Regulatory Capital Rule: Revisions to the Supplementary Leverage Ratio To Exclude Certain Central Bank Deposits of Banking Organizations Predominantly Engaged in Custody, Safekeeping and Asset Servicing Activities

 
CONTENT
Federal Register, Volume 84 Issue 83 (Tuesday, April 30, 2019)
[Federal Register Volume 84, Number 83 (Tuesday, April 30, 2019)]
[Proposed Rules]
[Pages 18175-18186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08448]
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2019-0001]
RIN 1557-AE60
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket ID R-1659]
RIN 7100-AF 46
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE81
Regulatory Capital Rule: Revisions to the Supplementary Leverage
Ratio To Exclude Certain Central Bank Deposits of Banking Organizations
Predominantly Engaged in Custody, Safekeeping and Asset Servicing
Activities
AGENCY: The Office of the Comptroller of the Currency; 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, Board of
Governors of the Federal Reserve System, and Federal Deposit Insurance
Corporation are inviting public comment on a proposal to implement
section 402 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act. Section 402 directs these agencies to amend the
supplementary leverage ratio of the regulatory capital rule to exclude
certain funds of banking organizations deposited with central banks if
the banking organization is predominantly engaged in custody,
safekeeping, and asset servicing activities.
DATES: Comments should be received on or before July 1, 2019.
ADDRESSES: Comments should be directed to:
    OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Regulatory Capital Rule: Revisions to the Supplementary Leverage
Ratio to Exclude Certain Central Bank Deposits of Banking Organizations
Predominantly Engaged in Custody, Safekeeping and Asset Servicing
Activities'' 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
www.regulations.gov. Enter ``Docket ID OCC-2019-0001'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
     Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-
218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2019-0001'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information 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 include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2019-0001'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen. Comments and supporting materials can be viewed and
filtered by clicking on ``View all documents and comments in this
docket'' and then using the filtering tools on the left side of the
screen.
     Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. The docket may be viewed
after the close of the comment period in the same manner as during the
comment period.
     Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington,
[[Page 18176]]
DC 20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect comments.
    Board: You may submit comments, identified by Docket No. R-1659;
RIN 7100-AF 46, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. All public comments are available from the
Board's website at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or
to remove sensitive personal identifying information at the commenter's
request. Public comments may also be viewed electronically or in paper
form in Room 146, 1709 New York Avenue NW, Washington, DC 20006 between
9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-AE81, by any
of the following methods:
     Agency Website: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency
website.
     Email: [email protected]. Include ``RIN 3064-AE81'' on the
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/RIN 3064-AE81, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
     Hand Delivery/Courier: Comments may be hand delivered to
the 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. All comments
received must include the agency name (FDIC) and RIN 3064-AE81 and will
be posted without change to http://www.fdic.gov/regulations/laws/federal, including any personal information provided.
FOR FURTHER INFORMATION CONTACT:
    OCC: Venus Fan, Risk Expert, or Guowei Zhang, Risk Expert, Capital
and Regulatory Policy, (202) 649-6370; or Patricia Dalton, Technical
Expert for Credit and Market Risk, Asset Management, (202) 649-6401; or
Rima Kundnani, Attorney, or Christopher Rafferty, Attorney, Chief
Counsel's Office, (202) 649-5490; the Office of the Comptroller of the
Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Elizabeth MacDonald, Manager, (202) 475-6316; Mark Handzlik, Lead
Financial Institution Policy Analyst, (202) 475-6636; or Noah Cuttler,
Senior Financial Institution Policy Analyst I, (202) 912-4678; Division
of Supervision and Regulation; or Benjamin W. McDonough, Assistant
General Counsel, (202) 452-2036; Mark Buresh, Counsel, (202) 452-5270;
Mary Watkins, Senior Attorney, (202) 452-3722; 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, (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section,
[email protected]; Michael Maloney, Senior Policy Analyst,
[email protected]; Dushan Gorechan, Financial Analyst,
[email protected]; Keith Bergstresser, Capital Markets Policy Analyst,
[email protected]; or [email protected]; Capital Markets
Branch, Division of Risk Management Supervision, (202) 898-6888;
Michael Phillips, Counsel, [email protected]; Catherine Wood, Acting
Supervisory Counsel, [email protected]; or Alexander Bonander, Attorney,
[email protected]; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
    A. Overview of the Proposal
    B. Leverage Capital Requirements
    C. Overview of Custody, Safekeeping, Asset Servicing Activities
and Fiduciary Accounts
    D. Section 402 and the Supplementary Leverage Ratio
II. Summary of the Proposal
    A. Scope of Applicability
    B. Mechanics of the Central Bank Deposit Exclusion
    C. Central Bank Deposit Exclusion Limit
    D. Regulatory Reporting Requirements
III. Impact Analysis
IV. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. Riegle Community Development and Regulatory Improvement Act
of 1994
    E. OCC Unfunded Mandates Reform Act of 1995 Determination
SUPPLEMENTARY INFORMATION:
I. Background
A. Overview of the Proposal
    This proposal would implement section 402 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act (section 402).\1\
Section 402 directs the Office of the Comptroller of the Currency
(OCC), Board of Governors of the Federal Reserve System (Board), and
Federal Deposit Insurance Corporation (FDIC) (together, the agencies)
to amend the capital rule \2\ to exclude from the supplementary
leverage ratio certain central bank deposits of custodial banks.
Section 402 defines a custodial bank as any depository institution
holding company predominantly engaged in custody, safekeeping, and
asset servicing activities, including any insured depository
institution (IDI) subsidiary of such a holding company.\3\
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    \1\ Public Law 115-174, 402.
    \2\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR
part 324 (FDIC). While the agencies have codified the capital rule
in different parts of title 12 of the Code of Federal Regulations,
the internal structure of the sections within each agency's rule are
substantially similar. All references to sections in the capital
rule or the proposal are intended to refer to the corresponding
sections in the capital rule of each agency.
    \3\ See generally Public Law 115-174, section 402.
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    Under the proposal, a depository institution holding company would
be considered predominantly engaged in custody, safekeeping, and asset
servicing activities if the U.S. top-tier depository institution
holding company in the organization has a ratio of assets under custody
(AUC)-to-total assets of at least 30:1. The proposal would define such
a depository institution holding company, together with any subsidiary
depository institution, as a ``custodial banking organization.'' \4\
Under the proposal, a custodial banking organization would exclude
deposits placed at a ``qualifying central bank'' from the denominator
of the supplementary leverage ratio. For purposes of the proposal, a
qualifying
[[Page 18177]]
central bank would mean a Federal Reserve Bank, the European Central
Bank, or a central bank of a member country of the Organisation for
Economic Co-operation and Development (OECD) \5\ if the country's
sovereign exposures qualify for a zero percent risk weight under
section 32 of the capital rule and the sovereign debt of such member
country is not in default or has not been in default during the
previous five years. The amount of central bank deposits that could be
excluded from the denominator of the supplementary leverage ratio would
be limited by the amount of deposit liabilities on the consolidated
balance sheet of the custodial banking organization that are linked to
fiduciary or custody and safekeeping accounts.
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    \4\ For purposes of this proposal, the OCC's capital rule would
be revised to include a definition of ``custody bank'', defined as a
national bank or Federal savings association that is a subsidiary of
a depository institution holding company that is a custodial banking
organization under 12 CFR 217.2. Similarly, the FDIC's capital rule
would be revised to include a definition of ``custody bank'',
defined as an FDIC-supervised institution that is a subsidiary of a
depository institution holding company that is a custodial banking
organization under 12 CFR 217.2.
    \5\ The OECD is an intergovernmental organization founded in
1961 to stimulate economic progress and global trade. A list of OECD
member countries is available on the OECD's website, www.oecd.org.
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B. Leverage Capital Requirements
    Leverage requirements under the capital rule increase in stringency
based on the size and complexity of a banking organization.\6\ All
banking organizations must meet a minimum leverage ratio of 4 percent,
measured as the ratio of tier 1 capital to average total consolidated
assets.\7\ Advanced approaches banking organizations \8\ also must
maintain a supplementary leverage ratio of 3 percent.\9\ The
supplementary leverage ratio measures tier 1 capital relative to total
leverage exposure, which includes on-balance sheet assets (including
deposits at central banks) and certain off-balance sheet exposures.\10\
In addition, the largest and most interconnected U.S. bank holding
companies are subject to an enhanced supplementary leverage ratio
(eSLR) standard whereby they must maintain a supplementary leverage
ratio above 5 percent (comprised of the 3 percent minimum supplementary
leverage ratio requirement and a leverage capital buffer requirement of
2 percent) to avoid limitations on capital distributions and certain
discretionary bonus payments.\11\ An IDI subsidiary of a bank holding
company subject to the eSLR standard must have a supplementary leverage
ratio of at least 6 percent to be considered ``well capitalized'' under
the agencies' prompt corrective action framework.\12\
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    \6\ Banking organizations subject to the agencies' capital rule
include national banks, state member banks, insured state nonmember
banks, savings associations, and top-tier bank holding companies and
savings and loan holding companies domiciled in the United States,
but exclude banking organizations subject to the Board's Small Bank
Holding Company Policy Statement (12 CFR part 225, appendix C), and
certain savings and loan holding companies that are substantially
engaged in insurance underwriting or commercial activities or that
are estate trusts, and bank holding companies and savings and loan
holding companies that are employee stock ownership plans.
    \7\ 12 CFR 3.10(a)(4) & 3.10(b)(4) (OCC); 12 CFR 217.10(a)(4) &
217.10(b)(4) (Board); 12 CFR 324.10(a)(4) & 324.10(b)(4) (FDIC). On
November 21, 2018, the agencies released a proposal that would
simplify regulatory capital requirements for qualifying community
banking organizations, as required by the Economic Growth,
Regulatory Relief, and Consumer Protection Act. The proposal would
provide regulatory burden relief to qualifying community banking
organizations by giving them an option to calculate a simple
leverage ratio, rather than multiple measures of capital adequacy.
84 FR 3062 (February 8, 2019).
    \8\ Currently, an advanced approaches banking organization is
defined as a depository institution holding company with total
consolidated assets of at least $250 billion or at least $10 billion
in foreign exposure and any of its IDI subsidiaries. The agencies
recently proposed revisions to the capital rule that would amend
these thresholds and would tailor the application of capital
requirements based on a banking organization's risk profile. The
proposal would affect the scope of application of the supplementary
leverage ratio. See 83 FR 66024 (December 21, 2018).
    \9\ See n. 6, supra.
    \10\ 12 CFR 3.10(a)(5)), 3.10(c)(4) (OCC); 12 CFR 217.10(a)(5)),
217.10(c)(4) (Board); 12 CFR 324.10(a)(5)), 324.10(c)(4) (FDIC).
    \11\ See 79 FR 24528 (May 1, 2014). Under OCC and FDIC rules, a
depository institution that is a subsidiary of a bank holding
company with more than $700 billion in total consolidated assets or
more than $10 trillion in assets under custody is subject to the
eSLR standards. 12 CFR 6.4(c) (OCC); 12 CFR 324.403(b) (FDIC). Under
the Board's rule, a bank holding company that is a global
systemically important banking holding company (GSIB) is subject to
the eSLR standards. See 12 CFR 217.11(d); 12 CFR part 217, subpart
H.
    \12\ 12 CFR 6.4 (OCC); 12 CFR 208.42 (Board); 12 CFR 324.403
(FDIC).
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    Unlike risk-based capital requirements, leverage capital
requirements do not differentiate the amount of regulatory capital that
must be maintained for an exposure based on the risk it presents to a
banking organization. This distinction allows a leverage ratio to serve
as a complement to risk-based capital requirements by establishing a
simple and transparent constraint on a banking organization's leverage
and mitigating any potential underestimation of risk by either banking
organizations or risk-based capital requirements.\13\
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    \13\ Risk-based and leverage capital measures contain
significant information about a banking organization's condition.
See, e.g., Arturo Estrella, Sangkyun Park, and Stavros Peristiani
(2000): ``Capital Ratios as Predictors of Bank Failure,'' Federal
Reserve Bank of New York Economic Policy Review.
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C. Overview of Custody, Safekeeping, Asset Servicing Activities and
Fiduciary Accounts
    Certain banking organizations engage in fiduciary, custody,
safekeeping and asset servicing activities. Custody, safekeeping and
asset servicing activities generally involve holding securities or
other assets on behalf of clients, as well as activities such as
transaction settlement, income processing, and related record keeping
and operational services. A banking organization may also act as a
fiduciary by, for example, acting as trustee or executor, or by having
discretion over the management of client assets. Banking organizations
typically provide custody, safekeeping, and asset servicing to their
fiduciary accounts. While many banking organizations offer some or all
of these services, certain banking organizations specialize in these
activities, and often do not provide the same range or scale of
traditional commercial or retail banking products as are provided by
other banking organizations.\14\
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    \14\ See OCC Comptrollers Handbook, Custody Services (January
2002).
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    Fiduciary and custody clients often maintain cash deposits at the
banking organization in connection with these services. Specifically,
clients typically maintain cash positions consisting of funds awaiting
investment or distribution that are often in the form of deposits
placed in the banking organization. These cash deposits help facilitate
the administration of the custody account. Under U.S. generally
accepted accounting principles (U.S. GAAP), cash deposits at a banking
organization are a deposit liability and thus appear on the banking
organization's balance sheet.
    Cash deposits that are linked to custody and fiduciary accounts at
banking organizations fluctuate depending on the activities of the
banking organization's custodial clients. For example, cash deposit
balances of such banking organizations generally increase during
periods when clients liquidate securities, such as during times of
stress. To assist in managing these cash fluctuations, banking
organizations may maintain significant cash deposits at central banks.
Central bank deposits can be used as an asset-liability management
strategy to facilitate these banking organizations' ability to support
custodial clients' cash-related needs. Under U.S. GAAP, central bank
deposits placed by the banking organization are on-balance sheet assets
of the banking organization.
D. Section 402 and the Supplementary Leverage Ratio Requirements
    Section 402 requires the agencies to amend the supplementary
leverage ratio to not take into account funds of a custodial bank that
are deposited with certain central banks, provided that
[[Page 18178]]
``any amount that exceeds the value of deposits of the custodial bank
that are linked to fiduciary or custodial and safekeeping accounts
shall be taken into account when calculating the supplementary leverage
ratio as applied to the custodial bank.'' \15\ Under section 402,
central bank deposits that qualify for the exclusion include deposits
of custodial banks placed with (1) the Federal Reserve System, (2) the
European Central Bank, and (3) central banks of member countries of the
OECD, if the member country has been assigned a zero percent risk
weight under the agencies' capital rule and the sovereign debt of such
member country is not in default or has not been in default during the
previous five years.\16\ As noted above, section 402 defines a
custodial bank as ``any depository institution holding company
predominantly engaged in custody, safekeeping, and asset servicing
activities, including any insured depository institution subsidiary of
such a holding company.'' \17\
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    \15\ Public Law 115-174, section 402(b)(2).
    \16\ Public Law 115-174, section 402(a).
    \17\ Id. at section 402(b).
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    As discussed below, the proposal would implement section 402 by
defining the scope of banking organizations considered to be
predominantly engaged in custody, safekeeping, and asset servicing
activities, and revising the supplementary leverage ratio to exclude
any qualifying central bank deposits of such banking organizations from
total leverage exposure, subject to the limit described in section
402(b)(2).
II. Summary of the Proposal
A. Scope of Applicability
    The proposal would define a depository institution holding company
predominantly engaged in custody, safekeeping, and asset servicing
activities, together with any subsidiary depository institution, as a
``custodial banking organization.'' \18\ The phrase ``predominantly
engaged in custodial, safekeeping, and asset servicing activities''
suggests that the banking organization's business model is primarily
focused on custody, safekeeping, and asset servicing activities, as
compared to its other commercial lending, investment banking, or other
banking activities.\19\
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    \18\ See note 4, supra.
    \19\ See, e.g., 115 Cong. Rec. S1544 (Mar. 8, 2018) (statement
of Sen. Corker) (``Section 402 is not intended to provide relief to
an organization engaged in consumer banking, investment banking, or
other businesses, and that also happens to have some custodial
business or a banking subsidiary that engages in custodial
activities . . . section 402 was intended as a very narrowly
tailored provision, focused on true custodial banks''); see also
H.R. Rep. No. 115-656, at 3-4 (2018) (``Banks that have a
predominant amount of businesses derived from custodial services are
different from banks that engage in a wide variety of banking
activities'').
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    The agencies considered various measures that they could use to
identify and define a custodial banking organization. Specifically, the
agencies considered both an AUC-to-total assets measure and an income-
based measure. AUC-to-total assets would provide a measure of a banking
organization's custodial and safekeeping business relative to its other
businesses. An income-based measure would show the percentage of a
banking organization's income that it derives from custodial,
safekeeping, and asset servicing activities.
    Under the AUC-to-total assets measure, among The Bank of New York
Mellon Corporation, Northern Trust Corporation, and State Street
Corporation, the lowest AUC-to-total assets ratio observed during the
period from the second quarter of 2016 through the third quarter of
2018 was approximately 52:1.\20\ This means that the banking
organization had approximately $52 in AUC for every $1 recognized in
their total on-balance sheet assets. In comparison, among the other
depository institution holding companies subject to the supplementary
leverage ratio, the highest AUC-to-total assets ratio observed during
that same period was approximately 9:1. For the income-based measure,
the agencies analyzed fiduciary and custody and safekeeping income as a
percentage of income.\21\ This analysis also indicated a clear
separation between The Bank of New York Mellon Corporation, Northern
Trust Corporation, and State Street Corporation, and the other
depository institution holding companies subject to the supplementary
leverage ratio.\22\ The agencies' analysis revealed a significant
positive correlation between the AUC-to-total asset measure and the
income-based measure.\23\ The legislative history of section 402
suggests that members of Congress recognized the three institutions
identified under either test as custodial banking organizations.\24\
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    \20\ Banking organizations report Assets under Custody on the FR
Form Y-15, Schedule C, Item 3, and banking organizations report
total consolidated assets on the FR Form Y-9C, Schedule HC, Item 12.
Quarterly reporting of the FR Y-15 became effective starting with
the June 30, 2016 as-of date.
    \21\ Because depository institution holding companies currently
do not report income derived from custody activities separately from
income derived from fiduciary activities, the agencies used a
measure that includes income derived from both activities for
purposes of their analysis. Specifically, the agencies analyzed an
income-based measure with the numerator as income from fiduciary and
custody activities, as reported on FR Y-9C, Schedule HI, Item 5.a,
and the denominator as the sum of net interest income and total
noninterest income, as reported on the FR Y-9C, Schedule HI, Items 3
and 5.m.
    \22\ Among The Bank of New York Mellon, Northern Trust
Corporation, and State Street Corporation, the lowest percentage of
income derived from custody and fiduciary activities observed during
the period from the second quarter of 2016 through the third quarter
of 2018 was approximately 54 percent. In comparison, among the other
banking organizations subject to the supplementary leverage ratio,
the highest observed percentage of income derived from custody and
fiduciary activities during that same period was approximately 15
percent.
    \23\ Across depository institution holding companies subject to
the supplementary leverage ratio in the third quarter of 2018, the
correlation coefficient between AUC-to-total assets ratio and income
derived from custody and fiduciary activities as a percentage of
income was 0.948.
    \24\ See, e.g., 115 Cong. Rec. S1714 (Mar. 14, 2018) (statement
of Sen. Warner) (``Section 402 provides relief to only three banks:
Bank of New York Mellon, State Street, and Northern Trust . . . This
provision does not mean that, if a bank has a large custodial
business, it should get relief . . . .); 115 Cong Rec. S1659 (Mar.
13, 2018) (statement of Sen. Heitkamp) (``Under the plain reading of
[S.2155], the three custody banks are the only three institutions
that are predominantly engaged in the custody business.'').
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    The agencies propose to use the AUC-to-total assets measure to
define a custodial banking organization because it provides a measure
of the size of a banking organization's custodial, safekeeping, and
asset servicing business as compared with its other activities, is
objective and publicly reported, and is subject to review by
regulators, banking organizations, and the public. In addition, because
AUC is often comprised of marketable securities or other assets with
widely-quoted market values, banking organizations typically exercise
little or no valuation discretion when measuring AUC. A banking
organization's total assets reflect the size and scope of all the
businesses in which the banking organization is engaged and provides a
useful point of comparison to AUC. Accordingly, AUC-to-total assets
provides a measure of the extent to which a banking organization is
predominantly engaged in custody, safekeeping, and asset servicing
activities.
    The agencies are not proposing to use an income-based measure
because such an approach would increase reporting burden for banking
organizations subject to the supplementary leverage ratio. Consistent
with section 402, a custodial banking organization is defined with
respect to its custodial, safekeeping, and asset servicing activities.
Banking organizations do not currently report income from custodial,
safekeeping, and asset servicing
[[Page 18179]]
activities separately from income derived from fiduciary
activities.\25\
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    \25\ The agencies recognize that the FDIC has previously defined
the term ``custodial bank'' for the purposes of its risk-based
deposit insurance assessments. See 12 CFR 327.5(c). For assessment
purposes, the FDIC defined a custodial bank consistent with section
331 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, which required the FDIC to define a custodial bank based on
factors including the percentage of total revenues generated by
custodial businesses and the level of assets under custody. As
section 402 defines custodial bank as a ``depository institution
holding company that is predominantly engaged in custody,
safekeeping, and asset servicing activities,'' the agencies believe
it is appropriate to develop a separate definition (i.e., custodial
banking organization) consistent with section 402.
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    The agencies also considered using absolute amount measures. The
agencies do not believe that defining custodial banking organizations
by reference to an absolute amount measure (such as AUC of at least a
specified amount) would be consistent with section 402. Such a measure
would only take the scale of a banking organization's custodial,
safekeeping, and asset servicing activities into account, rather than
considering the predominance of these activities relative to the
banking organization's other activities.
    The agencies recognize that the ratio of AUC-to-total assets may
fluctuate significantly during a stress environment as client
securities decline in value or as clients liquidate custodial
securities and deposit the cash with the banking organization (thus
increasing the banking organization's total assets). To ensure the
ratio of AUC-to-total assets under this proposal is appropriately
calibrated to take into consideration a range of conditions, the
agencies evaluated the quarterly AUC-to-total assets ratios of advanced
approaches banking organizations from the first quarter of 2004 through
the third quarter of 2018.\26\ This period includes the 2007-2009
financial crisis. During the observed period, the lowest AUC-to-total
assets ratio among The Bank of New York Mellon Corporation, Northern
Trust Corporation, and State Street Corporation was approximately 35:1.
Using a four-quarter average, the lowest observed average AUC-to-
average total assets ratio among those banking organizations was
approximately 39:1. The highest observed AUC-to-total assets ratio for
all other advanced approaches banking organizations over the same
period was approximately 13:1. Consistent with the analysis described
above, this analysis demonstrated a clear separation between the lowest
observed AUC-to-total assets ratios of The Bank of New York Mellon,
Northern Trust Corporation, and State Street Corporation under stress
conditions, and the highest observed AUC-to-total asset ratio among
other advanced approaches banking organizations.
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    \26\ The agencies reviewed IDI-level data from the Consolidated
Reports of Condition and Income (Call Report) to approximate the
holding company-level AUC-to-total assets ratios of advanced
approaches banking organizations during the financial crisis,
because banking organizations began reporting FR Y-15 in 2015.
Information regarding AUC was derived from Call Report, Schedule RC-
T, Items 10 and 11, Columns A (managed assets) and B (non-managed
assets), and was used as a proxy for AUC at the holding company
level, as most custodial services are conducted out of IDI
subsidiaries.
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    In view of the agencies' analysis, the agencies are proposing a
standard of AUC-to-total assets of 30:1, calculated as an average over
the prior four calendar quarters, to identify banking organizations
predominantly engaged in custodial, safekeeping, and asset servicing
activities. An AUC-to-total assets ratio of 30:1 is approximately equal
to the midpoint of the range between the minimum observed for The Bank
of New York Mellon, Northern Trust Corporation, and State Street
Corporation (52:1) and the maximum observed for the other advanced
approaches banking organizations (9:1), over the period from the second
quarter of 2016 through the third quarter of 2018. An AUC-to-total
asset ratio of 30:1 also is less than the minimum estimated ratio for
The Bank of New York Mellon, Northern Trust Corporation, and State
Street Corporation (35:1) over the period from the first quarter of
2004 through the third quarter of 2018, which includes the 2007-2009
financial crisis. The use of a four-quarter average further serves to
minimize the impact of volatility in a banking organization's AUC-to-
total assets ratio, which is a particular concern under stress
conditions. The proposed measure also would limit the potential for a
banking organization that does not predominantly engage in custody,
safekeeping, and asset servicing activities, as compared to its other
activities, to qualify as a custodial banking organization.
    Accordingly, under the proposal, a custodial banking organization
would be defined as a depository institution holding company that is
predominantly engaged in custody, safekeeping, and asset servicing
activities, as well as any subsidiary depository institution of such a
holding company, which means a U.S. top-tier depository institution
holding company that has AUC that are at least 30 times the amount of
the depository institution holding company's total assets, or an AUC-
to-total assets ratio of least 30:1. AUC would be equal to the average
of a U.S. top-tier depository institution holding company's assets
under custody for the four most recent calendar quarters and total
assets would be equal to the average of the U.S. top-tier depository
institution holding company's total consolidated assets for the four
most recent calendar quarters. A U.S. top-tier depository institution
holding company that has a reported AUC-to-total assets ratio of less
than 30:1 would no longer qualify as a custodial banking organization
and would therefore no longer be able to exclude deposits with a
qualifying central bank from the supplementary leverage ratio as of
that reporting period.
    Under the proposal, any subsidiary depository institution of a U.S.
top-tier depository institution holding company that qualifies as a
custodial banking organization would exclude from total leverage
exposure all deposits with a qualifying central bank that are
recognized on its consolidated balance sheet in the same manner as its
parent depository institution holding company.\27\ The proposal
therefore would not require such a subsidiary depository institution to
satisfy separately a ratio of AUC-to-total assets to be able to make
this exclusion. This approach is both simple and consistent with
section 402, which defines a ``custodial bank'' based on the
characteristics of the holding company and provides that such a
subsidiary depository institution may also exclude deposits at
qualifying central banks from its supplementary leverage ratio, to the
extent that these deposits do not exceed deposit liabilities of the
banking organization that are linked to fiduciary or custodial and
safekeeping accounts.
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    \27\ This proposed rule would apply to all depository
institution subsidiaries of a custodial banking organization holding
company, including uninsured Federal savings associations (FSAs).
However, the proposal would not apply to Federal branches and
agencies supervised by the OCC.
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    Question 1: What alternative standard, if any, should be used to
define a custodial banking organization instead of, or in conjunction
with, an AUC-to-total asset ratio? What are the advantages or
disadvantages of using an income-based ratio to define a custodial
banking organization? What are commenters' views on the potential
increased reporting burden of requiring new regulatory reporting line
items to distinguish between income derived from custodial,
safekeeping, and asset servicing activities and income derived from
fiduciary activities, consistent with the requirements of section 402?
The agencies encourage commenters to provide an empirical analysis to
support the use of a different ratio or standard.
    Question 2: What alternative calculation or calibration, if any,
should
[[Page 18180]]
be used in the calculation of AUC-to-total assets to account for a
range of economic conditions? The agencies encourage commenters to
provide an empirical analysis to support the use of a different
calculation.
    Question 3: Under the proposed rule, a custodial banking
organization holding company and its subsidiary depository institutions
would be immediately disqualified as a custodial banking organization
holding company if the four quarter average of the holding company's
AUC-to-total asset ratio falls below the 30:1 ratio and would no longer
be permitted to adjust its supplementary leverage ratio under the
proposed rule. The use of a four-quarter average of AUC-to-total assets
measure should generally prevent an unforeseen disqualification of a
custodial banking organization holding company and its subsidiary
depository institutions. What would be the advantages and disadvantages
of delaying the timing of a banking organization losing its status as a
``custodial banking organization,'' to minimize market disruptions
during a stress environment? What would be an appropriate amount of
time for such a delay?
    Question 4: What changes, if any, should the agencies consider with
respect to the proposed definition of ``custodial banking
organization''?
    The agencies are contemplating applying this rule to a depository
institution that is not controlled by a holding company (standalone
depository institution) to permit such standalone depository
institution to qualify as a custodial banking organization for purposes
of the proposal. Extending the application of the proposal to
standalone depository institutions would be consistent with the current
scope of applicability of the agencies' capital rule. While section 402
does not apply to standalone depository institutions, it does not limit
the agencies' authority \28\ to otherwise tailor or adjust the
supplementary leverage ratio.\29\ Under such an approach, a standalone
depository institution would similarly be able to exclude certain
deposits placed at a ``qualifying central bank'' from the denominator
of its supplementary leverage ratio, subject to a specified limit, if
the standalone depository institution has an AUC-to-total assets ratio
of at least 30:1. The agencies are seeking comment on all aspects of
extending the proposal to standalone depository institutions.
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    \28\ See, e.g, 12 U.S.C. 3907 (International Lending Supervision
Act) (``Each appropriate Federal banking agency shall cause banking
institutions to achieve and maintain adequate capital by
establishing minimum levels of capital for such banking institutions
and by using such other methods as the appropriate Federal banking
agency deems appropriate.'').
    \29\ Public Law 115-174, section 402(c).
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    Question 5: Should a standalone depository institution be permitted
to qualify as a custodial banking organization and why? What would be
the advantages and disadvantages of allowing such a standalone
depository institution that has no depository institution holding
company to qualify as a custodial banking organization under this
proposed rule?
    Question 6: The agencies note that depository institutions
currently report information related to fiduciary or custodial and
safekeeping accounts under Schedule RC-T of the Call Report and do not
report FR Form Y-15. The agencies also note that the information
captured on Schedule RC-T and AUC reported on FR Form Y-15 is similar
but not identical. What would be the advantages and disadvantages of
allowing a standalone depository institution to use existing bank level
data currently reported under Schedule RC-T of the Call Report to
determine AUC, with a possible adjustment to reconcile Schedule RC-T
and Form Y-15?
B. Mechanics of the Central Bank Deposit Exclusion
    Consistent with section 402, the amount of central bank deposits
eligible for exclusion from the supplementary leverage ratio would
equal the average daily balance over the reporting quarter of all
deposits placed with a ``qualifying central bank.'' For purposes of the
proposal, a qualifying central bank would mean a Federal Reserve Bank,
the European Central Bank, or a central bank of a member country of the
OECD if an exposure to the member country receives a zero percent risk
weight under section 32 of the capital rule and the sovereign debt of
such member country is not in default or has not been in default during
the previous five years.\30\
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    \30\ Under section 32 of the capital rule, an exposure to a
member country that qualifies for a zero percent risk weight cannot
also be in default or have been in default during the previous five
years. The agencies are proposing to include this latter provision,
however, to preserve the intent of section 402.
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    The agencies are proposing that the exclusion amount be calculated
based on the average daily balance of deposits with a qualifying
central bank over the reporting quarter to align with the calculation
of on-balance sheet assets in total leverage exposure.\31\ All deposits
placed with a Federal Reserve Bank could qualify for the central bank
deposit exclusion, including deposits in a master account, deposits in
a term deposit account that offers an early withdrawal feature, and
deposits in an excess balance account. Any deposits with a qualifying
central bank that are denominated in a foreign currency would be
measured in U.S. dollars to determine the amount of the deposits that
could be excluded from total leverage exposure. Central bank deposits
recognized on the consolidated balance sheet of a custodial banking
organization may include cash placements with a central bank made by a
foreign subsidiary. Although a foreign bank subsidiary would not itself
be a custodial banking organization under this proposal, any qualifying
central bank deposits of the foreign bank subsidiary could be excluded
from total leverage exposure of the parent organization to the extent
that the central bank deposits are consolidated on the balance sheet of
the parent organization, and satisfy the requirements for a qualifying
central bank deposit.
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    \31\ 12 CFR 3.10(c)(4)(i)(A) (OCC); 12 CFR 217.10(c)(4)(i)(A)
(Board); 12 CFR 324.10(c)(4)(i)(A) (FDIC).
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    Question 7: What terms, if any, should the agencies define or more
specifically describe to facilitate the calculation of the amount of
central bank deposits eligible for exclusion from total leverage
exposure?
C. Central Bank Deposit Exclusion Limit
    The proposal would limit the amount of a custodial banking
organization's deposits with a qualifying central bank that could be
excluded from total leverage exposure. The amount of such deposits that
could be excluded could not exceed an amount equal to the on-balance-
sheet deposit liabilities of the custodial banking organization that
are linked to fiduciary or custody and safekeeping accounts.
Specifically, a custodial banking organization would be able to exclude
from its total leverage exposure the lesser of (1) the amount of
central bank deposits placed at qualifying central banks by the
custodial banking organization (including deposits placed by
consolidated subsidiaries), and (2) the amount of on-balance sheet
deposit liabilities of the custodial banking organization (including
consolidated subsidiaries) that are linked to fiduciary or custodial
and safekeeping accounts.\32\ Consistent with the calculation of on-
balance sheet assets for purposes of the supplementary leverage ratio,
a
[[Page 18181]]
custodial banking organization would calculate the amount of deposit
liabilities linked to a fiduciary or custody and safekeeping account as
the average deposit liabilities for such accounts, calculated as of
each day of the reporting quarter.
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    \32\ The proposal would not affect the calculation of the size
indicator under the Board's Banking Organization Systemic Risk
Report (FR Y-15).
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    The proposal would define a fiduciary or custodial and safekeeping
account as an account administered by a custodial banking organization
for which the custodial banking organization provides fiduciary or
custodial and safekeeping services, as authorized by applicable federal
and state law. The agencies anticipate that the scope of the fiduciary
or custodial and safekeeping accounts under the proposal would not
deviate materially from the current scope of the fiduciary and custody
and safekeeping accounts reported under Schedule RC-T of the Call
Report.
    Consistent with section 402, a custodial banking organization would
include in total leverage exposure any amount of central bank deposits
with a qualifying central bank that exceeds the value of funds
deposited with the custodial banking organization that are linked to
fiduciary or custodial and safekeeping accounts. The fact that a client
has both a deposit account and a fiduciary or custody and safekeeping
account at the same custodial banking organization, or an affiliate or
subsidiary of such custodial banking organization, would not alone be
sufficient for those accounts to be considered ``linked'' for purposes
of the proposal. A deposit account would be considered linked to a
fiduciary or custodial and safekeeping account if the deposit account
is used to facilitate the administration of the fiduciary or custody
and safekeeping account. For example, cash deposits may be used to
facilitate processing transactions for the custody or fiduciary
account, such as interest and dividend payments related to securities
held in the custody or fiduciary account, cash transfers or
distributions from the custody or fiduciary account, and the purchases
and sale of securities for the account. These deposit balances
correspond, and are reconciled, to the custodian's off-balance sheet
books and records for each fiduciary and custody account. In times of
stress when market conditions may lead to the liquidation of
significant volumes of securities in a banking organization's fiduciary
or custody and safekeeping accounts, these linked deposits may increase
significantly. That is, during times of stress, custodial banking
organizations may experience significant increases in custodial
deposits. A custodial banking organization may have to hold additional
capital to meet its supplementary leverage ratio requirement as a
result of the increase in on balance sheet assets. Implementation of
section 402 would mitigate this capital impact.
    The asset exclusion limit for ``custodial banks'' provided under
the FDIC's regulations for purposes of determining risk-based deposit
insurance assessments (FDIC exclusion limit) also includes a concept of
a ``linked'' deposit.\33\ In contrast to the FDIC exclusion limit, this
proposal would apply to both custodial banking organization holding
companies and custodial banking organization subsidiary depository
institutions, as well as foreign subsidiaries of such entities; would
use a more restrictive standard to define a custodial banking
organization; and would apply only to custodial banking organizations
that are subject to the supplementary leverage ratio. The agencies
believe that these differences are appropriate in light of the purpose
served by section 402 (i.e., prudential regulation of custodial banking
organizations' regulatory capital) as compared to deposit insurance
assessments, and because section 402 applies to a narrow set of the
largest banking organizations (i.e., advanced approaches banking
organization that qualify as custodial banking organizations).
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    \33\ See 12 CFR 327.5(c) (Assessment base for custodial banks)
and FFIEC 031 and FFIEC 041 Instructions, Schedule RC-O, Item No.
11.b., Custodial bank deduction limit (``An institution that meets
the definition of custodial bank is eligible to have the FDIC deduct
certain assets from its assessment base, subject to a limit . . .
which equals the average amount of the institution's transaction
account deposit liabilities identified by the institution as being
directly linked to a fiduciary, custodial, or safekeeping account. .
. .''), available at www.ffiec.gov.
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    Question 8: What alternative definitions, if any, should the
agencies consider to define a fiduciary or custodial and safekeeping
account and why? The agencies note that depository institutions
currently report information related to fiduciary or custodial and
safekeeping accounts under Schedule RC-T of the Call Report. Should the
proposed definition explicitly reference the reporting instructions for
Schedule RC-T of the Call Report? What challenges would banking
organizations anticipate in identifying fiduciary or custodial and
safekeeping accounts under the proposed definition?
    Question 9: What challenges would banking organizations face in
applying the proposed standard for determining linkage between a
deposit account and a fiduciary or custodial and safekeeping account;
that is, that the deposit account is used to facilitate the
administration of the fiduciary or custody and safekeeping account? How
should this standard be broadened or narrowed to include or exclude
particular types of deposits? What alternative standard should the
agencies consider and why? What are the advantages and disadvantages of
using the FDIC exclusion limit or the reporting instructions to
Schedule RC-O of the Call Report, which collects information for the
FDIC exclusion limit, for purposes of determining linkage between a
deposit account and a fiduciary or custody and safekeeping account?
    Question 10: Under the Board's total loss-absorbing capacity rule,
a GSIB is subject to requirements that, in part, rely on the GSIB's
total leverage exposure.\34\ Because the Board's total loss-absorbing
capacity rule relies on the definition of total leverage exposure in
the Board's capital rule, the proposal could affect the amount of
eligible external total loss-absorbing capacity required to be held by
a GSIB that is also a custodial banking organization. What are the
advantages and disadvantages of revising the definition of total
leverage exposure for custodial banking organizations solely for
purposes of the supplementary leverage ratio in the capital rule as
compared to revising total leverage exposure for custodial banking
organizations in other rules, such as in the Board's total loss-
absorbing capacity rule?
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    \34\ 12 CFR 252.61.
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D. Regulatory Reporting Requirements
    Advanced approaches banking organizations currently report their
supplementary leverage ratios on FFIEC Form 101, Schedule A and Form Y-
9C, Schedule HC-R. The agencies expect to propose modifications to the
regulatory reporting requirements for the supplementary leverage ratio
in a separate publication in the Federal Register to reflect the
implementation of the central bank deposit exclusion described in this
proposal.
III. Impact Analysis
    The top-tier U.S. depository institution holding companies that
would qualify as custodial banking organizations under the proposal, as
well as each of their depository institution subsidiaries, would be
able to exclude central bank deposits from total leverage exposure. For
custodial banking organization holding companies and their lead
depository institution subsidiaries, the agencies estimate that central
bank deposits eligible for exclusion represent between
[[Page 18182]]
21 and 30 percent of these firms' total assets and between 20 and 28
percent of their total leverage exposure.\35\ Based on an exclusion of
this amount from each of these firms' total leverage exposure, the
proposal would result in a decrease in the amount of required tier 1
capital of approximately $8 billion in aggregate across these top-tier
U.S. depository institution holding companies and approximately $8
billion in aggregate across their lead depository institution
subsidiaries when measuring the supplementary leverage ratio
requirement without consideration of other capital requirements.\36\
However, the binding capital requirement for a given firm is the
capital requirement that requires the highest amount of regulatory
capital.\37\ Although holding companies are subject to leverage, risk-
based, and post-stress capital requirements, only one of those
requirements binds an individual holding company at any given time.\38\
Similarly, only one of the applicable leverage and risk-based capital
requirements binds a depository institution at any given time.\39\ The
risk profile and the capital requirements for the activities and
exposures of a banking organization determine which capital requirement
is binding.
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    \35\ Analysis reflects data from the Consolidated Financial
Statements for Holding Companies (FR Y-9C), the Consolidated Reports
of Condition and Income for a Bank with Domestic and Foreign Offices
(FFIEC 031), the Regulatory Capital Reporting for Institutions
Subject to the Advanced Capital Adequacy Framework (FFIEC 101), as
reported by The Bank of New York Mellon Corporation, State Street
Corporation, and Northern Trust Corporation and their IDI
subsidiaries as of third quarter 2018, as well as data from the 2018
Comprehensive Capital Analysis and Review and confidential
information collected through the supervisory process.
    \36\ Because The Bank of New York Mellon Corporation and State
Street Corporation are each GSIBs, the amount of tier 1 capital
required to meet regulatory minimums and avoid limitations on
capital distributions is based on a 5 percent requirement at the
holding company level and a 6 percent requirement at the insured
depository institution subsidiary level. Because Northern Trust
Corporation is not a GSIB, its required amount of tier 1 capital is
based on a 3 percent requirement at both the holding company and
insured depository institution subsidiary levels.
    \37\ For purposes of this analysis, a capital requirement is
considered binding at the level that it would impose restrictions on
the ability of a firm to make capital distributions or if the firm
would no longer be considered ``well capitalized'' under the
agencies' prompt corrective action framework.
    \38\ The Board's capital plan rule requires certain large bank
holding companies, including the GSIBs, to hold capital in excess of
the minimum capital ratios by requiring them to demonstrate the
ability to satisfy the capital requirements, including the
supplementary leverage ratio, under stressful conditions. 12 CFR
225.8(e)(2).
    \39\ Depository institutions are not subject to post-stress
capital requirements.
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    Thus, the proposal would reduce the amount of tier 1 capital that
must be maintained by a custodial banking organization holding company
only if the supplementary leverage ratio currently serves as the
binding capital requirement for the banking organization.\40\ Data from
the third quarter of 2018 data suggests that top-tier U.S. depository
institution holding companies that would qualify as custodial banking
organizations currently are bound by other post-stress capital
requirements. Therefore, the proposal is not expected to decrease the
amount of tier 1 capital maintained by such holding companies.
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    \40\ The findings set forth in this impact analysis with respect
to the release of capital pertain only to the revisions under this
proposal, and do not consider the capital impact of other
prospective changes to the capital rule.
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    In contrast, the supplementary leverage ratio currently serves as
the binding constraint for two custodial banking organization
depository institution subsidiaries. Accordingly, under the proposal,
the amount of tier 1 capital required of those institutions would
decrease by approximately $7 billion, which represents approximately 23
percent of the total amount of tier 1 capital that must be maintained
by those institutions currently.
    Regulatory capital supports a depository institution subsidiary's
ability to absorb unexpected losses. The capital standards and other
constraints applicable at the custodial banking organization holding
company level are expected to limit the amount of capital that such a
holding company could distribute or allocate for other purposes, thus
limiting any safety and soundness or financial stability concerns for
the holding company as a whole. In addition, the agencies have
regulatory and supervisory tools to constrain the ability of a
depository institution to make capital distributions.
IV. Regulatory Analyses
A. Paperwork Reduction Act
    Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid Office of Management
and Budget (OMB) control number. The OMB control number for the OCC is
1557-0318, Board is 7100-0313, and FDIC is 3064-0153. These information
collections relate to the regulatory capital rules for each agency.
However, the agencies expect that these information collections will
not be affected by this proposed rule and therefore no submissions will
be made under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and
section 1320.11 of the OMB's implementing regulations (5 CFR 1320) for
each of the agencies' regulatory capital rules.
    The proposed rule, once final, may require changes to the following
reports: (1) Consolidated Reports of Condition and Income for a Bank
with Domestic and Foreign Offices (FFIEC 031); (2) Consolidated Reports
of Condition and Income for a Bank with Domestic Offices Only (FFIEC
041); (3) Consolidated Reports of Condition and Income for a Bank with
Domestic Offices Only and Total Assets Less Than $1 Billion (FFIEC 051)
(OMB Control Nos. 1557-0081 (OCC), 7100-0036 (Board), 3064-052 (FDIC));
(4) the Risk-Based Capital Reporting for Institutions Subject to the
Advanced Capital Adequacy Framework (FFIEC 101; OMB Control Nos. 1557-
0239 (OCC), 7100-0319 (Board), and 3064-0159 (FDIC)); (5) and the
Consolidated Financial Statements for Holding Companies (FR Y-9C; OMB
Control Nos. 7100-0128 (Board)). Any changes to these information
collections will be addressed in one or more separate Federal Register
notices at the final rule stage.
B. Regulatory Flexibility Act Analysis
    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a proposed rule, to prepare an
Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities (defined by the Small Business Administration
(SBA) for purposes of the RFA to include commercial banks and savings
institutions with total assets of $550 million or less and trust
companies with total revenue of $38.5 million or less) or to certify
that the proposed rule would not have a significant economic impact on
a substantial number of small entities. As of December 31, 2017, the
OCC supervised 886 small entities. The rule would impose requirements
on 4 OCC supervised entities that are subject to the advanced
approaches risk-based capital rule, which typically have assets in
excess of $250 billion, and therefore would not be small entities.
Therefore, the OCC certifies that the proposed rule would not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
    Board: The Board is providing an initial regulatory flexibility
analysis with respect to this proposed rule. The
[[Page 18183]]
Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an
agency to consider whether the rule it proposes will have a significant
economic impact on a substantial number of small entities.\41\ In
connection with a proposed rule, the RFA requires an agency to prepare
an Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities or to certify that the proposed rule would not
have a significant economic impact on a substantial number of small
entities. An initial regulatory flexibility analysis must contain (1) a
description of the reasons why action by the agency is being
considered; (2) a succinct statement of the objectives of, and legal
basis for, the proposed rule; (3) a description of, and, where
feasible, an estimate of the number of small entities to which the
proposed rule will apply; (4) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities that will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (5) an
identification, to the extent practicable, of all relevant Federal
rules which may duplicate, overlap with, or conflict with the proposed
rule; and (6) a description of any significant alternatives to the
proposed rule which accomplish its stated objectives.
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    \41\ 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. As of June 30, 2018, there were
approximately 3,304 small bank holding companies, 216 small savings
and loan holding companies, and 541 small state member banks.
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    The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. A
final regulatory flexibility analysis will be conducted after comments
received during the public comment period have been considered. The
proposal would also make corresponding changes to the Board's reporting
forms.
    As discussed in detail above, the proposed rule would amend the
capital rule to provide an exclusion under the denominator of the
supplementary leverage ratio for central bank deposits of a custodial
banking organization, defined as a top-tier depository institution
holding company domiciled in the United States that has assets under
custody that are at least 30 times the amount of the depository
institution holding company's total assets; or a subsidiary of such a
depository institution holding company.
    The Board has broad authority under the International Lending
Supervision Act (ILSA) \42\ and the PCA provisions of the Federal
Deposit Insurance Act \43\ to establish regulatory capital requirements
for the institutions it regulates. For example, ILSA directs each
Federal banking agency to cause banking institutions to achieve and
maintain adequate capital by establishing minimum capital requirements
as well as by other means that the agency deems appropriate.\44\ The
prompt corrective action (PCA) provisions of the Federal Deposit
Insurance Act direct each Federal banking agency to specify, for each
relevant capital measure, the level at which an IDI subsidiary is well
capitalized, adequately capitalized, undercapitalized, and
significantly undercapitalized.\45\ In addition, the Board has broad
authority to establish regulatory capital standards for bank holding
companies, savings and loan holding companies, and U.S. intermediate
holding companies of foreign banking organizations under the Bank
Holding Company Act, the Home Owners' Loan Act, and the Dodd-Frank
Reform and Consumer Protection Act (Dodd-Frank Act).\46\
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    \42\ 12 U.S.C. 3901-3911.
    \43\ 12 U.S.C. 1831o.
    \44\ 12 U.S.C. 3907(a)(1).
    \45\ 12 U.S.C. 1831o(c)(2).
    \46\ See 12 U.S.C. 1467a, 1844, 5365, 5371.
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    The proposed rule would apply only to advanced approaches banking
organizations. Advanced approaches banking organizations include
depository institutions, bank holding companies, savings and loan
holding companies, or intermediate holding companies with at least $250
billion in total consolidated assets or has consolidated on-balance
sheet foreign exposures of at least $10 billion, or a subsidiary of a
depository institution, bank holding company, savings and loan holding
company, or intermediate holding company that is an advanced approaches
banking organization. The proposed rule therefore would not impose
mandatory requirements on any small entities, unless the small entity
was a subsidiary of an advanced approaches banking organization.
    Further, as discussed previously in the Paperwork Reduction Act
section, the proposed rule, once final, may require changes to the
Risk-Based Capital Reporting for Institutions Subject to the Advanced
Capital Adequacy Framework (FFIEC 101; OMB No. 1557-0239 (OCC), 7100-
0319 (Board), and 3064-0159 (FDIC)) and the Consolidated Financial
Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128 (Board)).
In addition, the Board is aware of no other Federal rules that
duplicate, overlap, or conflict with the proposed changes to the
capital rule. Therefore, the Board believes that the proposed rule will
not have a significant economic impact on small banking organizations
supervised by the Board and therefore believes that there are no
significant alternatives to the proposed rule that would reduce the
economic impact on small banking organizations supervised by the Board.
    The Board welcomes comment on all aspects of its analysis. In
particular, the Board requests that commenters describe the nature of
any impact on small entities and provide empirical data to illustrate
and support the extent of the impact.
    FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires an agency, in connection with a proposed rule, to
prepare and make available for public comment an initial regulatory
flexibility analysis that describes the impact of a proposed rule on
small entities.\47\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The Small Business Administration (SBA) has defined ``small entities''
to include banking organizations with total assets of less than or
equal to $550 million if they are either independently owned and
operated or owned by a holding company that also has less than $550
million in total assets.\48\
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    \47\ 5 U.S.C. 601 et seq.
    \48\ The SBA defines a small banking organization as having $550
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended, effective December 2, 2014). In its determination, the
``SBA counts the receipts, employees, or other measure of size of
the concern whose size is at issue and all of its domestic and
foreign affiliates.'' See 13 CFR 121.103. Following these
regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
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    As of September 30, 2018, there were 3,533 FDIC-supervised
institutions, of which 2,726 are considered small entities for the
purposes of RFA. These small entities hold $494 billion in
[[Page 18184]]
assets, accounting for 16.5 percent of total assets held by FDIC-
supervised institutions.\49\
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    \49\ FDIC Call Report, September 30, 2018.
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    The proposed rule would apply to only three advanced approaches
banking organizations, one of which has an IDI subsidiary that is FDIC-
supervised and has less than $550 million in total assets. However,
that institution is not a small entity for the purposes of RFA since it
is owned by a holding company with over $550 million in total assets.
Since this proposal does not affect any FDIC-supervised institutions
that are defined as small entities for the purposes of the RFA, the
FDIC certifies that the proposed rule will not have a significant
economic impact on a substantial number of small entities.
    The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would this
proposed rule have any significant effects on small entities that the
FDIC has not identified?
C. Plain Language
    Section 722 of the Gramm-Leach-Bliley Act \50\ 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. For example:
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    \50\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
     Have the agencies organized the material to suit your
needs? If not, how could they present the rule more clearly?
     Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
     Is this section format adequate? If not, which of the
sections should be changed and how?
     What other changes can the agencies incorporate to make
the regulation easier to understand?
D. Riegle Community Development and Regulatory Improvement Act of 1994
    Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\51\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and clients of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form.\52\
---------------------------------------------------------------------------
    \51\ 12 U.S.C. 4802(a).
    \52\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
    The agencies note that comment on these matters has been solicited
in other sections of this Supplementary Information section, and that
the requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that further will inform the agencies' consideration of
RCDRIA.
E. OCC Unfunded Mandates Reform Act of 1995 Determination
    The OCC has analyzed the proposed rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA).\53\ Under this analysis,
the OCC considered whether the proposed rule includes a Federal mandate
that may result in the expenditure by State local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation). The
UMRA does not apply to regulations that incorporate requirements
specifically set forth in law.
---------------------------------------------------------------------------
    \53\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------
    The OCC's estimated UMRA cost is near zero. Therefore, the OCC
finds that the proposed rule does not trigger the UMRA cost threshold.
Accordingly, the OCC has not prepared the written statement described
in section 202 of the UMRA.
List of Subjects
12 CFR Part 3
    Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 217
    Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies.
12 CFR Part 324
    Administrative practice and procedure, Banks, Banking, Capital
adequacy, Savings associations, State non-member banks.
Office of the Comptroller of the Currency
    For the reasons set out in the joint preamble, the OCC proposes to
amend 12 CFR part 3 as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
    Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
2. Section 3.2 is amended by adding the definitions of ``custody
bank'', ``fiduciary or custodial and safekeeping account'', and
``qualifying central bank'' in alphabetical order as follows:
Sec.  3.2  Definitions.
* * * * *
    Custody bank means a national bank or Federal savings association
that is a subsidiary of a depository institution holding company that
is a custodial banking organization under 12 CFR 217.2.
* * * * *
    Fiduciary or custodial and safekeeping account means, for purposes
of section 3.10(c)(4)(ii)(J), an account administered by a custody bank
for which the custody bank provides fiduciary or custodial and
safekeeping services, as authorized by applicable federal or state law.
* * * * *
    Qualifying central bank means:
    (1) A Federal Reserve Bank;
    (2) The European Central Bank, and
    (3) The central bank of any member country of the OECD, if:
    (i) Sovereign exposures to the member country would receive a zero
percent risk-weight under section 3.32 of this part; and
    (ii) The sovereign debt of the member country is not in default or
has not been in default during the previous 5 years.
* * * * *
0
3. Section 3.10, paragraph (c)(4)(ii) is revised and new paragraph
(c)(4)(ii)(J) is added to read as follows:
Sec.  3.10  Minimum capital requirements.
* * * * *
[[Page 18185]]
    (c) * * *
    (4) * * *
* * * * *
    (ii) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(4)(ii)(A) through (H) of
this section, as adjusted pursuant to paragraph (c)(4)(ii)(I) of this
section for a clearing member national bank and Federal savings
association and paragraph (c)(4)(ii)(J) of this section for a custody
bank:
* * * * *
    (J) A custodial bank shall exclude from its total leverage exposure
the lesser of:
    (1) The amount of funds that the custody bank has on deposit at a
qualifying central bank; and
    (2) The amount of funds that the custody bank's clients have on
deposit at the custody bank that are linked to fiduciary or custodial
and safekeeping accounts. For purposes of this paragraph, a deposit
account is linked to a fiduciary or custodial and safekeeping account
if the deposit account is provided to a clients that maintains a
fiduciary or custodial and safekeeping account with the custody bank,
and the deposit account is used to facilitate the administration of the
fiduciary or custody and safekeeping account.
* * * * *
Federal Reserve System
12 CFR Chapter II
Authority and Issuance
    For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is proposed to be amended as set
forth below:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
4. The authority citation for part 217 continues to read as follows:
    Authority:  12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
5. Section 217.2 is amended by adding the definitions of ``custodial
banking organization,'' ``fiduciary or custodial and safekeeping
accounts,'' and ``qualifying central bank'' in alphabetical order as
follows:
Sec.  217.2  Definitions.
* * * * *
    Custodial banking organization means
    (1) A Board-regulated institution that is:
    (i) A top-tier depository institution holding company domiciled in
the United States that has assets under custody that are at least 30
times the amount of the depository institution holding company's total
assets; or
    (ii) A state member bank that is a subsidiary of a depository
institution holding company described in paragraph (1)(i).
    (2) For purposes of this definition, total assets are equal to the
average of the banking organization's total consolidated assets for the
four most recent calendar quarters. Assets under custody are equal to
the average of the Board-regulated institution's assets under custody
for the four most recent calendar quarters.
* * * * *
    Fiduciary or custodial and safekeeping account means, for purposes
of Sec.  217.10(c)(4)(ii)(J), an account administered by a custodial
banking organization for which the custodial banking organization
provides fiduciary or custodial and safekeeping services, as authorized
by applicable federal or state law.
* * * * *
    Qualifying central bank means
    (1) A Federal Reserve Bank;
    (2) The European Central Bank, and
    (3) The central bank of any member country of the Organisation for
Economic Co-operation and Development, if
    (i) Sovereign exposures to the member country would receive a zero
percent risk-weight under section 32 of this part; and
    (ii) The sovereign debt of the member country is not in default or
has not been in default during the previous 5 years.
* * * * *
0
6. Section 217.10, paragraph (c)(4)(ii) is revised and new paragraph
(c)(4)(ii)(J) is added to read as follows:
Sec.  217.10  Minimum capital requirements.
* * * * *
    (c) * * *
    (4) * * *
    (ii) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(4)(ii)(A) through (H) of
this section, as adjusted pursuant to paragraph (c)(4)(ii)(I) of this
section for a clearing member Board-regulated institution and paragraph
(c)(4)(ii)(J) of this section for a custodial banking organization:
* * * * *
    (J) A custodial banking organization shall exclude from its total
leverage exposure the lesser of:
    (1) The amount of funds that the custodial banking organization has
on deposit at a qualifying central bank; and
    (2) The amount of funds in deposit accounts at the custodial
banking organization that are linked to fiduciary or custodial and
safekeeping accounts at the custodial banking organization. For
purposes of this paragraph, a deposit account is linked to a fiduciary
or custodial and safekeeping account if the deposit account is provided
to a client that maintains a fiduciary or custodial and safekeeping
account with the custodial banking organization and the deposit account
is used to facilitate the administration of the fiduciary or custodial
and safekeeping account.
* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
    For the reasons set forth in the preamble, chapter III of title 12
of the Code of Federal Regulations is proposed to be amended as set
forth below.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
7. The authority citation for part 324 continues to read as follows:
    Authority:  12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
8. Section 324.2 is amended by adding the definitions of ``custody
bank,'' ``fiduciary or custodial and safekeeping accounts,'' and
``qualifying central bank'' in alphabetical order as follows:
Sec.  324.2  Definitions.
* * * * *
    Custody bank means an FDIC-supervised institution that is a
subsidiary of a depository institution holding company that is a
custodial banking organization under 12 CFR 217.2.
* * * * *
    Fiduciary or custodial and safekeeping account means, for purposes
of section 324.10(c)(4)(ii)(J), an account administered by a custody
bank for which the custody bank provides fiduciary or custodial and
safekeeping
[[Page 18186]]
services, as authorized by applicable federal or state law.
* * * * *
    Qualifying central bank means
    (1) A Federal Reserve Bank;
    (2) The European Central Bank, and
    (3) The central bank of any member country of the Organisation for
Economic Co-operation and Development, if
    (i) Sovereign exposures to the member country would receive a zero
percent risk-weight under section 324.32 of this part; and
    (ii) The sovereign debt of the member country is not in default or
has not been in default during the previous 5 years.
* * * * *
0
9. Section 324.10, paragraph (c)(4)(ii) is revised and new paragraph
(c)(4)(ii)(J) is added to read as follows:
Sec.  324.10  Minimum capital requirements.
* * * * *
    (c) * * *
    (4) * * *
    (ii) For purposes of this part, total leverage exposure means the
sum of the items described in paragraphs (c)(4)(ii)(A) through (H) of
this section, as adjusted pursuant to paragraph (c)(4)(ii)(I) of this
section for a clearing member FDIC-supervised institution and paragraph
(c)(4)(ii)(J) of this section for a custody bank:
* * * * *
    (J) A custody bank shall exclude from its total leverage exposure
the lesser of:
    (1) The amount of funds that the custody bank has on deposit at a
qualifying central bank; and
    (2) The amount of funds in deposit accounts at the custody bank
that are linked to fiduciary or custodial and safekeeping accounts at
the custody bank. For purposes of this paragraph, a deposit account is
linked to a fiduciary or custodial and safekeeping account if the
deposit account is provided to a client that maintains a fiduciary or
custodial and safekeeping account with the custody bank and the deposit
account is used to facilitate the administration of the fiduciary or
custodial and safekeeping account.
* * * * *
    Dated: March 25, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC, on March 29, 2019.
    By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-08448 Filed 4-29-19; 8:45 am]
 BILLING CODE 4810-33-P; 6210-01;-P 6714-01-P