Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action
Federal Register, Volume 77 Issue 169 (Thursday, August 30, 2012)
Federal Register Volume 77, Number 169 (Thursday, August 30, 2012)
Proposed Rules
Pages 52791-52886
From the Federal Register Online via the Government Printing Office www.gpo.gov
FR Doc No: 2012-16757
Page 52791
Vol. 77
Thursday,
No. 169
August 30, 2012
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
12 CFR Parts 3, 5, 6, et al.
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Federal Reserve System
12 CFR Parts 208, 217, and 225
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Federal Deposit Insurance Corporation
12 CFR Parts 324, 325, and 362
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Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action; Proposed Rule
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3, 5, 6, 165, and 167
Docket ID OCC-2012-0008
RIN 1557-AD46
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 217, and 225 Regulations H, Q, and Y
Docket No. R-1442
RIN 7100-AD87
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324, 325, and 362
RIN 3064-AD95
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action
AGENCIES: Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are seeking comment on three Notices of Proposed Rulemaking (NPR) that would revise and replace the agencies' current capital rules. In this NPR, the agencies are proposing to revise their risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision (BCBS) in ``Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems'' (Basel III). The proposed revisions would include implementation of a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for banking organizations subject to the advanced approaches capital rules, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator measure. Additionally, consistent with Basel III, the agencies are proposing to apply limits on a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-
based capital requirements. This NPR also would establish more conservative standards for including an instrument in regulatory capital. As discussed in the proposal, the revisions set forth in this NPR are consistent with section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires the agencies to establish minimum risk-based and leverage capital requirements.
In connection with the proposed changes to the agencies' capital rules in this NPR, the agencies are also seeking comment on the two related NPRs published elsewhere in today's Federal Register. The two related NPRs are discussed further in the SUPPLEMENTARY INFORMATION.
DATES: Comments must be submitted on or before October 22, 2012.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title ``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action'' to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to http://www.regulations.gov. Click ``Advanced Search''. Select ``Document Type'' of ``Proposed Rule'', and in ``By Keyword or ID'' box, enter Docket ID ``OCC-2012-0008,'' and click ``Search''. If proposed rules for more than one agency are listed, in the ``Agency'' column, locate the notice of proposed rulemaking for the OCC. Comments can be filtered by agency using the filtering tools on the left side of the screen. In the ``Actions'' column, click on ``Submit a Comment'' or ``Open Docket Folder'' to submit or view public comments and to view supporting and related materials for this rulemaking action.
Click on the ``Help'' tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting or viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period.
Email: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E Street SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and ``Docket ID OCC-2012-0008'' in your comment. In general, the OCC will enter all comments received into the docket and publish them on Regulations.gov without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to this notice by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Click ``Advanced Search''. Select ``Document Type'' of ``Public Submission'' and in ``By Keyword or ID'' box enter Docket ID ``OCC-2012-0008,'' and click ``Search.'' If comments from more than one agency are listed, the ``Agency'' column will indicate which comments were received by the OCC. Comments can be filtered by Agency using the filtering tools on the left side of the screen.
Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC, 250 E Street SW., Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.
Docket: You may also view or request available background documents and project summaries using the methods described previously.
Board: When submitting comments, please consider submitting your comments by email or fax because paper mail in the Washington, DC, area and at the Board may be subject to delay. You may submit comments, identified by Docket No. R-1430; RIN No. 7100-AD87, by any of the following methods:
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Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Email: regs.comments@federalreserve.gov. Include docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.
All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room MP-500 of the Board's Martin Building (20th and C Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of the 550 17th Street building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m.
Email: comments@FDIC.gov.
Instructions: Comments submitted must include ``FDIC'' and ``RIN 3064-AD95.'' Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Senior Risk Expert, (202) 874-6022; David Elkes, Risk Expert, (202) 874-3846; Mark Ginsberg, Risk Expert, (202) 927-4580; or Ron Shimabukuro, Senior Counsel, Patrick Tierney, Counsel, or Carl Kaminski, Senior Attorney, Legislative and Regulatory Activities Division, (202) 874-5090, Office of the Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
Board: Anna Lee Hewko, Assistant Director, (202) 530-6260, Thomas Boemio, Manager, (202) 452-2982, Constance M. Horsley, Manager, (202) 452-5239, or Juan C. Climent, Senior Supervisory Financial Analyst, (202) 872-7526, Capital and Regulatory Policy, Division of Banking Supervision and Regulation; or Benjamin McDonough, Senior Counsel, (202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or Christine Graham, Senior Attorney, (202) 452-3005, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov; Ryan Billingsley, Senior Policy Analyst, rbillingsley@fdic.gov; Karl Reitz, Senior Policy Analyst, kreitz@fdic.gov, Division of Risk Management Supervision; David Riley, Senior Policy Analyst, dariley@fdic.gov, Division of Risk Management Supervision, Capital Markets Branch, (202) 898-6888; or Mark Handzlik, Counsel, mhandzlik@fdic.gov, Michael Phillips, Counsel, mphillips@fdic.gov, Greg Feder, Counsel, gfeder@fdic.gov, or Ryan Clougherty, Senior Attorney, rclougherty@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION: In connection with the proposed changes to the agencies' capital rules in this NPR, the agencies are also seeking comment on the two related NPRs published elsewhere in today's Federal Register. In the notice titled ``Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements'' (Standardized Approach NPR), the agencies are proposing to revise and harmonize their rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the BCBS's Basel II standardized framework in the ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework,'' including subsequent amendments to that standard, and recent BCBS consultative papers. The Standardized Approach NPR also includes alternatives to credit ratings, consistent with section 939A of the Dodd-Frank Act. The revisions include methodologies for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk. The Standardized Approach NPR also would introduce disclosure requirements that would apply to top-
tier banking organizations domiciled in the United States with $50 billion or more in total assets, including disclosures related to regulatory capital instruments.
The proposals in this NPR and the Standardized Approach NPR would apply to all banking organizations that are currently subject to minimum capital requirements (including national banks, state member banks, state nonmember banks, state and federal savings associations, and top-tier bank holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C)), as well as top-tier savings and loan holding companies domiciled in the United States (together, banking organizations).
In the notice titled ``Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule,'' (Advanced Approaches and Market Risk NPR) the agencies are proposing to revise the advanced approaches risk-based capital rules consistent with Basel III and other changes to the BCBS's capital standards. The agencies also propose to revise the advanced approaches risk-based capital rules to be consistent with section 939A and section 171 of the Dodd-Frank Act. Additionally, in the Advanced Approaches and Market Risk NPR, the OCC and FDIC are proposing that the market risk capital rules be applicable to federal and state savings associations and the Board is proposing that the advanced approaches and market risk capital rules apply to top-tier savings and loan holding companies domiciled in the United States, in each case, if stated thresholds for trading activity are met.
As described in this NPR, the agencies also propose to codify their regulatory capital rules, which currently reside in various appendixes to their respective regulations. The proposals are published in three separate NPRs to reflect the distinct objectives of each proposal, to allow interested parties to better understand the various aspects of the overall capital framework, including which aspects of the rules would apply to which banking organizations, and to help interested parties better focus their comments on areas of particular interest.
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Table of Contents \1\
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\1\ Sections marked with an asterisk generally would not apply to less-complex banking organizations.
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Introduction
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Overview of the Proposed Changes to the Agencies' Current Capital Framework. A summary of the proposed changes to the agencies' current capital framework through three concurrent notices of proposed rulemaking, including comparison of key provisions of the proposals to the agencies' general risk-based and leverage capital rules.
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Background. A brief review of the evolution of the agencies' capital rules and the Basel capital framework, including an overview of the rationale for certain revisions in the Basel capital framework.
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Minimum Capital Requirements, Regulatory Capital Buffer, and Requirements for Overall Capital Adequacy
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Minimum Capital Requirements and Regulatory Capital Buffer. A short description of the minimum capital ratios and their incorporation in the agencies' Prompt Corrective Action (PCA) framework; introduction of a regulatory capital buffer.
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Leverage Ratio
1. Minimum Tier 1 Leverage Ratio. A description of the minimum tier 1 leverage ratio, including the calculation of the numerator and the denominator.
2. Supplementary Leverage Ratio for Advanced Approaches Banking Organizations.* A description of the new supplementary leverage ratio for advanced approaches banking organizations, including the calculation of the total leverage exposure.
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Capital Conservation Buffer. A description of the capital conservation buffer, which is designed to limit capital distributions and certain discretionary bonus payments if a banking organization does not hold a certain amount of common equity tier 1 capital in additional to the minimum risk-based capital ratios.
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Countercyclical Capital Buffer.* A description of the countercyclical buffer applicable to advanced approaches banking organizations, which would serve as an extension of the capital conservation buffer.
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Prompt Corrective Action Requirements. A description of the proposed revisions to the agencies' prompt corrective action requirements, including incorporation of a common equity tier 1 capital ratio, an updated definition of tangible common equity, and, for advanced approaches banking organizations only, a supplementary leverage ratio.
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Supervisory Assessment of Overall Capital Adequacy. A brief overview of the capital adequacy requirements and supervisory assessment of a banking organization's capital adequacy.
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Tangible Capital Requirement for Federal Savings Associations. A discussion of a statutory capital requirement unique to federal savings associations.
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Definition of Capital
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Capital Components and Eligibility Criteria for Regulatory Capital Instruments
1. Common Equity Tier 1 Capital. A description of the common equity tier 1 capital elements and a description of the eligibility criteria for common equity tier 1 capital instruments.
2. Additional Tier 1 Capital. A description of the additional tier 1 capital elements and a description of the eligibility criteria for additional tier 1 capital instruments.
3. Tier 2 Capital. A description of the tier 2 capital elements and a description of the eligibility criteria for tier 2 capital instruments.
4. Capital Instruments of Mutual Banking Organizations. A discussion of potential issues related to capital instruments specific to mutual banking organizations.
5. Grandfathering of Certain Capital Instruments. A discussion of the recognition within regulatory capital of instruments specifically related to certain U.S. government programs.
6. Agency Approval of Capital Elements. A description of the approval process for new capital instruments.
7. Addressing the Point of Non-viability Requirements under Basel III.* A discussion of disclosure requirements for advanced approaches banking organizations for regulatory capital instruments addressing the point of non-viability requirements in Basel III.
8. Qualifying Capital Instruments Issued by Consolidated Subsidiaries of a Banking Organization. A description of limits on the inclusion of minority interest in regulatory capital, including a discussion of Real Estate Investment Trust (REIT) preferred securities.
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Regulatory Adjustments and Deductions
1. Regulatory Deductions from Common Equity Tier 1 Capital. A discussion of the treatment of goodwill and certain other intangible assets and certain deferred tax assets.
2. Regulatory Adjustments to Common Equity Tier 1 Capital. A discussion of the adjustments to common equity tier 1 for certain cash flow hedges and changes in a banking organization's own creditworthiness.
3. Regulatory Deductions Related to Investments in Capital Instruments. A discussion of the treatment for capital investments in other financial institutions.
4. Items subject to the 10 and 15 Percent Common Equity Tier 1 Capital Threshold Deductions. A discussion of the treatment of mortgage servicing assets, certain capital investments in other financial institutions and certain deferred tax assets.
5. Netting of Deferred Tax Liabilities against Deferred Tax Assets and Other Deductible Assets. A discussion of a banking organization's option to net deferred tax liabilities against deferred tax assets if certain conditions are met under the proposal.
6. Deduction from Tier 1 Capital of Investments in Hedge Funds and Private Equity Funds Pursuant to section 619 of the Dodd-Frank Act.* A description of the deduction from tier 1 capital for investments in hedge funds and private equity funds pursuant to section 619 of the Dodd-Frank Act.
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Denominator Changes. A description of the changes to the calculation of risk-weighted asset amounts related to the Basel III regulatory capital requirements.
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Transition Provisions
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Minimum Regulatory Capital Ratios. A description of the transition provisions for minimum regulatory capital ratios.
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Capital Conservation and Countercyclical Capital Buffer. A description of the transition provisions for the capital conservation buffer, and for advanced approaches banking organizations, the countercyclical capital buffer.
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Regulatory Capital Adjustments and Deductions. A description of the transition provisions for regulatory capital adjustments and deductions.
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Non-qualifying Capital Instruments. A description of the transition provisions for non-qualifying capital instruments.
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Leverage Ratio.* A description of the transition provisions for the new supplementary leverage ratio for advanced approaches banking organizations.
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Additional OCC Technical Amendments. A description of additional technical and conforming amendments to the OCC's current capital framework in 12 CFR part 3.
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Abbreviations
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Regulatory Flexibility Act Analysis
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Paperwork Reduction Act
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Plain Language
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OCC Unfunded Mandates Reform Act of 1995 Determination
Addendum 1: Summary of This NPR for Community Banking Organizations
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Introduction
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Overview of the Proposed Changes to the Agencies' Current Capital Framework
The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are proposing comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking (NPR). These proposals would revise the agencies' current general risk-based rules, advanced approaches risk-based capital rules (advanced approaches), and leverage capital rules (collectively, the current capital rules).\2\ The proposed
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revisions incorporate changes made by the Basel Committee on Banking Supervision (BCBS) to the Basel capital framework, including those in ``Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems'' (Basel III).\3\ The proposed revisions also would implement relevant provisions of the Dodd-Frank Act and restructure the agencies' capital rules into a harmonized, codified regulatory capital framework.\4\
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\2\ The agencies' general risk-based capital rules are at 12 CFR part 3, appendix A, 12 CFR part 167 (OCC); 12 CFR parts 208 and 225, appendix A (Board); and 12 CFR part 325, appendix A, and 12 CFR part 390, subpart Z (FDIC). The agencies' current leverage rules are at 12 CFR 3.6(b), 3.6(c), and 167.6 (OCC); 12 CFR part 208, appendix B, and 12 CFR part 225, appendix D (Board); and 12 CFR 325.3, and 390.467 (FDIC) (general risk-based capital rules). For banks and bank holding companies with significant trading activity, the general risk-based capital rules are supplemented by the agencies' market risk rules, which appear at 12 CFR part 3, appendix B (OCC); 12 CFR part 208, appendix E, and 12 CFR part 225, appendix E (Board); and 12 CFR part 325, appendix C (FDIC) (market risk rules).
The agencies' advanced approaches rules are at 12 CFR part 3, appendix C, 12 CFR part 167, appendix C, (OCC); 12 CFR part 208, appendix F, and 12 CFR part 225, appendix G (Board); 12 CFR part 325, appendix D, and 12 CFR part 390, subpart Z, Appendix A (FDIC) (advanced approaches rules). The advanced approaches rules are generally mandatory for banking organizations and their subsidiaries that have $250 billion or more in total consolidated assets or that have consolidated total on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more. Other banking organizations may use the advanced approaches rules with the approval of their primary federal supervisor. See 12 CFR part 3, appendix C, section 1(b) (national banks); 12 CFR part 167, appendix C (federal savings associations); 12 CFR part 208, appendix F, section 1(b) (state member banks); 12 CFR part 225, appendix G, section 1(b) (bank holding companies); 12 CFR part 325, appendix D, section 1(b) (state nonmember banks); and 12 CFR part 390, subpart Z, appendix A, section 1(b) (state savings associations).
The market risk capital rules apply to a banking organization if its total trading assets and liabilities is 10 percent or more of total assets or exceeds $1 billion. See 12 CFR part 3, appendix B, section 1(b) (national banks); 12 CFR parts 208 and 225, appendix E, section 1(b) (state member banks and bank holding companies, respectively); and 12 CFR part 325, appendix C, section 1(b) (state nonmember banks).
\3\ The BCBS is a committee of banking supervisory authorities, which was established by the central bank governors of the G-10 countries in 1975. It currently consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Documents issued by the BCBS are available through the Bank for International Settlements Web site at http://www.bis.org.
\4\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010) (Dodd-
Frank Act).
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This notice (Basel III NPR) proposes the Basel III revisions to international capital standards related to minimum requirements, regulatory capital, and additional capital ``buffers'' to enhance the resiliency of banking organizations, particularly during periods of financial stress. It also proposes transition periods for many of the proposed requirements, consistent with Basel III and the Dodd-Frank Act. A second NPR (Standardized Approach NPR) would revise the methodologies for calculating risk-weighted assets in the general risk-
based capital rules, incorporating aspects of the Basel II Standardized Approach and other changes.\5\ The Standardized Approach NPR also proposes alternative standards of creditworthiness (to credit ratings) consistent with section 939A of the Dodd-Frank Act.\6\ A third NPR (Advanced Approaches and Market Risk NPR) proposes changes to the advanced approaches rules to incorporate applicable provisions of Basel III and other agreements reached by the BCBS since 2009, proposes to apply the market risk capital rule (market risk rule) to savings associations and savings and loan holding companies and to apply the advanced approaches rule to savings and loan holding companies, and also removes references to credit ratings.
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\5\ See BCBS, ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework,'' (June 2006), available at http://www.bis.org/publ/bcbs128.htm (Basel II).
\6\ See section 939A of the Dodd-Frank Act (15 U.S.C. 78o-7 note).
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Other than bank holding companies subject to the Board's Small Bank Holding Company Policy Statement \7\ (small bank holding companies), the proposals in the Basel III NPR and the Standardized Approach NPR would apply to all banking organizations currently subject to minimum capital requirements, including national banks, state member banks, state nonmember banks, state and federal savings associations, top-tier bank holding companies domiciled in the United States that are not small bank holding companies, as well as top-tier savings and loan holding companies domiciled in the United States (together, banking organizations).\8\ Certain aspects of these proposals would apply only to advanced approaches banking organizations or banking organizations with total consolidated assets of more than $50 billion. Consistent with the Dodd-Frank Act, a bank holding company subsidiary of a foreign banking organization that is currently relying on the Board's Supervision and Regulation Letter (SR) 01-1 would not be required to comply with the proposed capital requirements under any of these NPRs until July 21, 2015.\9\ In addition, the Board is proposing for all three NPRs to apply on a consolidated basis to top-tier savings and loan holding companies domiciled in the United States, subject to the applicable thresholds of the advanced approaches rules and the market risk rules.
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\7\ 12 CFR part 225, appendix C (Small Bank Holding Company Policy Statement).
\8\ Small bank holding companies would continue to be subject to the Small Bank Holding Company Policy Statement. Application of the proposals to all savings and loan holding companies (including small savings and loan holding companies) is consistent with the transfer of supervisory responsibilities to the Board and the requirements of section 171 of the Dodd-Frank Act. Section 171 of the Dodd-Frank Act by its terms does not apply to small bank holding companies, but there is no exemption from the requirements of section 171 for small savings and loan holding companies. See 12 U.S.C. 5371.
\9\ See section 171(b)(4)(E) of the Dodd-Frank Act (12 U.S.C. 5371(b)(4)(E)); see also SR letter 01-1 (January 5, 2001), available at http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
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The agencies are publishing all the proposed changes to the agencies' current capital rules at the same time in these three NPRs so that banking organizations can read the three NPRs together and assess the potential cumulative impact of the proposals on their operations and plan appropriately. The overall proposal is being divided into three separate NPRs to reflect the distinct objectives of each proposal and to allow interested parties to better understand the various aspects of the overall capital framework, including which aspects of the rules will apply to which banking organizations, and to help interested parties better focus their comments on areas of particular interest. The agencies believe that separating the proposals into three NPRs makes it easier for banking organizations of all sizes to more easily understand which proposed changes are related to the agencies' objective to improve the quality and increase the quantity of capital (Basel III NPR) and which are related to the agencies' objective to enhance the overall risk-sensitivity of the calculation of a banking organization's total risk-weighted assets (Standardized Approach NPR).
The agencies believe that the proposals would result in capital requirements that better reflect banking organizations' risk profiles and enhance their ability to continue functioning as financial intermediaries, including during periods of financial stress, thereby improving the overall resiliency of the banking system. The agencies have carefully considered the potential impact of the three NPRs on all banking organizations, including community banking organizations, and sought to minimize the potential burden of these changes where consistent with applicable law and the agencies' goals of
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establishing a robust and comprehensive capital framework.
In developing each of the three NPRs, wherever possible and appropriate, the agencies have tailored the proposed requirements to the size and complexity of a banking organization. The agencies believe that most banking organizations already hold sufficient capital to meet the proposed requirements, but recognize that the proposals entail significant changes with respect to certain aspects of the agencies' capital requirements. The agencies are proposing transition arrangements or delayed effective dates for aspects of the revised capital requirements consistent with Basel III and the Dodd-Frank Act. The agencies anticipate that they separately would seek comment on regulatory reporting instructions to harmonize regulatory reports with these proposals in a subsequent Federal Register notice.
Many of the proposed requirements in the three NPRs are not applicable to smaller, less complex banking organizations. To assist these banking organizations in rapidly identifying the elements of these proposals that would apply to them, this NPR and the Standardized Approach NPR provide, as addenda to the corresponding preambles, a summary of the various aspects of each NPR designed to clearly and succinctly describe the two NPRs as they would typically apply to smaller, less complex banking organizations.\10\
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\10\ The Standardized Approach NPR also contains a second addendum to the preamble, which contains the definitions proposed under the Basel III NPR. Many of the proposed definitions also are applicable to the Standardized Approach NPR, which is published elsewhere in today's Federal Register.
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Basel III NPR
In 2010, the BCBS published Basel III, a comprehensive reform package that is designed to improve the quality and the quantity of regulatory capital and to build additional capacity into the banking system to absorb losses in times of future market and economic stress.\11\ This NPR proposes the majority of the revisions to international capital standards in Basel III, including a more restrictive definition of regulatory capital, higher minimum regulatory capital requirements, and a capital conservation and a countercyclical capital buffer, to enhance the ability of banking organizations to absorb losses and continue to operate as financial intermediaries during periods of economic stress.\12\ The proposal would place limits on banking organizations' capital distributions and certain discretionary bonuses if they do not hold specified ``buffers'' of common equity tier 1 capital in excess of the new minimum capital requirements.
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\11\ BCBS published Basel III in December 2010 and revised it in June 2011. The text is available at http://www.bis.org/publ/bcbs189.htm. This NPR does not incorporate the Basel III reforms related to liquidity risk management, published in December 2010, ``Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring.'' The agencies expect to propose rules to implement the Basel III liquidity provisions in a separate rulemaking.
\12\ Selected aspects of Basel III that would apply only to advanced approaches banking organizations are proposed in the Advanced Approaches and Market Risk NPR.
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This NPR also includes a leverage ratio contained in Basel III that incorporates certain off-balance sheet assets in the denominator (supplementary leverage ratio). The supplementary leverage ratio would apply only to banking organizations that use the advanced approaches rules (advanced approaches banking organizations). The current leverage ratio requirement (computed using the proposed new definition of capital) would continue to apply to all banking organizations, including advanced approaches banking organizations.
In this NPR, the agencies also propose revisions to the agencies' prompt corrective action (PCA) rules to incorporate the proposed revisions to the minimum regulatory capital ratios.\13\
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\13\ 12 CFR part 6, 12 CFR 165 (OCC); 12 CFR part 208, subpart E (Board); 12 CFR part 325 and part 390, subpart Y (FDIC).
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Standardized Approach NPR
The Standardized Approach NPR aims to enhance the risk-sensitivity of the agencies' capital requirements by revising the calculation of risk-weighted assets. It would do this by incorporating aspects of the Basel II Standardized Approach, including aspects of the 2009 ``Enhancements to the Basel II Framework'' (2009 Enhancements), and other changes designed to improve the risk-sensitivity of the general risk-based capital requirements. The proposed changes are described in further detail in the preamble to the Standardized Approach NPR.\14\ As compared to the general risk-based capital rules, the Standardized Approach NPR includes a greater number of exposure categories for purposes of calculating total risk-weighted assets, provides for greater recognition of financial collateral, and permits a wider range of eligible guarantors. In addition, to increase transparency in the derivatives market, the Standardized Approach NPR would provide a more favorable capital treatment for derivative and repo-style transactions cleared through central counterparties (as compared to the treatment for bilateral transactions) in order to create an incentive for banking organizations to enter into cleared transactions. Further, to promote transparency and market discipline, the Standardized Approach NPR proposes disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets that are not subject to disclosure requirements under the advanced approaches rule.
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\14\ See BCBS, ``Enhancements to the Basel II Framework'' (July 2009), available at http://www.bis.org/publ/bcbs157.htm (2009 Enhancements). See also BCBS, ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework,'' (June 2006), available at http://www.bis.org/publ/bcbs128.htm (Basel II).
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In the Standardized Approach NPR, the agencies also propose to revise the calculation of risk-weighted assets for certain exposures, consistent with the requirements of section 939A of the Dodd-Frank Act by using standards of creditworthiness that are alternatives to credit ratings. These alternative standards would be used to assign risk weights to several categories of exposures, including sovereigns, public sector entities, depository institutions, and securitization exposures. These alternative standards and risk-based capital requirements have been designed to result in capital requirements that are consistent with safety and soundness, while also exhibiting risk sensitivity to the extent possible. Furthermore, these capital requirements are intended to be similar to those generated under the Basel capital framework.
The Standardized Approach NPR would require banking organizations to implement the revisions contained in that NPR on January 1, 2015; however, the proposal would also allow banking organizations to early adopt the Standardized Approach revisions.
Advanced Approaches and Market Risk NPR
The proposals in the Advanced Approaches and Market Risk NPR would amend the advanced approaches rules and integrate the agencies' revised market risk rules into the codified regulatory capital rules.\15\ The Advanced Approaches and Market Risk NPR would incorporate revisions to the Basel capital framework published by the BCBS in a series of documents between 2009 and 2011, including the 2009 Enhancements and Basel III. The proposals would also revise the
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advanced approaches rules to achieve consistency with relevant provisions of the Dodd-Frank Act.
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\15\ The agencies' market risk rules are revised by a final rule published elsewhere today in the Federal Register.
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Significant proposed revisions to the advanced approaches rules include the treatment of counterparty credit risk, the methodology for computing risk-weighted assets for securitization exposures, and risk weights for exposures to central counterparties. For example, the Advanced Approaches and Market Risk NPR proposes capital requirements to account for credit valuation adjustments (CVA), wrong-way risk, cleared derivative and repo-style transactions (similar to proposals in the Standardized Approach NPR) and default fund contributions to central counterparties. The Advanced Approaches and Market Risk NPR would also require banking organizations subject to the advanced approaches rules (advanced approaches banking organizations) to conduct more rigorous credit analysis of securitization exposures and implement certain disclosure requirements.
The Advanced Approaches and Market Risk NPR additionally proposes to remove the ratings-based approach and the internal assessment approach from the current advanced approaches rules' securitization hierarchy consistent with section 939A of the Dodd-Frank Act, and to include in the hierarchy the simplified supervisory formula approach (SSFA) as a methodology to calculate risk-weighted assets for securitization exposures. The SSFA methodology is also proposed in the Standardized Approach NPR and is included in the market risk rule. The agencies also are proposing to remove references to credit ratings from certain defined terms under the advanced approaches rules and replace them with alternative standards of creditworthiness.
Banking organizations currently subject to the advanced approaches rule would continue to be subject to the advanced approaches rules. In addition, the Board proposes to apply the advanced approaches and market risk rules to savings and loan holding companies, and the OCC and FDIC propose to apply the market risk rules to federal and state savings associations that meet the scope of application of those rules, respectively.
For advanced approaches banking organizations, the regulatory capital requirements proposed in this NPR and the Standardized Approach NPR would be ``generally applicable'' capital requirements for purposes of section 171 of the Dodd-Frank Act.\16\
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\16\ See 12 U.S.C. 5371.
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Proposed Structure of the Agencies' Regulatory Capital Framework and Key Provisions of the Three Proposals
In connection with the changes proposed in the three NPRs, the agencies intend to codify their current regulatory capital requirements under applicable statutory authority. Under the revised structure, each agency's capital regulations would include definitions in subpart A. The minimum risk-based and leverage capital requirements and buffers would be contained in Subpart B and the definition of regulatory capital would be included in subpart C. Subpart D would include the risk-weighted asset calculations required of all banking organizations; these proposed risk-weighted asset calculations are described in the Standardized Approach NPR. Subpart E would contain the advanced approaches rules, including changes made pursuant to the advanced approach NPR. The market risk rule would be contained in subpart F. Transition provisions would be in subpart G. The agencies believe that this revision would reduce the burden associated with multiple reference points for applicable capital requirements, promote consistency of capital rules across the banking agencies, and reduce repetition of certain features, such as definitions, across the rules.
Table 1 outlines the proposed structure of the agencies' capital rules, as well as references to the proposed revisions to the PCA rules.
Table 1--Proposed Structure of the Agencies' Capital Rules and Proposed
Revisions to the PCA Framework
------------------------------------------------------------------------
Subpart or regulation Description of content
------------------------------------------------------------------------
Subpart A (included in the Basel III Purpose; applicability;
NPR). reservation of authority;
definitions.
Subpart B (included in the Basel III Minimum capital requirements;
NPR). minimum leverage capital
requirements; capital buffers.
Subpart C (included in the Basel III Regulatory capital: Eligibility
NPR). criteria, minority interest,
adjustments and deductions.
Subpart D (included in the Standardized Calculation of standardized
Approach NPR). total risk-weighted assets for
general credit risk, off-
balance sheet items, over the
counter (OTC) derivative
contracts, cleared
transactions and default fund
contributions, unsettled
transactions, securitization
exposures, and equity
exposures. Description of
credit risk mitigation.
Subpart E (included in the Advanced Calculation of advanced
Approaches and Market Risk NPR). approaches total risk-weighted
assets.
Subpart F (included in the Advanced Calculation of market risk-
Approaches and Market Risk NPR). weighted assets.
Subpart G (included in the Basel III Transition provisions.
NPR).
Subpart D of Regulation H (Board), 12 Revised PCA capital framework,
CFR part 6 (OCC), Subpart H of part including introduction of a
324 (FDIC). common equity tier 1 capital
threshold; revision of the
current PCA thresholds to
incorporate the proposed
regulatory capital minimums;
an update of the definition of
tangible common equity, and,
for advanced approaches
organizations only, a
supplementary leverage ratio.
------------------------------------------------------------------------
While the agencies are mindful that the proposal will result in higher capital requirements and costs associated with changing systems to calculate capital requirements, the agencies believe that the proposed changes are necessary to address identified weaknesses in the agencies' current capital rules; strengthen the banking sector and help reduce risk to the deposit insurance fund and the financial system; and revise the agencies' capital rules
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consistent with the international agreements and U.S. law. Accordingly, this NPR includes transition arrangements that aim to provide banking organizations sufficient time to adjust to the proposed new rules and that are generally consistent with the transitional arrangements of the Basel capital framework.
In December 2010, the BCBS conducted a quantitative impact study of internationally active banks to assess the impact of the capital adequacy standards announced in July 2009 and the Basel III proposal published in December 2009. Overall, the BCBS found that as a result of the proposed changes, banking organizations surveyed will need to hold more capital to meet the new minimum requirements. In addition, quantitative analysis by the Macroeconomic Assessment Group, a working group of the BCBS, found that the stronger Basel capital requirements would lower the probability of banking crises and their associated output losses while having only a modest negative impact on gross domestic product and lending costs, and that the negative impact could be mitigated by phasing the requirements in over time.\17\ The agencies believe that the benefits of these changes to the U.S. financial system, in terms of the reduction of risk to the deposit insurance fund and the financial system, ultimately outweigh the burden on banking organizations of compliance with the new standards.
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\17\ See ``Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements'' (August 2010), available at http://www.bis.org/publ/othp10.pdf; ``An assessment of the long-term economic impact of stronger capital and liquidity requirements'' (August 2010), available at http://www.bis.org/publ/bcbs173.pdf.
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As part of developing this proposal, the agencies conducted an impact analysis using depository institution and bank holding company regulatory reporting data to estimate the change in capital that banking organizations would be required to hold to meet the proposed minimum capital requirements. The impact analysis assumed the proposed definition of capital for purposes of the numerator and the proposed standardized risk-weights for purposes of the denominator, and made stylized assumptions in cases where necessary input data were unavailable from regulatory reports. Based on the agencies' analysis, the vast majority of banking organizations currently would meet the fully phased-in minimum capital requirements as of March 31, 2012, and those organizations that would not meet the proposed minimum requirements should have ample time to adjust their capital levels by the end of the transition period.
Table 2 summarizes key changes proposed in the Basel III and Standardized Approach NPRs and how these changes compare with the agencies' general risk-based and leverage capital rules.
Table 2--Key Provisions of the Basel III and Standardized Approach NPRs
as Compared With the Current Risk-Based and Leverage Capital Rules
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Aspect of proposed requirements Proposed treatment
------------------------------------------------------------------------
Basel III NPR
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Minimum Capital Ratios:
Common equity tier 1 capital ratio Introduces a minimum
(section 10). requirement of 4.5 percent.
Tier 1 capital ratio (section 10).. Increases the minimum
requirement from 4.0 percent
to 6.0 percent.
Total capital ratio (section 10)... Minimum unchanged (remains at
8.0 percent).
Leverage ratio (section 10)........ Modifies the minimum leverage
ratio requirement based on the
new definition of tier 1
capital. Introduces a
supplementary leverage ratio
requirement for advanced
approaches banking
organizations.
Components of Capital and Eligibility Enhances the eligibility
Criteria for Regulatory Capital criteria for regulatory
Instruments (sections 20-22). capital instruments and adds
certain adjustments to and
deductions from regulatory
capital, including increased
deductions for mortgage
servicing assets (MSAs) and
deferred tax assets (DTAs) and
new limits on the inclusion of
minority interests in capital.
Provides that unrealized gains
and losses on all available
for sale (AFS) securities and
gains and losses associated
with certain cash flow hedges
flow through to common equity
tier 1 capital.
Capital Conservation Buffer (section Introduces a capital
11). conservation buffer of common
equity tier 1 capital above
the minimum risk-based capital
requirements, which must be
maintained to avoid
restrictions on capital
distributions and certain
discretionary bonus payments.
Countercyclical Capital Buffer (section Introduces for advanced
11). approaches banking
organizations a mechanism to
increase the capital
conservation buffer during
times of excessive credit
growth.
------------------------------------------------------------------------
Standardized Approach NPR Risk-Weighted Assets
------------------------------------------------------------------------
Credit exposures to: Unchanged.
U.S. government and its agencies...
U.S. government-sponsored entities.
U.S. depository institutions and
credit unions.
U.S. public sector entities, such
as states and municipalities
(section 32).
Credit exposures to: Introduces a more risk-
Foreign sovereigns sensitive treatment using the
Foreign banks Country Risk Classification
Foreign public sector entities (section measure produced by the
32) Organization for Economic
Cooperation and Development.
Corporate exposures (section 32)....... Assigns a 100 percent risk
weight to corporate exposures,
including exposures to
securities firms.
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Residential mortgage exposures (section Introduces a more risk-
32). sensitive treatment based on
several criteria, including
certain loan characteristics
and the loan-to-value-ratio of
the exposure.
High volatility commercial real estate Applies a 150 percent risk
exposures (section 32). weight to certain credit
facilities that finance the
acquisition, development or
construction of real property.
Past due exposures (section 32)........ Applies a 150 percent risk
weight to exposures that are
not sovereign exposures or
residential mortgage exposures
and that are more than 90 days
past due or on nonaccrual.
Securitization exposures (sections 41- Maintains the gross-up approach
45). for securitization exposures.
Replaces the current ratings-
based approach with a formula-
based approach for determining
a securitization exposure's
risk weight based on the
underlying assets and
exposure's relative position
in the securitization's
structure.
Equity exposures (sections 51-53)...... Introduces more risk-sensitive
treatment for equity
exposures.
Off-balance Sheet Items (sections 33).. Revises the measure of the
counterparty credit risk of
repo-style transactions.
Raises the credit conversion
factor for most short-term
commitments from zero percent
to 20 percent.
Derivative Contracts (section 34)...... Removes the 50 percent risk
weight cap for derivative
contracts.
Cleared Transactions (section 35)...... Provides preferential capital
requirements for cleared
derivative and repo-style
transactions (as compared to
requirements for non-cleared
transactions) with central
counterparties that meet
specified standards. Also
requires that a clearing
member of a central
counterparty calculate a
capital requirement for its
default fund contributions to
that central counterparty.
Credit Risk Mitigation (section 36).... Provides a more comprehensive
recognition of collateral and
guarantees.
Disclosure Requirements (sections 61- Introduces qualitative and
63). quantitative disclosure
requirements, including
regarding regulatory capital
instruments, for banking
organizations with total
consolidated assets of $50
billion or more that are not
subject to the separate
advanced approaches disclosure
requirements.
------------------------------------------------------------------------
Under section 165 of the Dodd-Frank Act, the Board is required to establish the enhanced risk-based and leverage capital requirements for bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies that the Financial Stability Oversight Council has designated for supervision by the Board (collectively, covered companies).\18\ The Board published for comment in the Federal Register on January 5, 2012, a proposal regarding the enhanced prudential standards and early remediation requirements. The capital requirements as proposed in the three NPRs would become a key part of the Board's overall approach to enhancing the risk-based capital and leverage standards applicable to covered companies in accordance with section 165 of the Dodd-Frank Act.\19\ In addition, the Board intends to supplement the enhanced risk-based capital and leverage requirements included in its January 2012 proposal with a subsequent proposal to implement a quantitative risk-based capital surcharge for covered companies or a subset of covered companies. The BCBS is calibrating a methodology for assessing an additional capital surcharge for global systemically important banks (G-SIBs).\20\ The Board intends to propose a quantitative risk-based capital surcharge in the United States based on the BCBS approach and consistent with the BCBS's implementation time frame. The forthcoming proposal would contemplate adopting implementing rules in 2014, and requiring G-SIBs to meet the capital surcharges on a phased-in basis from 2016-2019. The OCC also is reviewing the BCBS proposal and is considering whether to propose to apply a similar surcharge for globally significant national banks.
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\18\ See section 165 of the Dodd-Frank Act (12 U.S.C. 5365).
\19\ 77 FR 594 (January 5, 2012).
\20\ See ``Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement'' (July 2011), available at http://www.bis.org/publ/bcbs201.pdf.
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Question 1: The agencies solicit comment on all aspects of the proposals including comment on the specific issues raised throughout this preamble. Commenters are requested to provide a detailed qualitative or quantitative analysis, as appropriate, as well as any relevant data and impact analysis to support their positions.
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Background
In 1989, the agencies established a risk-based capital framework for U.S. national banks, state member and nonmember banks, and bank holding companies with the general risk-based capital rules.\21\ The agencies based the framework on the ``International Convergence of Capital Measurement and Capital Standards'' (Basel I), released by the BCBS in 1988.\22\ The general risk-based capital rules instituted a uniform risk-based capital system that was more risk-sensitive than, and addressed several shortcomings in, the regulatory capital rules in effect prior to 1989. The agencies' capital rules also included a minimum leverage measure of capital to total assets, established in the early 1980s, to place a constraint on the maximum degree to which a banking organization can leverage its capital base.
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\21\ See 54 FR 4186 (January 27, 1989) (Board); 54 FR 4168 (January 27, 1989) (OCC); 54 FR 11500 (March 21, 1989).
\22\ BCBS, ``International Convergence of Capital Measurement and Capital Standards'' (July 1988), available at http://www.bis.org/publ/bcbs04a.htm.
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In 2004, the BCBS introduced a new international capital adequacy framework (Basel II) that was intended
Page 52800
to improve risk measurement and management processes and to better align minimum risk-based capital requirements with risk of the underlying exposures.\23\ Basel II is designed as a ``three pillar'' framework encompassing risk-based capital requirements for credit risk, market risk, and operational risk (Pillar 1); supervisory review of capital adequacy (Pillar 2); and market discipline through enhanced public disclosures (Pillar 3). To calculate risk-based capital requirements for credit risk, Basel II provides three approaches: the standardized approach (Basel II standardized approach), the foundation internal ratings-based approach, and the advanced internal ratings-
based approach. Basel II also introduces an explicit capital requirement for operational risk, which may be calculated using one of three approaches: the basic indicator approach, the standardized approach, or the advanced measurement approaches. On December 7, 2007, the agencies implemented the advanced approaches rules that incorporated Basel II advanced internal ratings-based approach for credit risk and the advanced measurement approaches for operational risk.\24\
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\23\ See ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework'' (June 2006), available at http://www.bis.org/publ/bcbs128.htm.
\24\ See 72 FR 69288 (December 7, 2007).
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To address some of the shortcomings in the international capital standards exposed during the crisis, the BCBS issued the ``2009 Enhancements'' in July 2009 to enhance certain risk-based capital requirements and to encourage stronger management of credit and market risk. The ``2009 Enhancements'' strengthen the risk-based capital requirements for certain securitization exposures to better reflect their risk, increase the credit conversion factors for certain short-
term liquidity facilities, and require that banking organizations conduct more rigorous credit analysis of their exposures.\25\
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\25\ In July 2009, the BCBS also issued ``Revisions to the Basel II Market Risk Framework,'' available at http://www.bis.org/publ/bcbs193.htm. The agencies issued an NPR in January 2011 and a supplement in December 2011, that included provisions to implement the market-risk related provisions. 76 FR 1890 (January 11, 2011); 76 FR 79380 (December 21, 2011).
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In 2010, the BCBS published a comprehensive reform package, Basel III, which is designed to improve the quality and the quantity of regulatory capital and to build additional capacity into the banking system to absorb losses in times of future market and economic stress. Basel III introduces or enhances a number of capital standards, including a stricter definition of regulatory capital, a minimum tier 1 common equity ratio, the addition of a regulatory capital buffer, a leverage ratio, and a disclosure requirement for regulatory capital instruments. Implementing Basel III is the focus of this NPR, as described below. Certain elements of Basel III are also proposed in the Standardized Approach NPR and the Advanced Approaches and Market Risk NPR, as discussed in those notices.
Quality and Quantity of Capital
The recent financial crisis demonstrated that the amount of high-
quality capital held by banks globally was insufficient to absorb losses during that period. In addition, some non-common stock capital instruments included in tier 1 capital did not absorb losses to the extent previously expected. A lack of clear and easily understood disclosures regarding the amount of high-quality regulatory capital and characteristics of regulatory capital instruments, as well as inconsistencies in the definition of capital across jurisdictions, contributed to the difficulties in evaluating a bank's capital strength. To evaluate banks' creditworthiness and overall stability more accurately, market participants increasingly focused on the amount of banks' tangible common equity, the most loss-absorbing form of capital.
The crisis also raised questions about banks' ability to conserve capital during a stressful period or to cancel or defer interest payments on tier 1 capital instruments. For example, in some jurisdictions banks exercised call options on hybrid tier 1 capital instruments, even when it became apparent that the banks' capital positions would suffer as a result.
Consistent with Basel III, the proposals in this NPR would address these deficiencies by imposing, among other requirements, stricter eligibility criteria for regulatory capital instruments and increasing the minimum tier 1 capital ratio from 4 to 6 percent. To help ensure that a banking organization holds truly loss-absorbing capital, the proposal also introduces a minimum common equity tier 1 capital to total risk-weighted assets ratio of 4.5 percent. In addition, the proposals would require that most regulatory deductions from, and adjustments to, regulatory capital (for example, the deductions related to mortgage servicing assets (MSAs) and deferred tax assets (DTAs) be applied to common equity tier 1 capital. The proposals would also eliminate certain features of the current risk-based capital rules, such as adjustments to regulatory capital to neutralize the effect on the capital account of unrealized gains and losses on AFS debt securities. To reduce the double counting of regulatory capital, Basel III also limits investments in the capital of unconsolidated financial institutions that would be included in regulatory capital and requires deduction from capital if a banking organization has exposures to these institutions that go beyond certain percentages of its common equity tier 1 capital. Basel III also revises risk-weights associated with certain items that are subject to deduction from regulatory capital.
Finally, to promote transparency and comparability of regulatory capital across jurisdictions, Basel III introduces public disclosure requirements, including those for regulatory capital instruments, that are designed to help market participants assess and compare the overall stability and resiliency of banking organizations across jurisdictions.
Capital Conservation and Countercyclical Capital Buffer
As noted previously, some banking organizations continued to pay dividends and substantial discretionary bonuses even as their financial condition weakened as a result of the recent financial crisis and economic downturn. Such capital distributions had a significant negative impact on the overall strength of the banking sector. To encourage better capital conservation by banking organizations and to improve the resiliency of the banking system, Basel III and this proposal include limits on capital distributions and discretionary bonuses for banking organizations that do not hold a specified amount of common equity tier 1 capital in addition to the common equity necessary to meet the minimum risk-based capital requirements (capital conservation buffer).
Under this proposal, for advanced approaches banking organizations, the capital conservation buffer may be expanded by up to 2.5 percent of risk-weighted assets if the relevant national authority determines that financial markets in its jurisdiction are experiencing a period of excessive aggregate credit growth that is associated with an increase in system-wide risk. The countercyclical capital buffer is designed to take into account the macro-financial environment in which banking organizations function and help protect the banking system from the systemic vulnerabilities.
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Basel III Leverage Ratio
Since the early 1980s, U.S. banking organizations have been subject to a minimum leverage measure of capital to total assets designed to place a constraint on the maximum degree to which a banking organization can leverage its equity capital base. However, prior to the adoption of Basel III, the Basel capital framework did not include a leverage ratio requirement. It became apparent during the crisis that some banks built up excessive on- and off-balance sheet leverage while continuing to present strong risk-based capital ratios. In many instances, banks were forced by the markets to reduce their leverage and exposures in a manner that increased downward pressure on asset prices and further exacerbated overall losses in the financial sector.
The BCBS introduced a leverage ratio (the Basel III leverage ratio) to discourage the acquisition of excess leverage and to act as a backstop to the risk-based capital requirements. The Basel III leverage ratio is defined as the ratio of tier 1 capital to a combination of on- and off-balance sheet assets; the minimum ratio is 3 percent. The introduction of the leverage requirement in the Basel capital framework should improve the resiliency of the banking system worldwide by providing an ultimate limit on the amount of leverage a banking organization may incur.
As described in section II.B of this preamble, the agencies are proposing to apply the Basel III leverage ratio only to advanced approaches banking organizations as an additional leverage requirement (supplementary leverage ratio). For all banking organizations, the agencies are proposing to update and maintain the current leverage requirement, as revised to reflect the proposed definition of tier 1 capital.
Additional Revisions to the Basel Capital Framework
To facilitate the implementation of Basel III, the BCBS issued a series of releases in 2011 in the form of frequently asked questions.\26\ In addition, in 2011, the BCBS proposed to revise the treatment of counterparty credit risk and specific capital requirements for derivative and repo-style transaction exposures to central counterparties (CCP) to address concerns related to the interconnectedness and complexity of the derivatives markets.\27\ The proposed revisions provide incentives for banking organizations to clear derivatives and repo-style transactions through qualifying central counterparties (QCCP) to help promote market transparency and improve the ability of market participants to unwind their positions quickly and efficiently. The agencies have incorporated these provisions in the Standardized Approach NPR and the Advanced Approaches and Market Risk NPR.
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\26\ See, e.g., ``Basel III FAQs answered by the Basel Committee'' (July, October, December 2011), available at http://www.bis.org/list/press_releases/index.htm.
\27\ The BCBS left unchanged the treatment of exposures to CCPs for settlement of cash transactions such as equities, fixed income, spot foreign exchange and spot commodities. See ``Capitalization of Banking Organization Exposures to Central Counterparties'' (December 2010, revised November 2011) (CCP consultative release), available at http://www.bis.org/publ/bcbs206.pdf.
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-
-
Minimum Regulatory Capital Ratios, Additional Capital Requirements, and Overall Capital Adequacy
-
Minimum Risk-Based Capital Ratios and Other Regulatory Capital Provisions
Consistent with Basel III, the agencies are proposing to require that banking organizations comply with the following minimum capital ratios: (1) A common equity tier 1 capital ratio of 4.5 percent; (2) a tier 1 capital ratio of 6 percent; (3) a total capital ratio of 8 percent; and (4) a tier 1 capital to average consolidated assets of 4 percent and, for advanced approaches banking organizations only, an additional requirement tier 1 capital to total leverage exposure ratio of 3 percent.\28\ As noted above, the common equity tier 1 capital ratio would be a new minimum requirement. It is designed to ensure that banking organizations hold high-quality regulatory capital that is available to absorb losses. The proposed capital ratios would apply to a banking organization on a consolidated basis.
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\28\ Advanced approaches banking organizations should refer to section 10 of the proposed rule text and to the Advanced Approaches and Market Risk NPR for a more detailed discussion of the applicable minimum capital ratios.
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Under this NPR, tier 1 capital would equal the sum of common equity tier 1 capital and additional tier 1 capital. Total capital would consist of three capital components: common equity tier 1, additional tier 1, and tier 2 capital. The definitions of each of these categories of regulatory capital are discussed below in section III of this preamble. To align the proposed regulatory capital requirements with the agencies' current PCA rules, this NPR also would incorporate the proposed revisions to the minimum capital requirements into the agencies' PCA framework, as further discussed in section II.E of this preamble.
In addition, a banking organization would be subject to a capital conservation buffer in excess of the risk-based capital requirements that would impose limitations on its capital distributions and certain discretionary bonuses, as described in sections II.C and II.D of this preamble. Because the regulatory capital buffer would apply in addition to the regulatory minimum requirements, the restrictions on capital distributions and discretionary bonus payments associated with the regulatory capital buffer would not give rise to any applicable restrictions under section 38 of the Federal Deposit Insurance Act and the agencies' implementing PCA rules, which apply when an insured institution's capital levels drop below certain regulatory thresholds.\29\
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\29\ 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165 (OCC); 12 CFR 208.45 (Board); 12 CFR 325.105, 12 CFR 390.455 (FDIC).
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As a prudential matter, the agencies have a long-established policy that banking organizations should hold capital commensurate with the level and nature of the risks to which they are exposed, which may entail holding capital significantly above the minimum requirements, depending on the nature of the banking organization's activities and risk profile. Section II.F of this preamble describes the requirement for overall capital adequacy of banking organizations and the supervisory assessment of an entity's capital adequacy.
Furthermore, consistent with the agencies' authority under the current capital rules, section 10(d) of the proposal includes a reservation of authority that would allow a banking organization's primary federal supervisor to require a banking organization to hold a different amount of regulatory capital than otherwise would be required under the proposal, if the supervisor determines that the regulatory capital held by the banking organization is not commensurate with a banking organization's credit, market, operational, or other risks.
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Leverage Ratio
1. Minimum Tier 1 Leverage Ratio
Under the proposal, all banking organizations would remain subject to a 4 percent tier 1 leverage ratio, which would be calculated by dividing an organization's tier 1 capital by its average consolidated assets, minus amounts deducted from tier 1 capital. The numerator for this ratio would be a banking organization's tier 1 capital as defined in section 2 of the proposal. The denominator would be its average total on-balance sheet assets as reported on
Page 52802
the banking organization's regulatory report, net of amounts deducted from tier 1 capital.\30\
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\30\ Specifically, to determine average total on-balance sheet assets, bank holding companies and savings and loan holding companies would use the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C); national banks, state member banks, state nonmember banks, and savings associations would use On-balance sheet Reports of Condition and Income (Call Report).
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In this NPR, the agencies are proposing to remove the tier 1 leverage ratio exception for banking organizations with a supervisory composite rating of 1 that exists under the current leverage rules.\31\ This exception provides for a 3 percent tier 1 leverage measure for such institutions.\32\ The current exception would also be eliminated for bank holding companies with a supervisory composite rating of 1 and subject to the market risk rule. Accordingly, as proposed, all banking organizations would be subject to a 4 percent minimum tier 1 leverage ratio.
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\31\ Under the agencies' current rules, the minimum ratio of tier 1 capital to total assets for strong banking organizations (that is, rated composite ``1'' under the CAMELS system for state nonmember and national banks, ``1'' under UFIRS for state member banks, and ``1'' under RFI/CD for bank holding companies) not experiencing or anticipating significant growth is 3 percent. See 12 CFR 3.6, 12 CFR 167.8 (OCC); 12 CFR 208.43, 12 CFR part 225, Appendix D (Board); 12 CFR 325.3, 12 CFR 390.467 (FDIC).
\32\ See 12 CFR 3.6 (OCC); 12 CFR part 208, Appendix B and 12 CFR part 225, Appendix D (Board); and 12 CFR part 325.3 (FDIC).
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2. Supplementary Leverage Ratio for Advanced Approaches Banking Organizations
Advanced approaches banking organizations would also be required to maintain the supplementary leverage ratio of tier 1 capital to total leverage exposure of 3 percent. The supplementary leverage ratio incorporates the Basel III definition of tier 1 capital as the numerator and uses a broader exposure base, including certain off-
balance sheet exposures (total leverage exposure), for the denominator.
The agencies believe that the supplementary leverage ratio is most appropriate for advanced approaches banking organizations because these banking organizations tend to have more significant amounts of off-
balance sheet exposures that are not captured by the current leverage ratio. Applying the supplementary leverage ratio rather than the current tier 1 leverage ratio to other banking organizations would increase the complexity of their leverage ratio calculation, and in many cases could result in a reduced leverage capital requirement. The agencies believe that, along with the 5 percent ``well-capitalized'' PCA leverage threshold described in section II.E of this preamble, the proposed leverage requirements are, for the majority of banking organizations that are not subject to the advanced approaches rule, both more conservative and simpler than the supplementary leverage ratio.
An advanced approaches banking organization would calculate the supplementary leverage ratio, including each of the ratio components, at the end of every month and then calculate a quarterly leverage ratio as the simple arithmetic mean of the three monthly leverage ratios over the reporting quarter. As proposed, total leverage exposure would equal the sum of the following exposures:
(1) The balance sheet carrying value of all of the banking organization's on-balance sheet assets minus amounts deducted from tier 1 capital;
(2) The potential future exposure amount for each derivative contract to which the banking organization is a counterparty (or each single-product netting set for such transactions) determined in accordance with section 34 of the proposal;
(3) 10 percent of the notional amount of unconditionally cancellable commitments made by the banking organization; and
(4) The notional amount of all other off-balance sheet exposures of the banking organization (excluding securities lending, securities borrowing, reverse repurchase transactions, derivatives and unconditionally cancellable commitments).
The BCBS continues to assess the Basel III leverage ratio, including through supervisory monitoring during a parallel run period in which the proposed design and calibration of the Basel III leverage ratio will be evaluated, and the impact of any differences in national accounting frameworks material to the definition of the leverage ratio will be considered. A final decision by the BCBS on the measure of exposure for certain transactions and calibration of the leverage ratio is not expected until closer to 2018.
Due to these ongoing observations and international discussions on the most appropriate measurement of exposure for repo-style transactions, the agencies are proposing to maintain the current on-
balance sheet measurement of repo-style transactions for purposes of calculating total leverage exposure. Under this NPR, a banking organization would measure exposure as the value of repo-style transactions (including repurchase agreements, securities lending and borrowing transactions, and reverse repos) carried as an asset on the balance sheet, consistent with the measure of exposure used in the agencies' current leverage measure. The agencies are participating in international discussions and ongoing quantitative analysis of the exposure measure for repo-style transactions, and will consider modifying in the future the measurement of repo-style transactions in the calculation of total leverage exposure to reflect results of these international efforts.
The agencies are proposing to apply the supplementary leverage ratio as a requirement for advanced approaches banking organizations beginning in 2018, consistent with Basel III. However, beginning on January 1, 2015, advanced approaches banking organizations would be required to calculate and report their supplementary leverage ratio.
Question 2: The agencies solicit comments on all aspects of this proposal, including regulatory burden and competitive impact. Should all banking organizations, banking organizations with total consolidated assets above a certain threshold, or banking organizations with certain risk profiles (for example, concentrations in derivatives) be required to comply with the supplementary leverage ratio, and why? What are the advantages and disadvantages of the application of two leverage ratio requirements to advanced approaches banking organizations?
Question 3: What modifications to the proposed supplementary leverage ratio should be considered and why? Are there alternative measures of exposure for repo-style transactions that should be considered by the agencies? What alternative measures should be used in cases in which the use of the current exposure method may overstate leverage (for example, in certain cases of calculating derivative exposure) or understate leverage (for example, in the case of credit protection sold)? The agencies request data and supplementary analysis that would support consideration of such alternative measures.
Question 4: Given differences in international accounting, particularly the difference in how International Financial Reporting Standards and GAAP treat securities for securities lending, the agencies solicit comments on the adjustments that should be contemplated to mitigate or offset such differences.
Question 5: The agencies solicit comments on the advantages and disadvantages of including off-balance sheet exposures in the supplementary leverage ratio. The agencies seek
Page 52803
detailed comments, with supporting data, on the proposed method of calculating exposures and estimates of burden, particularly for off-
balance sheet exposures.
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Capital Conservation Buffer
Consistent with Basel III, the proposal incorporates a capital conservation buffer that is designed to bolster the resilience of banking organizations throughout financial cycles. The buffer would provide incentives for banking organizations to hold sufficient capital to reduce the risk that their capital levels would fall below their minimum requirements during stressful conditions. The capital conservation buffer would be composed of common equity tier 1 capital and would be separate from the minimum risk-based capital requirements.
As proposed, a banking organization's capital conservation buffer would be the lowest of the following measures: (1) The banking organization's common equity tier 1 capital ratio minus its minimum common equity tier 1 capital ratio; (2) the banking organization's tier 1 capital ratio minus its minimum tier 1 capital ratio; and (3) the banking organization's total capital ratio minus its minimum total capital ratio.\33\ If the banking organization's common equity tier 1, tier 1 or total capital ratio were less than or equal to its minimum common equity tier 1, tier 1 or total capital ratio, respectively, the banking organization's capital conservation buffer would be zero. For example, if a banking organization's common equity tier 1, tier 1, and total capital ratios are 7.5, 9.0, and 10 percent, respectively, and the banking organization's minimum common equity tier 1, tier 1, and total capital ratio requirements are 4.5, 6, and 8, respectively, the banking organization's applicable capital conservation buffer would be 2 percent for purposes of establishing a 60 percent maximum payout ratio under table 3.
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\33\ For purposes of the capital conservation buffer calculations, a banking organization would be required to use standardized total risk weighted assets if it is a standardized approach banking organization and it would be required to use advanced total risk weighted assets if it is an advanced approaches banking organization.
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Under the proposal, a banking organization would need to hold a capital conservation buffer in an amount greater than 2.5 percent of total risk-weighted assets (plus, for an advanced approaches banking organization, 100 percent of any applicable countercyclical capital buffer amount) to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers, as defined under the proposal. The maximum payout ratio would be the percentage of eligible retained income that a banking organization would be allowed to pay out in the form of capital distributions and certain discretionary bonus payments during the current calendar quarter and would be determined by the amount of the capital conservation buffer held by the banking organization during the previous calendar quarter. Under the proposal, eligible retained income would be defined as a banking organization's net income (as reported in the banking organization's quarterly regulatory reports) for the four calendar quarters preceding the current calendar quarter, net of any capital distributions, certain discretionary bonus payments, and associated tax effects not already reflected in net income.
A banking organization's maximum payout amount for the current calendar quarter would be equal to the banking organization's eligible retained income, multiplied by the applicable maximum payout ratio in accordance with table 3. A banking organization with a capital conservation buffer that is greater than 2.5 percent (plus, for an advanced approaches banking organization, 100 percent of any applicable countercyclical buffer) would not be subject to a maximum payout amount as a result of the application of this provision (but the agencies' authority to restrict capital distributions for other reasons remains undiminished).
In a scenario where a banking organization's risk-based capital ratios fall below its minimum risk-based capital ratios plus 2.5 percent of total risk-weighted assets, the maximum payout ratio would also decline, in accordance with table 3. A banking organization that becomes subject to a maximum payout ratio would remain subject to restrictions on capital distributions and certain discretionary bonus payments until it is able to build up its capital conservation buffer through retained earnings, raising additional capital, or reducing its risk-weighted assets. In addition, as a general matter, a banking organization would not be able to make capital distributions or certain discretionary bonus payments during the current calendar quarter if the banking organization's eligible retained income is negative and its capital conservation buffer is less than 2.5 percent as of the end of the previous quarter.
As illustrated in table 3, the capital conservation buffer is divided into equal quartiles, each associated with increasingly stringent limitations on capital distributions and discretionary bonus payments to executive officers as the capital conservation buffer falls closer to zero percent. As described in more detail in the next section, each quartile, associated with a certain maximum payout ratio in table 3, would expand proportionately for advanced approaches banking organizations when the countercyclical capital buffer amount is greater than zero.
The agencies propose to define a capital distribution as: (1) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means; (2) a reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means; (3) a dividend declaration on any tier 1 capital instrument; (4) a dividend declaration or interest payment on any tier 2 capital instrument if such dividend declaration or interest payment may be temporarily or permanently suspended at the discretion of the banking organization; or (5) any similar transaction that the agencies determine to be in substance a distribution of capital. The proposed definition is similar in effect to the definition of capital distribution in the Board's rule requiring annual capital plan submissions for bank holding companies with $50 billion or more in total assets.\34\
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\34\ See 12 CFR 225.8.
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The agencies propose to define a discretionary bonus payment as a payment made to an executive officer of a banking organization or an individual with commensurate responsibilities within the organization, such as a head of a business line, where: (1) The banking organization retains discretion as to the fact of the payment and as to the amount of the payment until the discretionary bonus is paid to the executive officer; (2) the amount paid is determined by the banking organization without prior promise to, or agreement with, the executive officer; and (3) the executive officer has no contract right, express or implied, to the bonus payment.
An executive officer would be defined as a person who holds the title or, without regard to title, salary, or compensation, performs the function of one or more of the following positions: president, chief executive officer, executive chairman, chief operating officer, chief financial officer, chief investment officer, chief legal officer, chief lending officer, chief risk officer, or head of a major business line, and other staff that the board of directors of the banking organization deems to have
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equivalent responsibility.\35\ The purpose of limiting restrictions on discretionary bonus payments to executive officers is to focus these measures on the individuals within a banking organization who could expose the organization to the greatest risk. The agencies note that a banking organization may otherwise be subject to limitations on capital distributions under other laws or regulations.\36\
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\35\ See 76 FR 21170 (April 14, 2011).
\36\ See 12 U.S.C. 56, 60, and 1831o(d)(1); 12 CFR 1467a(f); see also 12 CFR 225.8.
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Table 3 shows the relationship between the capital conservation buffer and the maximum payout ratio. The maximum dollar amount that a banking organization would be permitted to pay out in the form of capital distributions or discretionary bonus payments during the current calendar quarter would be equal to the maximum payout ratio multiplied by the banking organization's eligible retained income. The calculation of the maximum payout amount would be made as of the last day of the previous calendar quarter and any resulting restrictions would apply during the current calendar quarter.
Table 3--Capital Conservation Buffer and Maximum Payout Ratio \37\
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Capital conservation buffer (as a percentage Maximum payout ratio (as a percentage of eligible retained
of total risk-weighted assets) income)
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Greater than 2.5 percent....................... No payout ratio limitation applies.
Less than or equal to 2.5 percent, and greater 60 percent.
than 1.875 percent.
Less than or equal to 1.875 percent, and 40 percent.
greater than 1.25 percent.
Less than or equal to 1.25 percent, and greater 20 percent.
than 0.625 percent.
Less than or equal to 0.625 percent............ 0 percent.
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\37\ Calculations in this table are based on the assumption that the countercyclical buffer amount is zero.
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For example, a banking organization with a capital conservation buffer between 1.875 and 2.5 percent (for example, a common equity tier 1 capital ratio of 6.5 percent, a tier 1 capital ratio of 8 percent, or a total capital ratio of 10 percent) as of the end of the previous calendar quarter would be allowed to distribute no more than 60 percent of its eligible retained income in the form of capital distributions or discretionary bonus payments during the current calendar quarter. That is, the banking organization would need to conserve at least 40 percent of its eligible retained income during the current calendar quarter.
A banking organization with a capital conservation buffer of less than or equal to 0.625 percent (for example, a banking organization with a common equity tier 1 capital ratio of 5.0 percent, a tier 1 capital ratio of 6.5 percent, or a total capital ratio of 8.5 percent) as of the end of the previous calendar quarter would not be permitted to make any capital distributions or discretionary bonus payments during the current calendar quarter.
In contrast, a banking organization with a capital conservation buffer of more than 2.5 percent (for example, a banking organization with a common equity tier 1 capital ratio of 7.5 percent, a tier 1 capital ratio of 9.0 percent, and a total capital ratio of 11.0 percent) as of the end of the previous calendar quarter would not be subject to restrictions on the amount of capital distributions and discretionary bonus payments that could be made during the current calendar quarter. Consistent with the agencies' current practice with respect to regulatory restrictions on dividend payments and other capital distributions, each agency would retain its authority to permit a banking organization supervised by that agency to make a capital distribution or a discretionary bonus payment, if the agency determines that the capital distribution or discretionary bonus payment would not be contrary to the purposes of the capital conservation buffer or the safety and soundness of the banking institution. In making such a determination, the agency would consider the nature and extent of the request and the particular circumstances giving rise to the request.
The agencies are proposing that banking organizations that are not subject to the advanced approaches rule would calculate their capital conservation buffer using total risk-weighted assets as calculated by all banking organizations, and that banking organizations subject to the advanced approaches rule would calculate the buffer using advanced approaches total risk-weighted assets. Under the proposed approach, internationally active U.S. banking organizations using the advanced approaches would face capital conservation buffers determined in a manner comparable to those of their foreign competitors. Depending on the difference in risk-weighted assets calculated under the two approaches, capital distributions and bonus restrictions applied to an advanced approaches banking organization could be more or less stringent than if its capital conservation buffer were based on risk-
weighted assets as calculated by all banking organizations.
Question 6: The agencies seek comment on all aspects of the proposed capital buffer framework, including issues of domestic and international competitive equity, and the adequacy of the proposed buffer to provide incentives for banking organizations to hold sufficient capital to withstand a stress event and still remain above regulatory minimum capital levels. What are the advantages and disadvantages of requiring advanced approaches banking organizations to calculate their capital buffers using total risk-weighted assets that are the greater of standardized total risk-weighted assets and advanced total risk-weighted assets? What is the potential effect of the proposal on banking organizations' processes for planning and executing capital distributions and utilization of discretionary bonus payments to retain key staff? What modifications, if any, should the agencies consider?
Question 7: The agencies solicit comments on the scope of the definition of executive officer for purposes of the limitations on discretionary bonus payments under the proposal. Is the scope too broad or too narrow? Should other categories of employees who could expose the institution to material risk be included within the scope of employees whose discretionary bonuses could be subject to the restriction? If so, how should such a class of employees be defined? What are the potential implications for a banking organization of restricting discretionary bonus payments for executive officers or for broader classes of employees? Please
Page 52805
provide data and analysis to support your views.
Question 8: What are the pros and cons of the proposed definition for eligible retained income in the context of the proposed quarterly limitations on capital distributions and discretionary bonus payments?
Question 9: What would be the impact, if any, in terms of the cost of raising new capital, of not allowing a banking organization that is subject to a maximum payout ratio of zero percent to make a penny dividend to common stockholders? Please provide data to support any responses.
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Countercyclical Capital Buffer
Under Basel III, the countercyclical capital buffer is designed to take into account the macro-financial environment in which banking organizations function and to protect the banking system from the systemic vulnerabilities that may build-up during periods of excessive credit growth, then potentially unwind in a disorderly way that may cause disruptions to financial institutions and ultimately economic activity. As proposed and consistent with Basel III, the countercyclical capital buffer would serve as an extension of the capital conservation buffer.
The agencies propose to apply the countercyclical capital buffer only to advanced approaches banking organizations, because large banking organizations generally are more interconnected with other institutions in the financial system. Therefore, the marginal benefits to financial stability from a countercyclical buffer function should be greater with respect to such institutions. Application of the countercyclical buffer to advanced approaches banking organizations also reflects the fact that making cyclical adjustments to capital requirements is costly for institutions to implement and the marginal costs are higher for smaller institutions.
The countercyclical capital buffer aims to protect the banking system and reduce systemic vulnerabilities in two ways. First, the accumulation of a capital buffer during an expansionary phase could increase the resilience of the banking system to declines in asset prices and consequent losses that may occur when the credit conditions weaken. Specifically, when the credit cycle turns following a period of excessive credit growth, accumulated capital buffers would act to absorb the above-normal losses that a banking organization would likely face. Consequently, even after these losses are realized, banking organizations would remain healthy and able to access funding, meet obligations, and continue to serve as credit intermediaries. Countercyclical capital buffers may also reduce systemic vulnerabilities and protect the banking system by mitigating excessive credit growth and increases in asset prices that are not supported by fundamental factors. By increasing the amount of capital required for further credit extensions, countercyclical capital buffers may limit excessive credit extension.
Consistent with Basel III, the agencies propose a countercyclical capital buffer that would augment the capital conservation buffer under certain circumstances, upon a determination by the agencies.
The countercyclical capital buffer amount in the U.S. would initially be set to zero, but it could increase if the agencies determine that there is excessive credit in the markets, possibly leading to subsequent wide-spread market failures.\38\ The agencies expect to consider a range of macroeconomic, financial, and supervisory information indicating an increase in systemic risk including, but not limited to, the ratio of credit to gross domestic product, a variety of asset prices, other factors indicative of relative credit and liquidity expansion or contraction, funding spreads, credit condition surveys, indices based on credit default swap spreads, options implied volatility, and measures of systemic risk. The agencies anticipate making such determinations jointly. Because the countercyclical capital buffer amount would be linked to the condition of the overall U.S. financial system and not the characteristics of an individual banking organization, the agencies expect that the countercyclical capital buffer amount would be the same at the depository institution and holding company levels.
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\38\ The proposed operation of the countercyclical capital buffer is also consistent with section 616(c) of the Dodd-Frank Act. See 12 U.S.C. 3907(a)(1).
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To provide banking organizations with time to adjust to any changes, the agencies expect to announce an increase in the countercyclical capital buffer amount up to12 months prior to implementation. If the agencies determine that a more immediate implementation would be necessary based on economic conditions, the agencies may announce implementation of a countercyclical capital buffer in less than 12 months. The agencies would make their determination and announcement in accordance with any applicable legal requirements. The agencies would follow the same procedures in adjusting the countercyclical capital buffer applicable for exposures located in foreign jurisdictions.
A decrease in the countercyclical capital buffer amount would become effective the day following announcement or the earliest date permitted by applicable law or regulation. In addition, the countercyclical capital buffer amount would return to zero percent 12 months after its effective date, unless an agency announces a decision to maintain the adjusted countercyclical capital buffer amount or adjust it again before the expiration of the 12-month period.
In the United States, the countercyclical capital buffer would augment the capital conservation buffer by up to 2.5 percent of a banking organization's total risk-weighted assets. For other jurisdictions, an advanced approaches banking organization would determine its countercyclical capital buffer amount by calculating the weighted average of the countercyclical capital buffer amounts established for the national jurisdictions where the banking organization has private sector credit exposures, as defined below in this section. The contributing weight assigned to a jurisdiction's countercyclical capital buffer amount would be calculated by dividing the total risk-weighted assets for the banking organization's private sector credit exposures located in the jurisdiction by the total risk-
weighted assets for all of the banking organization's private sector credit exposures.\39\
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\39\ As described in the discussion of the capital conservation buffer, an advanced approaches banking organization would calculate its total risk-weighted assets using the advanced approaches rules for purposes of determining the capital conservation buffer amount. An advanced approaches banking organizations may also be subject to the capital plan rule and its stress testing provisions, which may have a separate effect on a banking organization's capital distributions. See 12 CFR 225.8.
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As proposed, a private sector credit exposure would be defined as an exposure to a company or an individual that is included in credit risk-weighted assets, not including an exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, a multilateral development bank (MDB), a public sector entity (PSE), or a government sponsored entity (GSE).
The geographic location of a private sector credit exposure (that is not a securitization exposure) would be the national jurisdiction where the borrower is located (that is, where the borrower
Page 52806
is incorporated, chartered, or similarly established or, if it is an individual, where the borrower resides). If, however, the decision to issue the private sector credit exposure is based primarily on the creditworthiness of the protection provider, the location of the non-
securitization exposure would be the location of the protection provider. The location of a securitization exposure would be the location of the borrowers of the underlying exposures. If the borrowers on the underlying exposures are located in multiple jurisdictions, the location of a securitization exposure would be the location of the borrowers of the underlying exposures in one jurisdiction with the largest proportion of the aggregate unpaid principal balance of the underlying exposures.
Table 4 illustrates how an advanced approaches banking organization would calculate the weighted average countercyclical capital buffer. In the following example, the countercyclical capital buffer established in the various jurisdictions in which the banking organization has private sector credit exposures is reported in column A. Column B contains the banking organization's risk-weighted asset amounts for the private sector credit exposures in each jurisdiction. Column C shows the contributing weight for each countercyclical buffer amount, which is calculated by dividing each of the rows in column B by the total for column B. Column D shows the contributing weight applied to each countercyclical capital buffer amount, calculated as the product of the corresponding contributing weight (column C) and the countercyclical capital buffer set by each jurisdiction's national supervisor (column A). The sum of the rows in column D shows the banking organization's weighted average countercyclical capital buffer, which is 1.4 percent of risk-weighted assets.
Table 4--Example of Weighted Average Countercyclical Capital Buffer Calculation for Advanced Approaches Banking Organizations
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(A) (B) (C) (D)
Countercyclical buffer Banking organization's Contributing weight Contributing weight
amount set by national risk-weighted assets (column B/column B applied to each
supervisor (RWA) for private total) countercyclical capital
(percent) sector credit exposures buffer amount
($b) (column A * column C)
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Non-U.S. jurisdiction 1............................. 2.0 250 0.29 0.6
Non-U.S. jurisdiction 2............................. 1.5 100 0.12 0.2
U.S................................................. 1 500 0.59 0.6
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Total........................................... ....................... 850 1.00 1.4
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A banking organization's maximum payout ratio for purposes of its capital conservation buffer would vary depending on its countercyclical buffer amount. For instance, if its countercyclical capital buffer amount is equal to zero percent of total risk-weighted assets, the banking organization that held only U.S. credit exposures would need to hold a combined capital conservation buffer of at least 2.5 percent to avoid restrictions on its capital distributions and certain discretionary bonus payments. However, if its countercyclical capital buffer amount is equal to 2.5 percent of total risk-weighted assets, the banking organization whose assets consist of only U.S. credit exposures would need to hold a combined capital conservation and countercyclical buffer of at least 5 percent to avoid restrictions on its capital distributions and discretionary bonus payments.
Question 10: The agencies solicit comment on potential inputs used in determining whether excessive credit growth is occurring and whether a formula-based approach might be useful in determining the appropriate level of the countercyclical capital buffer. What additional factors, if any, should the agencies consider when determining the countercyclical capital buffer amount? What are the pros and cons of using a formula-based approach and what factors might be incorporated in the formula to determine the level of the countercyclical capital buffer amount?
Question 11: The agencies recognize that a banking organization's risk-weighted assets for private sector credit exposures should include relevant covered positions under the market risk capital rule and solicit comment regarding appropriate methodologies for incorporating these positions; specifically, what position-specific or portfolio-
specific methodologies should be used for covered positions with specific risk and particularly those for which a banking organization uses models to measure specific risk?
Question 12: The agencies solicit comment on the appropriateness of the proposed 12-month prior notification period to adjust to a newly implemented or adjusted countercyclical capital buffer amount.
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Prompt Corrective Action Requirements
Section 38 of the Federal Deposit Insurance Act directs the federal banking agencies to take prompt corrective action (PCA) to resolve the problems of insured depository institutions at the least cost to the Deposit Insurance Fund.\40\ To facilitate this purpose, the agencies have established five regulatory capital categories in the current PCA regulations that include capital thresholds for the leverage ratio, tier 1 risk-based capital ratio, and the total risk-based capital ratio for insured depository institutions. These five PCA categories under section 38 of the Act and the PCA regulations are: ``Well capitalized,'' ``adequately capitalized,'' ``undercapitalized,'' ``significantly undercapitalized,'' and ``critically undercapitalized.'' Insured depository institutions that fail to meet these capital measures are subject to increasingly strict limits on their activities, including their ability to make capital distributions, pay management fees, grow their balance sheet, and take other actions.\41\ Insured depository institutions are expected to be closed within 90 days of becoming ``critically undercapitalized,'' unless their primary federal regulator takes such other action as the agency determines, with the concurrence of the
Page 52807
FDIC, would better achieve the purpose of PCA.\42\
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\40\ 12 U.S.C. 1831o.
\41\ 12 U.S.C. 1831o(e)-(i). See 12 CFR part 6 (OCC); 12 CFR part 208, subpart D (Board); 12 CFR part 325, subpart B (FDIC).
\42\ 12 U.S.C. 1831o(g)(3).
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All insured depository institutions, regardless of total asset size or foreign exposure, are required to compute PCA capital levels using the agencies' general risk-based capital rules, as supplemented by the market risk capital rule. Under this NPR, the agencies are proposing to augment the PCA capital categories by introducing a common equity tier 1 capital measure for four of the five PCA categories (excluding the critically undercapitalized PCA category).\43\ In addition, the agencies are proposing to amend the current PCA leverage measure to include in the leverage measure for the ``adequately capitalized'' and ``undercapitalized'' capital categories for advanced approaches depository institutions an additional leverage ratio based on the leverage ratio in Basel III. All banking organizations would continue to be subject to leverage measure thresholds using the current tier 1, or ``standard'' leverage ratio in the form of tier 1 capital to total assets. In addition, the agencies are proposing to revise the three current capital measures for the five PCA categories to reflect the changes to the definition of capital, as provided in the proposed revisions to the agencies' PCA regulations.
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\43\ See 12 U.S.C. 1831o(c)(1)(B)(i).
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The proposed changes to the current minimum PCA thresholds and the introduction of a new common equity tier 1 capital measure would take effect January 1, 2015. Consistent with transition provisions in Basel III, the proposed amendments to the current PCA leverage measure for advanced approaches depository institutions would take effect on January 1, 2018. In contrast, changes to the definitions of the individual capital components that are used to calculate the relevant capital measures under PCA would coincide with the transition arrangements discussed in section V of the preamble, or with the transition provisions of other capital regulations, as applicable. Thus, the changes to these definitions, including any deductions or modifications to capital, automatically would flow through to the definitions in the PCA framework.
Table 5 sets forth the current risk-based and leverage capital thresholds for each of the PCA capital categories for insured depository institutions.
Table 5--Current PCA Levels
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Total Risk- Leverage
Based Capital Tier 1 RBC measure (tier 1
Requirement (RBC) measure measure (tier 1 (standard) PCA requirements
(total RBC RBC ratio-- leverage ratio--
ratio--percent) percent) percent)
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Well Capitalized.................. >=10 >=6 >=5 None.
Adequately Capitalized............ >=8 >=4 \44\ >=4 (or May limit nonbanking
>=3) activities at DI's FHC
and includes limits on
brokered deposits.
Undercapitalized.................. =10 >=8 >=6.5 >=5 Unchanged from current rules *.
Adequately Capitalized.......................... >=8 >=6 >=4.5 >=4 Do.
Undercapitalized................................ =10 >=8 >=6.5 >=5 Not applicable........ Unchanged from current
rule *.
Adequately Capitalized.............. >=8 >=6 >=4.5 >=4 >=3................... Do.
Undercapitalized.................... Covered small banking organizations would not be subject to the proposed enhanced disclosure requirements.
Covered small banking organizations would not be subject to possible increases in the capital conservation buffer through the countercyclical buffer.
Covered small banking organizations would not be subject to the new supplementary leverage ratio.
Covered small institutions that have issued capital instruments to the U.S. Treasury through the Small Business Lending Fund (a program for banking organizations with less than $10 billion in consolidated assets) or under the Emergency Economic Stabilization Act of 2008 prior to October 4, 2010, would be able to continue to include those
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instruments in tier 1 or tier 2 capital (as applicable) even if not all criteria for inclusion under the proposed requirements are met.
Covered small banking organizations that issued capital instruments that could no longer be included in tier 1 capital or tier 2 capital under the proposed requirements would have a longer transition period for removing the instruments from tier 1 or tier 2 capital (as applicable).
The Board welcomes comment on any significant alternatives to the proposed requirements applicable to covered small banking organizations that would minimize their impact on those entities, as well as on all other aspects of its analysis. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period.
OCC
In accordance with section 3(a) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA), the OCC is publishing this summary of its Initial Regulatory Flexibility Analysis (IRFA) for this NPR. The RFA requires an agency to publish in the Federal Register its IRFA or a summary of its IRFA at the time of the publication of its general notice of proposed rulemaking \99\ or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities.\100\ For its IRFA, the OCC analyzed the potential economic impact of this NPR on the small entities that it regulates.
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\99\ 5 U.S.C. 603(a).
\100\ 5 U.S.C. 605(b).
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The OCC welcomes comment on all aspects of the summary of its IRFA. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period.
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Reasons Why the Proposed Rule Is Being Considered by the Agencies; Statement of the Objectives of the Proposed Rule; and Legal Basis
As discussed in the Supplementary Information section above, the agencies are proposing to revise their capital requirements to promote safe and sound banking practices, implement Basel III, and harmonize capital requirements across charter type. Federal law authorizes each of the agencies to prescribe capital standards for the banking organizations that it regulates.\101\
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\101\ See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C. 1831o(c)(1); 12 U.S.C. 1844; 12 U.S.C. 3907; and 12 U.S.C. 5371.
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Small Entities Affected by the Proposal
Under regulations issued by the Small Business Administration,\102\ a small entity includes a depository institution or bank holding company with total assets of $175 million or less (a small banking organization). As of March 31, 2012, there were approximately 599 small national banks and 284 small federally chartered savings associations.
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\102\ See 13 CFR 121.201.
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Projected Reporting, Recordkeeping, and Other Compliance Requirements
This NPR includes changes to the general risk-based capital requirements that affect small banking organizations. Under this NPR, the changes to minimum capital requirements that would impact small national banks and federal savings associations include a more conservative definition of regulatory capital, a new common equity tier 1 capital ratio, a higher minimum tier 1 capital ratio, new thresholds for prompt corrective action purposes, and a new capital conservation buffer. To estimate the impact of this NPR on national banks' and federal savings associations' capital needs, the OCC estimated the amount of capital the banks will need to raise to meet the new minimum standards relative to the amount of capital they currently hold. To estimate new capital ratios and requirements, the OCC used currently available data from banks' quarterly Consolidated Report of Condition and Income (Call Reports) to approximate capital under the proposed rule, which shows that most banks have raised their capital levels well above the existing minimum requirements. After comparing existing levels with the proposed new requirements, the OCC has determined that 28 small institutions that it regulates would fall short of the proposed increased capital requirements. Together, those institutions would need to raise approximately $82 million in regulatory capital to meet the proposed minimum requirements. The OCC estimates that the cost of lost tax benefits associated with increasing total capital by $82 million will be approximately $0.5 million per year. Averaged across the 28 affected institutions, the cost is approximately $18,000 per institution per year.
To determine if a proposed rule has a significant economic impact on small entities, we compared the estimated annual cost with annual noninterest expense and annual salaries and employee benefits for each small entity. Based on this analysis, the OCC has concluded for purposes of this IRFA that the changes described in this NPR, when considered without regard to other changes to the capital requirements that the agencies simultaneously are proposing, would not result in a significant economic impact on a substantial number of small entities.
However, as discussed in the Supplementary Information section above, the changes proposed in this NPR also should be considered together with changes proposed in the separate Standardized Approach NPR also published in today's Federal Register. The changes described in the Standardized NPR include:
1. Changing the denominator of the risk-based capital ratios by revising the asset risk weights;
2. Revising the treatment of counterparty credit risk;
3. Replacing references to credit ratings with alternative measures of creditworthiness;
4. Providing more comprehensive recognition of collateral and guarantees; and
5. Providing a more favorable capital treatment for transactions cleared through qualifying central counterparties.
These changes are designed to enhance the risk-sensitivity of the calculation of risk-weighted assets. Therefore, capital requirements may go down for some assets and up for others. For those assets with a higher risk weight under this NPR, however, that increase may be large in some instances, e.g., requiring the equivalent of a dollar-for-
dollar capital charge for some securitization exposures.
The Basel Committee on Banking Supervision has been conducting periodic reviews of the potential quantitative impact of the Basel III framework.\103\ Although these reviews monitor the impact of implementing the Basel III framework rather than the proposed rule, the OCC is using estimates consistent with the Basel Committee's analysis, including a conservative estimate of a 20 percent increase in risk-
weighted assets, to gauge the impact of the Standardized Approach NPR on risk-weighted assets. Using this assumption, the OCC estimates that a total of 56 small national banks and federally chartered savings associations will need to raise additional capital to meet their regulatory minimums. The OCC
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estimates that this total projected shortfall will be $143 million and that the cost of lost tax benefits associated with increasing total capital by $143 million will be approximately $0.8 million per year. Averaged across the 56 affected institutions, the cost is approximately $14,000 per institution per year.
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\103\ See, ``Update on Basel III Implementation Monitoring,'' Quantitative Impact Study Working Group, (January 28, 2012).
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To comply with the proposed rules in the Standardized Approach NPR, covered small banking organizations would be required to change their internal reporting processes. These changes would require some additional personnel training and expenses related to new systems (or modification of existing systems) for calculating regulatory capital ratios.
Additionally, covered small banking organizations that hold certain exposures would be required to obtain additional information under the proposed rules in order to determine the applicable risk weights. Covered small banking organizations that hold exposures to sovereign entities other than the United States, foreign depository institutions, or foreign public sector entities would have to acquire Country Risk Classification ratings produced by the OECD to determine the applicable risk weights. Covered small banking organizations that hold residential mortgage exposures would need to have and maintain information about certain underwriting features of the mortgage as well as the LTV ratio in order to determine the applicable risk weight. Generally, covered small banking organizations that hold securitization exposures would need to obtain sufficient information about the underlying exposures to satisfy due diligence requirements and apply either the simplified supervisory formula or the gross-up approach described in section --.43 of the Standardized Approach NPR to calculate the appropriate risk weight, or be required to assign a 1,250 percent risk weight to the exposure.
Covered small banking organizations typically do not hold significant exposures to foreign entities or securitization exposures, and the agencies expect any additional burden related to calculating risk weights for these exposures, or holding capital against these exposures, would be relatively modest. The OCC estimates that, for small national banks and federal savings associations, the cost of implementing the alternative measures of creditworthiness will be approximately $36,125 per institution.
Some covered small banking organizations may hold significant residential mortgage exposures. However, if the small banking organization originated the exposure, it should have sufficient information to determine the applicable risk weight under the proposed rule. If the small banking organization acquired the exposure from another institution, the information it would need to determine the applicable risk weight is consistent with information that it should normally collect for portfolio monitoring purposes and internal risk management.
Covered small banking organizations would not be subject to the disclosure requirements in subpart D of the proposed rule. However, the agencies expect to modify regulatory reporting requirements that apply to covered small banking organizations to reflect the changes made to the agencies' capital requirements in the proposed rules. The agencies expect to propose these changes to the relevant reporting forms in a separate notice.
To determine if a proposed rule has a significant economic impact on small entities the OCC compared the estimated annual cost with annual noninterest expense and annual salaries and employee benefits for each small entity. If the estimated annual cost was greater than or equal to 2.5 percent of total noninterest expense or 5 percent of annual salaries and employee benefits the OCC classified the impact as significant. As noted above, the OCC has concluded for purposes of this IRFA that the proposed rules in this NPR, when considered without regard to changes in the Standardized NPR, would not exceed these thresholds and therefore would not result in a significant economic impact on a substantial number of small entities. However, the OCC has concluded that the proposed rules in the Standardized Approach NPR would have a significant impact on a substantial number of small entities. The OCC estimates that together, the changes proposed in this NPR and the Standardized Approach NPR will exceed these thresholds for 500 small national banks and 253 small federally chartered private savings institutions. Accordingly, when considered together, this NPR and the Standardized Approach NPR appear to have a significant economic impact on a substantial number of small entities.
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Identification of Duplicative, Overlapping, or Conflicting Federal Rules
The OCC is unaware of any duplicative, overlapping, or conflicting federal rules. As noted previously, the OCC anticipates issuing a separate proposal to implement reporting requirements that are tied to (but do not overlap or duplicate) the requirements of the proposed rules. The OCC seeks comments and information regarding any such federal rules that are duplicative, overlapping, or otherwise in conflict with the proposed rule.
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Discussion of Significant Alternatives to the Proposed Rule
The agencies have sought to incorporate flexibility into the proposed rule and lessen burden and complexity for smaller banking organizations wherever possible, consistent with safety and soundness and applicable law, including the Dodd-Frank Act. The agencies are requesting comment on potential options for simplifying the rule and reducing burden, including whether to permit certain small banking organizations to continue using portions of the current general risk-
based capital rules to calculate risk-weighted assets. Additionally, the agencies proposed the following alternatives and flexibility features:
Covered small banking organizations are not subject to the enhanced disclosure requirements of the proposed rules.
Covered small banking organizations would continue to apply a 100 percent risk weight to corporate exposures (as described in section --.32 of the Standardized Approach NPR).
Covered small banking organizations may choose to apply the simpler gross-up method for securitization exposures rather than the Simplified Supervisory Formula Approach (SSFA) (as described in section --.43 of the Standardized Approach NPR).
The proposed rule offers covered small banking organizations a choice between a simpler and more complex methods of risk weighting equity exposures to investment funds (as described in section --.53 of the Standardized Approach NPR).
The agencies welcome comment on any significant alternatives to the proposed rules applicable to covered small banking organizations that would minimize their impact on those entities.
FDIC
Regulatory Flexibility Act
Summary of the FDIC's Initial Regulatory Flexibility Analysis (IRFA)
In accordance with section 3(a) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA), the FDIC is publishing this summary of the IRFA for this NPR. The RFA requires an agency to publish in the Federal Register an IRFA or a summary of its IRFA at the time of the
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publication of its general notice of proposed rulemaking \104\ or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities.\105\ For purposes of this IRFA, the FDIC analyzed the potential economic impact of this NPR on the small entities that it regulates.
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\104\ 5 U.S.C. 603(a).
\105\ 5 U.S.C. 605(b).
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The FDIC welcomes comment on all aspects of the summary of its IRFA. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period.
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Reasons Why the Proposed Rule Is Being Considered by the Agencies; Statement of the Objectives of the Proposed Rule; and Legal Basis
As discussed in the Supplementary Information section above, the agencies are proposing to revise their capital requirements to promote safe and sound banking practices, implement Basel III and certain aspects of the Dodd-Frank Act, and harmonize capital requirements across charter type. Federal law authorizes each of the agencies to prescribe capital standards for the banking organizations that it regulates.\106\
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\106\ See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C. 1831o(c)(1); 12 U.S.C. 1844; 12 U.S.C. 3907; and 12 U.S.C. 5371.
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Small Entities Affected by the Proposal
Under regulations issued by the Small Business Administration,\107\ a small entity includes a depository institution or bank holding company with total assets of $175 million or less (a small banking organization). As of March 31, 2012, there were approximately 2,433 small state nonmember banks, 115 small state savings banks, and 45 small state savings associations (collectively, small banks and savings associations).
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\107\ See 13 CFR 121.201.
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Projected Reporting, Recordkeeping, and Other Compliance Requirements
This NPR includes changes to the general risk-based capital requirements that affect small banking organizations. Under this NPR, the changes to minimum capital requirements that would impact small banks and savings associations include a more conservative definition of regulatory capital, a new common equity tier 1 capital ratio, a higher minimum tier 1 capital ratio, new thresholds for prompt corrective action purposes, and a new capital conservation buffer. To estimate the impact of this NPR on the capital needs of small banks and savings associations, the FDIC estimated the amount of capital such institutions will need to raise to meet the new minimum standards relative to the amount of capital they currently hold. To estimate new capital ratios and requirements, the FDIC used currently available data from the quarterly Consolidated Report of Condition and Income (Call Reports) filed by small banks and savings associations to approximate capital under the proposed rule. The Call Reports show that most small banks and savings associations have raised their capital to levels well above the existing minimum requirements. After comparing existing levels with the proposed new requirements, the FDIC has determined that 62 small banks and savings associations that it regulates would fall short of the proposed increased capital requirements. Together, those institutions would need to raise approximately $164 million in regulatory capital to meet the proposed minimum requirements. The FDIC estimates that the cost of lost tax benefits associated with increasing total capital by $164 million will be approximately $0.9 million per year. Averaged across the 62 affected institutions, the cost is approximately $15,000 per institution per year.
To determine if the proposed rule has a significant economic impact on small entities we compared the estimated annual cost with annual noninterest expense and annual salaries and employee benefits for each small entity. Based on this analysis, the FDIC has concluded for purposes of this IRFA that the changes described in this NPR, when considered without regard to other changes to the capital requirements that the agencies simultaneously are proposing, would not result in a significant economic impact on a substantial number of small entities.
However, as discussed in the Supplementary Information section above, the changes proposed in this NPR also should be considered together with changes proposed in the separate Standardized Approach NPR also published in today's Federal Register. The changes described in the Standardized NPR include:
1. Changing the denominator of the risk-based capital ratios by revising the asset risk weights;
2. Revising the treatment of counterparty credit risk;
3. Replacing references to credit ratings with alternative measures of creditworthiness;
4. Providing more comprehensive recognition of collateral and guarantees; and
5. Providing a more favorable capital treatment for transactions cleared through qualifying central counterparties.
These changes are designed to enhance the risk-sensitivity of the calculation of risk-weighted assets. Therefore, capital requirements may go down for some assets and up for others. For those assets with a higher risk weight under this NPR, however, that increase may be large in some instances, for example, the equivalent of a dollar-for-dollar capital charge for some securitization exposures.
In order to estimate the impact of the Standardized Approach NPR on small banks and savings associations, the FDIC used currently available data from the quarterly Consolidated Report of Condition and Income (Call Reports) filed by small banks and savings associations to approximate the change in capital under the proposed rule. After comparing the existing risk-based capital rules with the proposed rule, the FDIC estimates that risk-weighted assets may increase by 10 percent under the proposed rule. Using this assumption, the FDIC estimates that a total of 76 small national banks and federally chartered savings associations will need to raise additional capital to meet their regulatory minimums. The FDIC estimates that this total projected shortfall will be $34 million and that the cost of lost tax benefits associated with increasing total capital by $34 million will be approximately $0.2 million per year. Averaged across the 76 affected institutions, the cost is approximately $2,500 per institution per year.
To comply with the proposed rules in the Standardized Approach NPR, covered small banking organizations would be required to change their internal reporting processes. These changes would require some additional personnel training and expenses related to new systems (or modification of existing systems) for calculating regulatory capital ratios.
Additionally, small banks and savings associations that hold certain exposures would be required to obtain additional information under the proposed rules in order to determine the applicable risk weights. For example, small banks and savings associations that hold exposures to sovereign entities other than the United States, foreign depository institutions, or foreign public sector entities would have to acquire Country Risk Classification ratings produced by the OECD to determine the applicable risk weights. Small banks and savings
Page 52838
associations that hold residential mortgage exposures would need to have and maintain information about certain underwriting features of the mortgage as well as the LTV ratio to determine the applicable risk weight. Generally, small banks and savings associations that hold securitization exposures would need to obtain sufficient information about the underlying exposures to satisfy due diligence requirements and apply either the simplified supervisory formula or the gross-up approach described in section --.43 of the Standardized Approach NPR to calculate the appropriate risk weight, or be required to assign a 1,250 percent risk weight to the exposure.
Small banks and savings associations typically do not hold significant exposures to foreign entities or securitization exposures, and the agencies expect any additional burden related to calculating risk weights for these exposures, or holding capital against these exposures, would be relatively modest. The FDIC estimates that, for small banks and savings associations, the cost of implementing the alternative measures of creditworthiness will be approximately $39,000 per institution.
Small banks and savings associations may hold significant residential mortgage exposures. If the institution originated the exposure, it should have sufficient information to determine the applicable risk weight under the proposed rule. However, if the exposure is acquired from another institution, the information that would be needed to determine the applicable risk weight is consistent with information that should normally be collected for portfolio monitoring purposes and internal risk management.
Small banks and savings associations would not be subject to the disclosure requirements in subpart D of the proposed rule. However, the agencies expect to modify regulatory reporting requirements that apply to such institutions to reflect the changes made to the agencies' capital requirements in the proposed rules. The agencies expect to propose these changes to the relevant reporting forms in a separate notice.
To determine if a proposed rule has a significant economic impact on small entities the FDIC compared the estimated annual cost with annual noninterest expense and annual salaries and employee benefits for each small bank and savings association. If the estimated annual cost was greater than or equal to 2.5 percent of total noninterest expense or 5 percent of annual salaries and employee benefits the FDIC classified the impact as significant. As noted above, the FDIC has concluded for purposes of this IRFA that the proposed rules in this NPR, when considered without regard to changes in the Standardized NPR, would not exceed these thresholds and therefore would not result in a significant economic impact on a substantial number of small banks and savings associations. However, the FDIC has concluded that the proposed rules in the Standardized Approach NPR would have a significant impact on a substantial number of small banks and savings associations. The FDIC estimates that together, the changes proposed in this NPR and the Standardized Approach NPR will exceed these thresholds for 2,413 small state nonmember banks, 114 small savings banks, and 45 small savings associations. Accordingly, when considered together, this NPR and the Standardized Approach NPR appear to have a significant economic impact on a substantial number of small entities.
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Identification of Duplicative, Overlapping, or Conflicting Federal Rules
The FDIC is unaware of any duplicative, overlapping, or conflicting federal rules. As noted previously, the FDIC anticipates issuing a separate proposal to implement reporting requirements that are tied to (but do not overlap or duplicate) the requirements of the proposed rules. The FDIC seeks comments and information regarding any such federal rules that are duplicative, overlapping, or otherwise in conflict with the proposed rule.
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Discussion of Significant Alternatives to the Proposed Rule
The agencies have sought to incorporate flexibility into the proposed rule and lessen burden and complexity for small bank and savings associations wherever possible, consistent with safety and soundness and applicable law, including the Dodd-Frank Act. The agencies are requesting comment on potential options for simplifying the rule and reducing burden, including whether to permit certain small banking organizations to continue using portions of the current general risk-based capital rules to calculate risk-weighted assets. Additionally, the agencies proposed the following alternatives and flexibility features:
Small banks and savings associations are not subject to the enhanced disclosure requirements of the proposed rules.
Small banks and savings associations would continue to apply a 100 percent risk weight to corporate exposures (as described in section --.32 of the Standardized Approach NPR).
Small banks and savings associations may choose to apply the simpler gross-up method for securitization exposures rather than the SSFA (as described in section --.43 of the Standardized Approach NPR).
The proposed rule offers small banks and savings associations a choice between a simpler and more complex methods of risk weighting equity exposures to investment funds (as described in section --.53 of the Standardized Approach NPR).
The agencies welcome comment on any significant alternatives to the proposed rules applicable to small banks and savings associations that would minimize their impact on those entities.
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Paperwork Reduction Act
Paperwork Reduction Act
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Request for Comment on Proposed Information Collection
In accordance with the requirements of the Paperwork Reduction Act (PRA) of 1995, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The agencies are requesting comment on a proposed information collection.
The information collection requirements contained in this joint notice of proposed rulemaking (NPR) have been submitted by the OCC and FDIC to OMB for review under the PRA, under OMB Control Nos. 1557-0234 and 3064-0153. In accordance with the PRA (44 U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the Board has reviewed the NPR under the authority delegated by OMB. The Board's OMB Control No. is 7100-0313. The requirements are found in Sec. Sec. --.2.
The agencies have published two other NPRs in this issue of the Federal Register. Please see the NPRs entitled ``Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements'' and ``Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rules; Market Risk Capital Rule.'' While the three NPRs together comprise an integrated capital framework, the PRA burden has been divided among the three NPRs and a PRA statement has been provided in each.
Comments are invited on:
(a) Whether the collection of information is necessary for the proper performance of the Agencies' functions,
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including whether the information has practical utility;
(b) The accuracy of the estimates of the burden of the information collection, including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation, maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments should be addressed to:
OCC: Communications Division, Office of the Comptroller of the Currency, Public Information Room, Mail Stop 1-5, Attention: 1557-0234, 250 E Street SW., Washington, DC 20219. In addition, comments may be sent by fax to (202) 874-4448, or by electronic mail to regs.comments@occ.treas.gov. You can inspect and photocopy the comments at the OCC's Public Information Room, 250 E Street, SW., Washington, DC 20219. You can make an appointment to inspect the comments by calling (202) 874-5043.
Board: You may submit comments, identified by R-1442, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Email: regs.comments@federalreserve.gov. Include docket number in the subject line of the message.
Fax: 202-452-3819 or 202-452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room MP-500 of the Board's Martin Building (20th and C Streets NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit written comments, which should refer to RIN 3064-AD95 Implementation of Basel III 0153, by any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments on the FDIC Web site.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
Email: Comments@FDIC.gov.
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, FDIC, 550 17th Street NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose/html including any personal information provided. Comments may be inspected at the FDIC Public Information Center, Room 100, 801 17th Street NW., Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
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Proposed Information Collection
Title of Information Collection: Basel III.
Frequency of Response: On occasion.
Affected Public:
OCC: National banks and federally chartered savings associations.
Board: State member banks, bank holding companies, and savings and loan holding companies.
FDIC: Insured state nonmember banks, state savings associations, and certain subsidiaries of these entities.
Abstract: Section --.2 allows the use of a conservative estimate of the amount of a bank's investment in the capital of unconsolidated financial institutions held through the index security with prior approval by the appropriate agency. It also provides for termination and close-out netting across multiple types of transactions or agreements if the bank obtains a written legal opinion verifying the validity and enforceability of the agreement under certain circumstances and maintains sufficient written documentation of this legal review.
Estimated Burden: The burden estimates below exclude any regulatory reporting burden associated with changes to the Consolidated Reports of Income and Condition for banks (FFIEC 031 and FFIEC 041; OMB Nos. 7100- 0036, 3064-0052, 1557-0081), the Financial Statements for Bank Holding Companies (FR Y-9; OMB No. 7100-0128), and the Capital Assessments and Stress Testing information collection (FR Y-14A/Q/M; OMB No. 7100-
0341). The agencies are still considering whether to revise these information collections or to implement a new information collection for the regulatory reporting requirements. In either case, a separate notice would be published for comment on the regulatory reporting requirements.
OCC
Estimated Number of Respondents: Independent national banks, 172; federally chartered savings banks, 603.
Estimated Burden per Respondent: 16 hours.
Total Estimated Annual Burden: 12,400 hours.
Board
Estimated Number of Respondents: SMBs, 831; BHCs, 933; SLHCs, 438.
Estimated Burden per Respondent: 16 hours.
Total Estimated Annual Burden: 35,232 hours.
FDIC
Estimated Number of Respondents: 4,571.
Estimated Burden per Respondent: 16 hours.
Total Estimated Annual Burden: 73,136 hours.
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Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the proposed rule in a simple and straightforward manner, and invite comment on the use of plain language.
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OCC Unfunded Mandates Reform Act of 1995 Determinations
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532 et seq.) requires that an agency prepare a written statement before promulgating a rule that includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector of $100 million or more (adjusted annually for inflation) in any one year. If a written statement is required, the UMRA (2 U.S.C. 1535) also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule and from those alternatives, either select the least
Page 52840
costly, most cost-effective or least burdensome alternative that achieves the objectives of the rule, or provide a statement with the rule explaining why such an option was not chosen.
Under this NPR, the changes to minimum capital requirements include a new common equity tier 1 capital ratio, a higher minimum tier 1 capital ratio, a supplementary leverage ratio for advanced approaches banks, new thresholds for prompt corrective action purposes, a new capital conservation buffer, and a new countercyclical capital buffer for advanced approaches banks. To estimate the impact of this NPR on bank capital needs, the OCC estimated the amount of capital banks will need to raise to meet the new minimum standards relative to the amount of capital they currently hold. To estimate new capital ratios and requirements, the OCC used currently available data from banks' quarterly Consolidated Report of Condition and Income (Call Reports) to approximate capital under the proposed rule. Most banks have raised their capital levels well above the existing minimum requirements and, after comparing existing levels with the proposed new requirements, the OCC has determined that its proposed rule will not result in expenditures by State, local, and Tribal governments, or by the private sector, of $100 million or more. Accordingly, the UMRA does not require that a written statement accompany this NPR.
Addendum 1: Summary of This NPR for Community Banking Organizations
Overview
The agencies are issuing a notice of proposed rulemaking (NPR, proposal, or proposed rule) to revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The proposed rule would:
Revise the definition of regulatory capital components and related calculations;
Add a new regulatory capital component: common equity tier 1 capital;
Increase the minimum tier 1 capital ratio requirement;
Impose different limitations to qualifying minority interest in regulatory capital than those currently applied;
Incorporate the new and revised regulatory capital requirements into the Prompt Corrective Action (PCA) capital categories;
Implement a new capital conservation buffer framework that would limit payment of capital distributions and certain discretionary bonus payments to executive officers and key risk takers if the banking organization does not hold certain amounts of common equity tier 1 capital in addition to those needed to meet its minimum risk-based capital requirements; and
Provide for a transition period for several aspects of the proposed rule, including a phase-out period for certain non-
qualifying capital instruments, the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.
This addendum presents a summary of the proposed rule that is more relevant for smaller, non-complex banking organizations that are not subject to the market risk rule or the advanced approaches capital rule. The agencies intend for this addendum to act as a guide for these banking organizations, helping them to navigate the proposed rule and identify the changes most relevant to them. The addendum does not, however, by itself provide a complete understanding of the proposed rules and the agencies expect and encourage all institutions to review the proposed rule in its entirety.
1. Revisions to the Minimum Capital Requirements
The NPR proposes definitions of common equity tier 1 capital, additional tier 1 capital, and total capital. These proposed definitions would alter the existing definition of capital by imposing, among other requirements, additional constraints on including minority interests, mortgage servicing assets (MSAs), deferred tax assets (DTAs) and certain investments in unconsolidated financial institutions in regulatory capital. In addition, the NPR would require that most regulatory capital deductions be made from common equity tier 1 capital. The NPR would also require that most of a banking organization's accumulated other comprehensive income (AOCI) be included in regulatory capital.
Under the NPR, a banking organization would maintain the following minimum capital requirements:
(1) A ratio of common equity tier 1capital to total risk-
weighted assets of 4.5 percent.
(2) A ratio of tier 1 capital to total risk-weighted assets of 6 percent.
(3) A ratio of total capital to total risk-weighted assets of 8 percent.
(4) A ratio of tier 1 capital to adjusted average total assets of 4 percent.\108\
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\108\ Banking organizations should be aware that their leverage ratio requirements would be affected by the new definition of tier 1 capital under this proposal. See section 4 of this addendum on the definition of capital.
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The new minimum capital requirements would be implemented over a transition period, as outlined in the proposed rule. For a summary of the transition period, refer to section 7 of this Addendum. As noted in the NPR, banking organizations are generally expected, as a prudential matter, to operate well above these minimum regulatory ratios, with capital commensurate with the level and nature of the risks they hold.
2. Capital Conservation Buffer
In addition to these minimum capital requirements, the NPR would establish a capital conservation buffer. Specifically, banking organizations would need to hold common equity tier 1 capital in excess of their minimum risk-based capital ratios by at least 2.5 percent of risk-weighted assets in order to avoid limits on capital distributions (including dividend payments, discretionary payments on tier 1 instruments, and share buybacks) and certain discretionary bonus payments to executive officers, including heads of major business lines and similar employees.
Under the NPR, a banking organization's capital conservation buffer would be the smallest of the following ratios: a) its common equity tier 1 capital ratio (in percent) minus 4.5 percent; b) its tier 1 capital ratio (in percent) minus 6 percent;or c) its total capital ratio (in percent) minus 8 percent.
To the extent a banking organization's capital conservation buffer falls short of 2.5 percent of risk-weighted assets, the banking organization's maximum payout amount for capital distributions and discretionary bonus payments (calculated as the maximum payout ratio multiplied by the sum of eligible retained income, as defined in the NPR) would decline. The following table shows the maximum payout ratio, depending on the banking organization's capital conservation buffer.
Table 1--Capital Conservation Buffer
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Capital Conservation Buffer
(as a percentage of risk- Maximum payout ratio (as a percentage or
weighted assets) eligible retained income)
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Greater than 2.5 percent...... No payout limitation applies.
Less than or equal to 2.5 60 percent.
percent and greater than
1.875 percent.
Less than or equal to 1.875 40 percent.
percent and greater than 1.25
percent.
Less than or equal to 1.25 20 percent.
percent and greater than
0.625 percent.
Less than or equal to 0.625 0 percent.
percent.
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Page 52841
Eligible retained income for purposes of the proposed rule would mean a banking organization's net income for the four calendar quarters preceding the current calendar quarter, based on the banking organization's most recent quarterly regulatory reports, net of any capital distributions and associated tax effects not already reflected in net income.
Under the NPR, the maximum payout amount for the current calendar quarter would be equal to the banking organization's eligible retained income, multiplied by the applicable maximum payout ratio in Table 1.
The proposed rule would prohibit a banking organization from making capital distributions or certain discretionary bonus payments during the current calendar quarter if: (A) its eligible retained income is negative; and (B) its capital conservation buffer ratio is less than 2.5 percent as of the end of the previous quarter.
The NPR does not diminish the agencies' authority to place additional limitations on capital distributions.
3. Adjustments to Prompt Corrective Action (PCA) Thresholds
The NPR proposes to revise the PCA capital category thresholds to levels that reflect the new capital ratio requirements. The NPR also proposes to introduce the common equity tier 1 capital ratio as a PCA capital category threshold. In addition, the NPR proposes to revise the existing definition of tangible equity. Under the NPR, tangible equity would be defined as tier 1 capital (composed of common equity tier 1 and additional tier 1 capital) plus any outstanding perpetual preferred stock (including related surplus) that is not already included in tier 1 capital.
Table 2--Proposed PCA Threshold Requirements *
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Threshold ratios
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Common
Total risk- Tier 1 risk- equity tier
PCA capital category based based 1 risk- Tier 1
capital capital based leverage
ratio ratio capital ratio
ratio
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Well capitalized........................................ 10% 8% 6.5% 5%
Adequately capitalized.................................. 8% 6% 4.5% 4%
Undercapitalized........................................ 7% of the risk weighted assets of the banking organization that relate to the subsidiary, or
7% of the risk weighted assets of the subsidiary)
For tier 1 minority interest, the NPR proposes the same calculation method, but substitutes tier 1 capital in place of common equity tier 1 capital and 8.5 percent in place of 7 percent in the illustration above (and assuming the banking organization has a common equity tier 1 capital ratio of at least 7 percent). In the case of tier 1 minority interest, there is no requirement that the subsidiary be a depository institution. However, the NPR would require that any instrument giving rise to the minority interest must meet all of the criteria for either a common stock instrument or an additional tier 1 capital instrument.
For total capital minority interest, the NPR proposes an equivalent calculation method (by substituting total capital in place of common equity tier 1 capital and 10.5 percent in place of 7 percent in the illustration above; and assuming the banking organization has a common equity tier 1 capital ratio of at least 7 percent). In the case of total capital minority interest, there is no requirement that the subsidiary be a depository institution. However, the NPR would require that any instrument giving rise to the minority interest must meet all of the criteria for either a common stock instrument, an additional tier 1 capital instrument, or a tier 2 capital instrument.
e. Regulatory Capital Adjustments and Deductions
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Regulatory Deductions From Common Equity Tier 1 Capital
The NPR would require that a banking organization deduct the following from the sum of its common equity tier 1 capital elements:
cir Goodwill and all other intangible assets (other than MSAs), net of any associated deferred tax liabilities (DTLs). Goodwill for purposes of this deduction includes any goodwill embedded in the valuation of a significant investment in the capital of an unconsolidated financial institution in the form of common stock.
cir DTAs that arise from operating loss and tax credit carryforwards net of any valuation allowance and net of DTLs (see section 22 of the proposed rule for the requirements on the netting of DTLs).
cir Any gain-on-sale associated with a securitization exposure.
cir Any defined benefit pension fund net asset\109\, net of any associated deferred tax liability.\110\ (The pension deduction does not apply to insured depository institutions that have their own defined benefit pension plan.)
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\109\ With prior approval of the primary federal supervisor, the banking organization may reduce the amount to be deducted by the amount of assets of the defined benefit pension fund to which it has unrestricted and unfettered access, provided that the banking organization includes such assets in its risk-weighted assets as if the banking organization held them directly. For this purpose, unrestricted and unfettered access means that the excess assets of the defined pension fund would be available to protect depositors or creditors of the banking organization in a receivership, insolvency, liquidation, or similar proceeding.
\110\ The deferred tax liabilities for this deduction exclude those deferred tax liabilities that have already been netted against DTAs.
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Regulatory Adjustments to Common Equity Tier 1 Capital
The NPR would require that for the following items, a banking organization deduct any associated unrealized gain and add any associated unrealized loss to the sum of common equity tier 1 capital elements:
cir Unrealized gains and losses on cash flow hedges included in AOCI that relate to the hedging of items that are not recognized at fair value on the balance sheet.
cir Unrealized gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the banking organization's own credit risk.
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Additional Deductions From Regulatory Capital
Under the NPR, a banking organization would be required to make the following deductions with respect to investments in its own capital instruments:
cir Deduct from common equity tier 1 elements investments in the banking organization's own common stock instruments (including any contractual obligation to purchase), whether held directly or indirectly.
cir Deduct from additional tier 1 capital elements, investments in (including any contractual obligation to purchase) the banking organization's own additional tier 1 capital instruments, whether held directly or indirectly.
cir Deduct from tier 2 capital elements, investments in (including any contractual obligation to purchase) the banking organization's own tier 2 capital instruments, whether held directly or indirectly.
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Corresponding Deduction Approach
Under the NPR, a banking organization would use the corresponding deduction approach to calculate the required deductions from regulatory capital for:
cir Reciprocal cross-holdings;
cir Non-significant investments in the capital of unconsolidated financial institutions; and
cir Non-common stock significant investments in the capital of unconsolidated financial institutions.
Under the corresponding deduction approach, a banking organization would be required to make any such deductions from the same component of capital for which the underlying instrument would qualify if it were issued by the banking organization itself. In addition, if the banking organization does not have a sufficient amount of such component of capital to effect the deduction, the shortfall will be deducted from the next higher (that is, more subordinated) component of regulatory capital (for example, if the exposure may be deducted from additional tier 1 capital but the banking organization does not have sufficient additional tier 1 capital, it would take the deduction from common equity tier 1 capital). The NPR provides additional information regarding the corresponding deduction approach for those banking organizations with such holdings and investments.
Reciprocal crossholdings in the capital of financial institutions: The NPR would require a banking organization to deduct investments in the capital of other financial institutions it holds reciprocally.\111\
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\111\ An instrument is held reciprocally if the instrument is held pursuant to a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital instruments.
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Non-significant investments in the capital of unconsolidated financial institutions\112\: The proposed rule would require a banking organization to deduct any non-significant investments in the capital of unconsolidated financial institutions that, in the aggregate, exceed 10 percent of the sum of the banking organization's common equity tier 1 capital elements less all deductions and other regulatory adjustments required under sections 22(a) through 22(c)(3) of the proposed rule (the 10 percent threshold for non-significant investments in unconsolidated financial institutions).
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\112\ With prior written approval of the primary federal supervisor, for the period of time stipulated by the primary federal supervisor, a banking organization would not be required to deduct exposures to the capital instruments of unconsolidated financial institutions if the investment is made in connection with the banking organization providing financial support to a financial institution in distress.
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cir The amount to be deducted from a specific capital component is equal to (i) the amount of a banking organization's non-significant investments exceeding the 10 percent threshold for non-significant investments multiplied by (ii) the ratio of the non-
significant investments in unconsolidated financial institutions in the form of such capital component to the amount of the banking organization's total non-significant investments in unconsolidated financial institutions.
cir The banking organization's non-significant investments in the capital of unconsolidated financial institutions not exceeding the 10 percent threshold for non-significant investments must be assigned the appropriate risk weight under the Standardized Approach NPR.
Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock: A banking organization must deduct its significant investments in the capital of unconsolidated financial institutions not in the form of common stock.
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Threshold Deductions
The NPR would require a banking organization to deduct from common equity tier 1 capital elements each of the following assets (together, the threshold deduction items) that, individually, are above 10 percent of the sum of the banking organization's common equity tier 1 capital elements, less all required adjustments and deductions required under sections 22(a) through 22(c) of the proposed rule (the 10
Page 52843
percent common equity deduction threshold):
cir DTAs arising from temporary differences that the banking organization could not realize through net operating loss carrybacks, net of any associated valuation allowance, and DTLs, subject to the following limitations:
ssquf Only the DTAs and DTLs that relate to taxes levied by the same taxation authority and that are eligible for offsetting by that authority may be offset for purposes of this deduction.
ssquf The DTLs offset against DTAs must exclude amounts that have already been netted against other items that are either fully deducted (such as goodwill) or subject to deduction (such as MSA).
cir MSAs, net of associated DTLs.
cir Significant investments in the capital of unconsolidated financial institutions in the form of common stock.
In addition, the aggregate amount of the threshold deduction items in this section cannot exceed 15 percent of the banking organization's common equity tier 1 capital net of all deductions (the 15 percent common equity deduction threshold). That is, the banking organization must deduct from common equity tier 1 capital elements, the amount of the threshold deduction items that are not deducted after the application of the 10 percent common equity deduction threshold, and that, in aggregate, exceed 17.65 percent of the sum of the banking organization's common equity tier 1 capital elements, less all required adjustments and deductions required under sections 22(a) through 22(c) of the proposed rule and less the threshold deduction items in full.
5. Changes in Risk-weighted Assets
The amounts of the threshold deduction items within the limits and not deducted, as described above, would be included in the risk-
weighted assets of the banking organization and assigned a risk weight of 250 percent. In addition, certain exposures that are currently deducted under the general risk-based capital rules, for example certain credit enhancing interest-only strips, would receive a 1,250% risk weight.
6. Timeline and Transition Period
The NPR would provide for a multi-year implementation as summarized in the table below:
Table 3--Phase-in Schedule
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2013 2014 2015 2016 2017 2018 2019
Year (as of Jan. 1) (percent) (percent) (percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Minimum common equity tier 1 3.5 4.0 4.5 4.5 4.5 4.5 4.5
ratio......................
Common equity tier 1 capital .......... .......... .......... 0.625 1.25 1.875 2.50
conservation buffer........
Common equity tier 1 plus 3.5 4.0 4.5 5.125 5.75 6.375 7.0
capital conservation buffer
Phase-in of deductions from .......... 20 40 60 80 100 100
common equity tier 1
(including threshold
deduction items that are
over the limits)...........
Minimum tier 1 capital...... 4.5 5.5 6.0 6.0 6.0 6.0 6.0
Minimum tier 1 capital plus .......... .......... .......... 6.625 7.25 7.875 8.5
capital conservation buffer
Minimum total capital....... 8.0 8.0 8.0 8.0 8.0 8.0 8.0
Minimum total capital plus 8.0 8.0 8.0 8.625 9.25 9.875 10.5
conservation buffer........
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As provided in Basel III, capital instruments that no longer qualify as additional tier 1 or tier 2 capital will be phased out over a 10 year horizon beginning in 2013. However, trust preferred securities are phased out as required under the Dodd-Frank Act.
Attached to this Addendum I is a summary of the proposed revision to the components of capital introduced by the NPR.
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Components and tiers Explanation
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(1) COMMON EQUITY TIER 1 CAPITAL:
(a) + Qualifying common stock Instruments must meet all of the
instruments. common equity tier 1 criteria
(Note 1)
(b) + Retained earnings.............
(c) + AOCI.......................... With the exception in Note 2
below, AOCI flows through to
common equity tier 1 capital.
(d) + Qualifying common equity tier Subject to specific calculation
1 minority interest. method and limitation.
(e) - Regulatory deductions from Deduct: Goodwill and intangible
common equity tier 1 capital. assets (other than MSAs); DTAs
that arise from operating loss
and tax credit carryforwards;
any gain on sale from a
securitization; investments in
the banking organization's own
common stock instruments.
(f) +/- Regulatory adjustments to See explanation below (Note 2).
common equity tier 1 capital.
(g) - common equity tier 1 capital See section 4.e.D above.
deductions per the corresponding
deduction approach.
(h) - Threshold deductions.......... Deduct amount of threshold items
that are above the 10 and 15
percent common equity tier 1
thresholds. (See section 4.e.
above).
= common equity tier 1 capital.......
(2) ADDITIONAL TIER 1 CAPITAL:
(a) + additional tier 1 capital Instruments must meet all of the
instruments. additional tier 1 criteria (Note
1).
(b) + Tier 1 minority interest that Subject to specific calculation
is not included in common equity and limitation.
tier 1 capital.
(c) + Non-qualifying tier 1 capital (Note 3)
instruments subject to transition
phase-out and SBLF related
instruments.
(d) - Investments in a banking .................................
organization's own additional tier 1
capital instruments.
(e) - Additional tier 1 capital See section 4.e.D above.
deductions per the corresponding
deduction approach.
= Additional tier 1 capital..........
(3) TIER 2 CAPITAL:
(a) + Tier 2 capital instruments.... Instruments must meet all of the
tier 2 criteria (Note 1).
Page 52844
(b) + Total capital minority Subject to specific calculation
interest that is not included in and limitation.
tier 1.
(c) + ALLL.......................... Up to 1.25% of risk weighted
assets.
(d) - Investments in a banking
organization's own tier 2 capital
instruments.
(e) - Tier 2 capital deductions per See section 4.e.D above.
the Corresponding Deduction Approach.
(f) + Non-qualifying tier 2 capital (Note 3)
instruments subject to transition
phase-out and SBLF related
instruments.
= Tier 2 capital.....................
TOTAL CAPITAL = common equity tier 1
+ additional tier 1 + tier 2.
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Notes to Table:
Note 1:Includes surplus related to the instruments.
Note 2: Regulatory adjustments: A banking organization must deduct any
unrealized gain and add any unrealized loss for cash flow hedges
included in AOCI relating to hedging of items not fair valued on the
balance sheet and for unrealized gains and losses that have resulted
from changes in the fair value of liabilities that are due to changes
in the banking organization's own credit risk.
Note 3: Grandfathered SBLF related instruments: These are instruments
issued under the Small Business Lending Facility (SBLF); or prior
October 4, 2010 under the Emergency Economic Stabilization Act of
2008. If the instrument qualified as tier 1 capital under rules at the
time of issuance, it would count as additional tier 1 under this
proposal. If the instrument qualified as tier 2 under the rules at
that time, it would count as tier 2 under this proposal.
Attachment 2: Comparison of Current Rules vs. Proposal
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Minimum regulatory capital requirements
----------------------------------------------------------------------------------------------------------------
Current minimum ratios. Proposed minimum ratios Comments
----------------------------------------------------------------------------------------------------------------
Common equity tier 1 capital/risk N/A.................... 4.5%
weighted assets.
Tier 1 capital/risk weighted assets.. 4%..................... 6%
Total capital/risk weighted assets... 8%..................... 8%
Leverage ratio....................... >=4% (or >=3%)......... >=4% Minimum required level
will not vary
depending on the
supervisory rating.
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Capital buffers
----------------------------------------------------------------------------------------------------------------
Current treatment...... Proposed treatment..... Comment
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer.......... N/A.................... Capital conservation Not holding the capital
buffer equivalent to conservation buffer
2.5% of risk-weighted may result in
assets; composed of restrictions on
common equity tier 1 capital distributions
capital. and certain
discretionary bonus
payments.
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Prompt corrective action
----------------------------------------------------------------------------------------------------------------
Current PCA levels..... Proposed PCA levels.... Comment
----------------------------------------------------------------------------------------------------------------
Common equity tier 1 capital......... N/A.................... Well capitalized: Proposed adequately
>=6.5%; Adequately capitalized PCA level
capitalized: >=4.5%; aligned to new minimum
Undercapitalized: ratio.
=6%; Well capitalized: >=8%; Proposed adequately
Adequately Adequately capitalized PCA level
capitalized: >=4%; capitalized: >=6%; aligned to new minimum
Undercapitalized =10%; Adequately >=10%; Adequately
capitalized: >=8%; capitalized: >=8%;
Undercapitalized =5%; Well capitalized: >=5%; PCA adequately
Adequately Adequately capitalized level will
capitalized: >=4% (or capitalized: >=4%; not vary depending on
>=3%); Undercapitalized
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