Liquidity Coverage Ratio Rule: Treatment of Certain Municipal Obligations as High-Quality Liquid Assets
| Published date | 05 June 2019 |
| Citation | 84 FR 25975 |
| Record Number | 2019-11715 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation,The Comptroller Of The Currency Office |
Federal Register, Volume 84 Issue 108 (Wednesday, June 5, 2019)
[Federal Register Volume 84, Number 108 (Wednesday, June 5, 2019)]
[Rules and Regulations]
[Pages 25975-25978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11715]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 84, No. 108 / Wednesday, June 5, 2019 / Rules
and Regulations
[[Page 25975]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 50
[Docket ID OCC-2018-0013]
RIN 1557-AE36
FEDERAL RESERVE SYSTEM
12 CFR Part 249
[Docket No. R-1616]
RIN 7100-AF10
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 329
RIN 3064-AE77
Liquidity Coverage Ratio Rule: Treatment of Certain Municipal
Obligations as High-Quality Liquid Assets
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The OCC, the Board, and the FDIC (collectively, the agencies)
are jointly adopting as a final rule, without change, the August 31,
2018, interim final rule, which amended the agencies' liquidity
coverage ratio (LCR) rule to treat liquid and readily-marketable,
investment grade municipal obligations as high-quality liquid assets.
This treatment was mandated by section 403 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act.
DATES: The final rule is effective on July 5, 2019.
FOR FURTHER INFORMATION CONTACT:
OCC: Christopher McBride, Director, James Weinberger, Technical
Expert, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-
6360, Treasury & Market Risk Policy; David Stankiewicz, Special
Counsel, Lee Walzer, Counsel, Henry Barkhausen, Counsel, or Daniel
Perez, Senior Attorney, (202) 649-5490, Chief Counsel's Office; or for
persons who are deaf or hearing-impaired, TTY, (202) 649-5597, Office
of the Comptroller of the Currency, 400 7th Street SW, Washington, DC
20219.
Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, Peter Clifford, Manager, (202) 785-6057, J. Kevin Littler, Lead
Financial Institution Policy Analyst, (202) 475-6677, or Christopher
Powell, Senior Financial Institution Policy Analyst, (202) 452-3442,
Division of Banking Supervision and Regulation; Laurie Schaffer,
Associate General Counsel, (202) 452-2272, Benjamin W. McDonough,
Assistant General Counsel, (202) 452-2036, Steve Bowne, Counsel, (202)
452-3900, Laura Bain, Senior Attorney, (202) 736-5546, or Jeffery
Zhang, Attorney, (202) 736-1968, 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, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue NW, Washington, DC 20551.
FDIC: Bobby R. Bean, Associate Director, (202) 898-6705, Michael E.
Spencer, Chief, (202) 898-7041, Eric W. Schatten, Senior Policy
Analyst, (202) 898-7063, Andrew D. Carayiannis, Senior Policy Analyst,
(202) 898-6692, [email protected], Capital Markets Branch,
Division of Risk Management Supervision; Suzanne J. Dawley, Counsel,
(202) 898-6509, Gregory S. Feder, Counsel, (202) 898-8724, or Andrew B.
Williams, II, Counsel, (202) 898-3591, Supervision and Corporate
Operations Branch, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing
impaired only, Telecommunication Device for the Deaf (TDD), (800) 925-
4618.
SUPPLEMENTARY INFORMATION:
I. Background
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies)
adopted the liquidity coverage ratio (LCR) rule \1\ in 2014. The LCR
rule established a quantitative liquidity requirement that is designed
to promote the short-term resilience of the liquidity risk profile of
large and internationally active banking organizations. The intent of
the agencies in issuing the LCR rule was to improve the U.S. banking
sector's ability to absorb shocks arising from financial and economic
stress and the measurement and management of liquidity risk.\2\ The LCR
rule generally applies to a bank holding company, savings and loan
holding company, or depository institution if: (1) It has total
consolidated assets equal to $250 billion or more; (2) it has total
consolidated on-balance sheet foreign exposure equal to $10 billion or
more; or (3) it is a depository institution with total consolidated
assets equal to $10 billion or more and is a consolidated subsidiary of
a firm that is subject to the LCR rule (each, a covered company).\3\
Covered companies generally must maintain an amount of high-quality
liquid assets (HQLA) equal to or greater than their projected total net
cash outflows over a prospective 30 calendar-day period. The LCR rule
defines three categories of HQLA--level 1, level 2A, and level 2B
liquid assets--and sets forth qualifying criteria for HQLA and
limitations for an asset's inclusion in a banking organization's HQLA
amount.
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\1\ 79 FR 61440 (Oct. 10, 2014), codified at 12 CFR part 50
(OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC).
\2\ Id.
\3\ See section 1 of the LCR rule. On December 21, 2018, the
agencies invited comment on a proposed rule that would revise the
framework for determining the applicability of the standardized
liquidity requirements, including the LCR rule, for U.S. banking
organizations. See Proposed Changes to Applicability Thresholds for
Regulatory Capital and Liquidity Requirements, 83 FR 66024 (Dec. 21,
2018). On May 24, 2019, the agencies published for comment a
proposed rule to apply standardized liquidity requirements to
foreign banking organizations with respect to their combined U.S.
operations. See Proposed Changes to Applicability Thresholds for
Regulatory Capital Requirements for Certain U.S. Subsidiaries of
Foreign Banking Organizations and Application of Liquidity
Requirements for Foreign Banking Organizations, Certain U.S.
Depository Institution Holding Companies, and Certain Depository
Institution Subsidiaries, 84 FR 24296 (May 24, 2019). These proposed
rulemakings, if adopted, would revise the scope of application of
the LCR rule.
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In 2016, the Board amended its LCR rule to include certain U.S.
municipal securities as HQLA, subject to certain
[[Page 25976]]
limitations (2016 Amendments).\4\ The 2016 Amendments permitted U.S.
municipal securities to qualify as level 2B liquid assets if they were:
(1) General obligation securities of public sector entities (that is, a
state, local authority, or other governmental subdivision below the
U.S. sovereign entity level); \5\ (2) investment grade under 12 CFR
part 1 as of the calculation date; (3) issued or guaranteed by a public
sector entity whose obligations have a proven record as a reliable
source of liquidity in repurchase or sales markets during stressed
market conditions; and (4) not be an obligation of a financial sector
entity or a financial sector entity's consolidated subsidiary (unless
only guaranteed by a financial sector entity or its consolidated
subsidiary and otherwise eligible). The 2016 Amendments limited the
inclusion of general obligation securities in the HQLA amount to 5
percent of the covered company's total HQLA amount. The 2016 Amendments
also limited the inclusion of general obligation securities of any
single public sector entity to two times the average daily trading
volume during the previous four quarters of all general obligation
securities issued by that public sector entity.
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\4\ 81 FR 21223 (Apr. 11, 2016).
\5\ The 2016 Amendments defined a general obligation as a bond
or similar obligation that is backed by the full faith and credit of
a public sector entity. 12 CFR 249.20(c)(2).
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The Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) was enacted on May 24, 2018.\6\ Section 403 of the EGRRCPA
amended section 18 of the Federal Deposit Insurance Act \7\ and
requires the agencies--for purposes of the LCR rule and any other
regulation that incorporates a definition of the term ``high-quality
liquid asset'' or another substantially similar term--to treat a
municipal obligation as HQLA that is a level 2B liquid asset if that
obligation is, as of the calculation date, liquid and readily-
marketable and investment grade. Section 403 defines ``municipal
obligation'' as an obligation of a State or any political subdivision
thereof; or any agency or instrumentality of a State or any political
subdivision thereof. Section 403 defines ``liquid and readily-
marketable'' as having the meaning given the term in 12 CFR 249.3 or
any successor thereto. Section 403 defines ``investment grade'' as
having the meaning given the term in 12 CFR 1.2 or any successor
thereto.
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\6\ Public Law 115-174, 132 Stat. 1296-1368 (2018).
\7\ 12 U.S.C. 1828(aa).
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II. Interim Final Rule
On August 31, 2018, the agencies published an interim final rule
amending the agencies' LCR rule to implement section 403 of the EGRRCPA
and soliciting public comment.\8\
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\8\ 83 FR 44451 (Aug. 31, 2018).
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The interim final rule added a definition to the agencies' rule for
the term ``municipal obligations,'' which, consistent with the EGRRCPA,
means an obligation of (1) a state or any political subdivision thereof
or (2) any agency or instrumentality of a state or any political
subdivision thereof. In addition, the interim final rule amended the
HQLA criteria with respect to level 2B liquid assets by adding
municipal obligations that, as of the LCR calculation date, are both
liquid and readily-marketable and investment grade (under 12 CFR part
1) \9\ to the list of assets that are eligible for treatment as level
2B liquid assets.\10\
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\9\ The OCC's definition of ``investment grade'' under 12 CFR
1.2 provides that ``[i]nvestment grade means the issuer of a
security has an adequate capacity to meet financial commitments
under the security for the projected life of the asset or exposure.
An issuer has an adequate capacity to meet financial commitments if
the risk of default by the obligor is low and the full and timely
repayment of principal and interest is expected.'' 12 CFR 1.2.
\10\ 12 CFR 50.20 (OCC); 12 CFR 249.20 (Board); 12 CFR 329.20
(FDIC).
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Consistent with section 403 of the EGRRCPA, the interim final rule
also amended the definition of ``liquid and readily-marketable'' in the
FDIC's and OCC's rules so that the term has the same meaning given to
it under 12 CFR 249.3 of the Board's rule.\11\
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\11\ Under the Board's rule, a liquid and readily-marketable
security is a security that is traded in an active secondary market
with: (1) More than two committed market makers; (2) a large number
of non-market maker participants on both the buying and selling
sides of transactions; (3) timely and observable market prices; and
(4) a high trading volume. 12 CFR 249.3.
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The interim final rule also rescinded the Board's 2016 Amendments
so that municipal obligations under the Board's rule are treated
consistently with section 403 of the EGRRCPA.
III. Comments Received
The agencies received nine comment letters addressing the interim
final rule, including letters from trade associations, private sector
enterprises, and one individual. Commenters generally expressed support
for the inclusion of certain municipal obligations as HQLA and the
agencies' implementation of section 403 of the EGRRCPA through the
interim final rule. Many commenters asserted that municipal obligations
were a suitable asset class for HQLA eligibility, with qualities
consistent with other level 2B liquid assets, and that the interim
final rule effectively satisfied the underlying intent of section 403
of the EGRRCPA. Some commenters suggested additional changes to the LCR
rule for the agencies' consideration, including changes that were not
addressed or affected by section 403 of the EGRRCPA.
Comments Regarding Eligibility and Treatment of Municipal Obligations
as HQLA
Some commenters requested that the agencies treat municipal
obligations in the same manner as other asset types includable as HQLA,
without imposing additional limitations, such as those in the Board's
2016 Amendments.\12\
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\12\ For example, the 2016 Amendments limited the inclusion of
municipal obligations in a Board-supervised institution's HQLA
amount to 5 percent of the institution's total HQLA amount and
limited the inclusion as eligible HQLA of municipal obligations of
any single issuer to two times the average daily trading volume of
all general obligation securities of the issuer over the previous
four quarters.
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Other commenters argued that municipal obligations should not be
subject to certain requirements and limitations applicable to HQLA,
such as the haircuts and composition limits generally applicable to
level 2B liquid assets.\13\ Alternatively, commenters argued that these
requirements should be liberalized with respect to municipal
obligations. Another commenter recommended that the definition of
liquid and readily-marketable should be revised, because it would
exclude from HQLA certain municipal obligation securities with a
liquidity risk profile similar to other assets that currently qualify
as level 2B liquid assets.
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\13\ See 12 CFR 50.21 (OCC), 12 CFR 249.21 (Board), and 12 CFR
329.21 (FDIC).
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Section 403 requires the agencies to treat a municipal obligation
as a level 2B liquid asset if the obligation, as of the calculation
date, is liquid and readily-marketable and investment grade. The
interim final rule implemented section 403, imposing only those
restrictions on municipal obligations that also apply to other level 2B
liquid assets.\14\ In addition, the interim final rule defined ``liquid
and readily-marketable'' as having the meaning given the term in 12 CFR
249.3, as specifically mandated by section 403. Accordingly, the
agencies believe that it would not be appropriate to make changes to
the restrictions applicable to municipal obligations as level 2B liquid
assets or the definition of ``liquid and readily-marketable'' in this
final rule.
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\14\ As part of the interim final rule, the Board rescinded the
2016 Amendments.
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[[Page 25977]]
Comments Regarding Broader Changes to the LCR Rule
Several commenters, while supportive of the interim final rule,
requested broad changes to the LCR rule beyond the treatment of
municipal obligations as HQLA. For example, certain commenters argued
that the agencies should tailor the application of the LCR rule based
on the risk profile, operations, and complexity of the banking
organization. These commenters argued that the current applicability
thresholds are outdated and overly reliant on fixed asset thresholds.
These commenters also urged the agencies to eliminate the $10 billion
foreign exposure threshold as an interim measure.
One commenter recommended that the agencies revise the scope of
assets recognized as HQLA. The commenter also requested that the
agencies review the LCR rule's inflow and outflow assumptions,
including its stability assumptions. This commenter also recommended
revising the LCR rule to better reflect market realities, including by
revising maturity assumptions, the treatment of retail trusts, and the
definition of operational deposits. This commenter also recommended
that the agencies either ``remove or increase the lag time'' associated
with LCR disclosures.
The agencies are not adopting these broader proposed changes in
this final rule.\15\ The interim final rule was issued to implement
section 403 of the EGRRCPA, and broader revisions to the LCR rule fall
outside of the scope of the changes that the agencies sought comment on
in the interim final rule.
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\15\ The agencies have proposed revisions to the LCR rule in
separate rulemakings that would address certain comments regarding
the scope and applicability thresholds. See supra n. 3.
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IV. Description of the Final Rule
For the reasons described above, the agencies are adopting the
interim final rule as final without change.
The interim final rule's changes to the LCR rule provided covered
companies greater flexibility in meeting the LCR rule's minimum
requirements by expanding the types of assets that are eligible as
HQLA. For FDIC- and OCC-regulated institutions, the interim final
rule's changes marked the first time that such institution could treat
any municipal obligations as HQLA. For Board-regulated institutions,
those changes broadened the types of municipal obligations that could
be included as HQLA. In particular, because the Board rescinded the
2016 Amendments as part of the interim final rule, municipal
obligations were no longer required to be general obligation securities
and, as a result, many issuances of revenue bonds could qualify as
municipal obligations. In adopting the interim final rule as final
without change, the final rule does not impact the changes described
above.
This final rule does not otherwise affect which assets can count as
HQLA under the LCR rule.
V. Regulatory Analysis
A. Administrative Procedure Act and Effective Date
The Administrative Procedure Act (APA) generally requires that a
final rule be published in the Federal Register no less than 30 days
before its effective date.\16\ Therefore, the final rule will become
effective on July 5, 2019. The interim final rule will remain in effect
until the final rule becomes effective.
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\16\ 5 U.S.C. 553(d).
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B. Riegle Community Development and Regulatory Improvement Act
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\17\ in determining the effective
date and administrative compliance requirements for a new regulation
that imposes additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each federal banking agency
must consider any administrative burdens that such regulation would
place on depository institutions and the benefits of such regulation.
In addition, section 302(b) of the RCDRIA \18\ requires such new
regulation to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form, with certain exceptions, including for good cause. The
RCDRIA does not apply to the final rule because the rule does not
impose any additional reporting, disclosures, or other new requirements
on IDIs.
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\17\ 12 U.S.C. 4802(a).
\18\ 12 U.S.C. 4802(b).
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C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) does not apply to a rulemaking
when a general notice of proposed rulemaking is not required.\19\
Because the agencies previously determined that it was unnecessary to
publish a general notice of proposed rulemaking for the interim final
rule, the RFA's requirements relating to an initial and final
regulatory flexibility analysis do not apply to this final rule.
Nonetheless, the agencies believe that, because size thresholds for
covered companies under the final rule exceed the size limits of
``small entities'' as defined in section 601(6) of the RFA, small
entities are not affected by the final rule.\20\ Thus, the final rule
does not have a significant economic impact on a substantial number of
small entities.
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\19\ 5 U.S.C. 603, 604.
\20\ Under regulations issued by the Small Business
Administration, a small entity includes a depository institution,
bank holding company, or savings and loan holding company with total
assets of $550 million or less and trust companies with total assets
of $38.5 million or less.
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D. Paperwork Reduction Act of 1995
The Paperwork Reduction Act of 1995 \21\ states that no agency may
conduct or sponsor, nor is the respondent required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The agencies have
determined that this final rule does not create any new, or revise any
existing, collections of information pursuant to the Paperwork
Reduction Act and, therefore, no information collection request
submission needs to be made to the OMB.
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\21\ 44 U.S.C. 3501-3521.
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E. Use of Plain Language
Section 722 of the Gramm-Leach Bliley Act \22\ requires the
agencies to use plain language in all proposed and final rules
published after January 1, 2000. Having received no comments with
respect to making the interim final rule easier to understand, the
agencies are adopting the final rule without change.
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\22\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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F. Unfunded Mandates Reform Act of 1995
Consistent with section 202 of the Unfunded Mandates Reform Act of
1995 (Unfunded Mandates Act),\23\ the OCC prepares an impact statement
before promulgating any final rule for which a general notice of
proposed rulemaking was published. Because the OCC did not publish a
general notice of proposed rulemaking for the reasons described above
in paragraph A of this section, the OCC has not prepared an impact
statement for the final rule under the Unfunded Mandates Act.
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\23\ 2 U.S.C. 1532.
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List of Subjects
12 CFR Part 50
Administrative practice and procedure, Banks, Banking, Liquidity,
Reporting and recordkeeping requirements, Savings associations.
[[Page 25978]]
12 CFR Part 249
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Liquidity, Reporting and
recordkeeping requirements.
12 CFR Part 329
Administrative practice and procedure, Banks, Banking, Federal
Deposit Insurance Corporation, Reporting and recordkeeping
requirements.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
0
The interim final rule amending 12 CFR part 50 of chapter I, title 12
of the Code of Federal Regulations, which was published at 83 FR 44451
on August 31, 2018, is adopted as a final rule without change.
Federal Reserve System
12 CFR Chapter II
PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)
0
The interim final rule amending 12 CFR part 249 of chapter II, title 12
of the Code of Federal Regulations, which was published at 83 FR 44451
on August 31, 2018, is adopted as a final rule without change.
Federal Deposit Insurance Corporation
12 CFR Chapter III
PART 329--LIQUIDITY RISK STANDARDS
0
The interim final rule amending 12 CFR part 329 of chapter III, title
12 of the Code of Federal Regulations, which was published at 83 FR
44451 on August 31, 2018, is adopted as a final rule without change.
Dated: May 20, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, May 28, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on May 28, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-11715 Filed 6-4-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P
