. Other commenters

expressed concerns that deducting a

covered debt instrument from an

advanced approaches banking

organization’s own tier 2 capital is

overly restrictive. These commenters

asserted that a covered BHC or

advanced approaches covered IHC

should be able to effectuate deductions

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g a

covered debt instrument from an

advanced approaches banking

organization’s own tier 2 capital is

overly restrictive. These commenters

asserted that a covered BHC or

advanced approaches covered IHC

should be able to effectuate deductions

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21 See 12 CFR 252.61.

22 See 12 CFR 252.161.

23 The Basel Committee’s TLAC Holdings

standard excludes from the definition of ‘‘other

TLAC liabilities’’ instruments that are pari passu to

(1) excluded liabilities and (2) other instruments

that are eligible for recognition as external TLAC by

virtue of the exemptions to the subordination

requirements in the Financial Stability Board’s

TLAC term sheet. See section 66.c of the TLAC

Holdings standard. Only a proportion of

instruments that are eligible to be recognized as

external TLAC by virtue of the subordination

exemptions may be considered TLAC under the

TLAC Holdings standard. The proportion equals the

ratio of (1) the debt instruments issued by a GSIB

that rank pari passu to excluded liabilities and that

are recognized as external TLAC by the GSIB, to (2)

the debt instruments issued by the GSIB that rank

pari passu to excluded liabilities and that would be

recognized as external TLAC if the subordination

requirement was not applied. As stated in the

proposal, the agencies believe that implementation

of the proportional deduction approach used in the

Basel Committee’s TLAC Holdings standard would

have introduced too much complexity and

operational burden to the capital rule; the final rule

does not implement the proportional deduction

approach. See Basel Committee for Banking

Supervision and Regulation, ‘‘TLAC Holdings’’

(October 12, 2016), available at https://www.bis.org/

bcbs/publ/d387.pdf. (TLAC Holdings standard)

roach used in the

Basel Committee’s TLAC Holdings standard would

have introduced too much complexity and

operational burden to the capital rule; the final rule

does not implement the proportional deduction

approach. See Basel Committee for Banking

Supervision and Regulation, ‘‘TLAC Holdings’’

(October 12, 2016), available at https://www.bis.org/

bcbs/publ/d387.pdf. (TLAC Holdings standard).

24 See Financial Stability Board, ‘‘Principles on

Loss-absorbing and Recapitalisation Capacity of G–

SIBs in Resolution—Total Loss-absorbing Capacity

(TLAC) Term Sheet,’’ (November 9, 2015), available

at https://www.fsb.org/wp-content/uploads/TLAC-

Principles-and-Term-Sheet-for-publication-

final.pdf.

25 Under the FSB’s TLAC term sheet, ‘‘excluded

liabilities’’ do not qualify as TLAC and therefore are

not subject to deduction under the TLAC Holdings

from its own TLAC-eligible long-term

debt rather than its own tier 2 capital.

Requiring deduction of a covered debt

instrument from tier 2 capital should be

a sufficiently prudent and simple

approach that discourages advanced

approaches banking organizations’

investments in such instruments and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. Effectuating deductions

from a covered BHC’s or advanced

approaches covered IHC’s own TLAC-

eligible debt, rather than own tier 2

capital, could disproportionately favor

the largest and most internationally

active banking organizations. A less

complex banking organization, such as

a non-GSIB advanced approaches

banking organization, would make all

deductions related to an investment in

a covered debt instrument from its own

tier 2 capital, since non-GSIBs are not

required to issue TLAC-eligible debt

than own tier 2

capital, could disproportionately favor

the largest and most internationally

active banking organizations. A less

complex banking organization, such as

a non-GSIB advanced approaches

banking organization, would make all

deductions related to an investment in

a covered debt instrument from its own

tier 2 capital, since non-GSIBs are not

required to issue TLAC-eligible debt.

Further, allowing covered BHCs and

advanced approaches covered IHCs to

deduct from their own TLAC-eligible

debt creates additional balance sheet

capacity for these banking organizations

to invest in covered debt instruments

issued by other GSIBs relative to non-

GSIB advanced approaches banking

organizations, thereby undermining a

goal of the final rule to reduce

interconnectedness among large and

internationally active banking

organizations. The disproportionate

effects of allowing deduction from own

TLAC-eligible debt would be further

exacerbated if the agencies were to

expand the scope of the final rule in the

future as described above.

As such, the agencies are finalizing, as

proposed, the requirement that an

advanced approaches banking

organization treat an investment in a

covered debt instrument as an

investment in a tier 2 capital

instrument, and therefore, deduct such

investment from its own tier 2 capital.

C. Amendments to Definitions

The proposal would have added or

amended certain definitions in section _

_.2 of the capital rule to implement the

proposed deduction approach.

1. Definition of ‘‘Covered Debt

Instrument’’ for Covered BHC and

Covered IHC Issuance

Under the proposal, a ‘‘covered debt

instrument’’ would have been defined to

include an unsecured debt instrument

that is:

(1) Issued by a covered BHC and that

is an ‘‘eligible debt security’’ for

purposes of the TLAC rule,21 or that is

pari passu or subordinated to any

‘‘eligible debt security’’ issued by the

covered BHC; or

Debt

Instrument’’ for Covered BHC and

Covered IHC Issuance

Under the proposal, a ‘‘covered debt

instrument’’ would have been defined to

include an unsecured debt instrument

that is:

(1) Issued by a covered BHC and that

is an ‘‘eligible debt security’’ for

purposes of the TLAC rule,21 or that is

pari passu or subordinated to any

‘‘eligible debt security’’ issued by the

covered BHC; or

(2) Issued by a covered IHC and that

is an ‘‘eligible Covered IHC debt

security’’ for purposes of the TLAC

rule,22 or that is pari passu or

subordinated to any ‘‘eligible Covered

IHC debt security’’ issued by the

covered IHC.

Under the proposal, a covered debt

instrument would not have included a

debt instrument that qualifies as tier 2

capital under the capital rule.

Some commenters requested that pari

passu or subordinated unsecured debt

instruments be excluded from the

definition of ‘‘covered debt instrument.’’

Commenters argued that it is not

practical to determine whether a given

instrument is pari passu or

subordinated to TLAC-eligible debt

issued by a covered BHC or covered IHC

and whether a given debt instrument

was an eligible long-term debt

instrument under the TLAC rule.

Further, commenters argued that

because the TLAC rule limits the

amount of debt that a covered BHC or

covered IHC can issue that is not TLAC-

eligible but is pari passu with or

subordinated to TLAC-eligible debt,

significant amounts of such debt should

not be outstanding.

Treating unsecured debt instruments

that are pari passu or subordinated to

TLAC-eligible debt instruments as

‘‘covered debt instruments’’ is

important, given that these liabilities

will incur losses ahead of or

proportionally with TLAC-eligible debt.

Excluding these pari passu and

subordinated instruments from the

regulatory deduction treatment would

understate the degree of risk of these

investments

ured debt instruments

that are pari passu or subordinated to

TLAC-eligible debt instruments as

‘‘covered debt instruments’’ is

important, given that these liabilities

will incur losses ahead of or

proportionally with TLAC-eligible debt.

Excluding these pari passu and

subordinated instruments from the

regulatory deduction treatment would

understate the degree of risk of these

investments. Advanced approaches

banking organizations should be able to

determine whether an instrument

qualifies as TLAC under applicable

standards, or whether an instrument is

pari passu or subordinated to a

company’s TLAC-eligible debt

instruments based on public

information and routine due diligence.

Accordingly, the agencies are finalizing

as proposed the above prongs of the

definition of covered debt instrument

for covered BHC and covered IHC debt

issuances.

2. Definition of ‘‘Covered Debt

Instrument’’ for Foreign GSIB Issuance

A ‘‘covered debt instrument’’ also

would have included any unsecured

debt instrument issued by a foreign

GSIB or any of its subsidiaries, other

than its covered IHC, for the purpose of

absorbing losses or recapitalizing the

issuer or any of its subsidiaries in

connection with a resolution,

receivership, insolvency, or similar

proceeding of the issuer or any of its

subsidiaries (foreign TLAC-eligible

debt). Further, covered debt instruments

would have also included any debt

instrument that is pari passu or

subordinated to any foreign TLAC-

eligible debt, other than an unsecured

debt instrument that is included in the

regulatory capital of the issuer

ction with a resolution,

receivership, insolvency, or similar

proceeding of the issuer or any of its

subsidiaries (foreign TLAC-eligible

debt). Further, covered debt instruments

would have also included any debt

instrument that is pari passu or

subordinated to any foreign TLAC-

eligible debt, other than an unsecured

debt instrument that is included in the

regulatory capital of the issuer.

Commenters suggested that the scope

of the definition of ‘‘covered debt

instrument’’ should be revised to

include only foreign TLAC-eligible debt

as determined under applicable home-

country standards.23 Commenters stated

that the proposed scope of the definition

is broader than necessary because the

issuance of such liabilities is subject to

the Financial Stability Board (FSB)’s

TLAC term sheet’s limitation on

issuance of excluded liabilities.24 Some

commenters suggested that liabilities

issued by foreign GSIBs that are

‘‘excluded liabilities’’ under the FSB’s

TLAC term sheet should be excluded

from the proposal’s definition of

covered debt instrument and therefore

exempted from the deduction

framework.25

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Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations

standard, even if they rank pari passu or

subordinated to a TLAC instrument. Excluded

liabilities include deposits, liabilities arising from

derivatives, and structured notes, among other

items. The TLAC rule prohibits or limits covered

banking organizations from entering into financial

arrangements that may compromise an orderly

resolution process, including limiting the amount of

liabilities to unaffiliated companies

ri passu or

subordinated to a TLAC instrument. Excluded

liabilities include deposits, liabilities arising from

derivatives, and structured notes, among other

items. The TLAC rule prohibits or limits covered

banking organizations from entering into financial

arrangements that may compromise an orderly

resolution process, including limiting the amount of

liabilities to unaffiliated companies.

26 Generally, a resolution regime that is consistent

with the FSB’s Key Attributes of Effective

Resolution Regimes for Financial Institutions would

be a special resolution regime that addresses the

failure or potential failure of a financial company.

See Financial Stability Board, ‘‘Key Attributes of

Effective Resolution Regimes for Financial

Institutions,’’ (October 15, 2014), https://

www.fsb.org/wp-content/uploads/r_141015.pdf.

Current examples of special resolution regimes that

address the failure or potential failure of a financial

company are those included in the International

Swaps and Derivatives Association (ISDA) 2015

Universal Resolution Stay Protocol and the ISDA

2018 U.S. Resolution Stay Protocol. See ISDA 2015

Universal Resolution Stay Protocol (November 4,

2015), http://assets.isda.org/media/ac6b533f-3/

5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay

Protocol (July 31, 2018), https://www.isda.org/a/

CIjEE/3431552_40ISDA-2018-U.S.-Protocol-

Final.pdf.

27 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

and 12 CFR 324.2 (FDIC) (‘‘investment in the capital

of an unconsolidated financial institution,’’

‘‘investment in the banking organization’s own

capital instrument,’’ ‘‘indirect exposure,’’ and

‘‘synthetic exposure’’).

Some commenters reiterated that it is

not practical for banking organizations

to determine whether a given

instrument is pari passu or

subordinated to foreign TLAC-eligible

debt as such a determination requires

complex analyses of foreign law with

respect to insolvency regimes and

creditor hierarchies

zation’s own

capital instrument,’’ ‘‘indirect exposure,’’ and

‘‘synthetic exposure’’).

Some commenters reiterated that it is

not practical for banking organizations

to determine whether a given

instrument is pari passu or

subordinated to foreign TLAC-eligible

debt as such a determination requires

complex analyses of foreign law with

respect to insolvency regimes and

creditor hierarchies. Commenters also

asserted that there could be unintended

consequences of including instruments

that are pari passu or subordinated to

foreign TLAC-eligible debt, including

interference with ordinary interbank

transactions. As a result, banking

organizations would make conservative

assumptions and treat all unsecured

debt instruments issued by foreign

GSIBs as subject to the deduction

framework. Therefore, commenters

suggested that the final rule should not

include instruments pari passu or

subordinated to foreign TLAC-eligible

debt in the definition of ‘‘covered debt

instruments.’’

For the same reasons discussed above

with respect to instruments issued by

covered BHCs and covered IHCs, the

final rule defines debt instruments that

are pari passu or subordinated to

foreign TLAC-eligible debt as ‘‘covered

debt instruments.’’ As discussed, such

instruments would incur losses ahead of

or proportionally with foreign TLAC-

eligible debt and therefore should be

subject to the deduction framework.

However, the agencies recognize the

commenters’ concerns and revise in two

ways the definition of covered debt

instruments issued by foreign GSIBs and

their subsidiaries, other than covered

IHCs. First, the final rule provides that

an instrument is a covered debt

instrument if it is ‘‘eligible for use to

comply with an applicable law or

regulation’’ requiring the issuance of a

minimum amount of instruments to

absorb losses or to recapitalize the

issuer or any of its subsidiaries in

connection with a resolution,

receivership, insolvency, or similar

proceeding

r than covered

IHCs. First, the final rule provides that

an instrument is a covered debt

instrument if it is ‘‘eligible for use to

comply with an applicable law or

regulation’’ requiring the issuance of a

minimum amount of instruments to

absorb losses or to recapitalize the

issuer or any of its subsidiaries in

connection with a resolution,

receivership, insolvency, or similar

proceeding. The proposal’s definition

would not have explicitly considered

whether the instrument is eligible for

use to comply with such a law or

regulation.

Second, the final rule revises the

definition of a covered debt instrument

to exclude certain unsecured debt

instruments from the scope of the

definition. If the issuer may be subject

to a special resolution regime, in its

jurisdiction of incorporation or

organization, that addresses the failure

or potential failure of a financial

company and foreign TLAC-eligible

debt is eligible under that special

resolution regime to be written down or

converted into equity or any other

capital instrument, then an instrument

is pari passu or subordinated to foreign

TLAC-eligible debt if that instrument is

eligible to be written down or converted

into equity or another capital

instrument under that special resolution

regime ahead of or proportionally with

any foreign TLAC-eligible debt. These

revisions reflect the FSB’s TLAC term

sheet’s focus on having instruments and

liabilities that should be readily

available for bail-in, and that

instruments that cannot be bailed in

effectively rank senior to foreign TLAC-

eligible debt in bail-in.26

These revisions should reduce the

burden associated with determining

whether unsecured debt instruments are

pari passu or subordinated to foreign

TLAC-eligible debt

s TLAC term

sheet’s focus on having instruments and

liabilities that should be readily

available for bail-in, and that

instruments that cannot be bailed in

effectively rank senior to foreign TLAC-

eligible debt in bail-in.26

These revisions should reduce the

burden associated with determining

whether unsecured debt instruments are

pari passu or subordinated to foreign

TLAC-eligible debt. For purposes of the

final rule, an advanced approaches

banking organization can rely on the

terms of any special resolution regime

and other applicable laws or regulations

for purposes of determining the

applicability of the final rule’s

deduction framework for an unsecured

debt instrument. For example, if the

applicable law or regulation specifies

the seniority of instruments that must be

issued, the advanced approaches

banking organization can rely on that

specification of seniority in determining

whether a different instrument is pari

passu or subordinated to TLAC-eligible

debt instruments.

These revisions also address concerns

raised by commenters that the proposal

could have interfered with ordinary

interbank transactions. For example, if

the special resolution regime applicable

to a foreign GSIB provides that deposits

are excluded from bail-in, those

deposits are not covered debt

instruments subject to the final rule’s

deduction framework.

3. Other Definitions

Similar to the measurement of

investments in the capital of

unconsolidated financial institutions, an

‘‘investment in a covered debt

instrument’’ would have been defined

in the proposal as a net long position in

a covered debt instrument, including

direct, indirect, and synthetic exposures

to such covered debt instruments.

Investments in covered debt

instruments would have excluded

underwriting positions held for five

business days or less

al of

unconsolidated financial institutions, an

‘‘investment in a covered debt

instrument’’ would have been defined

in the proposal as a net long position in

a covered debt instrument, including

direct, indirect, and synthetic exposures

to such covered debt instruments.

Investments in covered debt

instruments would have excluded

underwriting positions held for five

business days or less. In addition, the

proposal would have amended the

definitions of ‘‘indirect exposure’’ and

‘‘synthetic exposure’’ in the capital rule

to add exposures to covered debt

instruments.27 The agencies received no

comments on these technical elements

of the proposal, and are finalizing, as

proposed, the definitions for

‘‘investment in a covered debt

instrument,’’ ‘‘indirect exposure,’’ and

‘‘synthetic exposure.’’

D. Investments in Covered Banking

Organizations’ Own Covered Debt

Instruments and Reciprocal Cross

Holdings

Under the agencies’ capital rule, a

banking organization must deduct from

regulatory capital an investment in its

own capital instruments and

investments in the capital of other

financial institutions that it holds

reciprocally under sections __.22(c)(1)

and (3), respectively. The proposal

would have amended section

217.22(c)(1) to require a covered BHC or

a covered IHC to deduct from tier 2

capital its investments in its own

covered debt instruments. The proposal

also would have amended section __

.22(c)(3) to require advanced approaches

banking organizations to deduct from

tier 2 capital any investment in a

covered debt instrument that is held

reciprocally with another financial

institution

ection

217.22(c)(1) to require a covered BHC or

a covered IHC to deduct from tier 2

capital its investments in its own

covered debt instruments. The proposal

also would have amended section __

.22(c)(3) to require advanced approaches

banking organizations to deduct from

tier 2 capital any investment in a

covered debt instrument that is held

reciprocally with another financial

institution.

As described earlier, some

commenters expressed concerns that

deducting a covered debt instrument

from an advanced approaches banking

organization’s own tier 2 capital is

overly restrictive, including in cases of

deductions for investments in its own

covered debt instruments, as applicable,

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28 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘significant investment in the

capital of an unconsolidated financial institution’’

and ‘‘non-significant investment in the capital of an

unconsolidated financial institution’’).

29 See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12

CFR 217.22(c)(6) and (d)(2)(i)(C) (Board); and 12

CFR 324.22(c)(6) and (d)(2)(i)(C) (FDIC). In addition

to the 10 percent threshold, a banking organization

could be subject to additional deductions for

significant investments in financial institutions in

the form of common stock, if the amount not

deducted under the 10 percent limit, combined

with mortgage servicing assets and deferred tax

assets that are not deducted, exceed 15 percent of

the banking organization’s common equity tier 1

capital. See 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d)

(Board); and 12 CFR 324.22(d) (FDIC).

30 See 12 CFR 3.22(c)(5) (OCC); 12 CFR

217.22(c)(5) (Board); and 12 CFR 324.2(c)(5) (FDIC).

and reciprocal cross holdings with other

financial institutions

with mortgage servicing assets and deferred tax

assets that are not deducted, exceed 15 percent of

the banking organization’s common equity tier 1

capital. See 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d)

(Board); and 12 CFR 324.22(d) (FDIC).

30 See 12 CFR 3.22(c)(5) (OCC); 12 CFR

217.22(c)(5) (Board); and 12 CFR 324.2(c)(5) (FDIC).

and reciprocal cross holdings with other

financial institutions. These

commenters asserted that a covered

BHC or a covered IHC should be able to

effectuate deductions from its own

TLAC-eligible long-term debt rather

than its own tier 2 capital for these

investments.

Requiring a deduction of a covered

debt instrument from tier 2 capital for

deductions related to investments in an

advanced approaches banking

organization’s own covered debt

instruments and reciprocal cross

holdings should be a sufficiently

prudent and simple approach that

discourages advanced approaches

banking organizations’ investments in

such instruments, as applicable, and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. As mentioned earlier,

effectuating deductions from a covered

BHC’s or a covered IHC’s own TLAC-

eligible debt, rather than its own tier 2

capital, could disproportionately favor

the largest and most internationally

active banking organizations. As such,

the agencies are finalizing, as proposed,

that an advanced approaches banking

organization will generally deduct

investments in own covered debt

instruments, as applicable, and

reciprocal cross holdings with other

financial institutions in covered debt

instruments from its own tier 2 capital.

Commenters asked that the final rule

include a separate deduction threshold

for market making activities in an

advanced approaches banking

organization’s own covered debt

instruments capped at five percent of a

covered BHC’s or advanced approaches

covered IHC’s own common equity tier

1 capital

ngs with other

financial institutions in covered debt

instruments from its own tier 2 capital.

Commenters asked that the final rule

include a separate deduction threshold

for market making activities in an

advanced approaches banking

organization’s own covered debt

instruments capped at five percent of a

covered BHC’s or advanced approaches

covered IHC’s own common equity tier

1 capital. Commenters stated that such

a threshold is necessary to better

facilitate deep and liquid markets for

TLAC-eligible debt instruments.

Further, commenters claimed that GSIBs

are often the biggest market makers in

their own covered debt instruments and,

under the U.S. GAAP accounting

standard, their own holdings of covered

debt instruments are not always

eliminated in full in consolidation. In

cases where a GSIB’s investments in its

own covered debt instruments are not

fully extinguished, the exposure amount

can be greater than zero and therefore

subject to deduction from tier 2 capital

under the proposal.

Commenters stated that a separate five

percent threshold for market making in

an advanced approaches banking

organization’s own covered debt

instruments in the final rule would

prevent a capital deduction for such

investments. However, finalizing the

rule with a separate threshold for

investments in an advanced approaches

banking organization’s own covered

debt instruments could create additional

balance sheet capacity for covered BHCs

and advanced approaches covered IHCs

to increase their investments in covered

debt instruments issued by other GSIBs.

Such an approach would not align with

the proposal’s goal of reducing

interconnectedness and systemic risks

among large and internationally active

banking organizations. Therefore, the

final rule does not implement this

suggested change.

E

sheet capacity for covered BHCs

and advanced approaches covered IHCs

to increase their investments in covered

debt instruments issued by other GSIBs.

Such an approach would not align with

the proposal’s goal of reducing

interconnectedness and systemic risks

among large and internationally active

banking organizations. Therefore, the

final rule does not implement this

suggested change.

E. Significant and Non-Significant

Investments in Covered Debt

Instruments

Under sections __.22(c)(5) and (6) of

the capital rule, an advanced

approaches banking organization must

deduct from regulatory capital certain

investments in the capital of

unconsolidated financial institutions.

The calculation of the deduction

depends on whether the banking

organization has a ‘‘significant’’ or a

‘‘non-significant’’ investment, with

‘‘significant’’ defined as ownership of

more than 10 percent of the common

stock of the unconsolidated financial

institution and ‘‘non-significant’’

defined as ownership of 10 percent or

less of the common stock of the

unconsolidated financial institution.28

When a banking organization has a

‘‘significant investment’’ in an

unconsolidated financial institution, the

banking organization must deduct from

regulatory capital any investment in the

capital of the unconsolidated financial

institution that is not in the form of

common stock as measured on a net

long basis, and the banking organization

must also deduct from regulatory capital

any investment in the capital of the

unconsolidated financial institution in

the form of common stock that exceeds

10 percent of the advanced approaches

banking organization’s own common

equity tier 1 capital as measured on a

net long basis.29 If an advanced

approaches banking organization has

one or more ‘‘non-significant

investments’’ in unconsolidated

financial institutions, it must aggregate

such investments and deduct from

regulatory capital any amount that

exceeds the 10 percent threshold for

non-significant investments, a

roaches

banking organization’s own common

equity tier 1 capital as measured on a

net long basis.29 If an advanced

approaches banking organization has

one or more ‘‘non-significant

investments’’ in unconsolidated

financial institutions, it must aggregate

such investments and deduct from

regulatory capital any amount that

exceeds the 10 percent threshold for

non-significant investments, as

measured on a net long basis.30

The proposal would have amended

the capital rule to require an advanced

approaches banking organization with

an investment in a covered debt

instrument issued by an unconsolidated

financial institution to deduct the

investment from tier 2 capital if the

advanced approaches banking

organization has a significant

investment in the capital of the

unconsolidated financial institution.

The agencies received no comments on

deductions for significant investments

in the capital of an unconsolidated

financial institution and are finalizing

this aspect of the rule as proposed.

The proposal would have amended

the capital rule to require an advanced

approaches banking organization with

an investment in a covered debt

instrument in a financial institution in

which the advanced approaches

banking organization does not also have

a significant investment in the form of

common stock to include such

investment in the covered debt

instrument in the aggregate amount of

non-significant investments in the

capital of unconsolidated financial

institutions. As under the existing

capital rule, the proposal would have

required an advanced approaches

banking organization to deduct from

regulatory capital the amount by which

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

and such covered debt instruments

exceeds the 10 percent threshold for

non-significant investments

l

institutions. As under the existing

capital rule, the proposal would have

required an advanced approaches

banking organization to deduct from

regulatory capital the amount by which

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

and such covered debt instruments

exceeds the 10 percent threshold for

non-significant investments. Any

investment in a covered debt instrument

subject to deduction would have been

deducted according to the

corresponding deduction approach

described below in section V.F. Any

investment in a covered debt instrument

not subject to deduction would have

been included in risk-weighted assets,

generally with a 100 percent risk

weight.

Some commenters suggested that the

agencies recalibrate the 10 percent

threshold for non-significant

investments in consideration of the

expanded scope of instruments that

would be included within that

threshold under the proposal. For

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31 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘synthetic exposure’’).

32 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC) (‘‘investment in the capital of

Continued

example, some commenters asked the

agencies to expand the non-significant

investments threshold to 10 percent of

an advanced approaches banking

organization’s own total capital from 10

percent of its own common equity tier

1 capital. Changing the non-significant

investments threshold in the manner the

commenters suggested could undermine

a main goal of the proposal—to reduce

interconnectedness among large and

internationally active banking

organizations

icant

investments threshold to 10 percent of

an advanced approaches banking

organization’s own total capital from 10

percent of its own common equity tier

1 capital. Changing the non-significant

investments threshold in the manner the

commenters suggested could undermine

a main goal of the proposal—to reduce

interconnectedness among large and

internationally active banking

organizations. Accordingly, the final

rule requires an advanced approaches

banking organization with an

investment in a covered debt instrument

in a financial institution in which the

advanced approaches banking

organization does not have a significant

investment to include such investment

in the aggregate amount of non-

significant investments in the capital of

unconsolidated financial institutions, as

proposed. Further, the final rule

requires an advanced approaches

banking organization to deduct from

regulatory capital the amount by which

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

exceeds the 10 percent threshold for

non-significant investments, as

proposed.

The proposal would have included

limited exclusions from the 10 percent

threshold for non-significant

investments’ deduction approach. The

exclusions would have depended on

whether an advanced approaches

banking organization is a U.S. GSIB or

a subsidiary of a U.S. GSIB (U.S. GSIB

banking organization). To help support

a deep and liquid market for covered

debt instruments, the proposal would

have permitted U.S. GSIB banking

organizations to exclude limited

amounts of market making exposures

(‘‘excluded covered debt instruments’’)

from the 10 percent threshold for non-

significant investments deduction. For

example, a U.S. GSIB could have

excluded covered debt instruments from

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions

rmitted U.S. GSIB banking

organizations to exclude limited

amounts of market making exposures

(‘‘excluded covered debt instruments’’)

from the 10 percent threshold for non-

significant investments deduction. For

example, a U.S. GSIB could have

excluded covered debt instruments from

the aggregate amount of non-significant

investments in the capital of

unconsolidated financial institutions.

The aggregate amount of the exclusion,

measured on a gross long basis, was

limited to five percent of the GSIB’s

own common equity tier 1 capital

(market making exclusion). If the

aggregate amount of excluded covered

debt instruments were more than five

percent of the common equity tier 1

capital, then the excess over five percent

would have been subject to deduction

from tier 2 capital on a gross long basis.

In addition, if an excluded covered debt

instrument were held for more than 30

business days or ceased to be held in

connection with market making

activities, then the excluded covered

debt instrument would have been

subject to deduction from tier 2 capital

on a gross long basis. Finally, in order

to dissuade regulatory arbitrage, the

proposal would not have allowed U.S.

GSIB banking organizations to

subsequently move ‘‘excluded covered

debt instruments’’ from the market

making exclusion to the 10 percent

threshold for non-significant

investments.

Commenters stressed the importance

of derivatives to market making

activities in securities, particularly

covered debt instruments issued by

GSIBs. In market making transactions,

U.S. GSIBs will often act as financial

intermediaries between clients,

transferring risks related to covered debt

instruments. This risk transfer is often

conducted through offsetting derivative

transactions or directly buying and

selling covered debt instruments

market making

activities in securities, particularly

covered debt instruments issued by

GSIBs. In market making transactions,

U.S. GSIBs will often act as financial

intermediaries between clients,

transferring risks related to covered debt

instruments. This risk transfer is often

conducted through offsetting derivative

transactions or directly buying and

selling covered debt instruments.

Commenters stated that this market

making activity supports deep and

liquid markets for covered debt

instruments by allowing investors to

reduce (or gain) exposure to covered

debt instruments without actually

selling (or buying) the securities.

Derivatives are essential to such

activities because they allow market

makers to establish and hedge these

exposures.

As such, these commenters asserted

that the agencies should eliminate the

proposed 30-business-day requirement

because it would make the proposed

market making exclusion unavailable

for many market making activities that

support the depth and liquidity of the

markets for TLAC-eligible debt, in

particular synthetic exposures from

derivatives used in market making

activities. These commenters noted that

bona fide market making activities,

including derivative- and hedging-

related activities, often involve holding

exposures for longer than 30 business

days. Commenters further indicated that

the 30-business-day requirement would

also create incentives for U.S. GSIB

banking organizations to arbitrage the

final rule by exiting and reestablishing

hedge positions to avoid a mandatory

deduction from tier 2 capital if the

position is held for more than 30

business days. Commenters indicated

that re-establishing hedge positions

would result in costs to banking

organizations and clients without

reducing the risks associated with the

transactions. Additionally, these

commenters indicated that the vast

majority of market making activity in

covered debt instruments is in the form

of derivative exposures

f the

position is held for more than 30

business days. Commenters indicated

that re-establishing hedge positions

would result in costs to banking

organizations and clients without

reducing the risks associated with the

transactions. Additionally, these

commenters indicated that the vast

majority of market making activity in

covered debt instruments is in the form

of derivative exposures. Therefore,

retaining the 30-business-day

requirement would arguably make the

five percent exclusion inoperable for

most market making activities in

covered debt instruments. As an

alternative to the proposed market

making standard and the proposed 30-

business-day requirement, commenters

suggested the agencies use the

regulatory framework implementing the

Volcker Rule to identify which positions

in covered debt instruments are held for

market making purposes and eliminate

the 30-business-day requirement. These

commenters stated that this approach

would promote effectiveness,

simplicity, and efficiency in the

regulation.

After considering commenters’

suggestions to eliminate the proposed

30-business-day requirement for market

making in covered debt instruments, the

agencies have revised the proposal by

removing the 30-business-day

requirement for market making in the

form of ‘‘synthetic exposures’’ as

defined in the agencies’ capital rule.31

Synthetic market making exposures,

such as derivatives, may frequently be

held for more than 30 business days.

Removing the 30-business-day

requirement for synthetic exposures

would, relative to the proposal, better

align with the proposal’s goal of

supporting deep and liquid markets for

covered debt instruments by allowing

synthetic exposures arising from market

making activities to be included in the

market making exclusion, subject to

limits. As discussed, this exclusion is

limited to five percent of common

equity tier 1 capital, measured on a

gross long basis

ld, relative to the proposal, better

align with the proposal’s goal of

supporting deep and liquid markets for

covered debt instruments by allowing

synthetic exposures arising from market

making activities to be included in the

market making exclusion, subject to

limits. As discussed, this exclusion is

limited to five percent of common

equity tier 1 capital, measured on a

gross long basis. These limits are

consistent with financial stability goals

of avoiding asset fire sales in times of

stress, encouraging risk-mitigating

hedges, and reducing

interconnectedness while still

supporting deep and liquid markets for

TLAC-eligible debt instruments.

Accordingly, the final rule reflects this

change. However, the agencies continue

to believe that the 30-business-day

requirement is an appropriate metric to

identify market making positions in

‘‘direct’’ investments in covered debt

instruments (i.e., holding the instrument

on the banking organization’s balance

sheet) and ‘‘indirect’’ investments in

covered debt instruments (i.e., exposure

to the instrument through investment

funds).32 Direct investments in covered

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an unconsolidated financial institution’’ and

‘‘indirect exposure’’).

33 See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board);

12 CFR 351.4 (FDIC).

34 See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h)

(Board); 12 CFR 324.22(h) (FDIC).

debt instruments held in connection

with market making should turn over

regularly and the agencies seek to dis-

incentivize long-term direct and indirect

exposures to covered debt instruments,

given the risk of write-down or

conversion to equity of such

instruments

12 CFR 248.4 (Board);

12 CFR 351.4 (FDIC).

34 See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h)

(Board); 12 CFR 324.22(h) (FDIC).

debt instruments held in connection

with market making should turn over

regularly and the agencies seek to dis-

incentivize long-term direct and indirect

exposures to covered debt instruments,

given the risk of write-down or

conversion to equity of such

instruments.

Therefore, the final rule retains the

30-business-day requirement for

‘‘direct’’ and ‘‘indirect’’ investments in

excluded covered debt instruments, but

not for ‘‘synthetic’’ investments in

excluded covered debt instruments.

This change from the proposal should

balance the goals of limiting

interconnectedness among the largest

and most internationally active banking

organizations and promoting the

liquidity of TLAC-eligible debt

instruments. Additionally, the agencies

clarify that there is no requirement

under the final rule to assign

investments in covered debt

instruments held in connection with

market making as ‘‘excluded covered

debt instruments.’’ To the extent a U.S.

GSIB banking organization has available

capacity, all investments in covered

debt instruments could be held on a net

long basis as non-significant

investments in the capital of an

unconsolidated financial institution

subject to the 10 percent threshold for

non-significant investments.

After consideration of comments, the

agencies also have revised the rule to

use the Volcker Rule exemption for

market making activities to identify

covered debt instruments held for

market making for purposes of

qualifying for the final rule’s market

making exclusion. Relative to the

proposal, this change should decrease

compliance burden by allowing banking

organizations to use a single

methodology for identifying market

making activities, rather than two

similar, but non-identical regulatory

standards.

This approach would capture

essentially the same set of exposures as

the proposal’s standard

ualifying for the final rule’s market

making exclusion. Relative to the

proposal, this change should decrease

compliance burden by allowing banking

organizations to use a single

methodology for identifying market

making activities, rather than two

similar, but non-identical regulatory

standards.

This approach would capture

essentially the same set of exposures as

the proposal’s standard. However, the

final rule’s definition of ‘‘excluded

covered debt instrument’’ differs from

the proposal by referring to the relevant

provisions of each agency’s rule

implementing the market making

exemption in the Volcker Rule.33

The proposal also included a simpler

deduction approach for advanced

approaches banking organizations that

are not U.S. GSIB banking organizations

given that these banking organizations

pose less systemic risks than U.S.

GSIBs. Unlike a U.S. GSIB, these

banking organizations can include any

non-significant investments in covered

debt instruments of unconsolidated

financial institutions in the five percent

exclusion (i.e., use of the exclusion is

not restricted to only those investments

held in connection to market making

activities). Any amount in excess of this

five percent exclusion would be subject

to the 10 percent threshold for non-

significant investments deduction on a

net long basis. The agencies did not

receive comments on this provision of

the proposal. Therefore, the final rule

implements the five percent exclusion

for advanced approaches banking

organizations that are not U.S. GSIBs as

proposed.

As noted above, an advanced

approaches banking organization could

exclude certain investments in covered

debt instruments, as applicable, from

the 10 percent threshold for non-

significant investments calculation and

potential deduction under section __

.22(c)(4) if the aggregate amount of

covered debt instruments, measured by

gross long position, were five percent or

less of its common equity tier 1 capital

dvanced

approaches banking organization could

exclude certain investments in covered

debt instruments, as applicable, from

the 10 percent threshold for non-

significant investments calculation and

potential deduction under section __

.22(c)(4) if the aggregate amount of

covered debt instruments, measured by

gross long position, were five percent or

less of its common equity tier 1 capital.

To achieve consistency with the TLAC

Holdings standard and with the

calculation of the 10 percent threshold

for non-significant investments

deduction, the agencies are modifying

the calculation for determining the

amount of covered debt instruments that

can be omitted from the 10 percent

threshold for non-significant

investments calculation. Under the final

rule, an advanced approaches banking

organization can omit covered debt

instruments from the 10 percent

threshold calculation and potential

deduction under section __.22(c)(4) if

the aggregate amount of covered debt

instruments, measured by gross long

position, is five percent or less of the

sum of the banking organization’s

common equity tier 1 capital elements

minus all deductions from and

adjustments to common equity tier 1

capital elements required under section

__.22(a) through __.22(c)(3), net of

associated deferred tax liabilities

(DTLs). This includes, for example,

deductions related to goodwill,

intangibles, and deferred tax assets, and

adjustments related to accumulated net

gains and losses on cash flow hedges.

The agencies believe that to achieve

consistency and clarity throughout the

deduction framework, the amount of

covered debt instruments that can be

omitted from the 10 percent threshold

for non-significant investments

calculation should be computed using

the same basis as the 10 percent

threshold for non-significant

investments calculation itself

et

gains and losses on cash flow hedges.

The agencies believe that to achieve

consistency and clarity throughout the

deduction framework, the amount of

covered debt instruments that can be

omitted from the 10 percent threshold

for non-significant investments

calculation should be computed using

the same basis as the 10 percent

threshold for non-significant

investments calculation itself.

The agencies intend to monitor

advanced approaches banking

organizations’ holdings of covered debt

instruments in the form of synthetic

exposures to ensure that the capital held

for these positions is commensurate

with risk and that such holdings do not

raise safety and soundness concerns.

Further, to better understand advanced

approaches banking organizations’ risk

from exposures to the capital of

unconsolidated financial institutions,

the agencies may issue an information

collection proposal to collect quarterly

data on advanced approaches banking

organizations’ non-significant

investments in the capital of

unconsolidated financial institutions

and excluded covered debt instruments,

as applicable.

Some commenters disagreed with the

proposal’s design of the exclusions for

covered debt instruments, which

measures positions on a gross long

basis. These commenters suggested that

the measurement of the exclusions for

covered debt instruments be based on

the ‘‘net long position,’’ in accordance

with the agencies’ capital rule, which

allows gross long positions to be offset

against qualifying short positions.34 The

commenters noted that the 10 percent

threshold for non-significant

investments is based on the ‘‘net long

position’’ and suggested that the

exclusions for covered debt instrument

be consistent with that standard

nts be based on

the ‘‘net long position,’’ in accordance

with the agencies’ capital rule, which

allows gross long positions to be offset

against qualifying short positions.34 The

commenters noted that the 10 percent

threshold for non-significant

investments is based on the ‘‘net long

position’’ and suggested that the

exclusions for covered debt instrument

be consistent with that standard.

Further, commenters stated that

finalizing the exclusions for covered

debt instruments based on a net long

position measurement basis would

allow advanced approaches banking

organizations to better support the

depth and liquidity of market making in

TLAC-eligible debt instruments, because

market making activities are typically

well hedged and a ‘‘net long position’’

would allow more positions to qualify

for the exclusions.

The final rule maintains measurement

of the exclusions for covered debt

instruments based on the gross long

position. Moving to a ‘‘net long

position’’ measurement could

undermine the agencies’ goal of

reducing interconnectedness among

large and internationally active banking

organizations as it would allow such

banking organizations to accumulate

exposure to covered debt instruments

significantly beyond the threshold

envisioned in the proposal. Further,

advanced approaches banking

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35 See 12 CFR 3.22(c)(2) (OCC); 12 CFR

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2)

(FDIC).

36 See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR

217.22(c)(2) and (f) (Board); and 12 CFR 324.22(c)(2)

and (f) (FDIC).

37 See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f)

(Board); and 12 CFR 324.22(f) (FDIC).

38 See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR

217.12(h)(2)(iii) (Board); and 12 CFR 324.22(h)

ons

35 See 12 CFR 3.22(c)(2) (OCC); 12 CFR

217.22(c)(2) (Board); and 12 CFR 324.22(c)(2)

(FDIC).

36 See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR

217.22(c)(2) and (f) (Board); and 12 CFR 324.22(c)(2)

and (f) (FDIC).

37 See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f)

(Board); and 12 CFR 324.22(f) (FDIC).

38 See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR

217.12(h)(2)(iii) (Board); and 12 CFR 324.22(h)

(2)(iii) (FDIC).

39 See 12 CFR 3.22(h)(3) (OCC); 12 CFR

217.12(h)(3) (Board); and 12 CFR 324.22(h)(3)

(FDIC).

organizations are able to assign hedged

covered debt instrument exposures to

the 10 percent threshold for non-

significant investments on a net long

basis. The optional exclusions remain

available to support market making

activities such as accumulating short

term cash positions to meet customer

demand and to acquire additional long

positions in covered debt instruments to

facilitate market stabilization during

times of stress. Such an approach is

consistent with financial stability goals

of avoiding asset fire sales in times of

stress, encouraging risk-mitigating

hedges, and reducing

interconnectedness while still

supporting deep and liquid markets for

TLAC-eligible debt instruments.

F. Corresponding Deduction Approach

Under the corresponding deduction

approach, a banking organization must

apply any required deduction to the

component of capital for which the

underlying instrument would qualify if

it were issued by the banking

organization.35 If the banking

organization does not have enough of

the component of capital to fully effect

the deduction, the corresponding

deduction approach provides that any

amount of the investment that has not

already been deducted would be

deducted from the next, more

subordinated component of capital.36 If,

for example, a banking organization has

insufficient amounts of tier 2 capital

and additional tier 1 capital to effect a

required deduction, the banking

organization would need to deduct from

common equity tier 1 capital the

amount

provides that any

amount of the investment that has not

already been deducted would be

deducted from the next, more

subordinated component of capital.36 If,

for example, a banking organization has

insufficient amounts of tier 2 capital

and additional tier 1 capital to effect a

required deduction, the banking

organization would need to deduct from

common equity tier 1 capital the

amount of the investment that exceeds

the tier 2 and additional tier 1 capital of

the banking organization.37 The

proposal would have amended the

corresponding deduction approach in

section __.22(c)(2) of the capital rule to

specify that an investment in a covered

debt instrument by an advanced

approaches banking organization would

have been subject to the corresponding

deduction approach, with the covered

debt instrument treated as a tier 2

capital instrument. Some commenters

disagreed with this approach and,

instead, asked the agencies to treat

investments in covered debt

instruments as a common equity tier 1

capital instrument or, as applicable,

allow deductions under the

corresponding deduction approach from

own TLAC-eligible debt instruments.

As stated earlier, requiring a

deduction of a covered debt instrument

from tier 2 capital should serve as a

sufficiently prudent and simple

approach that dis-incentivizes advanced

approaches banking organizations’

investments in such instruments and

thereby supports the objectives of

reducing both interconnectedness

within the financial system and

systemic risks. Accordingly, the

agencies are finalizing the proposal’s

amendments to the corresponding

deduction approach in section __

.22(c)(2) of the capital rule

G. Net Long Position Calculation

The proposal would have followed

the same general approach as currently

provided under the agencies’ capital

rule regarding the calculation of the

amount of any deduction and the

treatment of guarantees and indirect

investments for purposes of the

deductions

’s

amendments to the corresponding

deduction approach in section __

.22(c)(2) of the capital rule

G. Net Long Position Calculation

The proposal would have followed

the same general approach as currently

provided under the agencies’ capital

rule regarding the calculation of the

amount of any deduction and the

treatment of guarantees and indirect

investments for purposes of the

deductions. Under the capital rule, the

amount of a banking organization’s

investment in its own capital

instrument or in the capital of an

unconsolidated financial institution

subject to deduction is the banking

organization’s net long position in the

capital instrument as calculated under

section __.22(h) of the capital rule.

Under section __.22(h), a banking

organization may net certain qualifying

short positions in a capital instrument

against a gross long position in the same

instrument to determine the net long

position.

The proposal would have modified

section __.22(h) of the capital rule such

that an advanced approaches banking

organization would determine its net

long position in an exposure to its own

covered debt instrument, as applicable,

or in a covered debt instrument issued

by an unconsolidated financial

institution in the same manner as

currently provided for investments in an

institution’s own capital instruments or

investments in the capital of an

unconsolidated financial institution,

respectively. Consistent with the capital

rule, the calculation of a net long

position under the proposal would have

taken into account direct investments in

covered debt instruments as well as

indirect exposures to covered debt

instruments held through investment

funds

in an

institution’s own capital instruments or

investments in the capital of an

unconsolidated financial institution,

respectively. Consistent with the capital

rule, the calculation of a net long

position under the proposal would have

taken into account direct investments in

covered debt instruments as well as

indirect exposures to covered debt

instruments held through investment

funds.

A banking organization has three

options under the capital rule to

measure its gross long position in a

capital instrument held indirectly

through an investment fund.38 The

proposal would have amended section _

_.22(h)(2)(iii) of the capital rule to

provide the same three options to

determine the gross long position in a

covered debt instrument held through

an investment fund. The agencies

received no comments on this aspect of

the proposal and the final rule adopts

the changes as proposed.

The agencies’ capital rule sets

qualifying criteria for recognizing short

positions that can be netted against

gross long positions; specifically, a short

position must be in the ‘‘same

instrument’’ as the gross long position

and must meet minimum maturity

requirements, among other

requirements.39 The proposal would not

have changed these operational criteria

for recognizing short positions in the

calculation of a net long position. Some

commenters advocated for changes to

the capital rule’s requirements for

recognizing a short position under

section __.22(h)(3). These commenters

argued that the capital rule should be

modified to not require short positions

to be in the ‘‘same instrument’’ as the

gross long position when calculating the

net long position. Instead, commenters

recommended that the final rule allow

recognized short positions to be in any

instrument that is pari passu or

subordinated to the gross long position’s

instrument

.22(h)(3). These commenters

argued that the capital rule should be

modified to not require short positions

to be in the ‘‘same instrument’’ as the

gross long position when calculating the

net long position. Instead, commenters

recommended that the final rule allow

recognized short positions to be in any

instrument that is pari passu or

subordinated to the gross long position’s

instrument. These commenters

recommended that this change should

also apply to calculating the net long

position of investments in covered debt

instruments in the final rule.

The agencies have consistently

maintained that recognition of short

positions under the net long position

calculation are required to be in the

‘‘same instrument’’ as a matter of

prudent risk management and hedging

practices. To recognize short positions

in other than the ‘‘same instrument’’

would potentially undermine the

effectiveness of risk mitigating hedges.

Accordingly, the final rule adopts the

calculation of the net long position as

proposed.

Under the proposal, for purposes of

any deduction required for an advanced

approaches banking organization’s

investment in the capital of an

unconsolidated financial institution, the

amount of a covered debt instrument

would have included any contractual

obligations the advanced approaches

banking organization has to purchase

such covered debt instruments. The

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n the capital of an

unconsolidated financial institution, the

amount of a covered debt instrument

would have included any contractual

obligations the advanced approaches

banking organization has to purchase

such covered debt instruments. The

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Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations

40 See 84 FR 35234 (July 22, 2019).

41 See 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1)

(Board); 12 CFR 324.1(d)(1) (FDIC).

42 84 FR 59230 (November 1, 2019).

43 83 FR 17317, 17322 (April 19, 2018).

agencies received no comment on this

aspect of the proposal, and the final rule

adopts this change as proposed.

VI. Technical Amendment and Other

Comments

The agencies proposed amending the

definition of ‘‘investment in the capital

of an unconsolidated financial

institution’’ in section __.2 of the capital

rule to correct a drafting error in that

definition. The agencies did not receive

any comment with regard to the

proposed technical amendment.

However, in the period between the

issuance of the proposal and this final

rule, this technical amendment was

implemented by the agencies’ final rule

to simplify the capital rule.40

A few commenters suggested that the

proposal should go further in limiting

the exposure of advanced approaches

banking organizations to GSIBs, given

their size and the risk their failure could

pose to the financial system. These

commenters argued that the final rule

should ensure that the cost of TLAC

debt better reflect heightened risks of

GSIBs and that the agencies should

require U.S. GSIBs to hold more

common equity tier 1 capital. Other

commenters suggested that the agencies

consider existing elements of the

regulatory framework—such as the

single counterparty credit limit and the

GSIB surcharge—when finalizing the

deduction framework

nal rule

should ensure that the cost of TLAC

debt better reflect heightened risks of

GSIBs and that the agencies should

require U.S. GSIBs to hold more

common equity tier 1 capital. Other

commenters suggested that the agencies

consider existing elements of the

regulatory framework—such as the

single counterparty credit limit and the

GSIB surcharge—when finalizing the

deduction framework.

Under the capital rule, each agency

has the authority to require a banking

organization to hold additional capital

based on the banking organization’s risk

profile.41 Similarly, while other

elements of the regulatory framework

address the systemic risks of large,

internationally active banking

organizations or concentrations of

exposures to counterparties, no existing

regulation specifically address the risks

associated with investments in TLAC-

eligible debt instruments. The agencies,

therefore, are finalizing the proposal to

establish a regulatory capital treatment

for investments in covered debt

instruments with certain modifications,

as previously described.

The proposal did not contemplate

providing a transition period for

implementation of the final rule by

advanced approaches banking

organizations. Some commenters

requested that the agencies provide

banking organizations with a transition

period to ease compliance burden.

Specifically, commenters requested that

the agencies provide 18 months before

banking organizations must effectuate

the deduction treatment. These

commenters asserted that a transition

period would give banking

organizations more time to build out

systems to track which instruments are

covered debt instruments and therefore

subject to the deduction framework. A

commenter requested that the agencies

not require deduction of any unsecured

debt instrument issued by a GSIB until

the information necessary to determine

whether the instrument is a covered

debt instrument is available

ould give banking

organizations more time to build out

systems to track which instruments are

covered debt instruments and therefore

subject to the deduction framework. A

commenter requested that the agencies

not require deduction of any unsecured

debt instrument issued by a GSIB until

the information necessary to determine

whether the instrument is a covered

debt instrument is available.

The agencies maintain the

supervisory expectation that large and

internationally active banking

organizations should be deeply

knowledgeable of the securities

exposures on their own balance sheets,

if only for the purposes of prudent risk

management. The final rule will become

effective on April 1, 2021. The agencies

believe this effective date provides

sufficient time for advanced approaches

banking organizations to evaluate

investments in covered debt

instruments and apply the final rule’s

deduction treatment.

In addition to the above, the agencies

are making certain technical

amendments to section __.10 of the

capital rule to more clearly differentiate

between requirements applicable to

advanced approaches banking

organizations and those applicable to

Category III banking organizations. In

section __.10 of the capital rule, as

amended by the recent interagency

tailoring rule,42 paragraphs (c)(1)–(3)

describe the capital ratio calculations

applicable to advanced approaches

banking organizations, whereas

paragraph 10(c)(4) of the capital rule

describes the supplementary leverage

ratio calculations applicable to both

advanced approaches banking

organizations and Category III banking

organizations. To avoid confusion, the

agencies are amending section __.10 of

the capital rule such that paragraph (c)

will provide only the supplementary

leverage ratio requirements. The

advanced approaches capital

calculations will be moved to revised

paragraph (d) of section __.10 of the

capital rule

pplicable to both

advanced approaches banking

organizations and Category III banking

organizations. To avoid confusion, the

agencies are amending section __.10 of

the capital rule such that paragraph (c)

will provide only the supplementary

leverage ratio requirements. The

advanced approaches capital

calculations will be moved to revised

paragraph (d) of section __.10 of the

capital rule. Current paragraph (d),

Capital adequacy, will be re-designated

as paragraph (e) of section __.10 of the

capital rule. The agencies are also

amending language in sections __.2 and

__.121 of the capital rule to correct

cross-references in light of the

amendments described above. These

technical amendments do not amend

any substantive requirements applicable

to banking organizations.

VII. Amendments to the Board’s TLAC

Rule

In 2018, the Board issued a notice of

proposed rulemaking that, among other

items, included minor proposed

amendments to the Board’s TLAC

rule.43 The proposal included revisions

to ensure that the external TLAC risk-

weighted buffer level, TLAC leverage

buffer level, and the TLAC buffer level

for covered IHCs would be amended to

use the same haircuts applicable to LTD

instruments that are currently used to

calculate outstanding minimum

required TLAC amounts, which do not

include a 50 percent haircut on LTD

instruments with a remaining maturity

of between one and two years. Another

proposed amendment was to ensure that

the term ‘‘external TLAC risk-weighted

buffer’’ is used consistently in the TLAC

rule. The proposal also would have

provided that a new covered IHC would

always have three years to conform to

most of the requirements of the TLAC

rule, and to align the articulation of the

methodology for calculating the covered

IHC’s LTD instrument amount with the

same methodology used for GSIBs

sure that

the term ‘‘external TLAC risk-weighted

buffer’’ is used consistently in the TLAC

rule. The proposal also would have

provided that a new covered IHC would

always have three years to conform to

most of the requirements of the TLAC

rule, and to align the articulation of the

methodology for calculating the covered

IHC’s LTD instrument amount with the

same methodology used for GSIBs.

The Board received minimal

comments on these proposed revisions

to the TLAC rule within the comments

received on its proposal overall and the

comments received were supportive of

the specific proposed revisions. As a

result, the Board is issuing these

revisions in the final rule without

change from the proposal.

VIII. Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital

Related to Investments in Covered Debt

Instruments and Excluded Covered Debt

Instruments

In the April 2019 rulemaking, the

Board proposed to modify the

instructions to the Consolidated

Financial Statements for Holding

Companies (FR Y–9C), Schedule HC–R,

Part I and Part II, to effectuate the

deductions from regulatory capital for

Board-regulated advanced approaches

banking organizations related to

investments in covered debt

instruments and excluded covered debt

instruments as described in the

proposal.

Specifically, the Board would have

modified the instructions of the FR Y–

9C for Schedule HC–R, Part I, item 33,

‘‘Tier 2 capital deductions.’’ On the FR

Y–9C, a covered BHC would have been

required to deduct from tier 2 capital

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e

proposal.

Specifically, the Board would have

modified the instructions of the FR Y–

9C for Schedule HC–R, Part I, item 33,

‘‘Tier 2 capital deductions.’’ On the FR

Y–9C, a covered BHC would have been

required to deduct from tier 2 capital

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Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations

44 The proposed modifications would not affect

the Consolidated Reports of Condition and Income

for a Bank with Domestic Offices Only and Total

Assets Less than $1 Billion (FFIEC 051) because

banks and savings associations that are advanced

approaches banking organizations are not eligible to

file the FFIEC 051 report.

45 See 84 FR 53227 (October 4, 2019).

46 See 85 FR 15776 (March 19, 2020).

47 See 84 FR 13823–13824 (April 8, 2019).

48 See 85 FR 15776 (March 19, 2020).

the aggregate amount of its investments

in covered debt instruments that, when

combined with the banking

organization’s other non-significant

investments in the capital of

unconsolidated financial institutions,

exceed 10 percent of the common equity

tier 1 capital of the banking

organization. Also, if an excluded

covered debt instrument were held by a

covered BHC for more than 30 business

days, or no longer held in connection

with market making-related activities,

the excluded covered debt instrument

would have been deducted from tier 2

capital

capital of

unconsolidated financial institutions,

exceed 10 percent of the common equity

tier 1 capital of the banking

organization. Also, if an excluded

covered debt instrument were held by a

covered BHC for more than 30 business

days, or no longer held in connection

with market making-related activities,

the excluded covered debt instrument

would have been deducted from tier 2

capital.

In addition, for purposes of the

deduction requirements related to non-

significant investments in the capital of

unconsolidated financial institutions,

Board-regulated advanced approaches

banking organizations that are not

covered BHCs would have been

required to deduct from tier 2 capital

those investments in covered debt

instruments that exceed five percent of

common equity tier 1 capital, and that

also, when combined with the banking

organization’s other non-significant

investments in unconsolidated financial

institutions, exceed 10 percent of the

common equity tier 1 capital of the

banking organization. The Board also

would have modified the instructions

for calculating other deduction-related

and risk-weighted asset line items to

incorporate investments in covered debt

instruments and excluded covered debt

instruments, as applicable, by Board-

regulated advanced approaches banking

organizations.

In October 2019, the Federal Financial

Institutions Examination Council

(FFIEC) separately proposed to modify

the Consolidated Reports of Condition

and Income for a Bank with Domestic

and Foreign Offices (FFIEC 031),

Consolidated Reports of Condition and

Income for a Bank with Domestic

Offices Only (FFEIC 041) (collectively

with the FFIEC 031, the Call Report),44

and Regulatory Capital Reporting for

Institutions Subject to the Advanced

Capital Adequacy Framework (FFIEC

101) in a manner consistent with the

changes described above to the FR Y–9C

to effectuate the proposal’s deduction

approach for investments in covered

debt instruments and excluded covered

debt instruments, as app

ly (FFEIC 041) (collectively

with the FFIEC 031, the Call Report),44

and Regulatory Capital Reporting for

Institutions Subject to the Advanced

Capital Adequacy Framework (FFIEC

101) in a manner consistent with the

changes described above to the FR Y–9C

to effectuate the proposal’s deduction

approach for investments in covered

debt instruments and excluded covered

debt instruments, as applicable.45

In March 2020, the Board separately

proposed conforming changes to the FR

Y–14 to effectuate the proposed

deduction framework for investments in

covered debt instruments.46

With respect to the FR Y–9C proposed

changes, one commenter requested

clarification on the sequencing of

reporting changes related to effectuating

deductions for covered debt instruments

and the effective date of the final rule.

Specifically, this commenter requested

that the effective date of the final rule

should precede any requirement to

begin effectuating deductions related to

investments in covered debt

instruments on regulatory reports. The

agencies confirm that the effective date

of the final rule will precede any

reporting requirements related to

implementing the deduction framework

for covered debt instruments. The Board

received no comments on the FR Y–14

proposed changes.

As described above, reporting changes

to effectuate the deduction framework

for investments in covered debt

instruments described in the proposal

were proposed separately for the (1) FR

Y–9C, (2) FFIEC 101 and Call Report,

and (3) FR Y–14. The Board is finalizing

as proposed, changes to the FR Y–9C

and FR Y–14, to effectuate the

deduction framework for investments in

covered debt instruments in this

Federal Register notice. The agencies

will address comments submitted in

connection with the FFIEC’s October

2019 proposal when those forms and

instructions are finalized in a separate

Federal Register notice, consistent with

the final rule.

B

izing

as proposed, changes to the FR Y–9C

and FR Y–14, to effectuate the

deduction framework for investments in

covered debt instruments in this

Federal Register notice. The agencies

will address comments submitted in

connection with the FFIEC’s October

2019 proposal when those forms and

instructions are finalized in a separate

Federal Register notice, consistent with

the final rule.

B. Public Disclosure of Long-Term Debt

and TLAC by Covered BHCs and

Covered IHCs

In the April 2019 rulemaking, the

Board also proposed to modify Schedule

HC–R, Part I of the FR Y–9C by adding

new data items that would publicly

disclose: (1) The long-term debt and

TLAC for covered BHCs and covered

IHCs; (2) these banking organizations’

long-term debt and TLAC ratios to

ensure compliance with the TLAC rule;

(3) TLAC buffers; and (4) amendments

to the instructions for the calculation of

eligible retained income (item 47),

institution-specific capital buffer (items

46.a and 46.b), and distributions and

discretionary bonus payments (item 48)

for covered BHCs and covered IHCs.47

Commenters suggested that the Board

clarify in the final rule when changes to

FR Y–9C related to long-term debt and

TLAC reporting disclosures will become

effective. Reporting changes for

deductions related to investments in

covered debt instruments on the FR Y–

9C will not go into effect until after the

final rule’s effective date.

In March 2020, the Board separately

proposed conforming changes to the FR

Y–14 to disclose new items related to

long-term debt and TLAC, as described

above.48

In response to the proposal,

commenters requested that the Board

clarify how U.S. GSIBs are to calculate

the TLAC rule’s leverage ratios on the

FR Y–9C report. More specifically,

commenters suggested the Board clarify

that U.S. GSIBs should not be required

to report long-term debt and TLAC

leverage ratios based on total assets

because U.S

long-term debt and TLAC, as described

above.48

In response to the proposal,

commenters requested that the Board

clarify how U.S. GSIBs are to calculate

the TLAC rule’s leverage ratios on the

FR Y–9C report. More specifically,

commenters suggested the Board clarify

that U.S. GSIBs should not be required

to report long-term debt and TLAC

leverage ratios based on total assets

because U.S. GSIBs’ applicable long-

term debt and TLAC leverage

requirement is based on the

denominator for the supplementary

leverage ratio. Commenters noted that

only covered IHCs are required to report

the long-term debt and TLAC leverage

ratios based on total assets. The Board

confirms that reporting of the long-term

debt and TLAC leverage requirement for

U.S. GSIBs will only be based upon the

supplementary leverage ratio

denominator, consistent with the TLAC

rule’s leverage requirement. The Board

received no comments on the FR Y–14

proposed changes.

The Board is finalizing the proposed

changes to the FR Y–9C and FR Y–14 to

require covered BHCs and covered IHCs

to report their long-term debt and TLAC

resources, with modifications in

response to comment as described

above, in this Federal Register notice.

Some commenters suggested the

Board develop a more robust disclosure

regime related to TLAC so that the level

of risk is appropriately priced into these

instruments. They stated that

disclosures will incentivize GSIBs to

meet their TLAC requirements with

equity rather than debt instruments.

Commenters offered suggestions for

improving disclosures by noting that the

agencies should collaborate with the

Securities and Exchange Commission to

require plain-language warnings

regarding risk of bail-in to investors (1)

when purchasing a TLAC instrument in

their brokerage account and (2) in

offering materials published by pension

and mutual funds that invest in TLAC

instruments

s.

Commenters offered suggestions for

improving disclosures by noting that the

agencies should collaborate with the

Securities and Exchange Commission to

require plain-language warnings

regarding risk of bail-in to investors (1)

when purchasing a TLAC instrument in

their brokerage account and (2) in

offering materials published by pension

and mutual funds that invest in TLAC

instruments. The Board does not have

the authority to change disclosures

required by the Securities and Exchange

Commission related to securities

issuances or sales to retail investors.

The interagency statement on retail

sales of nondeposit investments

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49 See ‘‘Interagency Statement on Retail Sales of

Nondeposit Investment Products.’’ OCC Bulletin

1994–13 (OCC); SR 94–11 (FIS) (Board); and FIL–

9–94 (FDIC).

50 44 U.S.C. 3501–3521.

products should ensure certain

disclosures for retail sales programs

involving mutual funds, annuities and

other nondeposit investment

products.49 Further, the Board does not

have the authority to mandate

disclosures by pension or mutual funds.

The final rule does not incorporate these

suggestions.

IX. Regulatory Analyses

A. Paperwork Reduction Act

Certain provisions of the final rule

contain ‘‘collection of information’’

within the meaning of the Paperwork

Reduction Act of 1995 (PRA).50 In

accordance with the requirements of the

PRA, the agencies may not conduct or

sponsor, and the respondent is not

required to respond to, an information

collection unless it displays a currently-

valid Office of Management and Budget

(OMB) control number.

The final rule revises section __.22(c),

lection of information’’

within the meaning of the Paperwork

Reduction Act of 1995 (PRA).50 In

accordance with the requirements of the

PRA, the agencies may not conduct or

sponsor, and the respondent is not

required to respond to, an information

collection unless it displays a currently-

valid Office of Management and Budget

(OMB) control number.

The final rule revises section __.22(c),

(f), and (h) of the capital rule to

incorporate the proposed deduction

approach for investments in covered

debt instruments. Several new

definitions are added to section __.2 to

effectuate these deductions.

Each agency has an information

collection related to its regulatory

capital rules. The OMB control number

for the OCC is 1557–0318, Board is

7100–0313, and FDIC is 3064–0153. The

final rule will not, however, result in

changes to burden under these

information collections and therefore no

submissions will be made under section

3507(d) of the PRA (44 U.S.C. 3507(d))

and section 1320.11 of the OMB’s

implementing regulations (5 CFR 1320)

for each of the agencies’ regulatory

capital rules.

In addition, the final rule requires

changes to the Call Reports (OMB No.

1557–0081 (OCC), 7100–0036 (Board),

and 3064–0052 (FDIC)), and the FFIEC

101 (OMB No. 1557–0239 (OCC), 7100–

0319 (Board), and 3064–0159 (FDIC)),

which will be addressed in one or more

separate Federal Register notices.

The final rule requires changes to the

Consolidated Financial Statements for

Holding Companies (FR Y–9C; OMB No.

7100–0128) and the Capital

Assessments and Stress Testing Reports

(FR Y–14A/Q/M; OMB No. 7100–0341).

The Board reviewed the final rule under

the authority delegated to the Board by

OMB.

Revised Collection (Board only)

Title of Information Collection:

Consolidated Financial Statements for

Holding Companies.

Agency form number: FR Y–9C, FR Y–

9LP, FR Y–9SP, FR Y–9ES, and FR Y–

9CS.

OMB control number: 7100–0128.

Effective date: June 30, 2021.

Frequency: Quarterly, semiannually,

and annually

oard reviewed the final rule under

the authority delegated to the Board by

OMB.

Revised Collection (Board only)

Title of Information Collection:

Consolidated Financial Statements for

Holding Companies.

Agency form number: FR Y–9C, FR Y–

9LP, FR Y–9SP, FR Y–9ES, and FR Y–

9CS.

OMB control number: 7100–0128.

Effective date: June 30, 2021.

Frequency: Quarterly, semiannually,

and annually.

Affected Public: Businesses or other

for-profit.

Respondents: Bank holding

companies (BHCs), savings and loan

holding companies (SLHCs), securities

holding companies (SHCs), and U.S.

Intermediate Holding Companies (IHCs)

(collectively, holding companies (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)—49.30, 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

n

total assets—46.98, FR Y–9C (AA

HCs)—49.30, 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)—3,747, FR Y–9LP—9,149, FR Y–

9SP—42,768, 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.

General description of report: The FR

Y–9 family of reporting forms continues

to be the primary source of financial

data on holding companies (HCs) on

which examiners rely between on-site

inspections. Financial data from these

reporting forms is used to detect

emerging financial problems, review

performance, conduct pre-inspection

analysis, monitor and evaluate capital

adequacy, evaluate HC mergers and

acquisitions, and analyze an HC’s

overall financial condition to ensure the

safety and soundness of its operations.

The FR Y–9C serves as the standardized

financial statements for certain

consolidated holding companies. The

Board requires HCs to provide

standardized financial statements to

fulfill the Board’s statutory obligation to

supervise these organizations. HCs file

the FR Y–9C on a quarterly basis

analyze an HC’s

overall financial condition to ensure the

safety and soundness of its operations.

The FR Y–9C serves as the standardized

financial statements for certain

consolidated holding companies. The

Board requires HCs to provide

standardized financial statements to

fulfill the Board’s statutory obligation to

supervise these organizations. HCs file

the FR Y–9C on a quarterly basis.

Legal authorization and

confidentiality: The reporting and

recordkeeping requirements associated

with the FR Y–9 series of reports are

authorized for BHCs pursuant to section

5 of the Bank Holding Company Act

(‘‘BHC Act’’); for SLHCs pursuant to

section 10(b)(2) and (3) of the Home

Owners’ Loan Act, 12 U.S.C. 1467a(b)(2)

and (3), as amended by sections 369(8)

and 604(h)(2) of the Dodd-Frank Wall

Street and Consumer Protection Act

(‘‘Dodd-Frank Act’’); for IHCs pursuant

to section 5 of the BHC Act, as well as

pursuant to sections 102(a)(1) and 165

of the Dodd-Frank Act; and for

securities holding companies pursuant

to section 618 of the Dodd-Frank Act.

Except for the FR Y–9CS report, which

is expected to be collected on a

voluntary basis, the obligation to submit

the remaining reports in the FR Y–9

series of reports and to comply with the

recordkeeping requirements set forth in

the respective instructions to each of the

other reports, is mandatory.

With respect to the FR Y–9C report,

Schedule HI’s Memoranda item 7(g)

‘‘FDIC deposit insurance assessments,’’

Schedule HC–P’s item 7(a)

‘‘Representation and warranty reserves

for 1–4 family residential mortgage

loans sold to U.S. government agencies

and government sponsored agencies,’’

and Schedule HC–P’s item 7(b)

‘‘Representation and warranty reserves

for 1–4 family residential mortgage

loans sold to other parties’’ are

considered confidential commercial and

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o U.S. government agencies

and government sponsored agencies,’’

and Schedule HC–P’s item 7(b)

‘‘Representation and warranty reserves

for 1–4 family residential mortgage

loans sold to other parties’’ are

considered confidential commercial and

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financial information. Such treatment is

appropriate under exemption 4 of the

Freedom of Information Act (‘‘FOIA’’),

because these data items reflect

commercial and financial information

that is both customarily and actually

treated as private by the submitter, and

which the Board has previously assured

submitters will be treated as

confidential. It also appears that

disclosing these data items may reveal

confidential examination and

supervisory information, and in such

instances, the information also would be

withheld pursuant to exemption 8 of the

FOIA, which protects information

related to the supervision or

examination of a regulated financial

institution.

In addition, for both the FR Y–9C

report and the FR Y–9SP report,

Schedule HC’s Memoranda item 2.b.,

the name and email address of the

external auditing firm’s engagement

partner, is considered confidential

commercial information and protected

by exemption 4 of the FOIA, if the

identity of the engagement partner is

treated as private information by HCs.

The Board has assured respondents that

this information will be treated as

confidential since the collection of this

data item was proposed in 2004.

Additionally, items on the FR Y–9C,

Schedule HC–C for loans modified

under Section 4013, data items

Memorandum items 16.a, ‘‘Number of

Section 4013 loans outstanding’’; and

Memorandum items 16.b, ‘‘Outstanding

balance of Section 4013 loans’’ are

considered confidential

ents that

this information will be treated as

confidential since the collection of this

data item was proposed in 2004.

Additionally, items on the FR Y–9C,

Schedule HC–C for loans modified

under Section 4013, data items

Memorandum items 16.a, ‘‘Number of

Section 4013 loans outstanding’’; and

Memorandum items 16.b, ‘‘Outstanding

balance of Section 4013 loans’’ are

considered confidential. While the

Board generally makes institution-level

FR Y–9C report data publicly available,

the Board is collecting Section 4013

loan information as part of condition

reports for the impacted HCs and the

Board considers disclosure of these

items at the HC level would not be in

the public interest. Such information is

permitted to be collected on a

confidential basis, consistent with 5

U.S.C. 552(b)(8). In addition, holding

companies may be reluctant to offer

modifications under Section 4013 if

information on these modifications

made by each holding company is

publicly available, as analysts,

investors, and other users of public FR

Y–9C report information may penalize

an institution for using the relief

provided by the CARES Act. The Board

may disclose Section 4013 loan data on

an aggregated basis, consistent with

confidentiality or as otherwise required

by law.

Aside from the data items described

above, the remaining data items

collected on the FR Y–9C report and the

FR Y–9SP report are generally not

accorded confidential treatment. The

data items collected on FR Y–9LP, FR

Y–9ES, and FR Y–9CS reports, are also

generally not accorded confidential

treatment. As provided in the Board’s

Rules Regarding Availability of

Information, however, a respondent may

request confidential treatment for any

data items the respondent believes

should be withheld pursuant to a FOIA

exemption. The Board will review any

such request to determine if confidential

treatment is appropriate, and will

inform the respondent if the request for

confidential treatment has been granted

or denied

s

Rules Regarding Availability of

Information, however, a respondent may

request confidential treatment for any

data items the respondent believes

should be withheld pursuant to a FOIA

exemption. The Board will review any

such request to determine if confidential

treatment is appropriate, and will

inform the respondent if the request for

confidential treatment has been granted

or denied.

To the extent the instructions to the

FR Y–9C, FR Y–9LP, FR Y–9SP, and FR

Y–9ES reports each respectively direct

the financial institution to retain the

workpapers and related materials used

in preparation of each report, such

material would only be obtained by the

Board as part of the examination or

supervision of the financial institution.

Accordingly, such information is

considered confidential pursuant to

exemption 8 of the FOIA. In addition,

the workpapers and related materials

may also be protected by exemption 4

of the FOIA, to the extent such financial

information is treated as confidential by

the respondent.

Current Actions: As discussed in

detail in section VIII above, several

comments were received on the

proposed changes to the FR Y–9C.

Commenters requested that the effective

date of the final rule precede proposed

changes to regulatory reports. The

agencies confirmed that the final rule

will be effective before changes are

implemented to regulatory reports. The

final rule is effective April 1, 2021, and

the changes to the FR Y–9C are effective

June 30, 2021. Also, commenters

requested that the Board clarify that

U.S. GSIBs will report long-term debt

and TLAC leverage requirements based

upon the supplementary leverage ratio

denominator. The Board agreed and

clarified this requirement. Finally, some

commenters suggested that the Board

develop a more robust disclosure regime

related to TLAC, including collaborating

with the SEC. The Board did not accept

this comment for the reasons noted

above

hat

U.S. GSIBs will report long-term debt

and TLAC leverage requirements based

upon the supplementary leverage ratio

denominator. The Board agreed and

clarified this requirement. Finally, some

commenters suggested that the Board

develop a more robust disclosure regime

related to TLAC, including collaborating

with the SEC. The Board did not accept

this comment for the reasons noted

above. Some of the item numbers below

have changed since the proposed rule

due to other FR Y–9C reporting changes

to Schedule HC–R that have been

implemented since that time.

To implement the reporting

requirements of the final rule, the Board

revises the FR Y–9C, Schedule HC–R,

Part I, Regulatory Capital Components

and Ratios, to amend instructions for

line items 11, 17, 24, and 43 to

effectuate the deductions from

regulatory capital for advanced

approaches holding companies related

to investments in covered debt

instruments and excluded covered debt

instruments as described above. Further,

the Board proposes to revise the FR Y–

9C, Schedule HC–R, Part II, Risk-

Weighted Assets, to amend instructions

for line items 2(a), 2(b), 7, and 8 to

incorporate investments in covered debt

instruments and excluded debt

instruments, as applicable, by advanced

approaches holding companies in their

calculation of risk-weighted assets.

In addition, the Board revises the FR

Y–9C, Schedule HC–R, Part I,

Regulatory Capital Components and

Ratios, to create new line items and

instructions to allow the BHCs of U.S.

GSIBs and the IHCs of foreign GSIBs to

publicly report their long-term debt

(LTD) and total loss-absorbing capacity

(TLAC) in accordance, respectively,

with 12 CFR part 252, subpart G and 12

CFR part 252, subpart P

n addition, the Board revises the FR

Y–9C, Schedule HC–R, Part I,

Regulatory Capital Components and

Ratios, to create new line items and

instructions to allow the BHCs of U.S.

GSIBs and the IHCs of foreign GSIBs to

publicly report their long-term debt

(LTD) and total loss-absorbing capacity

(TLAC) in accordance, respectively,

with 12 CFR part 252, subpart G and 12

CFR part 252, subpart P. Specifically,

new line items are created to report, as

applicable, BHCs of U.S GSIBs’ and

IHCs of foreign GSIBs’ (1) outstanding

eligible LTD (item 50); (2) TLAC (item

51); (3) LTD standardized risk-weighted

asset ratio (item 52, column A); (4)

TLAC standardized risk-weighted asset

ratio (item 52, column B); (5) LTD

advanced approaches risk-weighted

asset ratio (item 53, column A); (6)

TLAC advanced approaches risk-

weighted asset ratio (item 53, column

B); (7) IHCs of foreign GSIBs only: LTD

leverage ratio (item 54, column A); (8)

IHCs of foreign GSIBs only: TLAC

leverage ratio (item 54, column B); (9)

LTD supplementary leverage ratio (item

55, column A); (10) TLAC

supplementary leverage ratio (item 55,

column B); (11) institution-specific

TLAC risk-weighted asset buffer

necessary to avoid limitations on

distributions and discretionary bonus

payments (item 57(a)); and (12) TLAC

leverage buffer necessary to avoid

limitations on distributions and

discretionary bonus payments (item

57(b)). Existing line items 50(a), 50(b),

51, 52, and 53 are re-numbered to 56(a),

56(b), 58, 59, and 60, respectively, and

instructions’ references updated, to

account for the proposed inclusion of

the new data collection items described

above. Finally, the instructions for re-

numbered line item 59, ‘‘Distributions

and discretionary bonus payments

during the quarter,’’ are amended for the

BHCs of U.S. GSIBs and the IHCs of

foreign GSIBs to reflect maximum

payout amounts that take into account

a firm’s TLAC risk-weighted and

leverage buffers reported in line items

57(a) and 57(b), respectively

collection items described

above. Finally, the instructions for re-

numbered line item 59, ‘‘Distributions

and discretionary bonus payments

during the quarter,’’ are amended for the

BHCs of U.S. GSIBs and the IHCs of

foreign GSIBs to reflect maximum

payout amounts that take into account

a firm’s TLAC risk-weighted and

leverage buffers reported in line items

57(a) and 57(b), respectively. The final

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Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations

51 SLHCs with $100 billion or more in total

consolidated assets became members of the FR Y–

14Q and FR Y–14M panels effective June 30, 2020,

and will join the FR Y–14A panel effective

December 31, 2020. See 84 FR 59032 (November 1,

2019).

52 The estimated number of respondents for the

FR Y–14M is lower than for the FR Y–14Q and FR

Y– 14A because, in recent years, certain

respondents to the FR Y–14A and FR Y–14Q have

not met the materiality thresholds to report the FR

Y–14M due to their lack of mortgage and credit

activities. The Board expects this situation to

continue for the foreseeable future.

53 On October 10, 2019, the Board issued a final

rule that eliminated the requirement for firms

subject to Category IV standards to conduct and

publicly disclose the results of a company-run

stress test. See 84 FR 59032 (Nov. 1, 2019). That

final rule maintained the existing FR Y–14

substantive reporting requirements for these firms

in order to provide the Board with the data it needs

to conduct supervisory stress testing and inform the

Board’s ongoing monitoring and supervision of its

supervised firms

IV standards to conduct and

publicly disclose the results of a company-run

stress test. See 84 FR 59032 (Nov. 1, 2019). That

final rule maintained the existing FR Y–14

substantive reporting requirements for these firms

in order to provide the Board with the data it needs

to conduct supervisory stress testing and inform the

Board’s ongoing monitoring and supervision of its

supervised firms. However, as noted in the final

rule, the Board intends to provide greater flexibility

to banking organizations subject to Category IV

standards in developing their annual capital plans

and consider further change to the FR Y–14 forms

as part of a separate proposal. See 84 FR 59032,

59063.

54 See 85 FR 15776 (March 19, 2020).

reporting forms and instructions will

become available in the near future on

the Board’s public website at https://

www.federalreserve.gov/apps/

reportforms/review.aspx.

Revised Collection (Board only)

Title of Information Collection:

Capital Assessments and Stress Testing

Reports.

Agency form number: FR Y–14A/Q/

M.

OMB control number: 7100–0341.

Effective date: June 30, 2021.

Frequency: Annually, quarterly, and

monthly.

Respondents: These collections of

information are applicable to bank

holding companies (BHCs), U.S.

intermediate holding companies (IHCs),

and savings and loan holding

companies (SLHCs) 51 with $100 billion

or more in total consolidated assets, as

based on: (i) The average of the firm’s

total consolidated assets in the four

most recent quarters as reported

quarterly on the firm’s Consolidated

Financial Statements for Holding

Companies (FR Y–9C; OMB No. 7100–

0128); or (ii) if the firm has not filed an

FR Y–9C for each of the most recent four

quarters, then the average of the firm’s

total consolidated assets in the most

recent consecutive quarters as reported

quarterly on the firm’s FR Y–9Cs

sets in the four

most recent quarters as reported

quarterly on the firm’s Consolidated

Financial Statements for Holding

Companies (FR Y–9C; OMB No. 7100–

0128); or (ii) if the firm has not filed an

FR Y–9C for each of the most recent four

quarters, then the average of the firm’s

total consolidated assets in the most

recent consecutive quarters as reported

quarterly on the firm’s FR Y–9Cs.

Reporting is required as of the first day

of the quarter immediately following the

quarter in which the respondent meets

this asset threshold, unless otherwise

directed by the Board.

Estimated number of respondents: FR

Y–14A/Q: 36; FR Y–14M: 34.52

Estimated average hours per response:

FR Y–14A: 929 hours; FR Y–14Q: 2,201

hours; FR Y–14M: 1,072 hours.

On-going Automation Revisions: 480

hours; FR Y–14 Attestation On-going

Attestation: 2,560 hours.

Estimated annual burden hours: FR

Y–14A: 33,444 hours; FR Y–14Q:

316,944 hours; FR Y–14M: 437,376

hours; FR Y–14 On-going Automation

Revisions: 17,280 hours; FR Y–14

Attestation On-going Attestation: 33,280

hours.

General description of report: This

family of information collections is

composed of the following three reports:

• The FR Y–14A collects quantitative

projections of balance sheet, income,

losses, and capital across a range of

macroeconomic scenarios and

qualitative information on

methodologies used to develop internal

projections of capital across scenarios.53

• The quarterly FR Y–14Q collects

granular data on various asset classes,

including loans, securities, trading

assets, and PPNR for the reporting

period.

• The monthly FR Y–14M is

comprised of three retail portfolio- and

loan-level schedules, and one detailed

address-matching schedule to

supplement two of the portfolio and

loan-level schedules

projections of capital across scenarios.53

• The quarterly FR Y–14Q collects

granular data on various asset classes,

including loans, securities, trading

assets, and PPNR for the reporting

period.

• The monthly FR Y–14M is

comprised of three retail portfolio- and

loan-level schedules, and one detailed

address-matching schedule to

supplement two of the portfolio and

loan-level schedules.

The data collected through the FR Y–

14A/Q/M reports provide the Board

with the information needed to help

ensure that large firms have strong, firm-

wide risk measurement and

management processes supporting their

internal assessments of capital adequacy

and that their capital resources are

sufficient given their business focus,

activities, and resulting risk exposures.

The reports are used to support the

Board’s annual Comprehensive Capital

Analysis and Review (CCAR) and Dodd

Frank Act Stress Test (DFAST)

exercises, which complement other

Board supervisory efforts aimed at

enhancing the continued viability of

large firms, including continuous

monitoring of firms’ planning and

management of liquidity and funding

resources, as well as regular assessments

of credit, market and operational risks,

and associated risk management

practices. Information gathered in this

data collection is also used in the

supervision and regulation of

respondent financial institutions.

Respondent firms are currently required

to complete and submit up to 17 filings

each year: One annual FR Y–14A filing,

four quarterly FR Y–14Q filings, and 12

monthly FR Y–14M filings. Compliance

with the information collection is

mandatory.

Current actions: On March 19, 2020,

the Board proposed to revise the FR Y–

14 reports to collect TLAC and LTD

information.54 The Board did not

receive any comments on the proposed

TLAC and LTD revisions. The Board has

modified the Capital Assessments and

Stress Testing (FR Y–14A and Q; OMB

No. 7100–0341) in a manner consistent

with the changes described above to the

FR Y–9C

mandatory.

Current actions: On March 19, 2020,

the Board proposed to revise the FR Y–

14 reports to collect TLAC and LTD

information.54 The Board did not

receive any comments on the proposed

TLAC and LTD revisions. The Board has

modified the Capital Assessments and

Stress Testing (FR Y–14A and Q; OMB

No. 7100–0341) in a manner consistent

with the changes described above to the

FR Y–9C. In addition, the Board has

renumbered items in the FR Y–14A,

Schedule A.1.d (Capital) instructions to

correspond with related items on the FR

Y–9C. The Board has adopted, as

proposed, the following revisions to FR

Y–14A, Schedule A.1.d, and FR Y–14Q,

Schedule D, effective for the June 30,

2021, as of date:

FR Y–14A, Schedule A.1.d (Capital)

In order to align Schedule A.1.d with

the FR Y–9C, the Board has added the

following items to Schedule A.1.d:

• ‘‘Outstanding eligible long-term

debt’’;

• ‘‘Total loss-absorbing capacity’’;

• ‘‘LTD and TLAC total risk-weighted

assets ratios’’;

• ‘‘IHCs of foreign GSIBs only: LTD

and TLAC leverage ratios’’;

• ‘‘LTD and TLAC supplementary

leverage ratios’’;

• ‘‘Institution-specific TLAC buffer

necessary to avoid limitations on

distributions discretionary bonus

payments’’;

• ‘‘TLAC risk-weighted buffer’’; and

• ‘‘TLAC leverage buffer.’’

FR Y–14Q, Schedule D (Regulatory

Capital)

The Board has revised the

instructions for item 1 (‘‘Aggregate

amount of non-significant investments

in the capital of unconsolidated

financial institutions’’) to require

banking organizations subject to

Category I and II standards to include

covered debt instruments.

B. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act,

5 U.S.C. 601 et seq., (RFA), requires an

agency either to provide a final

regulatory flexibility analysis with a

final rule for which a general notice of

proposed rulemaking is required or to

certify that the final rule will not have

a significant, economic impact on a

substantial number of small entities

uments.

B. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act,

5 U.S.C. 601 et seq., (RFA), requires an

agency either to provide a final

regulatory flexibility analysis with a

final rule for which a general notice of

proposed rulemaking is required or to

certify that the final rule will not have

a significant, economic impact on a

substantial number of small entities.

The Small Business Administration

(SBA) establishes size standards that

define which entities are small

businesses for purposes of the RFA to

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55 The OCC calculated the number of small

entities using the SBA’s size thresholds for

commercial banks and savings institutions, and

trust companies, which are $600 million and $41.5

million, respectively. Consistent with the General

Principles of Affiliation, 13 CFR 121.103(a), the

OCC counted the assets of affiliated financial

institutions when determining whether to classify

a national bank or Federal savings association as a

small entity.

56 See 13 CFR 121.201. Effective August 19, 2019,

the SBA revised the size standards for banking

organizations to $600 million in assets from $550

million in assets. 84 FR 34261 (July 18, 2019).

57 5 U.S.C. 605(b).

58 With respect to the revisions to the Board’s

total loss-absorbing capacity rule, the scope of

impacted institutions is different—Covered BHCs

and Covered IHCs—but also only applies to

institutions significantly above the threshold to be

considered a ‘‘small entity.’’

59 5 U.S.C. 601 et seq

0 million in assets from $550

million in assets. 84 FR 34261 (July 18, 2019).

57 5 U.S.C. 605(b).

58 With respect to the revisions to the Board’s

total loss-absorbing capacity rule, the scope of

impacted institutions is different—Covered BHCs

and Covered IHCs—but also only applies to

institutions significantly above the threshold to be

considered a ‘‘small entity.’’

59 5 U.S.C. 601 et seq.

60 The SBA defines a small banking organization

as having $600 million or less in assets, where ‘‘a

financial institution’s assets are determined by

averaging the assets reported on its four quarterly

financial statements for the preceding year.’’ See 13

CFR 121.201 (as amended, effective August 19,

2019). ‘‘SBA counts the receipts, employees, or

other measure of size of the concern whose size is

at issue and all of its domestic and foreign

affiliates.’’ See 13 CFR 121.103. Following these

regulations, the FDIC uses a covered entity’s

affiliated and acquired assets, averaged over the

preceding four quarters, to determine whether the

covered entity is ‘‘small’’ for the purposes of RFA.

61 FDIC-supervised institutions are set forth in 12

U.S.C. 1813(q)(2).

62 Call Report data, June 30, 2020.

63 Call Report data, June 30, 2020.

64 Public Law 106–102, section 722, 113 Stat.

1338, 1471 (1999).

include commercial banks and savings

institutions with total assets of $600

million or less and trust companies with

total assets of $41.5 million of less) or

to certify that the final rule would not

have a significant economic impact on

a substantial number of small entities.

As of December 31, 2019, the OCC

supervises 745 small entities.55

As part of the OCC’s analysis, we

consider whether the final rule will

have a significant economic impact on

a substantial number of small entities,

pursuant to the RFA Because the final

rule only applies to advanced

approaches banking organizations it will

not impact any OCC-supervised small

entities

r of small entities.

As of December 31, 2019, the OCC

supervises 745 small entities.55

As part of the OCC’s analysis, we

consider whether the final rule will

have a significant economic impact on

a substantial number of small entities,

pursuant to the RFA Because the final

rule only applies to advanced

approaches banking organizations it will

not impact any OCC-supervised small

entities. Therefore, the final rule will

not have a significant economic impact

on a substantial number of small

entities.

Therefore, the OCC certifies that the

final rule will not have a significant

economic impact on a substantial

number of OCC-supervised small

entities.

Board: The Regulatory Flexibility Act

(RFA) generally requires that, in

connection with a final rulemaking, an

agency prepare and make available for

public comment a final regulatory

flexibility analysis describing the

impact of the proposed rule on small

entities. However, a final regulatory

flexibility analysis is not required if the

agency certifies that the final rule will

not have a significant economic impact

on a substantial number of small

entities. The Small Business

Administration (SBA) has defined

‘‘small entities’’ to include banking

organizations with total assets of less

than or equal to $600 million that are

independently owned and operated or

owned by a holding company with less

than or equal to $600 million in total

assets.56 For the reasons described

below and under section 605(b) of the

RFA, the Board certifies that the final

rule will not have a significant

economic impact on a substantial

number of small entities.57 As of

December 31, 2019, there were 2,799

bank holding companies, 171 savings

and loan holding companies, and 497

state member banks that would fit the

SBA’s current definition of ‘‘small

entity’’ for purposes of the RFA.

The Board has considered the

potential impact of the final rule on

small entities in accordance with the

RFA

onomic impact on a substantial

number of small entities.57 As of

December 31, 2019, there were 2,799

bank holding companies, 171 savings

and loan holding companies, and 497

state member banks that would fit the

SBA’s current definition of ‘‘small

entity’’ for purposes of the RFA.

The Board has considered the

potential impact of the final rule on

small entities in accordance with the

RFA. Based on its analysis and for the

reasons stated below, the Board believes

that this final rule will not have a

significant economic impact on a

substantial number of small entities.

As discussed in detail above, the final

rule amends the capital rule to require

advanced approaches banking

organizations to deduct exposures to

covered debt instruments issued by

covered BHCs, covered IHCs, and

foreign GSIBs and their subsidiaries.

These deductions are subject to

regulatory thresholds, as described

above. Deductions related to

investments in and exposures to

covered debt instruments are effectuated

by deduction from tier 2 capital

according to the corresponding

deduction approach, subject to

applicable deduction thresholds.

However, the assets of institutions

subject to this final rule substantially

exceed the $600 million asset threshold

under which a banking organization is

considered a ‘‘small entity’’ under SBA

regulations.58 Because the final rule is

not likely to apply to any depository

institution or company with assets of

$600 million or less, it is not expected

to apply to any small entity for purposes

of the RFA. In light of the foregoing, the

Board certifies that the final rule will

not have a significant economic impact

on a substantial number of small entities

supervised.

FDIC: The Regulatory Flexibility Act

(RFA), 5 U.S.C

s

not likely to apply to any depository

institution or company with assets of

$600 million or less, it is not expected

to apply to any small entity for purposes

of the RFA. In light of the foregoing, the

Board certifies that the final rule will

not have a significant economic impact

on a substantial number of small entities

supervised.

FDIC: The Regulatory Flexibility Act

(RFA), 5 U.S.C. 601 et seq., generally

requires an agency, in connection with

a final rule, to prepare and make

available for public comment a final

regulatory flexibility analysis that

describes the impact of a final rule on

small entities.59 However, a regulatory

flexibility analysis is not required if the

agency certifies that the rule will not

have a significant economic impact on

a substantial number of small entities.

The Small Business Administration

(SBA) has defined ‘‘small entities’’ to

include banking organizations with total

assets of less than or equal to $600

million who are independently owned

and operated or owned by a holding

company with less than $600 million in

total assets.60 Generally, the FDIC

considers a significant effect to be a

quantified effect in excess of 5 percent

of total annual salaries and benefits per

institution, or 2.5 percent of total

noninterest expenses. The FDIC believes

that effects in excess of these thresholds

typically represent significant effects for

FDIC-supervised institutions. For the

reasons described below and under

section 605(b) of the RFA, the FDIC

certifies that the final rule will not have

a significant economic impact on a

substantial number of small entities.

The FDIC supervises 3,270

institutions,61 of which 2,492 are

considered small entities for the

purposes of RFA.62

This final rule will affect all

institutions subject to the Category I and

Category II capital standards, and their

subsidiaries

n 605(b) of the RFA, the FDIC

certifies that the final rule will not have

a significant economic impact on a

substantial number of small entities.

The FDIC supervises 3,270

institutions,61 of which 2,492 are

considered small entities for the

purposes of RFA.62

This final rule will affect all

institutions subject to the Category I and

Category II capital standards, and their

subsidiaries. The FDIC supervises one

institution that is a subsidiary of an

institution that is subject to the Category

I capital standards, and no FDIC-

supervised institutions are subsidiaries

of institutions that are subject to the

Category II capital standards.63 The one

FDIC-supervised institution that would

be subject to this final rule is not

considered a small entity for the

purposes of the RFA since it is owned

by a holding company with over $600

million in total assets. Since this final

rule does not affect any FDIC-supervised

institutions that are defined as small

entities for the purposes of the RFA, the

FDIC certifies that the final rule will not

have a significant economic impact on

a substantial number of small entities.

C. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 64 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

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64 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

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724

Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations

65 2 U.S.C. 1532.

66 Based on available supervisory information, the

OCC determined that no OCC-supervised advanced

approaches institutions currently hold TLAC

instruments. Thus, there would no cost of capital

associated w

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