Notice of Proposed Interagency Rulemaking on Amendments to the Regulatory Capital Rule Applicable to Large Banking Organizations and to Banking Organizations with Significant Trading Activity
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FDIC Financial Institution Letters › Notice of Proposed Interagency Rulemaking on Amendments to the Regulatory Capital Rule Applicable to Large Banking Organizations and to Banking Organizations with Significant Trading Activity
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64028
Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3, 6, 32
[Docket ID OCC–2023–0008]
RIN 1557–AE78
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 217, 225, 238, 252
[Docket No. R–1813]
RIN 7100–AG64
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 324
RIN 3064–AF29
Regulatory Capital Rule: Large
Banking Organizations and Banking
Organizations With Significant Trading
Activity
AGENCY: Office of the Comptroller of the
Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Notice of proposed rulemaking.
SUMMARY: The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, and the
Federal Deposit Insurance Corporation
are inviting public comment on a notice
of proposed rulemaking (proposal) that
would substantially revise the capital
requirements applicable to large
banking organizations and to banking
organizations with significant trading
activity. The revisions set forth in the
proposal would improve the calculation
of risk-based capital requirements to
better reflect the risks of these banking
organizations’ exposures, reduce the
complexity of the framework, enhance
the consistency of requirements across
these banking organizations, and
facilitate more effective supervisory and
market assessments of capital adequacy.
The revisions would include replacing
current requirements that include the
use of banking organizations’ internal
models for credit risk and operational
risk with standardized approaches and
replacing the current market risk and
credit valuation adjustment risk
requirements with revised approaches.
The proposed revisions would be
generally consistent with recent changes
to international capital standards issued
by the Basel Committee on Banking
Supervision
the
use of banking organizations’ internal
models for credit risk and operational
risk with standardized approaches and
replacing the current market risk and
credit valuation adjustment risk
requirements with revised approaches.
The proposed revisions would be
generally consistent with recent changes
to international capital standards issued
by the Basel Committee on Banking
Supervision. The proposal would not
amend the capital requirements
applicable to smaller, less complex
banking organizations.
DATES: Comments must be received by
November 30, 2023.
ADDRESSES: Comments should be
directed to:
OCC: Commenters are encouraged to
submit comments through the Federal
eRulemaking Portal, if possible. Please
use the title ‘‘Regulatory capital rule:
Amendments applicable to large
banking organizations and to banking
organizations with significant trading
activity’’ to facilitate the organization
and distribution of the comments. You
may submit comments by any of the
following methods:
• Federal eRulemaking Portal—
Regulations.gov:
Go to https://regulations.gov/. Enter
‘‘Docket ID OCC–2023–0008’’ in the
Search Box and click ‘‘Search.’’ Public
comments can be submitted via the
‘‘Comment’’ box below the displayed
document information or by clicking on
the document title and then clicking the
‘‘Comment’’ box on the top-left side of
the screen. For help with submitting
effective comments, please click on
‘‘Commenter’s Checklist.’’ For
assistance with the Regulations.gov site,
please call 1–866–498–2945 (toll free)
Monday–Friday, 9 a.m.–5 p.m. ET, or
email regulationshelpdesk@gsa.gov.
• Mail: Chief Counsel’s Office,
Attention: Comment Processing, Office
of the Comptroller of the Currency, 400
7th Street SW, Suite 3E–218,
Washington, DC 20219.
• Hand Delivery/Courier: 400 7th
Street SW, Suite 3E–218, Washington,
DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2023–0008’’ in your comment
ET, or
email regulationshelpdesk@gsa.gov.
• Mail: Chief Counsel’s Office,
Attention: Comment Processing, Office
of the Comptroller of the Currency, 400
7th Street SW, Suite 3E–218,
Washington, DC 20219.
• Hand Delivery/Courier: 400 7th
Street SW, Suite 3E–218, Washington,
DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2023–0008’’ in your comment.
In general, the OCC will enter all
comments received into the docket and
publish the comments on the
Regulations.gov website without
change, including any business or
personal information provided such as
name and address information, email
addresses, or phone numbers.
Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
include any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
action by the following method:
• Viewing Comments Electronically—
Regulations.gov:
Go to https://regulations.gov/. Enter
‘‘Docket ID OCC–2023–0008’’ in the
Search Box and click ‘‘Search.’’ Click on
the ‘‘Dockets’’ tab and then the
document’s title. After clicking the
document’s title, click the ‘‘Browse All
Comments’’ tab. Comments can be
viewed and filtered by clicking on the
‘‘Sort By’’ drop-down on the right side
of the screen or the ‘‘Refine Comments
Results’’ options on the left side of the
screen. Supporting materials can be
viewed by clicking on the ‘‘Browse
Documents’’ tab. Click on the ‘‘Sort By’’
drop-down on the right side of the
screen or the ‘‘Refine Results’’ options
on the left side of the screen checking
the ‘‘Supporting & Related Material’’
checkbox. For assistance with the
Regulations.gov site, please call 1–866–
498–2945 (toll free) Monday–Friday, 9
a.m.–5 p.m. ET, or email
regulationshelpdesk@gsa.gov
by clicking on the ‘‘Browse
Documents’’ tab. Click on the ‘‘Sort By’’
drop-down on the right side of the
screen or the ‘‘Refine Results’’ options
on the left side of the screen checking
the ‘‘Supporting & Related Material’’
checkbox. For assistance with the
Regulations.gov site, please call 1–866–
498–2945 (toll free) Monday–Friday, 9
a.m.–5 p.m. ET, or email
regulationshelpdesk@gsa.gov.
The docket may be viewed after the
close of the comment period in the same
manner as during the comment period.
Board: You may submit comments,
identified by Docket No. R–1813, RIN
7100–AG64 by any of the following
methods:
Agency Website: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Email: regs.comments@
federalreserve.gov. Include the docket
number and RIN in the subject line of
the message.
Fax: (202) 452–3819 or (202) 452–
3102.
Mail: Ann E. Misback, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551.
In general, all public comments will
be made available on the Board’s
website at www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, and will not be modified to
remove confidential, contact or any
identifiable information. Public
comments may also be viewed
electronically or in paper in Room M–
4365A, 2001 C St. NW, Washington, DC
20551, between 9 a.m. and 5 p.m.
during Federal business weekdays.
FDIC: The FDIC encourages interested
parties to submit written comments.
Please include your name, affiliation,
address, email address, and telephone
number(s) in your comment
act or any
identifiable information. Public
comments may also be viewed
electronically or in paper in Room M–
4365A, 2001 C St. NW, Washington, DC
20551, between 9 a.m. and 5 p.m.
during Federal business weekdays.
FDIC: The FDIC encourages interested
parties to submit written comments.
Please include your name, affiliation,
address, email address, and telephone
number(s) in your comment. You may
submit comments to the FDIC,
identified by RIN 3064–AF29 by any of
the following methods:
Agency Website: https://
www.fdic.gov/resources/regulations/
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
federal-register-publications. Follow
instructions for submitting comments
on the FDIC’s website.
Mail: James P. Sheesley, Assistant
Executive Secretary, Attention:
Comments/Legal OES (RIN 3064–AF29),
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
Hand Delivered/Courier: Comments
may be hand-delivered to the guard
station at the rear of the 550 17th Street
NW, building (located on F Street NW)
on business days between 7 a.m. and 5
p.m.
Email: comments@FDIC.gov. Include
the RIN 3064–AF29 on the subject line
of the message.
Public Inspection: Comments
received, including any personal
information provided, may be posted
without change to https://www.fdic.gov/
resources/regulations/federal-register-
publications. Commenters should
submit only information that the
commenter wishes to make available
publicly. The FDIC may review, redact,
or refrain from posting all or any portion
of any comment that it may deem to be
inappropriate for publication, such as
irrelevant or obscene material
vided, may be posted
without change to https://www.fdic.gov/
resources/regulations/federal-register-
publications. Commenters should
submit only information that the
commenter wishes to make available
publicly. The FDIC may review, redact,
or refrain from posting all or any portion
of any comment that it may deem to be
inappropriate for publication, such as
irrelevant or obscene material. The FDIC
may post only a single representative
example of identical or substantially
identical comments, and in such cases
will generally identify the number of
identical or substantially identical
comments represented by the posted
example. All comments that have been
redacted, as well as those that have not
been posted, that contain comments on
the merits of this document will be
retained in the public comment file and
will be considered as required under all
applicable laws. All comments may be
accessible under the Freedom of
Information Act.
FOR FURTHER INFORMATION CONTACT:
OCC: Venus Fan, Risk Expert,
Benjamin Pegg, Analyst, Andrew
Tschirhart, Risk Expert, or Diana Wei,
Risk Expert, Capital Policy, (202) 649–
6370; Carl Kaminski, Assistant Director,
Kevin Korzeniewski, Counsel, Rima
Kundnani, Counsel, Daniel Perez,
Counsel, or Daniel Sufranski, Senior
Attorney, Chief Counsel’s Office, (202)
649–5490, Office of the Comptroller of
the Currency, 400 7th Street SW,
Washington, DC 20219. If you are deaf,
hard of hearing, or have a speech
disability, please dial 7–1–1 to access
telecommunications relay services.
Board: Anna Lee Hewko, Associate
Director, (202) 530–6260; Brian
Chernoff, Manager, (202) 452–2952;
Andrew Willis, Manager, (202) 912–
4323; Cecily Boggs, Lead Financial
Institution Policy Analyst, (202) 530–
6209; Marco Migueis, Principal
Economist, (202) 452–6447; Diana
Iercosan, Principal Economist, (202)
912–4648; Nadya Zeltser, Senior
Financial Institution Policy Analyst,
ervices.
Board: Anna Lee Hewko, Associate
Director, (202) 530–6260; Brian
Chernoff, Manager, (202) 452–2952;
Andrew Willis, Manager, (202) 912–
4323; Cecily Boggs, Lead Financial
Institution Policy Analyst, (202) 530–
6209; Marco Migueis, Principal
Economist, (202) 452–6447; Diana
Iercosan, Principal Economist, (202)
912–4648; Nadya Zeltser, Senior
Financial Institution Policy Analyst,
(202) 452–3164; Division of Supervision
and Regulation; or Jay Schwarz,
Assistant General Counsel, (202) 452–
2970; Mark Buresh, Special Counsel,
(202) 452–5270; Andrew Hartlage,
Special Counsel, (202) 452–6483;
Gillian Burgess, Senior Counsel, (202)
736–5564; Jonah Kind, Senior Counsel,
(202) 452–2045, Legal Division, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue NW, Washington, DC 20551.
For users of TTY–TRS, please call 711
from any telephone, anywhere in the
United States.
FDIC: Benedetto Bosco, Chief Capital
Policy Section; Bob Charurat, Corporate
Expert; Irina Leonova, Corporate Expert;
Andrew Carayiannis, Chief, Policy and
Risk Analytics Section; Brian Cox,
Chief, Capital Markets Strategies
Section; Noah Cuttler, Senior Policy
Analyst; David Riley, Senior Policy
Analyst; Michael Maloney, Senior
Policy Analyst; Richard Smith, Capital
Markets Policy Analyst; Olga Lionakis,
Capital Markets Policy Analyst; Kyle
McCormick, Senior Policy Analyst;
Keith Bergstresser, Senior Policy
Analyst, Capital Markets and
Accounting Policy Branch, Division of
Risk Management Supervision;
Catherine Wood, Counsel; Benjamin
Klein, Counsel; Anjoly David, Honors
Attorney, Legal Division;
regulatorycapital@fdic.gov, (202) 898–
6888; Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Overview of the Proposal
B. Use of Internal Models Under the
Proposed Framework
II. Scope of Application
III. Proposed Changes to the Capital Rule
A
Anjoly David, Honors
Attorney, Legal Division;
regulatorycapital@fdic.gov, (202) 898–
6888; Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Overview of the Proposal
B. Use of Internal Models Under the
Proposed Framework
II. Scope of Application
III. Proposed Changes to the Capital Rule
A. Calculation of Capital Ratios and
Application of Buffer Requirements
1. Standardized Output Floor
2. Stress Capital Buffer Requirement
B. Definition of Capital
1. Accumulated Other Comprehensive
Income
2. Regulatory Capital Deductions
3. Additional Definition of Capital
Adjustments
4. Changes to the Definition of Tier 2
Capital Applicable to Large Banking
Organizations
C. Credit Risk
1. Due Diligence
2. Proposed Risk Weights for Credit Risk
3. Off-Balance Sheet Exposures
4. Derivatives
5. Credit Risk Mitigation
D. Securitization Framework
1. Operational Requirements
2. Securitization Standardized Approach
(SEC–SA)
3. Exceptions to the SEC–SA Risk-Based
Capital Treatment for Securitization
Exposures
4. Credit Risk Mitigation for Securitization
Exposures
E. Equity Exposures
1. Risk-Weighted Asset Amount
F. Operational Risk
1. Business Indicator
2. Business Indicator Component
3. Internal Loss Multiplier
4. Operational Risk Management and Data
Collection Requirements
G. Disclosure Requirements
1. Proposed Disclosure Requirements
2. Specific Public Disclosure Requirements
H. Market Risk
1. Background
2. Scope and Application of the Proposed
Rule
3. Market Risk Covered Position
4. Internal Risk Transfers
5. General Requirements for Market Risk
6. Measure for Market Risk
7. Standardized Measure for Market Risk
8. Models-Based Measure for Market Risk
9. Treatment of Certain Market Risk
Covered Positions
10. Reporting and Disclosure Requirements
11. Technical Amendments
I. Credit Valuation Adjustment Risk
1. Background
2. Scope of Application
3
Covered Position
4. Internal Risk Transfers
5. General Requirements for Market Risk
6. Measure for Market Risk
7. Standardized Measure for Market Risk
8. Models-Based Measure for Market Risk
9. Treatment of Certain Market Risk
Covered Positions
10. Reporting and Disclosure Requirements
11. Technical Amendments
I. Credit Valuation Adjustment Risk
1. Background
2. Scope of Application
3. CVA Risk Covered Positions and CVA
Hedges
4. General Risk Management Requirements
5. Measure for CVA Risk
IV. Transition Provisions
A. Transitions for Expanded Total Risk-
Weighted Assets
B. AOCI Regulatory Capital Adjustments
V. Impact and Economic Analysis
A. Scope and Data
B. Impact on Risk-Weighted Assets and
Capital Requirements
C. Economic Impact on Lending Activity
D. Economic Impact on Trading Activity
E. Additional Impact Considerations
VI. Technical Amendments to the Capital
Rule
A. Additional OCC Technical Amendments
B. Additional FDIC Technical
Amendments
VII. Proposed Amendments to Related Rules
and Related Proposals
A. OCC Amendments
B. Board Amendments
C. Related Proposals
VIII. Administrative Law Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. Riegle Community Development and
Regulatory Improvement Act of 1994
E. OCC Unfunded Mandates Reform Act of
1995 Determination
F. Providing Accountability Through
Transparency Act of 2023
I. Introduction
The Office of the Comptroller of the
Currency (OCC), the Board of Governors
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Improvement Act of 1994
E. OCC Unfunded Mandates Reform Act of
1995 Determination
F. Providing Accountability Through
Transparency Act of 2023
I. Introduction
The Office of the Comptroller of the
Currency (OCC), the Board of Governors
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1 The term ‘‘banking organizations’’ includes
national banks, state member banks, state
nonmember banks, Federal savings associations,
state savings associations, top-tier bank holding
companies domiciled in the United States not
subject to the Board’s Small Bank Holding
Company and Savings and Loan Holding Company
Policy Statement (12 CFR part 225, appendix C),
U.S. intermediate holding companies of foreign
banking organizations, and top-tier savings and loan
holding companies domiciled in the United States,
except for certain savings and loan holding
companies that are substantially engaged in
insurance underwriting or commercial activities
and savings and loan holding companies that are
subject to the Small Bank Holding Company and
Savings and Loan Holding Company Policy
Statement.
2 The Board and the OCC issued a joint final rule
on October 11, 2013 (78 FR 62018) and the FDIC
issued a substantially identical interim final rule on
September 10, 2013 (78 FR 55340). In April 2014,
the FDIC adopted the interim final rule as a final
rule with no substantive changes. 79 FR 20754
(April 14, 2014).
3 The Basel Committee is a committee composed
of central banks and banking supervisory
authorities, which was established by the central
bank governors of the G–10 countries in 1975.
4 See 12 CFR 225.8; 12 CFR part 238, subparts N,
O, P, R, S; 12 CFR part 252, subparts D, E, F, N,
O.
5 12 CFR part 217, subpart H.
6 See 12 CFR part 252; 12 U.S.C. 5365
hanges. 79 FR 20754
(April 14, 2014).
3 The Basel Committee is a committee composed
of central banks and banking supervisory
authorities, which was established by the central
bank governors of the G–10 countries in 1975.
4 See 12 CFR 225.8; 12 CFR part 238, subparts N,
O, P, R, S; 12 CFR part 252, subparts D, E, F, N,
O.
5 12 CFR part 217, subpart H.
6 See 12 CFR part 252; 12 U.S.C. 5365.
7 See the consolidated Basel Framework at
https://www.bis.org/basel_framework/.
8 GAAP often serve as a foundational
measurement component for U.S. capital
requirements.
9 See the impact and economic analysis presented
in section V of this SUPPLEMENTARY INFORMATION.
of the Federal Reserve System (Board),
and the Federal Deposit Insurance
Corporation (FDIC) (collectively, the
agencies) are proposing to modify the
capital requirements applicable to
banking organizations 1 with total assets
of $100 billion or more and their
subsidiary depository institutions (large
banking organizations) and to banking
organizations with significant trading
activity. The revisions set forth in the
proposal would strengthen the
calculation of risk-based capital
requirements to better reflect the risks of
these banking organizations’ exposures.
In addition, the proposed revisions
would enhance the consistency of
requirements across large banking
organizations and facilitate more
effective supervisory and market
assessments of capital adequacy.
Following the 2007–09 financial
crisis, the agencies adopted an initial set
of reforms to improve the effectiveness
of and address weaknesses in the
regulatory capital framework
posures.
In addition, the proposed revisions
would enhance the consistency of
requirements across large banking
organizations and facilitate more
effective supervisory and market
assessments of capital adequacy.
Following the 2007–09 financial
crisis, the agencies adopted an initial set
of reforms to improve the effectiveness
of and address weaknesses in the
regulatory capital framework. For
example, in 2013, the agencies adopted
a final rule that increased the quantity
and quality of regulatory capital banking
organizations must maintain.2 These
changes were broadly consistent with an
initial set of reforms published by the
Basel Committee on Banking
Supervision (Basel Committee)
following the financial crisis.3 The
Board also implemented capital
planning and stress testing requirements
for large bank holding companies and
savings and loan holding companies 4
and an additional capital buffer
requirement to mitigate the financial
stability risks posed by U.S. global
systemically important banking
organizations (GSIBs),5 as well as other
enhanced prudential standards,
consistent with the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010 (Dodd-Frank Act).6
The proposal would build on these
initial reforms by making additional
changes developed in response to the
2007–09 financial crisis and informed
by experience since the crisis.
Requirements under the proposal would
generally be consistent with
international capital standards issued by
the Basel Committee, commonly known
as the Basel III reforms.7 Where
appropriate, the proposal differs from
the Basel III reforms to reflect, for
example, specific characteristics of U.S.
markets, requirements under U.S.
generally accepted accounting
principles (GAAP),8 practices of U.S.
banking organizations, and U.S. legal
requirements and policy objectives
capital standards issued by
the Basel Committee, commonly known
as the Basel III reforms.7 Where
appropriate, the proposal differs from
the Basel III reforms to reflect, for
example, specific characteristics of U.S.
markets, requirements under U.S.
generally accepted accounting
principles (GAAP),8 practices of U.S.
banking organizations, and U.S. legal
requirements and policy objectives.
The proposal would strengthen risk-
based capital requirements for large
banking organizations by improving
their comprehensiveness and risk
sensitivity. These proposed revisions,
including removal of certain internal
models, would increase capital
requirements in the aggregate, in
particular for those banking
organizations with heightened risk
profiles. Increased capital requirements
can produce both economic costs and
benefits. The agencies assessed the
likely effect of the proposal on
economic activity and resilience, and
expect that the benefits of strengthening
capital requirements for large banking
organizations outweigh the costs.9
Historical experience has
demonstrated the impact individual
banking organizations can have on the
stability of the U.S. banking system, in
particular banking organizations that
would have been subject to the
proposal. Large banking organizations
that experience an increase in their
capital requirements resulting from the
proposal would be expected to be able
to absorb losses with reduced disruption
to financial intermediation in the U.S.
economy. Enhanced resilience of the
banking sector supports more stable
lending through the economic cycle and
diminishes the likelihood of financial
crises and their associated costs.
The agencies seek comment on all
aspects of the proposal.
A
ements resulting from the
proposal would be expected to be able
to absorb losses with reduced disruption
to financial intermediation in the U.S.
economy. Enhanced resilience of the
banking sector supports more stable
lending through the economic cycle and
diminishes the likelihood of financial
crises and their associated costs.
The agencies seek comment on all
aspects of the proposal.
A. Overview of the Proposal
The proposal would improve the risk
capture and consistency of capital
requirements across large banking
organizations and reduce complexity
and operational costs through changes
across multiple areas of the agencies’
risk-based capital framework. For most
parts of the framework, the proposal
would eliminate the use of banking
organizations’ internal models to set
regulatory capital requirements and in
their place apply a simpler and more
consistent standardized framework. For
market risk, the proposal would retain
banking organizations’ ability to use
internal models, with an improved
models-based measure for market risk
that better accounts for potential losses.
The use of internal models would be
subject to enhanced requirements for
model approval and performance and a
new ‘‘output floor’’ to limit the extent to
which a banking organization’s internal
models may reduce its overall capital
requirement. The proposal would also
adopt new standardized approaches for
market risk and credit valuation
adjustment (CVA) risk that better reflect
the risks of banking organizations’
exposures.
This new framework for calculating
risk-weighted assets (the expanded risk-
based approach) would apply to
banking organizations with total assets
of $100 billion or more and their
subsidiary depository institutions. The
revised requirements for market risk
would also apply to other banking
organizations with $5 billion or more in
trading assets plus trading liabilities or
for which trading assets plus trading
liabilities exceed 10 percent of total
assets
risk-
based approach) would apply to
banking organizations with total assets
of $100 billion or more and their
subsidiary depository institutions. The
revised requirements for market risk
would also apply to other banking
organizations with $5 billion or more in
trading assets plus trading liabilities or
for which trading assets plus trading
liabilities exceed 10 percent of total
assets.
The expanded risk-based approach
would be more risk-sensitive than the
current U.S. standardized approach by
incorporating more credit-risk drivers
(for example, borrower and loan
characteristics) and explicitly
differentiating between more types of
risk (for example, operational risk,
credit valuation adjustment risk). In this
manner, the expanded risk-based
approach would better account for key
risks faced by large banking
organizations. The proposed changes
would also enhance the alignment of
capital requirements to the risks of
banking organizations’ exposures and
increase incentives for prudent risk
management.
To ensure that large banking
organizations would not have lower
capital requirements than smaller, less
complex banking organizations, the
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10 Banking organizations’ risk-based capital ratios
are the common equity tier 1 capital ratio, tier 1
capital ratio, and total capital ratio. See 12 CFR 3.10
(OCC), 12 CFR 217.10 (Board), and 12 CFR 324.10
(FDIC).
11 In 2019, the agencies adopted rules establishing
four categories of capital standards for U.S. banking
organizations with $100 billion or more in total
assets and foreign banking organizations with $100
billion or more in combined U.S. assets. Under this
framework, Category I capital standards apply to
U.S
l ratio. See 12 CFR 3.10
(OCC), 12 CFR 217.10 (Board), and 12 CFR 324.10
(FDIC).
11 In 2019, the agencies adopted rules establishing
four categories of capital standards for U.S. banking
organizations with $100 billion or more in total
assets and foreign banking organizations with $100
billion or more in combined U.S. assets. Under this
framework, Category I capital standards apply to
U.S. global systemically important bank holding
companies and their depository institution
subsidiaries. Category II capital standards apply to
banking organizations with at least $700 billion in
total consolidated assets or at least $75 billion in
cross-jurisdictional activity and their depository
institution subsidiaries. Category III capital
standards apply to banking organizations with total
consolidated assets of at least $250 billion or at
least $75 billion in weighted short-term wholesale
funding, nonbank assets, or off-balance sheet
exposure and their depository institution
subsidiaries. Category IV capital standards apply to
banking organizations with total consolidated assets
of at least $100 billion that do not meet the
thresholds for a higher category and their
depository institution subsidiaries. See 12 CFR 3.2
(OCC), 12 CFR 252.5, 12 CFR 238.10 (Board), 12
CFR 324.2 (FDIC); ‘‘Prudential Standards for Large
Bank Holding Companies, Savings and Loan
Holding Companies, and Foreign Banking
Organizations,’’ 84 FR 59032 (November 1, 2019);
and ‘‘Changes to Applicability Thresholds for
Regulatory Capital and Liquidity Requirements,’’ 84
FR 59230 (November 1, 2019).
12 On October 24, 2019, the Board published in
the Federal Register a notice of proposed
rulemaking inviting comment on a proposal to
establish risk-based capital requirements for
depository institution holding companies
significantly engaged in insurance activities. See 84
FR 57240 (October 24, 2019)
lds for
Regulatory Capital and Liquidity Requirements,’’ 84
FR 59230 (November 1, 2019).
12 On October 24, 2019, the Board published in
the Federal Register a notice of proposed
rulemaking inviting comment on a proposal to
establish risk-based capital requirements for
depository institution holding companies
significantly engaged in insurance activities. See 84
FR 57240 (October 24, 2019). The Board anticipates
that any final rule based on the proposal in this
SUPPLEMENTARY INFORMATION would include
appropriate adjustments as necessary to take into
account any final insurance capital rule.
13 The Basel Committee has published analysis
illustrating the variability of credit-risk-weighted
assets across banking organizations. See https://
www.bis.org/publ/bcbs256.pdf and https://
www.bis.org/bcbs/publ/d363.pdf.
proposal would maintain the capital
rule’s dual-requirement structure. Under
this structure, a large banking
organization would be required to
calculate its risk-based capital ratios
under both the new expanded risk-
based approach and the standardized
approach (including market risk, as
applicable), and use the lower of the
two for each risk-based capital ratio.10
All capital buffer requirements,
including the stress capital buffer
requirement, would apply regardless of
whether the expanded risk-based
approach or the existing standardized
approach produces the lower ratio.
For banking organizations subject to
Category III or IV capital standards,11
the proposal would align the calculation
of regulatory capital—the numerator of
the regulatory capital ratios—with the
calculation for banking organizations
subject to Category I or II capital
standards, providing the same approach
for all large banking organizations
andardized
approach produces the lower ratio.
For banking organizations subject to
Category III or IV capital standards,11
the proposal would align the calculation
of regulatory capital—the numerator of
the regulatory capital ratios—with the
calculation for banking organizations
subject to Category I or II capital
standards, providing the same approach
for all large banking organizations.
Banking organizations subject to
Category III or IV capital standards
would be subject to the same treatment
of accumulated other comprehensive
income (AOCI), capital deductions, and
rules for minority interest as banking
organizations subject to Category I or II
capital standards. This change would
help ensure that the regulatory capital
ratios of these banking organizations
better reflect their capacity to absorb
losses, including by taking into account
unrealized losses or gains on securities
positions reflected in AOCI.
The proposal would expand
application of the supplementary
leverage ratio and the countercyclical
capital buffer to banking organizations
subject to Category IV capital standards.
This change would bring further
alignment of capital requirements across
large banking organizations and is
consistent with the proposal’s goal of
strengthening the resilience of large
banking organizations.
The proposal would also introduce
enhanced disclosure requirements to
facilitate market participants’
understanding of a banking
organization’s financial condition and
risk management practices. Also, the
proposal would align Federal Reserve’s
regulatory reporting requirements with
the changes to capital requirements. The
agencies anticipate that revisions to the
reporting forms of the Federal Financial
Institutions Examination Council
(FFIEC) applicable to large banking
organizations and to banking
organizations with significant trading
activity will be proposed in the near
future, which would align with the
proposed revisions to the capital rule
requirements with
the changes to capital requirements. The
agencies anticipate that revisions to the
reporting forms of the Federal Financial
Institutions Examination Council
(FFIEC) applicable to large banking
organizations and to banking
organizations with significant trading
activity will be proposed in the near
future, which would align with the
proposed revisions to the capital rule.
The proposed changes would take
effect subject to the transition
provisions described in section IV of
this SUPPLEMENTARY INFORMATION.
The revisions introduced by the
proposal would interact with several
Board rules, including by modifying the
risk-weighted assets used to calculate
total loss-absorbing capacity
requirements, long-term debt
requirements, and the short-term
wholesale funding score included in the
GSIB surcharge method 2 score. Also,
the proposal would revise the
calculation of single-counterparty credit
limits by removing the option of using
a banking organization’s internal models
to calculate derivatives exposure
amounts and requiring the use of the
standardized approach for counterparty
credit risk for this purpose. The
proposal would also remove the
exemption from calculating risk-
weighted assets under subpart E of the
capital rule currently available to U.S.
intermediate holding companies of
foreign banking organizations under the
Board’s enhanced prudential standards.
In parallel, the Board is issuing a
notice of proposed rulemaking revising
the GSIB surcharge calculation
applicable to GSIBs and the systemic
risk report applicable to large banking
organizations.12
Question 1: The Board invites
comment on the interaction of the
revisions under the proposal with other
existing rules and with the other notice
of proposed rulemaking. In particular,
comment is invited on the impact of the
proposal on the single-counterparty
credit limit framework
calculation
applicable to GSIBs and the systemic
risk report applicable to large banking
organizations.12
Question 1: The Board invites
comment on the interaction of the
revisions under the proposal with other
existing rules and with the other notice
of proposed rulemaking. In particular,
comment is invited on the impact of the
proposal on the single-counterparty
credit limit framework. What are the
advantages and disadvantages of the
proposed approach? Which alternatives,
if any, should the Board consider and
why?
B. Use of Internal Models Under the
Proposed Framework
The proposal would remove the use of
internal models to set credit risk and
operational risk capital requirements
(the so-called advanced approaches) for
banking organizations subject to
Category I or II capital standards. These
internal models rely on a banking
organization’s choice of modeling
assumptions and supporting data. Such
model assumptions include a degree of
subjectivity, which can result in varying
risk-based capital requirements for
similar exposures. Moreover, empirical
verification of modeling choices can
require many years of historical
experience because severe credit risk
and operational risk losses can occur
infrequently. In the agencies’ previous
observations, the advanced approaches
have produced unwarranted variability
across banking organizations in
requirements for exposures with similar
risks.13 This unwarranted variability,
combined with the complexity of these
models-based approaches, can reduce
confidence in the validity of the
modeled outputs, lessen the
transparency of the risk-based capital
ratios, and challenge comparisons of
capital adequacy across banking
organizations.
Standardization of credit and
operational risk capital requirements
would improve the consistency of
requirements
ed variability,
combined with the complexity of these
models-based approaches, can reduce
confidence in the validity of the
modeled outputs, lessen the
transparency of the risk-based capital
ratios, and challenge comparisons of
capital adequacy across banking
organizations.
Standardization of credit and
operational risk capital requirements
would improve the consistency of
requirements. Standardized
requirements, together with robust
public disclosure and reporting
requirements, would enhance the
transparency of capital requirements
and the ability of supervisors and
market participants to make
independent assessments of a banking
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14 See 12 CFR 3.123(a) (OCC); 12 CFR 217.123(a)
(Board); 12 CFR 324.123(a) (FDIC).
15 See 12 CFR 3.10(e)(1) (OCC); 12 CFR
217.10(e)(1) (Board); 12 CFR 324.10(e)(1) (FDIC).
16 See 12 CFR 3.10(e)(2) (OCC); 12 CFR
217.10(e)(2) (Board); 12 CFR 324.10(e)(2) (FDIC).
17 See 12 CFR 46 (OCC); 12 CFR 252 subpart B
and F (Board); 12 CFR 325 (FDIC).
18 See 12 CFR 225.8 and 12 CFR 238.170.
19 The proposal would also apply to depository
institutions with total assets of $100 billion or more
that are not consolidated subsidiaries of depository
institution holding companies, and to depository
institutions with total assets of $100 billion or more
that are subsidiaries of depository institution
holding companies that are not assigned a category
under the capital rule.
20 See ‘‘Prudential Standards for Large Bank
Holding Companies, Savings and Loan Holding
Companies, and Foreign Banking Organizations,’’
84 FR 59032 (November 1, 2019).
organization’s capital adequacy,
individually and relative to its peers
ets of $100 billion or more
that are subsidiaries of depository institution
holding companies that are not assigned a category
under the capital rule.
20 See ‘‘Prudential Standards for Large Bank
Holding Companies, Savings and Loan Holding
Companies, and Foreign Banking Organizations,’’
84 FR 59032 (November 1, 2019).
organization’s capital adequacy,
individually and relative to its peers.
The use of robust, risk-sensitive
standardized approaches for credit and
operational risk would also improve the
efficiency of the capital framework by
reducing operational costs. Under the
advanced approaches, banking
organizations subject to Category I or II
capital standards must develop and
maintain internal modeling systems to
determine capital requirements, which
may differ from the risk measurement
approaches they use to monitor risk for
internal assessments. Further, any
material changes to a banking
organization’s internal models must be
fully documented and presented to the
banking organization’s primary Federal
supervisor for review.14 Replacing the
use of internal models with
standardized approaches would reduce
costs associated with maintaining such
modeling systems and eliminate the
associated submissions to the agencies.
Eliminating the use of internal models
to set credit and operational risk capital
requirements would not reduce the
overall risk capture of the regulatory
framework
ederal
supervisor for review.14 Replacing the
use of internal models with
standardized approaches would reduce
costs associated with maintaining such
modeling systems and eliminate the
associated submissions to the agencies.
Eliminating the use of internal models
to set credit and operational risk capital
requirements would not reduce the
overall risk capture of the regulatory
framework. In addition to the
calculation of expanded risk-based
approach and standardized approach
capital requirements, a large banking
organization would continue to be
required to maintain capital
commensurate with the level and nature
of all risks to which the banking
organization is exposed,15 to have a
process for assessing its overall capital
adequacy in relation to its risk profile
and a comprehensive strategy for
maintaining an appropriate level of
capital,16 and, where applicable, to
conduct internal stress tests.17 Also,
holding companies subject to the
Board’s capital plan rule would
continue to be subject to a stress capital
buffer requirement that is based on a
supervisory stress test of the holding
company’s exposures.18 Although the
proposal would remove use of internal
models for calculating capital
requirements for credit and operational
risk, internal models can provide
valuable information to a banking
organization’s internal stress testing,
capital planning, and risk management
functions. Large banking organizations
should employ internal modeling
capabilities as appropriate for the
complexity of their activities.
The proposal would continue to allow
use of internal models to set market risk
capital requirements for portfolios
where modeling can be demonstrated to
be appropriate. In addition, the proposal
would provide for conservative but risk-
sensitive standardized alternatives
where modeling is not supported. In
contrast to credit and operational risk,
market risk data allows for daily
feedback on model performance to
support empirical verification
els to set market risk
capital requirements for portfolios
where modeling can be demonstrated to
be appropriate. In addition, the proposal
would provide for conservative but risk-
sensitive standardized alternatives
where modeling is not supported. In
contrast to credit and operational risk,
market risk data allows for daily
feedback on model performance to
support empirical verification. The
proposal would limit the use of models
to only those trading desks for which a
banking organization has received
approval from its primary Federal
supervisor. Ongoing use of such models
would depend upon a banking
organization’s ability to demonstrate
through robust testing that the models
are sufficiently conservative and
accurate for purposes of calculating
market risk capital requirements. In
cases where a banking organization
cannot demonstrate acceptable
performance of its internal models for a
given trading desk, the banking
organization would be required to use
the standardized measure for market
risk which acts as a risk-sensitive
alternative.
II. Scope of Application
The proposal’s expanded risk-based
approach would apply to banking
organizations with total assets of $100
billion or more and their subsidiary
depository institutions.19 These banking
organizations are large and exhibit
heightened complexity. Application of
the expanded risk-based approach to
large banking organizations would
provide granular, generally standardized
requirements that result in robust risk
capture and appropriate risk sensitivity.
By strengthening the requirements that
apply to large banking organizations, the
proposal would enhance their resilience
and reduce risks to U.S. financial
stability and costs they may pose to the
Federal Deposit Insurance Fund in case
of material distress or failure. Relative to
smaller, less complex banking
organizations, these banking
organizations have greater operational
capacity to apply more sophisticated
requirements
apply to large banking organizations, the
proposal would enhance their resilience
and reduce risks to U.S. financial
stability and costs they may pose to the
Federal Deposit Insurance Fund in case
of material distress or failure. Relative to
smaller, less complex banking
organizations, these banking
organizations have greater operational
capacity to apply more sophisticated
requirements.
Previously, the agencies determined
that the advanced approaches
requirements should not apply to
banking organizations subject to
Category III or IV capital standards, as
the agencies considered such
requirements to be overly complex and
burdensome relative to the safety and
soundness benefits that they would
provide for these banking
organizations.20 The expanded risk-
based approach generally is based on
standardized requirements, which
would be less complex and costly. In
addition, recent events demonstrate the
impact banking organizations subject to
Category III or IV capital standards can
have on financial stability. While the
recent failure of banking organizations
subject to Category IV capital standards
may be attributed to a variety of factors,
the effect of these failures on financial
stability supports further alignment of
the regulatory capital framework across
large banking organizations.
Banking organizations with
significant trading activities are subject
to substantial market risk and, therefore,
would be subject to market risk capital
requirements. Recognizing that the
dollar-based threshold for the
application of market risk requirements
was established in 1996, the proposal
would increase this dollar-based
threshold from $1 billion to $5 billion
of trading assets plus trading liabilities.
Banking organizations would also
continue to be subject to market risk
requirements if their trading assets plus
trading liabilities represent 10 percent
or more of total assets
threshold for the
application of market risk requirements
was established in 1996, the proposal
would increase this dollar-based
threshold from $1 billion to $5 billion
of trading assets plus trading liabilities.
Banking organizations would also
continue to be subject to market risk
requirements if their trading assets plus
trading liabilities represent 10 percent
or more of total assets. The proposal
would revise the calculation of the
dollar-based threshold amount to be
based on four-quarter averages of
trading assets and trading liabilities
instead of point-in-time amounts.
Banking organizations that would no
longer meet these minimum thresholds
for being subject to market risk capital
requirements would calculate risk-
weighted assets for trading exposures
under the standardized approach.
Additionally, under the proposal, large
banking organizations would be subject
to market risk capital requirements
regardless of trading activities.
The proposal would expand
application of the countercyclical
capital buffer to banking organizations
subject to Category IV capital standards.
The countercyclical capital buffer is a
macroprudential tool that can be used to
increase the resilience of the financial
system by increasing capital
requirements for large banking
organizations during a period of
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IV capital standards.
The countercyclical capital buffer is a
macroprudential tool that can be used to
increase the resilience of the financial
system by increasing capital
requirements for large banking
organizations during a period of
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21 The proposed methodology for determining
market risk-weighted assets, in certain instances,
would require a banking organization that is subject
to subpart E to apply risk weights from subpart D
for purposes of determining its standardized total
risk-weighted assets and from subpart E for
purposes of determining its expanded total risk-
weighted assets. This approach would apply in the
case of: (i) capital add-ons for re-designations, (ii)
term repo-style transactions the banking
organization elects to include in market risk, (iii)
the standardized default risk capital requirement for
securitization positions non-CTP, and (iv) the
standardized default risk capital requirement for
correlation trading positions, each as discussed
further below.
elevated risk of above-normal losses.
Failure or distress of a banking
organization with assets of $100 billion
or more during a time of elevated risk
or stress can have significant
destabilizing effects for other banking
organizations and the broader financial
system—even if the banking
organization does not meet the criteria
for being subject to Category II or III
capital standards. Applying the
countercyclical capital buffer to banking
organizations subject to Category IV
capital standards would increase the
resilience of these banking organizations
and, in turn, improve the resilience of
the broader financial system. The
proposed approach also has the
potential to moderate fluctuations in the
supply of credit over time
ject to Category II or III
capital standards. Applying the
countercyclical capital buffer to banking
organizations subject to Category IV
capital standards would increase the
resilience of these banking organizations
and, in turn, improve the resilience of
the broader financial system. The
proposed approach also has the
potential to moderate fluctuations in the
supply of credit over time. The proposal
would also modify how the
countercyclical capital buffer amount is
determined to reflect the proposed
changes to market risk capital
requirements. Specifically, the risk-
weighted asset amount for private sector
credit exposures that are market risk
covered positions under the proposal
would be determined using the
standardized default risk capital
requirement for such positions rather
than using the specific risk add-on of
the current rule.
The proposal also would expand
application of the supplementary
leverage ratio requirement to banking
organizations subject to Category IV
capital standards. In contrast to the risk-
based capital requirements, a leverage
ratio does not differentiate the amount
of capital required by exposure type.
Rather, a leverage ratio puts a simple
and transparent limit on banking
organization leverage. Leverage
requirements protect against
underestimation of risk both by banking
organizations and by risk-based capital
requirements and serve as a
complement to risk-based capital
requirements. The supplementary
leverage ratio measures tier 1 capital
relative to total leverage exposure,
which includes on-balance sheet assets
and certain off-balance sheet exposures.
The proposed change would ensure that
all large banking organizations are
subject to a consistent and robust
leverage requirement that serves as a
complement to risk-based capital
requirements and takes into account on-
and off-balance sheet exposures
asures tier 1 capital
relative to total leverage exposure,
which includes on-balance sheet assets
and certain off-balance sheet exposures.
The proposed change would ensure that
all large banking organizations are
subject to a consistent and robust
leverage requirement that serves as a
complement to risk-based capital
requirements and takes into account on-
and off-balance sheet exposures.
Question 2: What are the advantages
and disadvantages of applying the
expanded risk-based approach to
banking organizations subject to
Category III or IV capital standards? To
what extent is the expanded risk-based
approach appropriate for banking
organizations with different risk
profiles, including from a cost and
operational burden perspective? Are
there specific areas, such as the market
risk capital framework, for which the
agencies should consider a materiality
threshold to better balance cost and
operational burden and risk sensitivity,
and if so what should that threshold be
and why? What would the appropriate
exposure treatment be for banking
organizations with such exposures
beneath any materiality threshold, and
how would that treatment be consistent
with the overall calibration of the
expanded risk-based approach? What
alternatives, if any, should the agencies
consider to help ensure that the risks of
large banking organizations are
appropriately captured under minimum
risk-based capital requirements and
why?
Question 3: What are the advantages
and disadvantages of harmonizing the
calculation of regulatory capital across
large banking organizations? What are
any unintended consequences of the
proposal and what steps should the
agencies consider to mitigate those
consequences? What are the advantages
and disadvantages of harmonizing the
calculation of regulatory capital across
large banking organizations and using
different approaches (for example, the
expanded risk-based approach and the
U.S
ital across
large banking organizations? What are
any unintended consequences of the
proposal and what steps should the
agencies consider to mitigate those
consequences? What are the advantages
and disadvantages of harmonizing the
calculation of regulatory capital across
large banking organizations and using
different approaches (for example, the
expanded risk-based approach and the
U.S. standardized approach) for the
calculation of risk-weighted assets?
Question 4: What are the advantages
and disadvantages of applying the
countercyclical capital buffer and
supplementary leverage ratio to banking
organizations subject to Category IV
capital standards?
III. Proposed Changes to the Capital
Rule
A. Calculation of Capital Ratios and
Application of Buffer Requirements
Under the proposal, large banking
organizations would be required to
calculate total risk-weighted assets
under two approaches: (1) the expanded
risk-based approach, and (2) the
standardized approach. Total risk-
weighted assets under the expanded
risk-based approach (expanded total
risk-weighted assets) would equal the
sum of risk-weighted assets for credit
risk, equity risk, operational risk, market
risk, and CVA risk, as described in this
proposal, minus any amount of the
banking organization’s adjusted
allowance for credit losses that is not
included in tier 2 capital and any
amount of allocated transfer risk
reserves
xpanded
risk-based approach (expanded total
risk-weighted assets) would equal the
sum of risk-weighted assets for credit
risk, equity risk, operational risk, market
risk, and CVA risk, as described in this
proposal, minus any amount of the
banking organization’s adjusted
allowance for credit losses that is not
included in tier 2 capital and any
amount of allocated transfer risk
reserves. For calculating standardized
total risk-weighted assets, the proposal
would revise the methodology for
determining market risk-weighted assets
and would require banking
organizations subject to Category III or
IV capital standards to use the
standardized approach for counterparty
credit risk (SA–CCR) for derivative
exposures.21
To determine its applicable risk-based
capital ratios, a large banking
organization would calculate two sets of
risk-based capital ratios (common equity
tier 1 capital ratio, tier 1 capital ratio,
and total capital ratio), one using
expanded total risk-weighted assets and
one using standardized total risk-
weighted assets. A banking
organization’s common equity tier 1
capital ratio, tier 1 capital ratio, and
total capital ratio would be the lower of
each ratio of the two approaches.
The proposal would not change the
minimum risk-based capital ratios
under the capital rule. Also, the capital
conservation buffer would continue to
apply to risk-based capital ratios as
under the capital rule, except that the
stress capital buffer requirement—a
component of the capital conservation
buffer that is applicable to banking
organizations subject to the Board’s
capital plan rule—would apply to a
banking organization’s risk-based
capital ratios regardless of whether the
ratios result from the expanded risk-
based approach or the standardized
approach
ratios as
under the capital rule, except that the
stress capital buffer requirement—a
component of the capital conservation
buffer that is applicable to banking
organizations subject to the Board’s
capital plan rule—would apply to a
banking organization’s risk-based
capital ratios regardless of whether the
ratios result from the expanded risk-
based approach or the standardized
approach.
Question 5: What are the advantages
and disadvantages of banking
organizations being required to
calculate risk-based capital ratios in two
different ways and what alternatives,
such as a single calculation, should the
agencies consider and why? What
modifications, if any, to the proposed
structure of the risk-based capital
calculation should the agencies
consider?
1. Standardized Output Floor
To enhance the consistency of capital
requirements and ensure that the use of
internal models for market risk does not
result in unwarranted reductions in
capital requirements, the proposal
would introduce an ‘‘output floor’’ to
the calculation of expanded total risk-
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22 12 CFR 3.11 (OCC); 12 CFR 217.11 (Board); 12
CFR 324.11 (FDIC).
23 12 CFR 225.8 (bank holding companies and
U.S. intermediate holding companies of foreign
banking organizations); 12 CFR 238.170 (savings
and loan holding companies).
24 See 12 CFR 217.11(c).
25 See 85 FR 15576 (March 18, 2020).
26 12 CFR 225.8(f)(2); 12 CFR 238.170(f)(2).
weighted assets
tember 18, 2023 / Proposed Rules
22 12 CFR 3.11 (OCC); 12 CFR 217.11 (Board); 12
CFR 324.11 (FDIC).
23 12 CFR 225.8 (bank holding companies and
U.S. intermediate holding companies of foreign
banking organizations); 12 CFR 238.170 (savings
and loan holding companies).
24 See 12 CFR 217.11(c).
25 See 85 FR 15576 (March 18, 2020).
26 12 CFR 225.8(f)(2); 12 CFR 238.170(f)(2).
weighted assets. This output floor
would correspond to 72.5 percent of the
sum of a banking organization’s credit
risk-weighted assets, equity risk-
weighted assets, operational risk-
weighted assets, and CVA risk-weighted
assets under the expanded risk-based
approach and risk-weighted assets
calculated using the standardized
measure for market risk, minus any
amount of the banking organization’s
adjusted allowance for credit losses that
is not included in tier 2 capital and any
amount of allocated transfer risk
reserves.
The output floor would serve as a
lower bound on the risk-weighted assets
under the expanded risk-based
approach. In other words, if the risk-
weighted assets under the expanded
risk-based approach were less than the
output floor, the output floor would
have to be used as the risk-weighted
asset amount to determine the expanded
risk-based approach capital ratios.
The proposed calibration of the
output floor aims to strike a balance
between allowing internal models to
enhance the risk sensitivity of market
risk capital requirements and ensuring
that these models would not result in
unwarranted reductions in capital
requirements. The output floor would
be consistent with the Basel III reforms,
which would promote consistency in
capital requirements for large, complex,
and internationally active banking
organizations across jurisdictions.
Question 6: What are the advantages
and disadvantages of the proposed
output floor?
2
ring
that these models would not result in
unwarranted reductions in capital
requirements. The output floor would
be consistent with the Basel III reforms,
which would promote consistency in
capital requirements for large, complex,
and internationally active banking
organizations across jurisdictions.
Question 6: What are the advantages
and disadvantages of the proposed
output floor?
2. Stress Capital Buffer Requirement
Under the current capital rule, each
banking organization is subject to one or
more buffer requirements, and must
maintain capital ratios above the sum of
its minimum requirements and buffer
requirements to avoid restrictions on
capital distributions and certain
discretionary bonus payments.22
Banking organizations that are subject to
the Board’s capital plan rule 23 (bank
holding companies, U.S. intermediate
holding companies, and savings and
loan holding companies that have over
$100 billion or more in total
consolidated assets) are currently
subject to a standardized approach
capital conservation buffer requirement,
which is calculated as the sum of the
banking organization’s stress capital
buffer requirement, applicable
countercyclical capital buffer
requirement, and applicable GSIB
surcharge. The standardized approach
capital conservation buffer requirement
applies to a banking organization’s
standardized approach risk-based
capital ratios. In addition, banking
organizations that are subject to the
capital plan rule and the advanced
approaches requirements are subject to
an advanced approaches capital
conservation buffer requirement, which
applies to their advanced approaches
risk-based capital ratios, and which is
calculated in the same manner as the
standardized approach capital
conservation buffer requirement, except
that the banking organization’s stress
capital buffer requirement is replaced
with a 2.5 percent buffer requirement.24
The stress capital buffer requirement
integrates the results of the Board’s
supervisory stress tests wi
advanced approaches
risk-based capital ratios, and which is
calculated in the same manner as the
standardized approach capital
conservation buffer requirement, except
that the banking organization’s stress
capital buffer requirement is replaced
with a 2.5 percent buffer requirement.24
The stress capital buffer requirement
integrates the results of the Board’s
supervisory stress tests with the risk-
based requirements of the capital rule to
determine capital distribution
limitations. As a result, required capital
levels for each banking organization
more closely align with the banking
organization’s risk profile and projected
losses as measured by the Board’s stress
test.25 The stress capital buffer
requirement is generally calculated as
(1) the difference between the banking
organization’s starting and minimum
projected common equity tier 1 capital
ratios under the severely adverse
scenario in the supervisory stress test
(stress test losses) plus (2) the sum of
the dollar amount of the banking
organization’s planned common stock
dividends for each of the fourth through
seventh quarters of the planning horizon
as a percentage of risk-weighted assets
(dividend add-on).26 A banking
organization’s stress capital buffer
requirement cannot be less than 2.5
percent of standardized total risk-
weighted assets.
Currently, the stress test losses and
dividend add-on portion of the stress
capital buffer requirement are calculated
using only the standardized approach
common equity tier 1 capital ratio. This
is consistent with the exclusion of the
stress capital buffer requirement from
the advanced approaches capital
conservation buffer requirement, and
with the Board’s stress testing and
capital plan rules, under which banking
organizations are not required to project
capital ratios using the advanced
approaches
using only the standardized approach
common equity tier 1 capital ratio. This
is consistent with the exclusion of the
stress capital buffer requirement from
the advanced approaches capital
conservation buffer requirement, and
with the Board’s stress testing and
capital plan rules, under which banking
organizations are not required to project
capital ratios using the advanced
approaches.
The Board is proposing to amend its
capital plan rule, stress testing rule, and
the buffer framework in its capital rule
to take into account capital ratios
calculated under the expanded risk-
based approach, in addition to the
standardized approach. Under the
proposal, banking organizations subject
to the capital plan rule would be subject
to a single capital conservation buffer
requirement, which would include the
stress capital buffer requirement,
applicable countercyclical capital buffer
requirement, and applicable GSIB
surcharge, and would apply to the
banking organization’s risk-based
capital ratios, regardless of whether the
ratios result from the expanded risk-
based approach or the standardized
approach. In this manner, the proposal
would ensure that the stress capital
buffer requirement contributes to the
robustness and risk-sensitivity of the
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result from the expanded risk-
based approach or the standardized
approach. In this manner, the proposal
would ensure that the stress capital
buffer requirement contributes to the
robustness and risk-sensitivity of the
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
27 Initially, the Board did not incorporate the
stress capital buffer requirement into the advanced
approaches capital conservation buffer requirement
owing to the complexity involved in doing so.
28 The Board’s Stress Testing Policy Statement
includes an assumption that the magnitude of a
banking organization’s balance sheet will be fixed
throughout the projection horizon under the
supervisory stress test. 12 CFR part 252, appendix
B. Under this assumption, because the
denominators of the common equity tier 1 capital
ratios as calculated under the standardized
approach and the expanded risk-based approach
would remain the same throughout the stress test,
the approach under which the binding common
equity tier 1 capital ratio is calculated would
remain the same throughout the final quarter of the
previous capital plan cycle and the projection
horizon.
risk-based capital requirements of these
banking organizations. Application of
the stress capital buffer requirement to
the risk-based capital ratios derived
from the expanded risk-based approach
would not introduce complexity given
the fixed balance sheet assumption
currently used in the Board stress tests
and because the expanded risk-based
approach is based in mostly
standardized requirements.27
Additionally, the proposal would
revise the calculation of the stress
capital buffer requirement for large
banking organizations
l ratios derived
from the expanded risk-based approach
would not introduce complexity given
the fixed balance sheet assumption
currently used in the Board stress tests
and because the expanded risk-based
approach is based in mostly
standardized requirements.27
Additionally, the proposal would
revise the calculation of the stress
capital buffer requirement for large
banking organizations. Under the
proposal, both the stress test losses and
dividend add-on components of the
stress capital buffer requirement would
be calculated using the binding common
equity tier 1 capital ratio, as of the final
quarter of the previous capital plan
cycle, regardless of whether it results
from the expanded risk-based approach
or the standardized approach.28 The
proposed calculation methodology
would limit complexity relative to
potential alternatives, such as
introducing two stress capital buffer
requirements for each banking
organization (one for each approach to
calculating total risk-weighted assets).
In addition, the proposed approach
recognizes that the binding approach for
a banking organization is unlikely to
change within the period in which a
given stress capital buffer requirement is
applicable.
As part of the capital buffer
framework, the stress capital buffer
requirement helps ensure that a banking
organization can withstand losses from
a severely adverse scenario, while still
meeting its minimum regulatory capital
requirements and thereby continuing to
serve as a viable financial intermediary.
Because this proposal aims to better
reflect the risk of banking organizations’
exposures in the calculation of risk-
weighted assets, without changing the
targeted level of conservatism of the
minimum capital requirements, the
Board is not proposing associated
changes to the targeted severity of the
stress capital buffer requirement
ontinuing to
serve as a viable financial intermediary.
Because this proposal aims to better
reflect the risk of banking organizations’
exposures in the calculation of risk-
weighted assets, without changing the
targeted level of conservatism of the
minimum capital requirements, the
Board is not proposing associated
changes to the targeted severity of the
stress capital buffer requirement. The
Board evaluates the minimum risk-
based capital requirements, which are
largely determined by risk-weighted
assets, and the stress capital buffer
requirement individually for their
specific intended purposes in the
capital framework, and holistically as
they determine the aggregate capital
banking organizations hold in the
normal course of business.
In addition to revising the stress
capital buffer requirement, the proposal
would amend the Board’s stress testing
and capital plan rules to require banking
organizations subject to Category I, II, or
III standards to project their risk-based
capital ratios in their company-run
stress tests and capital plans using the
calculation approach that results in the
binding ratios as of the start of the
projection horizon (generally, as of
December 31 of a given year). Also, the
proposal would require banking
organizations subject to Category IV
standards to project their risk-based
capital ratios under baseline conditions
in their capital plans and FR Y–14A
submissions using the risk-weighted
assets calculation approach that results
in the binding ratios as of the start of the
projection horizon. The use of the
binding approach to calculating risk-
based capital ratios aims to conform
company-run stress tests and capital
plans with the binding risk-based
capital ratios in the proposed capital
rule and promote simplicity relative to
possible alternatives (such as requiring
that firms project ratios under both the
expanded risk-based approach and the
standardized approach)
horizon. The use of the
binding approach to calculating risk-
based capital ratios aims to conform
company-run stress tests and capital
plans with the binding risk-based
capital ratios in the proposed capital
rule and promote simplicity relative to
possible alternatives (such as requiring
that firms project ratios under both the
expanded risk-based approach and the
standardized approach).
Question 7: The Board invites
comment on the appropriate level of
risk capture for the risk-weighted assets
framework and the stress capital buffer
requirement, both for their respective
roles in the capital framework and for
their joint determination of overall
capital requirements. How should the
Board balance considerations of overall
capital requirements with the distinct
roles of minimum requirements and
buffer requirements? What adjustments,
if any, to either piece of the framework
should the Board consider? Which, if
any, specific portfolios or exposure
classes merit particular attention and
why?
Question 8: What are the advantages
and disadvantages of applying the same
stress capital buffer requirement to a
banking organization’s risk-based
capital ratios regardless of whether they
are determined using the standardized
or expanded risk-based approach? What
would be the advantages and
disadvantages of applying different
stress capital buffer requirements for
each set of risk-based capital ratios?
Question 9: What, if any, adjustments
should the Board consider with respect
to the buffer requirements to account for
the transitions in this proposal,
particularly related to expanded total
risk-weighted assets? For example, what
would be the advantages and
disadvantages of the Board determining
stress capital buffer requirements using
fully phased-in expanded total risk-
weighted assets versus transitional
expanded total risk-weighted assets?
What, if any, additional adjustments to
stress capital buffer requirements
should the Board consider during the
expanded total risk-w
isk-weighted assets? For example, what
would be the advantages and
disadvantages of the Board determining
stress capital buffer requirements using
fully phased-in expanded total risk-
weighted assets versus transitional
expanded total risk-weighted assets?
What, if any, additional adjustments to
stress capital buffer requirements
should the Board consider during the
expanded total risk-weighted assets
transition?
B. Definition of Capital
The agencies regularly review their
capital framework to help ensure it is
functioning as intended. Consistent
with this ongoing assessment, the
agencies believe it is appropriate to
align the definition of capital for
banking organizations subject to
Category III or IV capital standards with
the definition currently applicable to
banking organizations subject to
Category I or II capital standards. The
current definition of capital applicable
to banking organizations subject to
Category I or II capital standards
provides for risk sensitivity and
transparency that is commensurate with
the size, complexity, and risk profile of
banking organizations subject to
Category III or IV capital standards. The
proposed alignment of the numerator
and denominator of regulatory capital
ratios of large banking organizations
would support the transparency of the
capital rule as it facilitates market
participants’ assessment of loss
absorbency and would promote
consistency of requirements across large
banking organizations.
As described in more detail below,
under the proposal, banking
organizations subject to Category III or
IV capital standards would be required
to recognize most elements of AOCI in
regulatory capital consistent with the
treatment for banking organizations
subject to Category I or II capital
standards
bency and would promote
consistency of requirements across large
banking organizations.
As described in more detail below,
under the proposal, banking
organizations subject to Category III or
IV capital standards would be required
to recognize most elements of AOCI in
regulatory capital consistent with the
treatment for banking organizations
subject to Category I or II capital
standards. Banking organizations
subject to Category III or IV capital
standards would also apply the capital
deductions and minority interest
treatments that are currently applicable
to banking organizations subject to
Category I or II capital standards. The
proposal would also apply total loss
absorbing capacity (TLAC) holdings
deduction treatments to banking
organizations subject to Category III or
IV capital standards. The proposal
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
29 See 12 CFR 3.22(b) (OCC); 12 CFR 217.22(b)
(Board); 12 CFR 324.22(b) (FDIC). A banking
organization that made an opt-out election is
currently required to adjust common equity tier 1
capital as follows: subtract any net unrealized
holding gains and add any net unrealized holding
losses on available-for-sale securities; subtract any
accumulated net gains and add any accumulated
net losses on cash flow hedges; subtract any
amounts recorded in AOCI attributed to defined
benefit postretirement plans resulting from the
initial and subsequent application of the relevant
GAAP standards that pertain to such plans
(excluding, at the banking organization’s option, the
portion relating to pension assets deducted under
§ ll.22(a)(5) of the current capital rule); and,
subtract any net unrealized holding gains and add
any net unrealized holding losses on held-to-
maturity securities that are included in AOCI
the
initial and subsequent application of the relevant
GAAP standards that pertain to such plans
(excluding, at the banking organization’s option, the
portion relating to pension assets deducted under
§ ll.22(a)(5) of the current capital rule); and,
subtract any net unrealized holding gains and add
any net unrealized holding losses on held-to-
maturity securities that are included in AOCI.
30 AFS securities refers to debt securities. ASC
Subtopic 321–10 eliminated the classification of
equity securities with readily determinable fair
values not held for trading as available-for-sale and
generally requires investments in equity securities
to be measured at fair value with changes in fair
value recognized in net income. Changes in the fair
value of (i.e., the unrealized gains and losses on) a
banking organization’s equity securities are
recognized through net income rather than other
comprehensive income.
31 84 FR 59230, 59249 (November 1, 2019).
32 GAAP set forth restrictions on the classification
of a debt security as HTM, circumstances not
consistent with the HTM classification, and
situations that call into question or taint a banking
organization’s intent to hold securities in the HTM
category.
33 See Board of Governors of the Federal Reserve
System, Supervision and Regulation Report, at 11
(November 2022); Office of the Comptroller of the
Currency, Semiannual Risk Perspective, at 22 (Fall
2022); Federal Deposit Insurance Corporation,
Fourth Quarter 2022 Quarterly Banking Profile, at
5, 22 (February 2023), Managing Sensitivity to
Market Risk in a Challenging Interest Rate
Environment (FIL–46–2013, October 8, 2013).
34 See 12 CFR part 50 (OCC); 12 CFR part 249
(Board); 12 CFR part 329 (FDIC).
35 Minority interest, also referred to as non-
controlling interest, reflects investments in the
capital instruments of subsidiaries of banking
organizations that are held by third parties
ebruary 2023), Managing Sensitivity to
Market Risk in a Challenging Interest Rate
Environment (FIL–46–2013, October 8, 2013).
34 See 12 CFR part 50 (OCC); 12 CFR part 249
(Board); 12 CFR part 329 (FDIC).
35 Minority interest, also referred to as non-
controlling interest, reflects investments in the
capital instruments of subsidiaries of banking
organizations that are held by third parties.
36 A significant investment in the capital of an
unconsolidated financial institution is defined as an
investment in the capital of an unconsolidated
financial institution where a banking organization
subject to Category I or II capital standards owns
more than 10 percent of the issued and outstanding
common stock of the unconsolidated financial
institution. 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC).
37 See 12 CFR 3.22(c)(6), (d)(2) (OCC); 12 CFR
217.22(c)(6), (d)(2) (Board); 12 CFR 324.22(c)(6),
(d)(2) (FDIC).
includes a three-year transition period
for AOCI.
1. Accumulated Other Comprehensive
Income
Under the current capital rule,
banking organizations subject to
Category I or II capital standards are
required to include most elements of
AOCI in regulatory capital; whereas all
other banking organizations including
those subject to Category III or IV capital
standards were provided an opportunity
to make a one-time election to opt-out
of recognizing most elements of AOCI
and related deferred tax assets (DTAs)
and deferred tax liabilities within
regulatory capital (AOCI opt-out
banking organizations).29 Under the
proposal, consistent with the treatment
applicable to banking organizations
subject to Category I or II capital
standards, banking organizations subject
to Category III or IV capital standards
would be required to include all AOCI
components in common equity tier 1
capital, except gains and losses on cash-
flow hedges where the hedged item is
not recognized on a banking
organization’s balance sheet at fair
value
the treatment
applicable to banking organizations
subject to Category I or II capital
standards, banking organizations subject
to Category III or IV capital standards
would be required to include all AOCI
components in common equity tier 1
capital, except gains and losses on cash-
flow hedges where the hedged item is
not recognized on a banking
organization’s balance sheet at fair
value. This would require all net
unrealized holding gains and losses on
available-for-sale (AFS) debt
securities 30 from changes in fair value
to flow through to common equity tier
1 capital, including those that result
primarily from fluctuations in
benchmark interest rates. This treatment
would better reflect the point in time
loss-absorbing capacity of banking
organizations subject to Category III or
IV capital standards and would align
with banking organizations subject to
Category I or II capital standards.
The agencies have previously
observed that the requirement to
recognize elements of AOCI in
regulatory capital has helped improve
the transparency of regulatory capital
ratios, as it better reflects banking
organizations’ actual loss-absorbing
capacity at a specific point in time,
notwithstanding the potential volatility
that such recognition may pose for their
regulatory capital ratios. The agencies
have also previously observed that
AOCI is an important indicator used by
market participants to evaluate the
capital strength of a banking
organization.31 More recently, the
agencies have observed generally higher
levels of securities classified as held-to-
maturity (HTM) among banking
organizations that recognize AOCI in
regulatory capital.32
Changes in interest rates have led to
net unrealized losses for banking
organizations’ investment portfolios and
brought into focus the importance of
regulatory capital measures reflecting
the loss absorbing capacity of a banking
organization
nerally higher
levels of securities classified as held-to-
maturity (HTM) among banking
organizations that recognize AOCI in
regulatory capital.32
Changes in interest rates have led to
net unrealized losses for banking
organizations’ investment portfolios and
brought into focus the importance of
regulatory capital measures reflecting
the loss absorbing capacity of a banking
organization. The agencies have
observed that adverse trends in a
banking organization’s GAAP equity can
have negative market perception and
liquidity implications.33 Specifically,
net unrealized losses on AFS securities
included in AOCI have reduced banking
organizations’ tangible book value and
liquidity buffers,34 which can adversely
affect market participants’ assessments
of capital adequacy and liquidity.
Banking organizations are often
reluctant to sell these AFS securities as
the unrealized losses would become
realized losses upon sale, thus reducing
regulatory capital. However, banking
organizations may need to take such
steps in order to meet liquidity needs.
Recognizing elements of AOCI in
regulatory capital thus achieves a better
alignment of regulatory capital with
market participants’ assessment of loss-
absorbing capacity.
Question 10: What complementary
measures should the banking agencies
consider regarding the regulatory
capital treatment for securities held as
HTM rather than AFS?
2. Regulatory Capital Deductions
The agencies have long limited the
amount of intangible and higher-risk
assets, such as mortgage servicing assets
(MSAs) and certain temporary
difference DTAs, included in regulatory
capital and required deduction of the
amounts above the limits. This is due to
the relatively high level of uncertainty
regarding the ability of banking
organizations to both accurately value
and realize value from these assets,
especially under adverse financial
conditions
isk
assets, such as mortgage servicing assets
(MSAs) and certain temporary
difference DTAs, included in regulatory
capital and required deduction of the
amounts above the limits. This is due to
the relatively high level of uncertainty
regarding the ability of banking
organizations to both accurately value
and realize value from these assets,
especially under adverse financial
conditions. The current capital rule also
limits the amount of investments in the
capital instruments of other banking
organizations that can be reflected in
regulatory capital. Furthermore, the
current capital rule limits the inclusion
of minority interest 35 in regulatory
capital in recognition that minority
interest is generally not available to
absorb losses at the banking
organization’s consolidated level and to
prevent highly capitalized subsidiaries
from overstating the amount of capital
available to absorb losses at the
consolidated organization.
Under the current capital rule,
banking organizations subject to
Category I or II capital standards must
deduct from common equity tier 1
capital amounts of MSAs, temporary
difference DTAs that the banking
organization could not realize through
net operating loss carrybacks, and
significant investments in the capital of
unconsolidated financial institutions in
the form of common stock 36
(collectively, threshold items) that
individually exceed 10 percent of the
banking organization’s common equity
tier 1 capital minus certain deductions
and adjustments.37 Banking
organizations subject to Category I or II
capital standards must also deduct from
common equity tier 1 capital the
aggregate amount of threshold items not
deducted under the 10 percent
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minus certain deductions
and adjustments.37 Banking
organizations subject to Category I or II
capital standards must also deduct from
common equity tier 1 capital the
aggregate amount of threshold items not
deducted under the 10 percent
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38 For banking organizations that are not subject
to Category I or II capital standards, the current
capital rule does not have distinct treatments for
significant and nonsignificant investments in the
capital of unconsolidated financial institutions.
Rather, the regulatory capital treatment for an
investment in the capital of unconsolidated
financial institutions would be based on the type
of instrument underlying the investment.
39 A non-significant investment in the capital of
an unconsolidated financial institution is defined as
an investment in the capital of an unconsolidated
financial institution where a banking organization
subject to Category I or II capital standards owns 10
percent or less of the issued and outstanding
common stock of the unconsolidated financial
institution. 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC).
40 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5)
(Board); 12 CFR 324.22(c)(5) (FDIC).
41 12 CFR 3.22(c)(6) (OCC); 12 CFR 217.22(c)(6)
(Board); 12 CFR 324.22(c)(6) (FDIC).
42 See 12 CFR 3.22(c) (OCC); 12 CFR 217.22(c)
(Board); 12 CFR 324.22(c) (FDIC).
43 Similar to banking organizations subject to
Category II capital standards, the definition of
excluded covered debt and the applicable capital
treatment, would not apply to banking
organizations subject to Category III and IV capital
standards. See 12 CFR 3.2 (OCC); 12 CFR 217.2)
(Board); 12 CFR 324.2 (FDIC).
44 See 12 CFR 3.21(b) (OCC); 12 CFR 217.21(b)
(Board); 12 CFR 324.21(b) (FDIC)
43 Similar to banking organizations subject to
Category II capital standards, the definition of
excluded covered debt and the applicable capital
treatment, would not apply to banking
organizations subject to Category III and IV capital
standards. See 12 CFR 3.2 (OCC); 12 CFR 217.2)
(Board); 12 CFR 324.2 (FDIC).
44 See 12 CFR 3.21(b) (OCC); 12 CFR 217.21(b)
(Board); 12 CFR 324.21(b) (FDIC).
45 See 12 CFR 3.21(a) (OCC); 12 CFR 217.21(a)
(Board); 12 CFR 324.21(a) (FDIC).
threshold deduction but that
nevertheless exceeds 15 percent of the
banking organization’s common equity
tier 1 capital minus certain deductions
and adjustments. Under the current
capital rule, banking organizations
subject to Category III or IV capital
standards are required to deduct from
common equity tier 1 capital any
amount of MSAs, temporary difference
DTAs that the banking organization
could not realize through net operating
loss carrybacks, and investments in the
capital of unconsolidated financial
institutions 38 that individually exceed
25 percent of common equity tier 1
capital of the banking organization
minus certain deductions and
adjustments.
Under the proposal, banking
organizations subject to Category III or
IV capital standards would be required
to deduct threshold items from common
equity tier 1 capital and apply other
capital deductions that are currently
applicable to banking organizations
subject to Category I or II capital
standards instead of the deductions
applicable to all other banking
organizations, thereby creating
alignment across all banking
organizations subject to the proposal
V capital standards would be required
to deduct threshold items from common
equity tier 1 capital and apply other
capital deductions that are currently
applicable to banking organizations
subject to Category I or II capital
standards instead of the deductions
applicable to all other banking
organizations, thereby creating
alignment across all banking
organizations subject to the proposal.
In addition to deductions for the
threshold items, the current capital rule
requires that a banking organization
subject to Category I or II capital
standards deduct from regulatory capital
any amount of the banking
organization’s nonsignificant
investments 39 in the capital of
unconsolidated financial institutions
that exceeds 10 percent of the banking
organization’s common equity tier 1
capital minus certain deductions and
adjustments.40 Further, significant
investments in the capital of
unconsolidated financial institutions
not in the form of common stock must
be deducted from regulatory capital in
their entirety.41 Under the proposal,
banking organizations subject to
Category III or IV capital standards
would be required to make these
deductions.
Similar to the deductions for
investments in the capital of
unconsolidated financial institutions,
the current capital rule requires banking
organizations subject to Category I or II
capital standards to deduct covered debt
instruments from regulatory capital.42
Under the proposal, banking
organizations subject to Category III or
IV capital standards would be required
to apply the deduction requirements for
certain investments in unsecured debt
instruments issued by U.S. or foreign
GSIBs (covered debt instruments) that
currently apply to banking organizations
subject to Category I or II capital
standards.43 The current capital rule
generally treats investments in
unsecured debt instruments issued by
U.S. or foreign GSIBs as tier 2 capital
instruments for purposes of applying
deduction requirements
investments in unsecured debt
instruments issued by U.S. or foreign
GSIBs (covered debt instruments) that
currently apply to banking organizations
subject to Category I or II capital
standards.43 The current capital rule
generally treats investments in
unsecured debt instruments issued by
U.S. or foreign GSIBs as tier 2 capital
instruments for purposes of applying
deduction requirements.
The current capital rule also limits the
amount of minority interest that banking
organizations subject to Category I or II
capital standards may include in
regulatory capital based on the amount
of capital held by a consolidated
subsidiary, relative to the amount of
capital the subsidiary would have had
to maintain to avoid any restrictions on
capital distributions and discretionary
bonus payments under capital
conservation buffer requirements.44
Under the current capital rule, banking
organizations subject to Category III or
IV capital standards are allowed to
include: (i) common equity tier 1
minority interest comprising up to 10
percent of the parent banking
organization’s common equity tier 1
capital; (ii) tier 1 minority interest
comprising up to 10 percent of the
parent banking organization’s tier 1
capital; and (iii) total capital minority
interest comprising up to 10 percent of
the parent banking organization’s total
capital.45 Under the proposal, the
limitations on minority interests that
apply to banking organizations subject
to Category I or II capital standards
would also apply to banking
organizations subject to Category III or
IV capital standards.
3. Additional Definition of Capital
Adjustments
The current capital rule applies an
additional capital eligibility criterion to
banking organizations subject to
Category I or II capital standards for
their additional tier 1 and tier 2 capital
instruments
ject
to Category I or II capital standards
would also apply to banking
organizations subject to Category III or
IV capital standards.
3. Additional Definition of Capital
Adjustments
The current capital rule applies an
additional capital eligibility criterion to
banking organizations subject to
Category I or II capital standards for
their additional tier 1 and tier 2 capital
instruments. The criterion requires that
the governing agreement, offering
circular or prospectus for the instrument
must disclose that the holders of the
instrument may be fully subordinated to
interests held by the U.S. government in
the event the banking organization
enters into a receivership, insolvency,
liquidation, or similar proceeding.
Under the proposal, this eligibility
criterion would also apply to
instruments issued after the date on
which the issuer becomes subject to the
proposed rule, which generally would
be the effective date of a final rule for
banking organizations subject to
Category III or IV capital standards.
Instruments issued by banking
organizations subject to Category III or
IV capital standards prior to the
effective date of a final rule that
currently count as regulatory capital
would continue to count as regulatory
capital as long as those instruments
remain outstanding.
4. Changes to the Definition of Tier 2
Capital Applicable to Large Banking
Organizations
The current capital rule defines an
element of tier 2 capital to include the
allowance for loan and lease losses
(ALLL) or the adjusted allowance for
credit losses (AACL), as applicable, up
to 1.25 percent of standardized total
risk-weighted assets not including any
amount of the ALLL or AACL, as
applicable (and excluding in the case of
a banking organization subject to market
risk requirements, its standardized
market risk-weighted assets)
capital to include the
allowance for loan and lease losses
(ALLL) or the adjusted allowance for
credit losses (AACL), as applicable, up
to 1.25 percent of standardized total
risk-weighted assets not including any
amount of the ALLL or AACL, as
applicable (and excluding in the case of
a banking organization subject to market
risk requirements, its standardized
market risk-weighted assets). Further, as
part of its calculations for determining
its total capital ratio, a banking
organization subject to Category I or II
standards must determine its advanced-
approaches-adjusted total capital by (1)
deducting from its total capital any
ALLL or AACL, as applicable, included
in its tier 2 capital and; (2) adding to its
total capital any eligible credit reserves
that exceed the banking organization’s
total expected credit losses to the extent
that the excess reserve amount does not
exceed 0.6 percent of credit-risk-
weighted assets. Due to changes in
GAAP, all large banking organizations
are no longer using ALLL and must use
AACL. In addition, the concept of
eligible credit reserves is related to use
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46 See 12 CFR 3.10(e) (OCC); 12 CFR 217.10(e)
(Board); 12 CFR 324.10(e) (FDIC).
47 See 12 CFR part 30, appendix A (OCC); 12 CFR,
appendix D–1 to part 208 (Board); 12 CFR,
appendix A to part 364 (FDIC).
48 When performing due diligence, banking
organizations must adhere to the operational and
managerial standards for loan documentation and
credit underwriting as set forth in the Interagency
Guidelines Establishing Standards for Safety and
Soundness (safety and soundness guidelines).
49 For treatment of other exposures to GSEs, see
discussion related to equity exposures in section
III.E
.
48 When performing due diligence, banking
organizations must adhere to the operational and
managerial standards for loan documentation and
credit underwriting as set forth in the Interagency
Guidelines Establishing Standards for Safety and
Soundness (safety and soundness guidelines).
49 For treatment of other exposures to GSEs, see
discussion related to equity exposures in section
III.E. and exposures to subordinated debt
instruments in section III.C.2.d. of this
SUPPLEMENTARY INFORMATION.
of the internal ratings-based approach,
which the proposal would eliminate.
Therefore, under the proposal, a large
banking organization would determine
its expanded risk-based approach-
adjusted total capital by (1) deducting
from its total capital AACL included in
its tier 2 capital and; (2) adding to its
total capital any AACL up to 1.25
percent of total credit risk-weighted
assets. The proposal would define total
credit risk-weighted assets as the sum of
total risk-weighted assets for: (1) general
credit risk as calculated under
§ ll.110; (2) cleared transactions and
default fund contributions as calculated
under § ll.114; (3) unsettled
transactions as calculated under
§ ll.115; and (4) securitization
exposures as calculated under
§ ll.132.
Question 11: The agencies seek
comment on the proposed definition of
total credit risk-weighted assets in
connection with determining a banking
organization’s total capital ratio. What,
if any, modifications should the
agencies consider making to this
definition and why?
C. Credit Risk
Credit risk arises from the possibility
that an obligor, including a borrower or
counterparty, will fail to perform on an
obligation. While loans are a significant
source of credit risk, other products,
activities, and services also expose
banking organizations to credit risk,
including investments in debt securities
and other credit instruments, credit
derivatives, and cash management
services
risk arises from the possibility
that an obligor, including a borrower or
counterparty, will fail to perform on an
obligation. While loans are a significant
source of credit risk, other products,
activities, and services also expose
banking organizations to credit risk,
including investments in debt securities
and other credit instruments, credit
derivatives, and cash management
services. Off-balance sheet activities,
such as letters of credit, unfunded loan
commitments, and the undrawn portion
of lines of credit, also expose banking
organizations to credit risk.
In this section of the SUPPLEMENTARY
INFORMATION, subsection III.C.1.
describes expectations for completing
due diligence on a banking
organization’s credit risk portfolio;
subsection III.C.2. describes the risk-
weight treatment for on-balance sheet
exposures under the proposal;
subsection III.C.3. describes the
proposed approach to determine the
exposure amount for off-balance sheet
exposures; and subsections III.C.4.–5
provide the available approaches for
recognizing the benefits of credit risk
mitigants including certain guarantees,
certain credit derivatives and financial
collateral.
1. Due Diligence
Banking organizations must maintain
capital commensurate with the level
and nature of the risks to which they are
exposed.46 The agencies’ safety and
soundness guidelines establish
standards for banking organizations to
have an adequate understanding of the
impact of their lending decisions on the
banking organization’s credit risk.47 A
banking organization’s performance of
due diligence on their credit portfolios
is central to meeting both of these
obligations
nature of the risks to which they are
exposed.46 The agencies’ safety and
soundness guidelines establish
standards for banking organizations to
have an adequate understanding of the
impact of their lending decisions on the
banking organization’s credit risk.47 A
banking organization’s performance of
due diligence on their credit portfolios
is central to meeting both of these
obligations. For example, under the
safety and soundness guidelines, a
banking organization is expected to
have established effective internal
policies, processes, systems, and
controls to ensure that the banking
organization’s regulatory reporting is
accurate and reflects appropriate risk
weights assigned to credit exposures.48
When properly performed, due
diligence may lead a banking
organization to conclude that the
minimum regulatory capital
requirements for certain exposures do
not sufficiently account for their
potential credit risk. In such instances,
the banking organization should take
appropriate risk mitigating measures
such as allocating additional capital,
establishing larger credit loss
allowances, or requiring additional
collateral. Adherence to due diligence
standards, as established through the
agencies’ safety and soundness
guidelines, directly supports and
facilitates requirements for banking
organizations to maintain capital
commensurate with the level and nature
of the risks to which they are exposed.
Question 12: The agencies seek
comment on whether due diligence
requirements should be directly
integrated into the text of the final rule.
What would be the advantages and
disadvantages of specifying increases in
risk weights that would be required to
the extent that due diligence
requirements are not met, similar to the
proposed risk-weight treatment for
securitization exposures as described in
section III.D of this SUPPLEMENTARY
INFORMATION?
2
e
requirements should be directly
integrated into the text of the final rule.
What would be the advantages and
disadvantages of specifying increases in
risk weights that would be required to
the extent that due diligence
requirements are not met, similar to the
proposed risk-weight treatment for
securitization exposures as described in
section III.D of this SUPPLEMENTARY
INFORMATION?
2. Proposed Risk Weights for Credit Risk
The proposal would replace the use of
internal models to set regulatory capital
requirements for credit risk as set out in
subpart E of the current capital rule
with a new expanded risk-based
approach for credit risk applicable to
large banking organizations. The
proposed expanded risk-based approach
for credit risk would retain many of the
same definitions § ll.2 of the current
capital rule including among others a
sovereign, a sovereign exposure, certain
supranational entities, a multilateral
development bank, a public sector
entity (PSE), a government-sponsored
enterprise (GSE), other assets, and a
commitment. Some elements of the
proposed expanded risk-based approach
for credit risk would apply the same
risk-weight treatment provided in
subpart D of the current capital rule
(current standardized approach) for on-
balance sheet exposures, including
exposures to sovereigns, certain
supranational entities and multilateral
development banks, government
sponsored entities (GSEs) in the form of
senior debt and guaranteed exposures,
Federal Home Loan Bank (FHLB) and
Federal Agricultural Mortgage
Corporation (Farmer Mac) equity
exposures,49 public sector entities
(PSEs), and other assets. The proposal
would also apply the same risk-weight
treatment provided in the current
standardized approach to the following
real estate exposures: pre-sold
construction loans, statutory
multifamily mortgages, and high-
volatility commercial real estate
(HVCRE) exposures
al Agricultural Mortgage
Corporation (Farmer Mac) equity
exposures,49 public sector entities
(PSEs), and other assets. The proposal
would also apply the same risk-weight
treatment provided in the current
standardized approach to the following
real estate exposures: pre-sold
construction loans, statutory
multifamily mortgages, and high-
volatility commercial real estate
(HVCRE) exposures.
Relative to the internal models-based
approaches in the advanced approaches
under the current capital rule, the
proposed expanded risk-based approach
would result in more transparent capital
requirements for credit risk exposures
across banking organizations. The
proposal would also facilitate
comparisons of capital adequacy across
banking organizations by reducing
excessive, unwarranted variability in
risk-weighted assets for similar
exposures. Relative to the current
standardized approach, the proposal
would incorporate more granular risk
factors to allow for a broader range of
risk weights.
Specifically, the proposal would
introduce the expanded risk-based
approach for exposures to depository
institutions, foreign banks, and credit
unions; exposures to subordinated debt
instruments, including those to GSEs;
and real estate, retail, and corporate
exposures. The proposal would also
increase risk capture for certain off-
balance sheet exposures through a new
exposure methodology for commitments
without pre-set limits and would
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those to GSEs;
and real estate, retail, and corporate
exposures. The proposal would also
increase risk capture for certain off-
balance sheet exposures through a new
exposure methodology for commitments
without pre-set limits and would
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50 Carrying value under § ll. 2 of the current
capital rule means, with respect to an asset, the
value of the asset on the balance sheet of the
banking organization as determined in accordance
with GAAP. For all assets other than available-for-
sale debt securities or purchased credit deteriorated
assets, the carrying value is not reduced by any
associated credit loss allowance that is determined
in accordance with GAAP. See 12 CFR 3.2 (OCC);
12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). The
exposure amount arising from an OTC derivative
contract; a repo-style transaction or an eligible
margin loan; a cleared transaction; a default fund
contribution; or a securitization exposure would be
calculated in accordance with §§ ll.113, 121, or
131 of the proposal, respectively, as described in
sections III.C.4, II.C.5.b., and III.D. of this
SUPPLEMENTARY INFORMATION.
51 See 12 U.S.C. 1831n.
52 Under the proposal, the expanded risk-based
approach would rely on the treatment of sovereign
default in the current standardized approach in the
capital rule. See 12 CFR 3.32(a)(6) (OCC); 12 CFR
217.32(a)(6) (Board); 12 CFR 324.32 (a)(6) (FDIC).
53 For the treatment of defaulted real estate
exposures, see section III.C.2.e.vii of this
SUPPLEMENTARY INFORMATION
51 See 12 U.S.C. 1831n.
52 Under the proposal, the expanded risk-based
approach would rely on the treatment of sovereign
default in the current standardized approach in the
capital rule. See 12 CFR 3.32(a)(6) (OCC); 12 CFR
217.32(a)(6) (Board); 12 CFR 324.32 (a)(6) (FDIC).
53 For the treatment of defaulted real estate
exposures, see section III.C.2.e.vii of this
SUPPLEMENTARY INFORMATION.
54 A policy loan is defined under § ll.2 of the
current capital rule to mean means a loan by an
insurance company to a policy holder pursuant to
the provisions of an insurance contract that is
secured by the cash surrender value or collateral
assignment of the related policy or contract. A
policy loan includes: (1) A cash loan, including a
loan resulting from early payment benefits or
accelerated payment benefits, on an insurance
contract when the terms of contract specify that the
payment is a policy loan secured by the policy; and
(2) An automatic premium loan, which is a loan
that is made in accordance with policy provisions
which provide that delinquent premium payments
are automatically paid from the cash value at the
end of the established grace period for premium
payments. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC).
55 Counterparty credit risk is the risk that the
counterparty to a transaction could default before
the final settlement of the transaction where there
is a bilateral risk of loss.
modify the credit conversion factors
applicable to commitments.
Additionally, the proposal would
introduce new definitions for defaulted
exposures and defaulted real estate
exposures.
Under the proposal, a banking
organization would determine the risk-
weighted asset amount for an on-
balance sheet exposure by multiplying
the exposure amount by the applicable
risk weight, consistent with the method
used under the current standardized
approach
ents.
Additionally, the proposal would
introduce new definitions for defaulted
exposures and defaulted real estate
exposures.
Under the proposal, a banking
organization would determine the risk-
weighted asset amount for an on-
balance sheet exposure by multiplying
the exposure amount by the applicable
risk weight, consistent with the method
used under the current standardized
approach. The on-balance sheet
exposure amount would generally be
the banking organization’s carrying
value 50 of the exposure, consistent with
the value of the asset on the balance
sheet as determined in accordance with
GAAP, which is the same as under the
current capital rule. For all assets other
than AFS securities and purchased
credit-deteriorated assets, the carrying
value is not reduced by any associated
credit loss allowance that is determined
in accordance with GAAP. Using the
value of an asset under GAAP to
determine a banking organization’s
exposure amount would reduce burden
and provide a consistent framework that
can be easily applied across all banking
organizations of the proposal because,
in most cases, GAAP serve as the basis
for the information presented in
financial statements and regulatory
reports.51
The proposal would group credit risk
exposures into the following categories:
sovereign exposures; exposures to
certain supranational entities and
multilateral development banks;
exposures to GSEs; exposures to
depository institutions, foreign banks,
and credit unions; exposures to PSEs;
real estate exposures; retail exposures;
corporate exposures; defaulted
exposures; exposures to subordinated
debt instruments; and off-balance sheet
exposures
llowing categories:
sovereign exposures; exposures to
certain supranational entities and
multilateral development banks;
exposures to GSEs; exposures to
depository institutions, foreign banks,
and credit unions; exposures to PSEs;
real estate exposures; retail exposures;
corporate exposures; defaulted
exposures; exposures to subordinated
debt instruments; and off-balance sheet
exposures.
The proposed categories with
amended risk-weight treatments relative
to the current standardized approach
include equity exposures to GSEs and
exposures to subordinated debt
instruments issued by GSEs; exposures
to depository institutions, foreign banks,
and credit unions; exposures to
subordinated debt instruments; real
estate exposures; retail exposures;
corporate exposures; defaulted
exposures; and some off-balance sheet
exposures such as commitments. The
proposed risk weight treatments for
each of these categories are described in
the following sections of this
SUPPLEMENTARY INFORMATION.
a. Defaulted Exposures
The proposal would introduce an
enhanced definition of a defaulted
exposure that would be broader than the
current capital rule’s definition of a
defaulted exposure under subpart E.
The proposed scope and criteria of the
defaulted exposure category is intended
to appropriately capture the elevated
credit risk of exposures where the
banking organization’s reasonable
expectation of repayment has been
reduced, including exposures where the
obligor is in default on an unrelated
obligation. Under the proposal, a
defaulted exposure would be any
exposure that is a credit obligation and
that meets the proposed criteria related
to reduced expectation of repayment,
and that is not an exposure to a
sovereign entity,52 a real estate
exposure,53 or a policy loan.54 The
proposal would define a credit
obligation as any exposure where the
lender but not the obligor is exposed to
credit risk
he proposal, a
defaulted exposure would be any
exposure that is a credit obligation and
that meets the proposed criteria related
to reduced expectation of repayment,
and that is not an exposure to a
sovereign entity,52 a real estate
exposure,53 or a policy loan.54 The
proposal would define a credit
obligation as any exposure where the
lender but not the obligor is exposed to
credit risk. In other words, for these
exposures, the lender would have a
claim on the obligor that does not give
rise to counterparty credit risk 55 and
would exclude derivative contracts,
cleared transactions, default fund
contributions, repo-style transactions,
eligible margin loans, equity exposures,
and securitization exposures.
For all other exposure categories
(excluding an exposure to a sovereign
entity, real estate exposure, a retail
exposure, or a policy loan), the
proposed definition of defaulted
exposure would look to the performance
of the borrower with respect to credit
obligations to any creditor. Specifically,
if the banking organization determines
that an obligor meets any of the of the
defaulted criteria for exposures that are
not retail exposures, described further
below, the proposal would require the
banking organization to treat all
exposures that are credit obligations of
that obligor as defaulted exposures.
Additionally, the proposal would
differentiate the criteria for determining
whether an exposure is a defaulted
exposure between exposures that are
retail exposures and those that are not.
Retail exposures are originated to
individuals or small- and medium-sized
businesses. Evaluating whether a retail
borrower has other exposures that are in
default as defined by the proposal may
be difficult to operationalize for banking
organizations given many unique
obligors
whether an exposure is a defaulted
exposure between exposures that are
retail exposures and those that are not.
Retail exposures are originated to
individuals or small- and medium-sized
businesses. Evaluating whether a retail
borrower has other exposures that are in
default as defined by the proposal may
be difficult to operationalize for banking
organizations given many unique
obligors. For other types of exposures
that are not retail exposures, evaluating
default at the obligor level is
appropriate because those obligors are
more likely to have additional credit
obligations that are large and held by
multiple banking organizations. Default
on one of those credit obligations would
be indicative of increased riskiness of
the exposure held by a banking
organization, and hence a banking
organization should account for this in
evaluating the risk profile of the
borrower.
Under the proposal, for a retail
exposure, a credit obligation would be
considered a defaulted exposure if any
of the following has occurred: (1) the
exposure is 90 days past due or in
nonaccrual status; (2) the banking
organization has taken a partial charge-
off, write-down of principal, or negative
fair value adjustment on the exposure
for credit-related reasons, until the
banking organization has reasonable
assurance of repayment and
performance for all contractual
principal and interest payments on the
exposure; or (3) a distressed
restructuring of the exposure was agreed
to by the banking organization, until the
banking organization has reasonable
assurance of repayment and
performance for all contractual
principal and interest payments on the
exposure as demonstrated by a
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ing of the exposure was agreed
to by the banking organization, until the
banking organization has reasonable
assurance of repayment and
performance for all contractual
principal and interest payments on the
exposure as demonstrated by a
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56 Overdrafts are past due and are considered
defaulted exposures once the obligor has breached
an advised limit or been advised of a limit smaller
than the current outstanding balance.
57 Under § ll.2 of the current capital rule,
investment grade means that the entity to which the
banking organization is exposed through a loan or
security, or the reference entity with respect to a
credit derivative, has adequate capacity to meet
financial commitments for the projected life of the
asset or exposure. Such an entity or reference entity
has adequate capacity to meet financial
commitments if the risk of its default is low and the
full and timely repayment of principal and interest
is expected. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC).
58 The proposal would revise the definition of
speculative grade to mean that the entity to which
a banking organization is exposed through a loan
or security, or the reference entity with respect to
a credit derivative, has adequate capacity to meet
financial commitments in the near term, but is
vulnerable to adverse economic conditions, such
that should economic conditions deteriorate, the
issuer or the reference entity would present an
elevated default risk.
59 Government-sponsored enterprise (GSE) under
§ ll. 2 of the current capital rule means an entity
established or chartered by the U.S. government to
serve public purposes specified by the U.S
tments in the near term, but is
vulnerable to adverse economic conditions, such
that should economic conditions deteriorate, the
issuer or the reference entity would present an
elevated default risk.
59 Government-sponsored enterprise (GSE) under
§ ll. 2 of the current capital rule means an entity
established or chartered by the U.S. government to
serve public purposes specified by the U.S.
Congress but whose debt obligations are not
explicitly guaranteed by the full faith and credit of
the U.S. government. See 12 CFR 3.2 (OCC); 12 CFR
217.2 (Board); 12 CFR 324.2 (FDIC).
60 Similar to the treatment of senior debt
exposures to GSEs and GSE exposures that are not
equity exposures or exposures to a subordinated
debt instrument issued by a GSE, the proposal
would apply the same 20 percent risk weight to all
exposures to FHLB or Farmer Mac, including equity
exposures and exposures to subordinated debt
instruments, which continues the treatment under
the current standardized approach.
sustained period of repayment
performance, provided that a distressed
restructuring includes the following
made for credit-related reasons:
forgiveness or postponement of
principal, interest, or fees, term
extension, or an interest rate reduction.
A sustained period of repayment
performance by the borrower is
generally a minimum of six months in
accordance with the contractual terms
of the restructured exposure.
For exposures that are not retail
exposures (excluding an exposure to a
sovereign entity, a real estate exposure,
or a policy loan), a credit obligation
would be considered a defaulted
exposure if either of the following has
occurred: (1) the obligor has a credit
obligation to the banking organization
that is 90 days or more past due 56 or in
nonaccrual status; or (2) the banking
organization determines that, based on
ongoing credit monitoring, the obligor is
unlikely to pay its credit obligations to
the banking organization in full, without
recourse by the banking organization
if either of the following has
occurred: (1) the obligor has a credit
obligation to the banking organization
that is 90 days or more past due 56 or in
nonaccrual status; or (2) the banking
organization determines that, based on
ongoing credit monitoring, the obligor is
unlikely to pay its credit obligations to
the banking organization in full, without
recourse by the banking organization. If
a banking organization determines that
an obligor meets these proposed criteria,
the proposal would require the banking
organization to treat all exposures that
are credit obligations of that obligor as
defaulted exposures.
For purposes of the second criterion,
the proposal would require a banking
organization to consider an obligor as
unlikely to pay its credit obligations if
any of the following criteria apply: (1)
the obligor has any credit obligation that
is 90 days or more past due or in
nonaccrual status with any creditor; (2)
any credit obligation of the obligor has
been sold at a credit-related loss; (3) a
distressed restructuring of any credit
obligation of the obligor was agreed to
by any creditor, provided that a
distressed restructuring includes the
following made for credit-related
reasons: forgiveness or postponement of
principal, interest, or fees, term
extension or an interest rate reduction;
(4) the obligor is subject to a pending or
active bankruptcy proceeding; or (5) any
creditor has taken a full or partial
charge-off, write-down of principal, or
negative fair value adjustment on a
credit obligation of the obligor for
credit-related reasons. Under the
proposal, banking organizations are
expected to conduct ongoing credit
monitoring regarding relevant obligors
e reduction;
(4) the obligor is subject to a pending or
active bankruptcy proceeding; or (5) any
creditor has taken a full or partial
charge-off, write-down of principal, or
negative fair value adjustment on a
credit obligation of the obligor for
credit-related reasons. Under the
proposal, banking organizations are
expected to conduct ongoing credit
monitoring regarding relevant obligors.
The proposal would require banking
organizations to continue to treat an
exposure as a defaulted exposure until
the exposure no longer meets the
definition or until the banking
organization determines that the obligor
meets the definition of investment
grade 57 or the proposed definition of
speculative grade.58 The proposal
would revise the definition of
speculative grade, consistent with the
current definition of investment grade,
to allow the definition to apply to
entities to which the banking
organization is exposed through a loan
or security. In addition, the proposal
would make the same revision to the
definition of sub-speculative grade.
A banking organization would assign
a 150 percent risk weight to a defaulted
exposure including any exposure
amount remaining on the balance sheet
following a charge-off, and any other
non-retail exposure to the same obligor,
to reflect the increased uncertainty as to
the recovery of the remaining carrying
value. The proposed risk weight is
intended to reflect the impaired credit
quality of defaulted exposures and to
help ensure that banking organizations
maintain sufficient regulatory capital for
the increased probability of losses on
these exposures. A banking organization
may apply a risk weight to the
guaranteed or secured portion of a
defaulted exposure based on (1) the risk
weight under § ll.120 of the proposal
if the guarantee or credit derivative
meets the applicable requirements or (2)
the risk weight under § ll.121 of the
proposal if the collateral meets the
applicable requirements
ed probability of losses on
these exposures. A banking organization
may apply a risk weight to the
guaranteed or secured portion of a
defaulted exposure based on (1) the risk
weight under § ll.120 of the proposal
if the guarantee or credit derivative
meets the applicable requirements or (2)
the risk weight under § ll.121 of the
proposal if the collateral meets the
applicable requirements.
Question 13: How does the defaulted
exposure definition compare with
banking organizations’ existing policies
relating to the determination of the
credit risk of a defaulted exposure and
the creditworthiness of a defaulted
obligor? What additional clarifications
are necessary to determine the point at
which retail and non-retail exposures
should no longer be treated as defaulted
exposures?
Question 14: What operational
challenges, if any, would a banking
organization face in identifying which
exposures meet the proposed definition
of defaulted exposure? In particular, the
agencies seek comment on the ability of
a banking organization to obtain the
necessary information to assess whether
the credit obligations of a borrower to
creditors other than the banking
organization would meet the proposed
criteria? What operational challenges, if
any, would a banking organization face
in identifying whether obligors on non-
retail credit obligations are subject to a
pending or active bankruptcy
proceeding?
Question 15: For the purposes of retail
credit obligations, the agencies invite
comment on the appropriateness of
including a borrower’s bankruptcy as a
criterion for a defaulted exposure
iteria? What operational challenges, if
any, would a banking organization face
in identifying whether obligors on non-
retail credit obligations are subject to a
pending or active bankruptcy
proceeding?
Question 15: For the purposes of retail
credit obligations, the agencies invite
comment on the appropriateness of
including a borrower’s bankruptcy as a
criterion for a defaulted exposure. What
operational challenges, if any, would a
banking organization face in identifying
whether obligors on retail credit
obligations are subject to a pending or
active bankruptcy proceeding? To what
extent would criteria (1) through (3) in
the proposed defaulted exposure
definition for retail exposures
sufficiently capture the risk of a
borrower involved in a bankruptcy
proceeding?
Question 16: What alternatives to the
proposed treatment should the agencies
consider while maintaining a risk-
sensitive treatment for credit risk of a
defaulted borrower? For example, what
would be the advantages and
disadvantages of limiting the defaulted
borrower scope to obligations of the
borrower with the banking organization?
b. Exposures to Government-Sponsored
Enterprises
The proposal would assign a 20
percent risk weight to GSE 59 exposures
that are not equity exposures,
securitization exposures or exposures to
a subordinated debt instrument issued
by a GSE, consistent with the current
standardized approach.60 Under the
proposal, an exposure to the common
stock issued by a GSE would be an
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ity exposures,
securitization exposures or exposures to
a subordinated debt instrument issued
by a GSE, consistent with the current
standardized approach.60 Under the
proposal, an exposure to the common
stock issued by a GSE would be an
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
61 Under § ll.2 of the current capital rule, a
depository institution means a depository
institution as defined in section 3 of the Federal
Deposit Insurance Act, a foreign bank means a
foreign bank as defined in section 211.2 of the
Federal Reserve Board’s Regulation K (12 CFR
211.2) (other than a depository institution), and a
credit union means an insured credit union as
defined under the Federal Credit Union Act (12
U.S.C. 1751 et seq.). See 12 CFR 3.2 (OCC); 12 CFR
217.2 (Board); 12 CFR 324.2 (FDIC). Exposures to
other financial institutions, such as bank holding
companies, savings and loans holding companies,
and securities firms, generally would be considered
corporate exposures. See 78 FR 62087 (October 11,
2013).
62 The capital ratios used for this determination
are the ratios on the depository institution’s most
recent quarterly Consolidated Report of Condition
and Income (Call Report).
63 See 12 CFR part 702 (National Credit Union
Administration).
64 See 12 CFR 3.12(a)(1) (OCC); 12 CFR
217.12(a)(1) (Board); 12 CFR 324.12(a)(1) (FDIC).
65 See 12 CFR 6.4(b)(2) (OCC); 12 CFR
208.43(b)(2) (Board); 12 CFR 324.403(b)(2) (FDIC).
66 The capital ratios used for this determination
are the ratios on the depository institution’s most
recent quarterly Call Report.
67 See 12 CFR part 702 (National Credit Union
Administration).
equity exposure
.
64 See 12 CFR 3.12(a)(1) (OCC); 12 CFR
217.12(a)(1) (Board); 12 CFR 324.12(a)(1) (FDIC).
65 See 12 CFR 6.4(b)(2) (OCC); 12 CFR
208.43(b)(2) (Board); 12 CFR 324.403(b)(2) (FDIC).
66 The capital ratios used for this determination
are the ratios on the depository institution’s most
recent quarterly Call Report.
67 See 12 CFR part 702 (National Credit Union
Administration).
equity exposure. An exposure to the
preferred stock issued by a GSE would
be an equity exposure or an exposure to
a subordinated debt instrument,
depending on the contractual terms of
the preferred stock instrument. Equity
exposures to a GSE must be assigned a
risk-weighted asset amount as
calculated under §§ ll.140 through
ll.142 of subpart E. An exposure to a
subordinated debt instrument issued by
a GSE must be assigned a 150 percent
risk weight, unless issued by a FHLB or
Farmer Mac. As discussed later in
sections III.E. and III.C.2.d. of this
SUPPLEMENTARY INFORMATION, equity
exposures and exposures to
subordinated debt instruments would
generally be subject to an increased risk-
based capital requirement to reflect their
heightened risk relative to exposures to
senior debt.
c. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions
The proposal would define the scope
of exposures to depository institutions,
foreign banks, and credit unions in a
manner that is consistent with the
definitions and scope of exposures
covered under the current capital rule.
Under the proposal, a bank exposure
would mean an exposure (such as a
receivable, guarantee, letter of credit,
loan, OTC derivative contract, or senior
debt instrument) to any depository
institution, foreign bank, or credit
union.61
The proposed treatment for bank
exposures supports the simplicity,
transparency, and consistency
objectives of the proposal in a manner
that is appropriately risk sensitive
al, a bank exposure
would mean an exposure (such as a
receivable, guarantee, letter of credit,
loan, OTC derivative contract, or senior
debt instrument) to any depository
institution, foreign bank, or credit
union.61
The proposed treatment for bank
exposures supports the simplicity,
transparency, and consistency
objectives of the proposal in a manner
that is appropriately risk sensitive. The
proposal would provide three categories
for bank exposures that are ranked from
the highest to the lowest in terms of
creditworthiness: Grade A, Grade B, and
Grade C. The assignment of the bank
exposure category would be based on
the obligor depository institution,
foreign bank, or credit union. As
outlined below, the proposal would rely
on the current capital rule’s definition
of investment grade and the proposed
definition of speculative grade for
differentiating the credit risk of bank
exposures. In addition, the proposal
would incorporate publicly disclosed
capital levels to differentiate the
financial strength of a depository
institution, foreign bank, or credit union
in a manner that is both objective and
transparent to supervisors and the
public.
More specifically, a Grade A bank
exposure would mean a bank exposure
for which the obligor depository
institution, foreign bank, or credit union
(1) is investment grade, and (2) whose
most recent publicly disclosed capital
ratios meet or exceed the higher of: (a)
the minimum capital requirements and
any additional amounts necessary to not
be subject to limitations on distributions
and discretionary bonus payments
under the capital rules established by
the prudential supervisor of the
depository institution, foreign bank, or
credit union, and (b) if applicable, the
capital ratio requirements for the well-
capitalized category under the agencies’
prompt corrective action framework,62
or under similar rules of the National
Credit Union Administration.63 For
example, an exposure to an investment
grade depository institution co
ablished by
the prudential supervisor of the
depository institution, foreign bank, or
credit union, and (b) if applicable, the
capital ratio requirements for the well-
capitalized category under the agencies’
prompt corrective action framework,62
or under similar rules of the National
Credit Union Administration.63 For
example, an exposure to an investment
grade depository institution could
qualify as a Grade A bank exposure if
the depository institution was not
subject to limitations on distributions
and discretionary bonus payments
under the capital rules and had risk-
based capital ratios that met the well
capitalized thresholds under the
agencies’ prompt corrective action
framework. Further, a bank exposure to
a depository institution that had opted
into the community bank leverage ratio
(CBLR) framework and is investment
grade would be considered to be a Grade
A bank exposure, even if the obligor
depository institution were in the grace
period under the CBLR framework.64
Under the proposal, a depository
institution that uses the CBLR
framework would not be required to
calculate or disclose risk-based capital
ratios for purposes of qualifying as a
Grade A bank exposure.
A Grade B bank exposure would mean
a bank exposure that is not a Grade A
bank exposure and for which the obligor
depository institution, foreign bank, or
credit union (1) is speculative grade or
investment grade, and (2) whose most
recent publicly disclosed capital ratios
meet or exceed the higher of: (a) the
applicable minimum capital
requirements under capital rules
established by the prudential supervisor
of the depository institution, foreign
bank, or credit union, and (b) if
applicable, the capital ratio
requirements for the adequately-
capitalized category 65 under the
agencies’ prompt corrective action
framework,66 or under similar rules of
the National Credit Union
Administration.67
For a foreign bank to qualify as a
Grade A or Grade B bank exposure, the
proposal would require the
of the depository institution, foreign
bank, or credit union, and (b) if
applicable, the capital ratio
requirements for the adequately-
capitalized category 65 under the
agencies’ prompt corrective action
framework,66 or under similar rules of
the National Credit Union
Administration.67
For a foreign bank to qualify as a
Grade A or Grade B bank exposure, the
proposal would require the applicable
capital standards imposed by the home
country supervisor to be consistent with
international capital standards issued by
the Basel Committee.
A Grade C bank exposure would mean
a bank exposure that does not qualify as
a Grade A or Grade B bank exposure.
For example, a bank exposure would be
a Grade C bank exposure if the obligor
depository institution, foreign bank, or
credit union has not publicly disclosed
its capital ratios within the last six
months. In addition, an exposure would
be a Grade C bank exposure if the
external auditor of the depository
institution, foreign bank, or credit union
has issued an adverse audit opinion or
has expressed substantial doubt about
the ability of the depository institution,
foreign bank, or credit union to continue
as a going concern within the previous
12 months.
Under the proposal, a foreign bank
exposure that is a Grade A or Grade B
bank exposure and is a self-liquidating,
trade-related contingent item that arises
from the movement of goods and that
has a maturity of three months or less
may be assigned a risk weight that is
lower than the risk weight applicable to
other exposures to the same foreign
bank. The proposed approach to
providing a preferential risk weight for
short-term self-liquidating, trade-related
contingent items would be consistent
with the current standardized approach
at arises
from the movement of goods and that
has a maturity of three months or less
may be assigned a risk weight that is
lower than the risk weight applicable to
other exposures to the same foreign
bank. The proposed approach to
providing a preferential risk weight for
short-term self-liquidating, trade-related
contingent items would be consistent
with the current standardized approach.
The proposal would also address the
risk that capital and foreign exchange
controls imposed by a sovereign entity
in which a foreign bank is located could
prevent or materially impede the ability
of the foreign bank to convert its
currency to meet its obligations or
transfer funds. The proposal would,
therefore, provide a risk weight floor for
foreign bank exposures based on the risk
weight applicable to a sovereign
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
68 See § ll.111 for the proposed sovereign risk-
weight table, which is identical to Table 1 to
§ ll.32 in the current capital rule.
69 Under § ll. 2 of the current capital rule, a
Country Risk Classification (CRC) for a sovereign
means the most recent consensus CRC published by
the Organization for Economic Cooperation and
Development (OECD) as of December 31st of the
prior calendar year that provides a view of the
likelihood that the sovereign will service its
external debt. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC). For more information
on the OECD country risk classification
methodology, see OECD, ‘‘Country Risk
Classification,’’ available at https://www.oecd.org/
trade/topics/export-credits/arrangement-and-
sector-understandings/financing-terms-and-
conditions/country-risk-classification/
t the sovereign will service its
external debt. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); 12 CFR 324.2 (FDIC). For more information
on the OECD country risk classification
methodology, see OECD, ‘‘Country Risk
Classification,’’ available at https://www.oecd.org/
trade/topics/export-credits/arrangement-and-
sector-understandings/financing-terms-and-
conditions/country-risk-classification/.
70 The CRCs reflect an assessment of country risk,
used to set interest rate charges for transactions
covered by the OECD arrangement on export
credits. The CRC methodology classifies countries
into one of eight risk categories (0–7), with
countries assigned to the zero category having the
lowest possible risk assessment and countries
assigned to the 7 category having the highest
possible risk assessment. See 78 FR 62088 (October
11, 2018).
exposure for the jurisdiction where the
foreign bank is incorporated when (1)
the exposure is not in the local currency
of the jurisdiction where the foreign
bank is incorporated; or (2) the exposure
to a foreign bank branch that is not in
the local currency of the jurisdiction in
which the foreign branch operates
(sovereign risk-weight floor).68 The risk
weight floor would not apply to short-
term self-liquidating, trade-related
contingent items that arise from the
movement of goods.
As provided in Table 1, the proposed
risk weights for bank exposures
generally would range from 40 percent
to 150 percent
ch that is not in
the local currency of the jurisdiction in
which the foreign branch operates
(sovereign risk-weight floor).68 The risk
weight floor would not apply to short-
term self-liquidating, trade-related
contingent items that arise from the
movement of goods.
As provided in Table 1, the proposed
risk weights for bank exposures
generally would range from 40 percent
to 150 percent.
Question 17: What are the advantages
and disadvantages of assigning a range
of risk weights based on the bank’s
creditworthiness? What alternatives, if
any, should the agencies consider,
including to address potential concerns
around procyclicality?
Question 18: What are the advantages
and disadvantages of incorporating
specific capital levels in the
determination of each of the three
categories of bank exposures? What, if
any, other risk factors should the
banking agencies consider to
differentiate the credit risk of bank
exposures? What concerns, if any, could
limitations on available information
about foreign banks raise in the context
of determining the appropriate risk
weights for exposures to such banks and
how should the agencies consider
addressing such concerns?
Question 19: What is the impact of
limiting the lower risk weight for self-
liquidating, trade-related contingent
items that arise from the movement of
goods to those with a maturity of three
months or less? What would be the
advantages and disadvantages of
expanding this risk weight treatment to
include such exposures with a maturity
of six months or less? What would be
the advantages and disadvantages of
limiting this reduced risk weight
treatment to only foreign banks whose
home country has an Organization for
Economic Cooperation and
Development (OECD) Country Risk
Classification (CRC) 69 of 0, 1, 2, or 3, or
is an OECD member with no CRC,
consistent with the current standardized
approach? 70
d
s with a maturity
of six months or less? What would be
the advantages and disadvantages of
limiting this reduced risk weight
treatment to only foreign banks whose
home country has an Organization for
Economic Cooperation and
Development (OECD) Country Risk
Classification (CRC) 69 of 0, 1, 2, or 3, or
is an OECD member with no CRC,
consistent with the current standardized
approach? 70
d. Subordinated Debt Instruments
The proposal would introduce a
definition and an explicit risk weight
treatment for exposures in the form of
subordinated debt instruments. The
proposed definition of a subordinated
debt instrument would capture
exposures that are financial instruments
and present heightened credit risk but
are not equity exposures, including: (1)
any preferred stock that does not meet
the definition of an equity exposure, (2)
any covered debt instrument, including
a TLAC debt instrument, that is not
deducted from regulatory capital, and
(3) any debt instrument that qualifies as
tier 2 capital under the current capital
rule or that would otherwise be treated
as regulatory capital by the primary
Federal supervisor of the issuer and that
is not deducted from regulatory capital.
The proposal would define a
subordinated debt instrument as (1) a
debt security that is a corporate
exposure, a bank exposure, or an
exposure to a GSE, including a note,
bond, debenture, similar instrument, or
other debt instrument as determined by
the primary Federal supervisor, that is
subordinated by its terms, or separate
intercreditor agreement, to any creditor
of the obligor, or (2) preferred stock that
is not an equity exposure
strument as (1) a
debt security that is a corporate
exposure, a bank exposure, or an
exposure to a GSE, including a note,
bond, debenture, similar instrument, or
other debt instrument as determined by
the primary Federal supervisor, that is
subordinated by its terms, or separate
intercreditor agreement, to any creditor
of the obligor, or (2) preferred stock that
is not an equity exposure. For these
purposes, a debt security would be
subordinated if the documentation
creating or evidencing such
indebtedness (or a separate intercreditor
agreement) provides for any of the
issuer’s other creditors to rank senior to
the payment of such indebtedness in the
event the issuer becomes the subject of
a bankruptcy or other insolvency
proceeding, with the scope of applicable
bankruptcy or other insolvency
proceedings being defined in the
applicable documentation. The scope of
the definition of a subordinated debt
instrument is meant to capture the types
of entities that issue subordinated debt
instruments and for which the level of
subordination is a meaningful
determinant of the credit risk of the
instrument.
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Federal Register / Vol. 88, No. 179 / Monday, September 18, 2023 / Proposed Rules
71 Covered debt instruments are subject to
deduction by banking organizations subject to
Category I or II capital standards similar to the
deduction framework for exposures to capital
instruments. See 12 CFR 3.22(c) (OCC); 12 CFR
217.22(c) (Board); 12 CFR 324.22(c) (FDIC). As
noted in section III.B.3. of this SUPPLEMENTARY
INFORMATION, under the proposal, this deduction
framework will be expanded to banking
organizations subject to Category III or IV capital
standards. As discussed in section III.C.2.b
tandards similar to the
deduction framework for exposures to capital
instruments. See 12 CFR 3.22(c) (OCC); 12 CFR
217.22(c) (Board); 12 CFR 324.22(c) (FDIC). As
noted in section III.B.3. of this SUPPLEMENTARY
INFORMATION, under the proposal, this deduction
framework will be expanded to banking
organizations subject to Category III or IV capital
standards. As discussed in section III.C.2.b. above,
exposures to subordinated debt instruments issued
by an FHLB or by Farmer Mac would be assigned
a 20 percent risk weight.
72 For purposes of the proposal, ‘‘secured by
collateral in the form of real estate’’ should be
interpreted in a manner that is consistent with the
current definition for ‘‘a loan secured by real estate’’
in the Call Report and Consolidated Financial
Statements for Holding Companies (FR Y–9C)
instructions.
73 The Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of 1991
(RTCRRI Act) mandates that each agency provide in
its capital regulations (i) a 50 percent risk weight
for certain one-to-four-family residential pre-sold
construction loans that meet specific statutory
criteria in the RTCRRI Act and any other
underwriting criteria imposed by the agencies, and
(ii) a 100 percent risk weight for one-to-four-family
residential pre-sold construction loans for
residences for which the purchase contract is
cancelled. See 12 U.S.C. 1831n, note.
74 The RTCRRI Act mandates that each agency
provide in its capital regulations a 50 percent risk
weight for certain multifamily residential loans that
meet specific statutory criteria in the RTCRRI Act
and any other underwriting criteria imposed by the
agencies. See 12 U.S.C. 1831n, note.
75 Section 214 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act
imposes certain requirements on high volatility
commercial real estate acquisition, development, or
construction loans. Section 214 of Public Law 115–
174, 132 Stat. 1296 (2018). See 12 U.S.C. 1831bb
in the RTCRRI Act
and any other underwriting criteria imposed by the
agencies. See 12 U.S.C. 1831n, note.
75 Section 214 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act
imposes certain requirements on high volatility
commercial real estate acquisition, development, or
construction loans. Section 214 of Public Law 115–
174, 132 Stat. 1296 (2018). See 12 U.S.C. 1831bb.
In addition, even though the
provision of collateral typically reduces
the risk of loss on indebtedness, the
proposal includes secured as well as
unsecured subordinated debt securities
in the scope of subordinated debt
instruments, since the effect of
subordination may result in the
collateral providing little or no real
value to the subordinated debt holder in
the event the issuer becomes to subject
of a bankruptcy or other insolvency
proceeding. A subordinated debt
instrument would not include any loan,
including a syndicated loan, a debt
security issued by a sovereign, public
sector entity, multilateral development
bank, or supranational entity, or a
security that would be captured under
the securitization framework. Due to the
contractual obligations and structures
associated with subordinated debt
instruments, such exposures generally
pose increased risk relative to a senior
loan, including a syndicated loan, or a
senior debt security to the same entity
because investments in subordinated
debt instruments are usually considered
junior creditors and subordinate to
obligations specified in the definition of
senior debt in the document governing
the junior creditors’ obligations
debt
instruments, such exposures generally
pose increased risk relative to a senior
loan, including a syndicated loan, or a
senior debt security to the same entity
because investments in subordinated
debt instruments are usually considered
junior creditors and subordinate to
obligations specified in the definition of
senior debt in the document governing
the junior creditors’ obligations.
The proposal generally would apply a
150 percent risk weight for exposures
that meet the definition of a
subordinated debt instrument, including
any preferred stock that is not an equity
exposure, and any tier 2 instrument or
covered debt instrument that is not
deducted from regulatory capital,
including TLAC debt instruments, and
any debt instrument that would
otherwise be treated as regulatory
capital by the primary Federal
supervisor of the issuer and that is not
deducted from regulatory capital.71
The instruments included in the
scope of subordinated debt instruments
present a greater risk of loss to an
investing banking organization relative
to more senior debt exposures to the
same issuer because subordinated debt
instruments have a lower priority of
repayment in the event of default. As a
result, the proposal would apply an
increased risk weight to recognize this
increase in loss given default. Since a
covered debt instrument that qualifies
as a TLAC debt instrument shares
similar risk characteristics with a
subordinated debt instrument, the
proposal would require banking
organizations to apply the same 150
percent risk weight to any such
exposures that are not otherwise
deducted from regulatory capital.
Question 20: The agencies seek
comment on the scope of the proposed
definition of a subordinated debt
instrument
lifies
as a TLAC debt instrument shares
similar risk characteristics with a
subordinated debt instrument, the
proposal would require banking
organizations to apply the same 150
percent risk weight to any such
exposures that are not otherwise
deducted from regulatory capital.
Question 20: The agencies seek
comment on the scope of the proposed
definition of a subordinated debt
instrument. What, if any, operational
challenges might the proposed
definition pose for banking
organizations, such as identifying the
level of subordination in debt securities
or similar instruments, and how should
the agencies consider addressing such
challenges?
Question 21: Would expanding the
definition of a subordinated debt
instrument to include loans that are not
securities more appropriately capture
the types of exposures that pose
elevated risk and, if so, why?
Question 22: The agencies seek
comment on applying a heightened 150
percent risk weight to exposures to
subordinated debt instruments issued by
GSEs. What would be the advantages
and disadvantages of this proposed
regulatory capital requirement? Would
there be any challenges for banking
organizations to be able to identify
which GSE exposures would be subject
to the 150 percent risk weight? Please
provide specific examples of any
challenges and supporting data.
e. Real Estate Exposures
The proposal would define a real
estate exposure as an exposure that is
neither a sovereign exposure nor an
exposure to a PSE and that is (1) a
residential mortgage exposure, (2)
secured by collateral in the form of real
estate,72 (3) a pre-sold construction
loan,73 (4) a statutory multifamily
mortgage,74 (5) a high volatility
commercial real estate (HVCRE)
exposure,75 or (6) an acquisition,
development, or construction (ADC)
exposure. A pre-sold construction loan,
a statutory multifamily mortgage, and an
HVCRE exposure are collectively
referred to as statutory real estate
exposures for purposes of this
SUPPLEMENTARY INFORMATION
onstruction
loan,73 (4) a statutory multifamily
mortgage,74 (5) a high volatility
commercial real estate (HVCRE)
exposure,75 or (6) an acquisition,
development, or construction (ADC)
exposure. A pre-sold construction loan,
a statutory multifamily mortgage, and an
HVCRE exposure are collectively
referred to as statutory real estate
exposures for purposes of this
SUPPLEMENTARY INFORMATION. Under the
proposal, the risk weight treatment for
statutory real estate exposures that are
not defaulted real estate exposures
would be consistent with the current
standardized approach.
The proposal would differentiate the
credit risk of real estate exposures that
are not statutory real estate exposures by
introducing the following categories:
regulatory residential real estate
exposures, regulatory commercial real
estate exposures, ADC exposures, and
other real estate exposures. The
applicable risk weight for these non-
statutory real estate exposures would
depend on (1) whether the real estate
exposure meets the definitions of
regulatory residential real estate
exposure, regulatory commercial real
estate exposure, ADC exposure, or other
real estate exposure, described below;
(2) whether the repayment of such
exposures is dependent on the cash
flows generated by the underlying real
estate (such as rental properties, leased
properties, hotels); and (3) in the case of
regulatory residential or regulatory
commercial real estate exposures, the
loan-to-value (LTV) ratio of the
exposure.
These proposed criteria for
differentiating the credit risk of real
estate exposures would be based on
information already collected and
maintained by a banking organization as
part of its mortgage lending activities
and underwriting practices. Under the
proposal, regulatory residential and
regulatory commercial real estate
exposures would be required to meet
prudential criteria that are intended to
reduce the likelihood of default relative
to other real estate exposures
would be based on
information already collected and
maintained by a banking organization as
part of its mortgage lending activities
and underwriting practices. Under the
proposal, regulatory residential and
regulatory commercial real estate
exposures would be required to meet
prudential criteria that are intended to
reduce the likelihood of default relative
to other real estate exposures. The
criteria in these definitions generally
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