[Federal Register Volume 76, Number 231 (Thursday, December 1, 2011)]
[Rules and Regulations]
[Pages 74631-74648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30665]
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1425]
RIN 7100-AD 77
Capital Plans
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
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SUMMARY: The Board is adopting amendments to Regulation Y to require
large bank holding companies to submit capital plans to the Federal
Reserve on an annual basis and to require such bank holding companies
to obtain approval from the Federal Reserve under certain circumstances
before making a capital distribution. This rule applies only to bank
holding companies with $50 billion or more of total consolidated
assets.
DATES: The final rule will become effective on December 30, 2011.
FOR FURTHER INFORMATION CONTACT: Benjamin W. McDonough, Senior Counsel,
(202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or
Christine E. Graham, Senior Attorney, (202) 452-3005, Legal Division;
Timothy P. Clark, Senior Advisor, (202) 452-5264, Michael Foley, Senior
Associate Director, (202) 452-6420, Anna Lee Hewko, Assistant Director,
(202) 530-6260, or Thomas R. Boemio, Manager, (202) 452-2982, Division
of Banking Supervision and Regulation, Board of Governors of the
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.
Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Overview of Comments
III. Scope
IV. Capital Planning
A. Annual Capital Planning Requirement
B. Mandatory Elements of a Capital Plan
C. Data Submissions
D. Federal Reserve Review of a Capital Plan
E. Federal Reserve Action on a Capital Plan
F. Federal Reserve Objection to a Capital Plan
G. Re-submission of a Capital Plan
V. Approval Requirements
A. General Requirements
B. Contents of Request for Approval and Procedures for Review
VI. Conforming Changes to Section 225.4(b) of Regulation Y
VII. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background
On June 17, 2011, the Board published a proposal in the Federal
Register to require large bank holding companies to submit capital
plans to the Federal Reserve on an annual basis and to require such
bank holding companies to provide prior notice to the Federal Reserve
under certain circumstances before making a capital distribution (the
proposed rule or NPR).\1\ The public comment period on the proposed
rule closed on August 5, 2011. The Board is adopting the rule in final
form with certain modifications that are discussed below (final
rule).\2\ The final rule
[[Page 74632]]
applies only to bank holding companies with $50 billion or more of
total consolidated assets.
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\1\ 76 FR 35351 (June 17, 2011).
\2\ The amendments to Regulation Y are codified at 12 CFR 225.8.
As discussed in section VI of this preamble, the rule also makes
conforming changes to section 225.4(b) of Regulation Y (12 CFR
225.4(b)).
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During the years leading up to the recent financial crisis, many
bank holding companies made significant distributions of capital, in
the form of stock repurchases and dividends, without due consideration
of the effects that a prolonged economic downturn could have on their
capital adequacy and ability to continue to operate and remain credit
intermediaries during times of economic and financial stress. The final
rule is intended to address such practices, building upon the Federal
Reserve's existing supervisory expectation that large bank holding
companies have robust systems and processes that incorporate forward-
looking projections of revenue and losses to monitor and maintain their
internal capital adequacy.\3\
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\3\ See SR letter 09-4 (Revised March 27, 2009), available at
http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm;
see also Revised Temporary Addendum to SR letter 09-4 (November 17,
2010) (SR 09-4), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101117b1.pdf.
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The Federal Reserve has long held the view that bank holding
companies generally should operate with capital positions well above
the minimum regulatory capital ratios, with the amount of capital held
commensurate with the bank holding company's risk profile.\4\ Bank
holding companies should have internal processes for assessing their
capital adequacy that reflect a full understanding of their risks and
ensure that they hold capital corresponding to those risks to maintain
overall capital adequacy.\5\ Bank holding companies that are subject to
the Board's advanced approaches risk-based capital requirements must
satisfy specific requirements relating to their internal capital
adequacy processes in order to use the advanced approaches to calculate
their minimum risk-based capital requirements.\6\
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\4\ See 12 CFR part 225, Appendix A; see also SR letter 99-18
(July 1, 1999), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM.
\5\ See SR 09-4.
\6\ See 12 CFR part 225, Appendix G, section 22(a); see also,
Supervisory Guidance: Supervisory Review Process of Capital Adequacy
(Pillar 2) Related to the Implementation of the Basel II Advanced
Capital Framework, 73 FR 44620 (July 31, 2008).
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As part of their fiduciary responsibilities to a bank holding
company, the board of directors and senior management bear the primary
responsibility for developing, implementing, and monitoring a bank
holding company's capital planning strategies and internal capital
adequacy process. The final rule does not diminish that responsibility.
Rather, the final rule is designed to (i) establish common minimum
supervisory standards for such strategies and processes for certain
large bank holding companies; (ii) describe how boards of directors and
senior management of these bank holding companies should communicate
the strategies and processes, including any material changes thereto,
to the Federal Reserve; and (iii) provide the Federal Reserve with an
opportunity to review large bank holding companies' proposed capital
distributions under certain circumstances.
In the Board's view, the analytical techniques and other
requirements set forth in the final rule are necessary to identify,
measure, and monitor risks to the financial stability of the United
States.\7\ An elevated capital planning standard for large bank holding
companies is appropriate because of the heightened risk they pose to
the financial system and the importance of capital in mitigating these
risks.\8\ Under section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act), the Board is required
to impose enhanced prudential standards on large bank holding
companies, including stress testing requirements; enhanced capital,
leverage, liquidity, and risk management requirements; and a
requirement to establish a risk committee.\9\ The Board expects that
large bank holding companies will reflect these enhanced prudential
standards, including the results of any required stress tests, in their
capital planning strategies and internal capital adequacy processes.
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\7\ See section 165(i)(1)(B)(iii) of Public Law 111-203, 124
Stat. 1376 (2010) (Dodd-Frank Act); 12 U.S.C. 5365(i)(1)(B)(iii).
\8\ Currently, savings and loan holding companies are not
subject to minimum regulatory capital ratio requirements. As
discussed in the Board's Notice of Intent To Apply Certain
Supervisory Guidance to Savings and Loan Holding Companies, the
Board is considering applying to savings and loan holding companies
the same consolidated risk-based and leverage capital requirements
as bank holding companies to the extent reasonable and feasible
taking into consideration the unique characteristics of savings and
loan holding companies and the requirements of Home Owners' Loan
Act. See 76 FR 22662, 22665 (April 22, 2011). The Board may extend
the capital plan rule's requirements to savings and loan holding
companies at such time as the Board applies minimum regulatory
capital ratio requirements to them.
\9\ See generally section 165 of the Dodd Frank Act; 12 U.S.C.
5365. One commenter expressed support for enhanced capital and
leverage requirements.
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The Dodd-Frank Act also requires the Board to implement early
remediation requirements on large bank holding companies under which a
large bank holding company experiencing financial distress must take
specific remedial actions in order to minimize the probability that the
company will become insolvent and minimize the potential harm of such
insolvency to the United States.\10\ These early remediation
requirements must impose limitations on capital distributions in the
initial stages of financial decline and increase in stringency as the
financial condition of the company declines.\11\ Depending on a large
bank holding company's financial condition, early remediation
requirements imposed under the Dodd-Frank Act may result in limitations
on a company's capital distributions in addition to the requirements
that are imposed by the final rule.
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\10\ See section 166 of the Dodd-Frank Act; 12 U.S.C. 5366.
\11\ Id.
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II. Overview of Comments
The Board received 16 comments on the proposed rule. Commenters
included financial trade associations, bank holding companies, policy
institutions, and individuals. Commenters generally expressed support
for the proposed rule. Several commenters recommended one or more
changes to specific provisions of the proposed rule.
For instance, many commenters provided suggestions on the timeframe
under which the Federal Reserve would review and act on a bank holding
company's capital plan. Commenters asked for more information related
to the data submissions that accompany the capital plan submission. In
addition, many of the commenters asked for clarification on the content
of the capital plans and provided views on the standards under which
the Federal Reserve could object to capital plans. Other commenters
provided suggestions on whether firms should be able to make capital
distributions not specified in their capital plans without providing
prior notice to the Federal Reserve and how such a standard should be
crafted. In addition, three commenters raised issues that would be
relevant to savings and loan holding companies should the final rule's
requirements extend to these institutions at a future date.
In developing this final rule, the Board has carefully considered
the comments received on the proposed rule. In response to these
comments, the Board has clarified the requirements of the rule and
modified the proposed rule in certain respects. For example, the Board
has--
Clarified in the preamble that a notice of a non-objection
to a capital
[[Page 74633]]
plan will extend through the first quarter of the subsequent year;
Clarified in the preamble that large bank holding
companies will remain subject to SR letter 09-4, which provides
guidance regarding capital distributions;
Revised the final rule to provide that, if the Federal
Reserve objects to a bank holding company's capital plan, the bank
holding company may not make any capital distribution (other than a
capital distribution with respect to which the Federal Reserve did not
object) until such time as the Federal Reserve issues a non-objection
to the company's capital plan; and
Added a limited exception that permits well capitalized
large bank holding companies that are performing in accordance with
baseline projections to make modest capital distributions in excess of
the amount described in the company's capital plan under certain
circumstances.
In addition, in response to commenters' requests for additional
guidance on the data collection, the Federal Reserve has published a
detailed description of the data that it intends to collect for
supervisory purposes and to support the review of capital plans in a
separate Federal Register notice.\12\
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\12\ 76 FR 55288 (September 7, 2011).
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These changes, as well as the Board's other responses to the
comments received, are discussed in greater detail below.
III. Scope
The final rule applies to every top-tier bank holding company
domiciled in the United States that has $50 billion or more in total
consolidated assets (large bank holding companies).\13\ As of September
30, 2011, there were approximately 34 large bank holding companies. The
Board notes that the asset threshold of $50 billion is consistent with
the threshold established by section 165 of the Dodd-Frank Act relating
to enhanced supervision and prudential standards for certain bank
holding companies.\14\
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\13\ Thus, the final rule will not apply to a foreign bank or
foreign banking organization that is itself a bank holding company
or treated as a bank holding company pursuant to section 8(a) of the
International Banking Act of 1978 (12 U.S.C. 3106(a)), but generally
will apply to any U.S.-domiciled bank holding company subsidiary of
the foreign bank or foreign banking organization that meets the
final rule's size threshold.
\14\ See section 165(a) of the Dodd-Frank Act; 12 U.S.C.
5365(a). The Dodd-Frank Act provides that the Board may, upon the
recommendation of the Financial Stability Oversight Council,
increase the $50 billion asset threshold for the application of the
resolution plan, concentration limit, and credit exposure report
requirements. See 12 U.S.C. 5365(a)(2)(B).
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The Board received a comment suggesting that the $50 billion asset
threshold be measured over a four-quarter period in order to minimize
the likelihood that temporary asset fluctuations would trigger the
rule's application. In response to this comment, the Board has amended
the proposal to measure ``total consolidated assets'' as the average of
a company's total consolidated assets over the previous four calendar
quarters, as reflected on the bank holding company's Consolidated
Financial Statements for Bank Holding Companies (FR Y-9C). This
calculation will be effective as of the due date of the bank holding
company's most recent FR Y-9C. The final rule also applies to any
institution that the Board determines, by order, shall be subject in
whole or in part to the rule's requirements based on the institution's
size, level of complexity, risk profile, scope of operations, or
financial condition. The final rule provides that a bank holding
company that becomes subject to the final rule by operation of the
asset threshold after the 5th of January of a calendar year will not be
subject until January 1 of the next calendar year to the final rule's
requirement to file a capital plan with the Federal Reserve, resubmit a
capital plan under certain circumstances, or to obtain prior approval
of capital distributions in excess of those described in the firm's
capital plan.
Consistent with the phase-in period for the imposition of minimum
risk-based and leverage capital requirements established in section 171
of the Dodd-Frank Act, until July 21, 2015, the final rule does not
apply to any bank holding company subsidiary of a foreign banking
organization that is currently relying on Supervision and Regulation
Letter SR 01-01 issued by the Board of Governors (as in effect on May
19, 2010).\15\
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\15\ Under Supervision and Regulation Letter SR 01-01, as a
general matter, a U.S. bank holding company that is owned and
controlled by a foreign bank that is a financial holding company
that the Board has determined to be well-capitalized and well-
managed is not required to comply with the Board's capital adequacy
guidelines. See SR letter 01-01 (January 5, 2001), available at
http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
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Several commenters suggested that the Board grant a transition
period to large bank holding companies that did not participate in the
2011 Comprehensive Capital Analysis and Review (CCAR). One commenter
further suggested that, during the transition period, this set of large
bank holding companies (non-CCAR firms) participate in a capital
planning exercise where they would submit data templates and conduct
stress testing, but would not be subject to the other requirements of
the rule, including the prior notice requirements. The Board has
carefully considered these comments and has decided not to provide for
a formal transition period for non-CCAR firms. Thus, all large bank
holding companies will be required to submit capital plans in January
2012 and will generally be subject to the rule's requirements. The
Board notes that the final rule is designed to be flexible enough to
accommodate bank holding companies of varying degrees of complexity and
to adjust to changing conditions over time. The level of detail and
analysis expected in a capital plan will vary based on the large bank
holding company's size, complexity, risk profile, and scope of
operations. Moreover, the Federal Reserve will work with non-CCAR firms
to communicate the review process and the information requirements of
the rule.
The Board understands that non-CCAR firms may need additional time
to build and implement the internal systems necessary to satisfy the
data collection requirements required with respect to stress scenarios
provided by the Board. Thus, for purposes of the Federal Reserve's
evaluation of capital plans due January 5, 2012, non-CCAR firms will
not be required to submit the complete set of data templates required
of the CCAR firms. Instead, as discussed in section IV.C. of the
preamble, some non-CCAR firms may be asked to submit limited, summary
information to the Federal Reserve about their projections of revenues
and losses.
Finally, three commenters raised issues that would be relevant to
savings and loan holding companies should the final rule's requirements
extend to these institutions at a future date. If the Board decides to
extend the final rule to savings and loan holding companies through
separate rulemaking or by order, it intends to take these comments into
account.
IV. Capital Planning
A. Annual Capital Planning Requirement
The final rule requires a large bank holding company to develop and
maintain a capital plan. At least annually, the bank holding company's
board of directors or a designated committee thereof is required to
review the robustness \16\ of the holding
[[Page 74634]]
company's process for assessing capital adequacy, ensure that any
deficiencies in the firm's process for assessing capital adequacy are
appropriately remedied, and approve the bank holding company's capital
plan.\17\
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\16\ The proposed rule would have required a bank holding
company's board of directors or designated committee to review the
``effectiveness'' of the holding company's process for assessing
internal capital adequacy. In response to comments that this
requirement was unclear, the Board has replaced the term
``effectiveness'' with the term ``robustness'' and provided guidance
on how robustness should be evaluated.
\17\ As part of this review, the board of directors should
consider any remaining uncertainties, limitations, and assumptions
associated with the bank holding company's capital adequacy process.
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Robustness of a large bank holding company's capital adequacy
process should be evaluated based on the following elements:
(i) A sound risk management infrastructure that supports the
identification, measurement, and assessment of all material enterprise-
level risks arising from the exposures and business activities of the
bank holding company;
(ii) An effective process for translating risk measures into
estimates of potential loss over a range of adverse scenarios and
environments--using multiple, complementary loss forecasting
methodologies--and for aggregating those estimated losses across the
bank holding company; \18\
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\18\ While a company should use multiple, complementary loss
forecasting methodologies in its process for assessing capital
adequacy (see section 225.8(d)(2)(ii) of the final rule), a company
is not required to use multiple methodologies when estimating the
expected uses and sources of capital for purposes of section
225.8(d)(2)(i) of the final rule.
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(iii) A clear definition of available capital resources and an
effective process for forecasting available capital resources
(including any forecasted revenues) over the same range of adverse
scenarios and environments used for loss forecasting;
(iv) A process for considering the impact of loss and resource
estimates on capital adequacy, in line with the bank holding company's
stated goals for the level and composition of capital, and taking into
account any limitations of the company's capital adequacy process and
its components;
(v) A process, supported by the bank holding company's capital
policy, to use its assessments of the impact of loss and resource
estimates on capital adequacy to make key decisions regarding the
current level and composition of capital, specific capital actions, and
capital contingency plans as they affect capital adequacy;
(vi) Robust internal controls governing capital adequacy process
components, including sufficient documentation; change control; model
validation and independent review; and audit testing; and
(vii) Effective board and senior management oversight of the bank
holding company's capital adequacy process, including periodic review
of capital goals, assessment of the appropriateness of adverse
scenarios considered in capital planning, regular review of any
limitations and uncertainties in the process, and approval of planned
capital actions.
Under the proposed rule, a large bank holding company would have
been required to submit its capital plan by January 5th. Commenters
provided suggestions on the proposed deadline. One commenter expressed
the concern that a large bank holding company will be required to rely
on tentative fourth quarter financial statements in developing its
capital plan and suggested that the deadline be pushed to later in the
first quarter. Another commenter suggested that the Board adopt a
rolling submission process to permit firms to align capital plan
submission with internal capital planning process. As discussed below,
these concerns were motivated in part by the concern that the timing of
the capital plan submission and review interrupted firms' ability to
make capital distributions in the first quarter. The Board has
addressed these concerns to a degree by clarifying in the preamble
that, for a capital plan submitted in the first quarter, a non-
objection would cover the four-quarter period commencing with the
second quarter and extend through the first quarter of the following
year. For a capital plan resubmitted after the first quarter, a non-
objection would extend through the first quarter of the subsequent
year.
As further discussed below, the Board has decided to maintain the
proposed submission date of January 5th for capital plans. Doing so
will permit review of capital plans within the first quarter, thus
minimizing to the greatest extent possible the potential to disrupt a
large bank holding company's ability to make capital distributions in
subsequent quarters of that year. In addition, a single submission date
ensures that firms are finalizing their capital plans based on the same
quarter's data, which permits the Board to perform a cross-firm
comparison of capital plans based on the same scenarios and to
determine whether to object to firms' capital plans based on consistent
scenarios.
B. Mandatory Elements of a Capital Plan
Consistent with the NPR, the final rule defines a capital plan as a
written presentation of a large bank holding company's capital planning
strategies and capital adequacy process that includes certain mandatory
elements. These mandatory elements are organized into four main
components:
(i) An assessment of the expected uses and sources of capital over
the planning horizon (at least nine quarters, beginning with the
quarter preceding the quarter in which the bank holding company submits
its capital plan) that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions;
(ii) A detailed description of the bank holding company's process
for assessing capital adequacy;
(iii) The bank holding company's capital policy; and
(iv) A discussion of any expected changes to the bank holding
company's business plan that are likely to have a material impact on
the firm's capital adequacy or liquidity.
The mandatory elements under each component are described below.
While the final rule reflects a different organizational structure than
the proposed rule, the elements are substantively the same.\19\
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\19\ The proposed rule defined a ``capital plan'' as ``a written
presentation of a bank holding company's capital planning strategies
and capital adequacy processes that includes: (i) An assessment of
the expected uses and sources of capital over a nine-quarter
forward-looking planning period (beginning with the quarter
preceding the quarter in which the bank holding company submits its
capital plan) that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions, (ii) a detailed description of
the bank holding company's processes for assessing capital adequacy,
and (iii) an analysis of the effectiveness of these processes.''
Section 225.8(d)(2) of the proposed rule set forth additional
mandatory elements of a capital plan. The final rule simplifies the
organization by locating all of the required elements of a capital
plan in one place. The final rule defines a ``capital plan'' as
``written presentation of a bank holding company's capital planning
strategies and capital adequacy processes that includes the
mandatory elements set forth in [section 225.8(d)(2) of the final
rule].'' Section 225.8(d)(2) of the final rule sets forth the
comprehensive list of elements required to be included in a firm's
capital plan, including elements of the definition of a ``capital
plan'' in the proposed rule.
The final rule does not require a capital plan to include an
analysis of the effectiveness of the large bank holding company's
processes for assessing capital adequacy. As described in section
IV.A of this preamble, the board of directors of a large bank
holding company is required to assess the robustness of the bank
holding company's capital plan at least annually. In light of the
Board's supervisory review of this assessment, the Board will not
require a large bank holding company to include a separate analysis
in its capital plan.
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[[Page 74635]]
These mandatory elements of a capital plan are consistent with the
Federal Reserve's existing supervisory practice with respect to the
information that it expects large bank holding companies to include in
a capital plan for internal planning purposes. A large bank holding
company should include in its capital plan other information and
analysis that it determines is relevant to its capital planning
strategies and internal capital adequacy process.
The level of detail and analysis expected in a capital plan will
vary based on the large bank holding company's size, complexity, risk
profile, and scope of operations. Thus, for example, a large bank
holding company that has extensive credit exposures to commercial real
estate but very limited trading activities will be expected to have
robust systems in place to identify and monitor its commercial real
estate exposures, but its systems related to trading activities will
not need to be as sophisticated or extensive. In contrast, a large bank
holding company with extensive exposure to a variety of risk exposures,
including both retail and wholesale exposures, as well as significant
trading activities and international operations, will be expected to
have an integrated system for measuring and aggregating all of these
risk exposures.
One commenter requested that the Board clarify that the capital
planning process should focus on the consolidated organization. The
Board confirms that the capital planning process should focus on the
consolidated organization, but should also provide for the specific
capital needs of material subsidiaries consistent with the large bank
holding company's obligations to serve as a source of strength to its
subsidiary depository institutions.
Another commenter requested that the Federal Reserve recognize that
bank holding companies that are wholly-owned subsidiaries of foreign
banking organizations have different capital planning goals than
publicly-traded domestic bank holding companies. In particular, capital
planning by these institutions should take into account the financial
condition of their parent foreign bank and/or developments in the
parent foreign bank's home country. The Board recognizes that the
capital planning considerations will be different for domestic
subsidiaries of foreign banking organizations than for publicly traded
domestic bank holding companies and expects that the capital plans of
such domestic subsidiaries will reflect these differences.
1. Assessment of the Expected Uses and Sources of Capital Over the
Planning Horizon That Reflects the Large Bank Holding Company's Size,
Complexity, Risk Profile, and Scope of Operations, Assuming Both
Expected and Stressful Conditions
The first component of a large bank holding company's capital plan
is an assessment of the expected uses and sources of capital over the
planning horizon, assuming both expected and stressful conditions. This
assessment must contain the following elements:
(1) Estimates of projected revenues, losses, reserves, and pro
forma capital levels, including any minimum regulatory capital ratios
(for example, leverage, tier 1 risk-based, and total risk-based capital
ratios) and any additional capital measures deemed relevant by the bank
holding company, over the planning horizon under expected conditions
and under a range of stressed scenarios, including any scenarios
provided by the Federal Reserve and at least one stressed scenario
developed by the bank holding company appropriate to its business model
and portfolios; \20\
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\20\ Whereas the proposed rule required a large bank holding
company to conduct a probabilistic assessment of the likelihood of
the bank holding company-developed scenario, the Board has not
included it as a mandatory element in the final rule because it does
not believe that such a probabilistic assessment will assist the
bank holding company's board of directors in determining the
robustness of a capital plan in all circumstances. The Board has
also provided additional guidance on its expectations in regard to
the bank holding company-developed scenarios.
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(2) A calculation of the pro forma tier 1 common ratio over the
planning horizon under expected conditions and under a range of
stressed scenarios and discussion of how the company will maintain a
pro forma tier 1 common ratio above 5 percent under the stressed
scenarios required by the final rule;
(3) a discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(4) a description of all planned capital actions over the planning
horizon.
a. Stress Scenarios
In assessing its expected uses and sources of capital over the
planning horizon, a large bank holding company must estimate projected
revenues, losses, reserves, and pro forma capital levels under expected
conditions and under a range of stressed scenarios, including any
scenarios provided by the Federal Reserve. Several commenters asked
that the Board provide more guidance on these stressed scenarios and to
provide the scenarios to a bank holding company well before the
company's capital plan is due. Because the Board expects that the
stressed scenarios will change over time and in order for the scenarios
to reflect current data, the Board intends to provide the stressed
scenarios to a firm at least several weeks before the capital plans are
due.
Other commenters requested guidance on the relationship between
these stressed scenarios and the scenarios that the Board is required
to provide under section 165(i) of the Dodd-Frank Act. The Board
expects that the stress scenarios that it provides under the final rule
will be consistent with the stress scenarios it will provide to firms
for stress tests they conduct under section 165 of the Dodd-Frank Act.
In addition, the Board confirms that stress testing should be conducted
in accordance with any applicable supervisory guidance.
One commenter suggested that the Board design stress scenarios
based on extreme yet plausible conditions that are administered
simultaneously across multiple banks. Generally, the Board expects that
the stressed scenarios will consist of forecasts of key economic and
financial variables consistent with a stressful environment. In
calibrating the severity of a stress scenario, the Federal Reserve will
target a severe scenario that is not outside the range of
possibilities. There are multiple quantitative and qualitative
approaches to achieve this level of target severity, described below.
One approach involves the construction of a baseline forecast from
a large-scale macroeconomic model and identification of a scenario that
would have a specific probabilistic likelihood given the baseline
forecast. For example, a scenario may be constructed that has a 5
percent chance of occurring, conditional on the baseline outlook. While
many scenarios would be equally likely using this ``probabilistic
approach'' there are a variety of statistical approaches (together with
some judgment) that help to select an appropriate scenario from this
set. However, given that the probabilities of macroeconomic events can
only be imprecisely estimated, and that many macroeconomic models tend
to underestimate the true probabilities of stressful economic outcomes,
such an approach may not, by itself, be well-suited to scenario design.
An alternative approach assumes that the future path of the U.S.
economy would follow the path experienced during post-war recessions.
For example, of the 9 recessions since 1957, the average increase in
the unemployment rate was 2.4 percentage points and the average peak-
to-trough
[[Page 74636]]
decline in GDP was 2.2 percent; the stress scenario could thus be
designed to match these changes, or one could select from among
scenarios that were worse than the average one. While this ``recession
approach'' is transparent and straightforward to implement, it may not
account for the underlying state of the economy at the time the stress
test is conducted. The same shocks may lead to better or worse
macroeconomic performance at a particular point in time depending on
the scope for monetary or fiscal policy to offset the shocks or other
factors. The ``recession approach'' may be augmented with a
macroeconomic model to take into account the effect of current
conditions on macroeconomic performance.
Another approach augments the scenario generated by either the
``probabilistic approach'' or ``recession approach'' with one or more
particularly salient risks facing the economy or the financial system.
As an example, while the more adverse macroeconomic scenario used in
the 2009 Supervisory Capital Assessment Program (SCAP) was designed to
capture a generally stressful macroeconomic environment, it also
assumed an unprecedented 30 percent fall in house prices in 2009-2010,
in part because of the important role that house prices had played in
the macro-financial stress over the previous few years and expectations
that house price declines would continue to be a salient risk facing
the economy and the banking system.
The stress scenarios will provide forecasts for a number of
macroeconomic variables. In SCAP, the Federal Reserve defined the macro
scenarios by providing forecasts for three variables: GDP, unemployment
and house prices. In CCAR, the Federal Reserve defined the
macroeconomic scenarios using nine variables: GDP, the consumer price
index, disposable personal income, the unemployment rate, the three-
month T-bill rate, the 10-year Treasury rate, the rate on triple-B
rated corporate bonds, the value of a broad index of U.S. stock prices,
and house prices. Going forward, the Federal Reserve will likely
modestly increase the number of variables used to define the scenarios.
In particular, it will likely increase the number of U.S. macroeconomic
indicators, as well as variables summarizing global macroeconomic
conditions and exchange rates. In increasing the number of variables,
the Federal Reserve intends to balance the benefits of additional
precision to the scenarios with the cost of increased complexity.
Measuring the effects of the scenarios on a firm's trading
exposures requires the consideration of additional variables.
Evaluating the profit and loss sensitivity of a firm's trading
portfolio in response to an adverse market shock requires defining a
large set of specific factors for which macroeconomic models can give
only limited guidance (e.g., the Libor-overnight indexed swap rate
spread). In the SCAP and CCAR, the Federal Reserve used financial
market shocks consistent with what actually occurred from the end of
June 2008 to year-end 2008, a period of severe financial dislocation.
In the future, as the financial products traded by firms evolve, the
trading scenario will likely rely less on a particular historical
episode, and be guided more by a statistical framework based on
historical experience, or hypothetical assumptions, reflecting salient
risks facing the financial system. However, the trading book shock will
not be inconsistent with the environment and circumstances
characterized by the general macroeconomic scenario that is used.
The Board intends that a large bank holding company will integrate
into its capital plan, as one part of the underlying analysis, the
results of the company-run stress tests conducted under section 165 of
the Dodd-Frank Act, when implemented, and the Federal Reserve will
consider the results of those stress tests in its evaluation of that
bank holding company's capital plan.\21\ However, the Board does not
expect that the results of stress tests conducted under the Dodd-Frank
Act alone will be sufficient to address all relevant adverse outcomes
that should be covered in a satisfactory capital plan for purposes of
the final rule. The bank holding company-designed stress scenario
should reflect an individual company's unique vulnerabilities to
factors that affect its firm-wide activities and risk exposures,
including macroeconomic, market-wide, and firm-specific events.
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\21\ See section 165(i)(1) and (2) of the Dodd-Frank Act; 12
U.S.C. 5365(i)(1) and (2). In reviewing stress test results of U.S.
subsidiaries of foreign banking organizations, the Federal Reserve
intends to take into account any stress tests applicable to the
foreign consolidated group.
---------------------------------------------------------------------------
b. Minimum Regulatory Capital Ratios and 5 Percent Tier 1 Common Ratio
The following discussion provides more detail on the requirement
that a company calculate pro forma capital levels, including any
minimum regulatory capital ratios, and its pro forma tier 1 common
ratio over the planning horizon under expected and stressful
conditions. The final rule defines minimum regulatory capital ratios as
any minimum regulatory capital ratio that the Federal Reserve may
require of a large bank holding company, by regulation or order,
including the bank holding company's leverage ratio and tier 1 and
total risk-based capital ratios as calculated under Appendices A, D, E,
and G to this part 225 (12 CFR part 225, Appendices A, D, E, and G), or
any successor regulation. In the future, the Board may propose to
modify, or add to, the existing minimum regulatory capital
requirements.
In addition to the requirements discussed above, under the proposed
rule, until January 1, 2016, a large bank holding company would have
been required to calculate its pro forma tier 1 common ratio under
expected and stressful conditions and discuss in its capital plan how
the bank holding company will maintain a pro forma tier 1 common ratio
above 5 percent under those conditions throughout the planning horizon.
This level reflects a supervisory assessment of the minimum capital
needed to be a going concern throughout stressful conditions and on a
post-stress basis, based on an analysis of the historical distribution
of earnings by large banking organizations.
For purposes of this requirement, a large bank holding company's
tier 1 common ratio means the ratio of a large bank holding company's
tier 1 common capital to its total risk-weighted assets. Tier 1 common
capital is calculated as tier 1 capital less non-common elements in
tier 1 capital, including perpetual preferred stock and related
surplus, minority interest in subsidiaries, trust preferred securities
and mandatory convertible preferred securities.\22\ Tier 1 capital has
the same meaning as under Appendix A to Regulation Y, or any successor
regulation, and total risk-weighted assets has the same meaning as
under Appendices A, E, and G of Regulation Y, or any successor
regulation.\23\
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\22\ Specifically, non-common elements will include the
following items captured in the FR Y-9C: Schedule HC, line item 23
net of Schedule HC-R, line item 5; and Schedule HC-R, line items 6a,
6b, and 6c.
\23\ See 12 CFR part 225, Appendices A, E, and G.
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This definition of tier 1 common capital is consistent with the
definition that the Federal Reserve has used for supervisory purposes,
including in CCAR. The Basel III framework proposed by the Basel
Committee on Bank Supervision includes a different definition of tier 1
common capital.\24\ In recognition of the fact that the Board
[[Page 74637]]
and the other federal banking agencies continue to work on implementing
Basel III in the United States, the Board is requiring a large bank
holding company to demonstrate how it will maintain a minimum tier 1
common ratio above 5 percent under stressful conditions using the
Board's existing supervisory definition of tier 1 common capital. The
Board will work with the other federal banking agencies to implement
Basel III and to propose a Basel III tier 1 common capital ratio as a
new minimum regulatory capital ratio. The existing supervisory
definition of tier 1 common capital will remain in force under the
final capital plan rule until the Board adopts the Basel III tier 1
common ratio, which the Board remains strongly committed to implement.
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\24\ See Basel Committee on Banking Supervision, Basel III: A
global framework for more resilient banks and banking systems
(December 2010), available at http://www.bis.org/publ/bcbs189.pdf.
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c. Planned Capital Actions
In its assessment of the uses and sources of capital, a large bank
holding company's capital plan must describe all planned capital
actions over the planning horizon. The final rule defines a capital
action as any issuance of a debt or equity capital instrument, capital
distribution, and any similar action that the Federal Reserve
determines could impact a large bank holding company's consolidated
capital. A capital distribution is defined as a redemption or
repurchase of any debt or equity capital instrument, a payment of
common or preferred stock dividends, a payment that may be temporarily
or permanently suspended by the issuer on any instrument that is
eligible for inclusion in the numerator of any minimum regulatory
capital ratio, and any similar transaction that the Federal Reserve
determines to be in substance a distribution of capital.\25\
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\25\ For example, this definition includes payments on trust
preferred securities, but does not include payments on subordinated
debt that could not be temporarily or permanently suspended by the
issuer under the terms of the instrument.
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One commenter requested that the Board permit a capital plan to
specify alternative uses of capital. The Board believes that the
effects on a bank holding company's capital adequacy may vary
significantly depending on the nature of a capital distribution and
thus has not changed the requirement that a capital plan must include a
description of all planned capital actions over the planning horizon.
2. Description of the Bank Holding Company's Process for Assessing
Capital Adequacy
The second component of a large bank holding company's plan is a
description of the bank holding company's process for assessing capital
adequacy. This description must contain the following elements:
(1) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain capital commensurate with
its risks, maintain capital above the minimum regulatory capital ratios
and above a tier 1 common ratio of 5 percent, and serve as a source of
strength to its subsidiary depository institutions; and
(2) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain sufficient capital to
continue its operations by maintaining ready access to funding, meeting
its obligations to creditors and other counterparties, and continuing
to serve as a credit intermediary.
One commenter requested that the Board clarify that bank holding
companies subject to an internal capital adequacy assessment process
(ICAAP) requirement under the Federal Reserve's advanced approaches
rules would be able to combine components of their ICAAP with their
capital plan submissions and submit them on the capital plan timeline.
ICAAP would constitute an internal capital adequacy process for
purposes of the final rule, and bank holding companies that have a
satisfactory ICAAP generally would be considered to have a satisfactory
internal capital adequacy process for purposes of the final rule.
Moreover, the description of the bank holding company's process for
assessing capital adequacy may be presented in a document separate from
the capital plan. Like other elements of a large bank holding company's
capital plan, this description must be submitted to the Federal Reserve
on an annual basis and must describe any changes to the bank holding
company's capital planning process and any new analyses supporting
changes to this process.
3. Capital Policy
The third component of a large bank holding company's plan is its
capital policy. A capital policy is defined as the bank holding
company's written assessment of the principles and guidelines used for
capital planning, capital issuance, usage and distributions, including
internal capital goals; the quantitative or qualitative guidelines for
dividend and stock repurchases; the strategies for addressing potential
capital shortfalls; and the internal governance procedures around
capital policy principles and guidelines. A large bank holding company
should be able to demonstrate that achieving its stated internal
capital goals will allow it to maintain ready access to funding, meet
its obligations to creditors and other counterparties, and continue to
serve as a credit intermediary during and after the impact of the
stressed scenarios included in its capital plan over the planning
horizon.\26\ Similarly, a large bank holding company's capital policy
should reflect strategies for addressing potential capital shortfalls,
such as by reducing or eliminating capital distributions, raising
additional capital, or preserving its existing capital, to support
circumstances where the economic outlook has deteriorated, the bank
holding company has underestimated its risks, or the bank holding
company's performance has not met its expectations.
---------------------------------------------------------------------------
\26\ In addition, each bank holding company should ensure that
its internal capital goals reflect any relevant minimum regulatory
capital ratio levels, any higher levels of regulatory capital ratios
(above regulatory minimums), and any additional capital measures
that, when maintained, will allow the bank holding company to
continue its operations.
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4. Discussion of Any Expected Changes to the Bank Holding Company's
Business Plan That Are Likely To Have a Material Impact on the Firm's
Capital Adequacy or Liquidity
The fourth element of a large bank holding company's capital plan
is a discussion of any expected changes to the bank holding company's
business plan that are likely to have a material impact on the firm's
capital adequacy or liquidity. For example, the capital plan should
reflect any expected material effects of new lines of business or
activities on the bank holding company's capital adequacy or liquidity,
including revenue and losses.
C. Data Submissions
In connection with its submission of a capital plan to the Federal
Reserve, a large bank holding company is required to provide certain
data to the Federal Reserve. To the greatest extent possible, the data
templates, and any other data requests, are designed to minimize burden
on the bank holding company and to avoid duplication, particularly in
light of potential new reporting requirements arising from the Dodd-
Frank Act. Data required by the Federal Reserve may include, but are
not limited to, information regarding the bank holding company's
financial condition, structure, assets, risk exposure, policies and
procedures, liquidity, and management.
Commenters requested that the Board provide more guidance on the
nature and scope of the data requirements and
[[Page 74638]]
to provide any data templates at the time that the final rule becomes
effective. Commenters also asked that the Federal Reserve be mindful to
avoid duplicative data requests.
In response to these comments, the Board has published a separate
notice in the Federal Register that clarifies the nature and scope of
the data requirements on the large bank holding companies firms that
participated in CCAR, including the data templates, and is soliciting
public comments on this information collection.\27\
---------------------------------------------------------------------------
\27\ 76 FR 55288 (September 7, 2011).
---------------------------------------------------------------------------
Commenters suggested that companies be given additional time to
develop technology and processes to the extent strict compliance with a
data request would result in undue burden or expense. The Board
understands that non-CCAR firms are less likely to have technology and
processes relevant for the specific data collection than the bank
holding companies that participated in CCAR, and thus only large bank
holding companies that previously participated in CCAR will be required
to provide the complete set of data templates in connection with the
submission of the capital plan due on January 5, 2012. In connection
with this capital plan submission, non-CCAR firms may be required to
submit certain limited, summary information under the baseline and
stress scenarios, which may include income, balance sheet, capital, and
revenue information by asset class. Going forward, the Federal Reserve
will require a more complete set of data from non-CCAR firms to support
their future capital plan submissions.
In addition, the Board recognizes that non-CCAR firms have not had
the benefit of receiving the supervisory review and feedback provided
in the CCAR and Supervisory Capital Assessment Program. The Federal
Reserve is engaging in extensive dialogue with these non-CCAR firms to
communicate its expectations on capital planning and capital policies.
In addition, commenters requested that the Board provide additional
information regarding the security controls and processes the Board and
the Reserve Banks have in place to safeguard data. The Board and
Reserve Banks have internal controls and processes in place to help to
ensure the integrity of confidential and proprietary data. In addition,
the Board follows the National Institute of Standards and Technology
guidance and adheres to Federal Information Security Management Act
compliance for all the information collections and storage where
sensitive data are concerned.\28\
---------------------------------------------------------------------------
\28\ See generally National Institute of Standards and
Technology, http://csrc.nist.gov/; 44 U.S.C. 3541, et seq.
---------------------------------------------------------------------------
One commenter suggested that capital plans, non-objections or
objections to capital plans, requests for reconsideration, approvals or
rejections of any such requests, prior notice filings, and results of
stressed scenarios be treated as confidential supervisory information.
The confidentiality of information submitted to the Board under the
final rule and related materials shall be determined in accordance with
applicable exemptions under the Freedom of Information Act (5 U.S.C.
552) and the Board's Rules Regarding Availability of Information (12
CFR part 261).
D. Federal Reserve Review of a Capital Plan
The final rule provides that the Federal Reserve will consider the
following factors in reviewing a large bank holding company's capital
plan:
(i) The comprehensiveness of the capital plan, including the extent
to which the analysis underlying the capital plan captures and
addresses potential risks stemming from activities across the firm and
the company's capital policy;
(ii) The reasonableness of the bank holding company's assumptions
and analysis underlying the capital plan and its methodologies for
reviewing the robustness of its capital adequacy process; and
(iii) The bank holding company's ability to maintain capital above
each minimum regulatory capital ratio and above a tier 1 common ratio
of 5 percent on a pro forma basis under expected and stressful
conditions throughout the planning horizon, including but not limited
to any stressed scenarios required under the final rule.
The Federal Reserve will also consider the following information in
reviewing a large bank holding company's capital plan:
(i) Relevant supervisory information about the bank holding company
and its subsidiaries;
(ii) The bank holding company's regulatory and financial reports,
as well as supporting data that will allow for an analysis of the bank
holding company's loss, revenue, and reserve projections;
(iii) As applicable, the Federal Reserve's own pro forma estimates
of the firm's potential losses, revenues, reserves, and resulting
capital adequacy under expected and stressful conditions, including but
not limited to any stressed scenarios required under the final rule, as
well as the results of any stress tests conducted by the bank holding
company or the Federal Reserve; and
(iv) Other information requested or required by the Federal
Reserve, as well as any other information relevant, or related, to the
bank holding company's capital adequacy.
A commenter suggested that the Federal Reserve recognize the
significance of consultation and coordination with appropriate home
country supervisory authorities to the capital planning and review
process. The Federal Reserve intends to continue consultation and
coordination with home country supervisors in evaluating compliance
with prudential standards.
E. Federal Reserve Action on a Capital Plan
Nearly all commenters expressed the concern that the timing of the
capital plan submission and review will interrupt the ability of bank
holding companies to make capital distributions in the first quarter.
Commenters proposed several alternatives, including a rolling
submission process to allow greater flexibility and both earlier and
later submission due dates to address blackout periods under the
federal securities laws.
In response to these commenters, the Board has adjusted the period
over which a non-objection applies. For a capital plan submitted in the
first quarter, a non-objection would cover the four-quarter period
commencing with the second quarter. For a capital plan resubmitted
after the first quarter, a non-objection would extend through the first
quarter of the subsequent year. This change is intended to permit bank
holding companies to continue to engage in planned capital actions
throughout the first quarter of the calendar year while their capital
plans are under review.
In the final rule, a large bank holding company is required to
submit a complete annual capital plan by January 5 of each calendar
year. The Federal Reserve will object by March 31 to the capital plan,
in whole or in part, or provide the large bank holding company with a
notice of non-objection. With respect to a large bank holding company
that submits its 2012 capital plan on a timely basis in January 2012,
the Federal Reserve commits to respond by March 15, 2012, in order to
give the bank holding company adequate opportunity to make adjustments
to its capital distributions in the first quarter of 2012.
This timeframe is intended to balance the Federal Reserve's
interest in having
[[Page 74639]]
adequate time to review a capital plan with the bank holding company's
interest in a process that does not unduly interfere with the ability
of its board of directors and senior management to take appropriate
capital actions. For example, if a firm submitted a capital plan to the
Federal Reserve on a timely basis in January 2012, the Federal Reserve
would provide a response by no later than March 15, 2012. The Federal
Reserve's non-objection to that capital plan would extend through the
first quarter of 2013, meaning that the firm could continue to make
capital distributions during the first quarter of 2013 in accordance
with the capital plan it submitted in 2012. If the firm submitted its
2013 capital plan on a timely basis in January 2013, the firm would be
notified by March 31, 2013, whether or not the Federal Reserve had any
objection to its 2013 capital plan. If the Federal Reserve did not
object to the firm's 2013 capital plan, the firm could begin making
capital distributions under that capital plan in the second quarter of
2013. Thus, for this hypothetical firm, the Federal Reserve's review of
its capital plan should not delay the bank holding company's ability to
pay dividends or take other capital actions while awaiting a response
from the Federal Reserve.
Commenters also suggested that the Board make appropriate
transitional arrangements so that bank holding companies are not
unnecessarily prevented from making capital distributions in the period
between the effective date of the final rule and the first date on
which a large bank holding company would be permitted to make capital
distributions pursuant to its initial capital plan.
Large bank holding companies remain subject to the SR letter 09-4.
SR letter 09-4 states that a banking organization should consult with
the Federal Reserve before making certain capital distributions. \29\
In addition, SR letter 09-4 states that a banking organization should
hold capital commensurate with its overall risk profile and that a
banking organization should include a full understanding of its risks
in its assessment of capital adequacy and ensure that it holds capital
corresponding to those risks to maintain overall capital adequacy.\30\
---------------------------------------------------------------------------
\29\ See supra note 3.
\30\ Id.
---------------------------------------------------------------------------
With respect to the period between the effective date of the final
rule and the date on which capital distributions would be permitted
pursuant to a bank holding company's initial capital plan, bank holding
companies that participated in CCAR will continue to be subject to
Revised Temporary Addendum to SR letter 09-4 until the firms receive a
notice of objection or non-objection from the Federal Reserve with
respect to the capital plan due January 5, 2012.\31\ Thus, the Board
expects such firms would not increase their capital distributions above
the amount described in an approved capital plan, which may include an
updated and resubmitted capital plan. Non-CCAR firms--which are subject
to SR letter 09-4 but not the Revised Temporary Addendum to SR letter
09-4--may make capital distributions before receiving a response from
the Federal Reserve with respect to their capital plans due January 5,
2012, but are expected to consult with their appropriate Reserve Bank
before increasing capital distributions.\32\
---------------------------------------------------------------------------
\31\ Id.
\32\ Id.
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The Board recognizes that certain bank holding companies may have
to align their internal capital planning processes with the required
dates for capital plan submission. However, the Board believes that the
timeframes set forth in the final rule balance the Federal Reserve's
interest in performing a cross-firm comparison of capital plans based
on the same scenarios with the bank holding company's interest in
minimizing disruptions to firms' capital planning processes. In order
to adhere to the schedule set forth in the final rule, the Federal
Reserve may require bank holding companies to submit data templates and
other required information several weeks before complete capital plans
are due.
F. Federal Reserve Objection to a Capital Plan
As under the NPR, the final rule provides that the Federal Reserve
may object to a capital plan, in whole or in part, if:
(i) The Federal Reserve determines that the bank holding company
has material unresolved supervisory issues, including but not limited
to issues associated with its capital adequacy process;
(ii) The assumptions and analysis underlying the bank holding
company's capital plan, or the bank holding company's methodologies for
reviewing the robustness of its capital adequacy process, are not
reasonable or appropriate;
(iii) The bank holding company has not demonstrated an ability to
maintain capital above each minimum regulatory capital ratio or above a
tier 1 common ratio of 5 percent on a pro forma basis under expected
and stressful conditions throughout the planning horizon; or
(iv) The bank holding company's capital planning process or
proposed capital distributions otherwise constitute an unsafe or
unsound practice, or would violate any law, regulation, Board order,
directive, or any condition imposed by, or written agreement with, the
Board. In determining whether a capital plan or proposed capital
distributions would constitute an unsafe or unsound practice, the
Federal Reserve will consider whether the bank holding company is and
will remain in sound financial condition after giving effect to the
capital plan and all proposed capital distributions.
The Federal Reserve received general comments on the grounds for
objection. One commenter suggested that the Federal Reserve not
substitute its judgment regarding capital distributions for the board
of directors' judgment. As noted above, the Board believes that the
board of directors and senior management of a large bank holding
company bear the primary responsibility for developing, implementing,
and monitoring the bank holding company's capital planning strategies
and internal capital adequacy process. The Federal Reserve's review of
capital plans is intended to ensure that large bank holding companies
have sufficient capital to weather stressful economic conditions and
help to mitigate any systemic risks posed by the firms. In this manner,
the Board intends to strike a balance between maintaining the board of
directors and senior management's primary responsibility in capital
planning and ensuring that these firms have sufficient capital to
operate in a manner that is safe and sound and does not pose material
risk to the financial system.
The Federal Reserve intends to review capital plans on a firm-by-
firm basis in accordance with the regulatory standards set forth in the
final rule. When evaluating capital adequacy and reviewing banks'
estimates of capital adequacy, the Federal Reserve may consider
macroprudential factors, including financial stability, in determining
whether the assumptions and analysis underlying the bank holding
company's capital plan, or the bank holding company's methodologies for
assessing its capital adequacy, are reasonable or appropriate.
Commenters also had several comments on the use of material
unresolved supervisory issues as grounds for objection. For example,
commenters requested that the Board confirm that not every ``matter
requiring
[[Page 74640]]
attention'' will constitute a ``material unresolved supervisory
issue.'' Commenters also suggested that supervisory issues unlikely to
have a material impact on a large bank holding company's capital
position, liquidity, or financial results should not be grounds for
objecting to a proposed capital plan.
Under the final rule, not every ``matter requiring attention'' will
constitute a ``material unresolved supervisory issue''; rather, the
Federal Reserve will review supervisory issues on a case-by-case basis.
The Federal Reserve generally expects an institution to correct such
deficiencies before making any significant capital distributions.
The Federal Reserve will notify the bank holding company in writing
of the reasons for a decision to object to a capital plan. The Federal
Reserve will communicate the basis for the objection when it notifies
the firm of the objection. Within ten calendar days of receipt of a
notice of objection, the bank holding company may submit a written
request for reconsideration of the objection, including an explanation
of why reconsideration should be granted. Within ten calendar days of
receipt of the bank holding company's request, the Board will notify
the company of its decision to affirm or withdraw the objection to the
bank holding company's capital plan.
Under the final rule, the period in which a large bank holding
company is permitted to submit a written request for reconsideration
was increased from five days to ten days in response to a commenter
request. The Board had initially proposed the five-day period to permit
adequate processing time with respect to dividend proposals before the
end of the first quarter. The commenter suggested giving a large bank
holding company the ability to respond within ten days would not
necessarily interfere with that process. The final rule provides that
the Federal Reserve will respond to a request for reconsideration
within ten days of receipt. With respect to a capital plan submitted on
a timely basis in January 2012, a large bank holding company that
chooses to submit a written request for reconsideration not later than
ten days before quarter-end will receive a response before the end of
the quarter. With respect to a capital plan submitted on a timely basis
in future years, the timing of a written request for reconsideration
would not constrain a large bank holding company's ability to make
capital distributions in the first quarter.
Under the final rule, as an alternative to requesting
reconsideration of the Federal Reserve's objection to a capital plan, a
large bank holding company may instead choose to request a hearing. The
hearing procedures would be the same as those that apply following the
Federal Reserve's disapproval of a capital distribution. These
procedures are discussed in section V.B. of this preamble.
To the extent that the Federal Reserve objects to a capital plan
and to the capital actions described therein, and until such time as
the Federal Reserve determines that the bank holding company's capital
plan satisfies the factors provided in the final rule, the bank holding
company generally may not make any capital distribution, other than as
provided below.
G. Re-Submission of a Capital Plan
A large bank holding company is required to update and re-submit
its capital plan to the Federal Reserve within 30 calendar days after
the occurrence of one of the following events:
(i) The bank holding company determines there has been or will be a
material change in the bank holding company's risk profile (including a
material change in its business strategy or any material risk
exposures), financial condition, or corporate structure since the bank
holding company adopted the capital plan; \33\
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\33\ For purposes of determining whether a change in its risk
profile is material, a bank holding company will be required to
consider a variety of risks, including credit, market, operational,
liquidity, and interest rate risks.
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(ii) The Federal Reserve objects to the capital plan; or
(iii) The Federal Reserve directs the bank holding company in
writing to revise and resubmit its capital plan for any of the
following reasons: \34\
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\34\ At the request of a commenter, the Board clarifies that a
bank holding company is not required to file a new full capital plan
under section 225.8(d)(4)(i)(A) if the Federal Reserve has required
that an updated plan be filed under section 225.8(d)(4)(i)(C).
---------------------------------------------------------------------------
(1) The capital plan is incomplete or the capital plan, or the bank
holding company's internal capital adequacy process, contains material
weaknesses;
(2) There has been or will likely be a material change in the bank
holding company's risk profile (including a material change in its
business strategy or any risk exposure), financial condition, or
corporate structure;
(3) The stressed scenario(s) developed by the bank holding company
is not appropriate to its business model and portfolios, or changes in
financial markets or the macro-economic outlook that could have a
material impact on the bank holding company's risk profile and
financial condition require the use of updated scenarios; or
(4) The capital plan or the condition of the bank holding company
raise any issues to which the Federal Reserve could object to in its
review of a capital plan.
While the final rule reflects a different organizational structure
than the proposed rule, the requirements for resubmission are
substantively the same.\35\
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\35\ In the proposed rule, section 225.8(d)(1)(iv) imposed the
resubmission requirement and section 225.8(e)(4) set forth
additional grounds for resubmission. The final rule simplifies the
organization by locating all of the resubmission provisions in
section 225.8(d)(4).
---------------------------------------------------------------------------
Commenters asked for more guidance on the first condition for
resubmission, which requires a large bank holding company to resubmit
its capital plan if the bank holding company determines there has been
or will be a material change in the bank holding company's risk
profile, financial condition, or corporate structure since the bank
holding company adopted the capital plan. For example, resubmission may
be required if the financial performance of the bank holding company is
substantially worse than anticipated in its initial capital plan, or if
the company engages in a significant acquisition. In addition, one
commenter requested that the Board limit a ``material change''
requiring a large bank holding company to resubmit its capital plan to
one that would adversely affect the bank holding company's financial
condition and capital position.
The final rule leaves the decision to resubmit based on ``a
material change in the bank holding company's risk profile'' to the
bank holding company in the first instance. In addition, the Federal
Reserve may notify the bank holding company in writing that the Federal
Reserve had determined that a material change in the company's risk
profile, financial condition, or corporate structure had occurred or
was likely to occur.
One commenter suggested that the criteria for plan resubmission
should focus only on events that occurred after the date that the
Federal Reserve issued its non-objection. The Federal Reserve generally
does not intend to reevaluate a firm's capital plan to which it has
issued a non-objection, but reserves the right to determine that such a
capital plan was incomplete or the scenarios used in the capital plan
were not sufficiently stressed based on new information or changed
circumstances.
The Federal Reserve may extend the 30-day period for resubmission
for up to an additional 60 calendar days. The
[[Page 74641]]
Board considered a commenter's suggestion that the timing of a
resubmission should depend on the nature of the triggering event. Under
the final rule, the Federal Reserve may exercise its authority to
extend the 30-day period to provide for a longer resubmission period as
necessary to adjust for the nature of the triggering event.
Under the final rule, a large bank holding company is only required
to resubmit those portions of its capital plan that have changed. To
the extent that information contained in an initial capital plan were
still considered accurate and appropriate, the bank holding company
would be able to continue to rely on this information for purposes of
any revised or updated plan, provided that the bank holding company
provides an explanation of how the information should be considered in
the light of any new capital actions or changes in the bank holding
company's risk profile or strategy.
One commenter suggested that a large bank holding company be able
to comply with the resubmission requirement by updating portions of the
plan affected by the change or providing an informational supplement to
the plan describing its change and its impact. The Board expects that
bank holding companies will be able to incorporate by reference
portions of their previously filed capital plan to the extent those
portions were unaffected by the change requiring resubmission, and that
an informational supplement may be appropriate depending on the nature
of the revisions. However, in cases in which a large bank holding
company anticipates undertaking a significant acquisition of a
financial company, the Federal Reserve expects that nearly all of a
company's capital plan will be affected. Furthermore, to the extent
that the firm elects to develop new stressed scenarios or must
incorporate new stressed scenarios provided by the Federal Reserve into
its capital plan, the bank holding company should resubmit all portions
of the capital plan affected by those new stressed scenarios.
Another commenter suggested that the criteria for the issuance of a
non-objection to a revised and resubmitted capital plan focus on
whether the plan addresses the deficiencies identified in the Federal
Reserve's objection to the capital plan. Under the final rule, the
Federal Reserve intends to focus on whether the plan addresses
deficiencies identified in the objection, but will consider all aspects
of a company's capital adequacy in connection with a resubmission. In
conducting this review, the Federal Reserve will apply the same
standards that would apply to the review of an initial capital plan.
Another commenter requested that capital plan resubmissions be
responded to within 15 days, subject to a 15-day extension. The final
rule provides that the Federal Reserve will respond to a resubmitted
capital plan within 75 days of its resubmission. However, the Federal
Reserve intends to respond to a resubmitted capital plan in a shorter
time period if possible. The length of the review period will depend on
the materiality of the issues raised in the resubmission.
V. Approval Requirements
A. General Requirements
The proposed rule would have required a large bank holding company
to notify the Federal Reserve before making a capital distribution if
the Federal Reserve objected to the bank holding company's capital plan
and that objection was still outstanding.\36\ The Board is modifying
this requirement in the final rule. The final rule provides that, if
the Federal Reserve objects to a capital plan and until such time as
the Federal Reserve issues a non-objection to the bank holding
company's capital plan, the bank holding company may not make any
capital distribution, other than those capital distributions with
respect to which the Federal Reserve has indicated its non-objection.
This prohibition would remain in place until the Federal Reserve issued
a non-objection to the bank holding company's capital plan.
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\36\ Notwithstanding this requirement, prior notice would not
have been required under the NPR with respect to specific capital
distributions described in a company's capital plan that the Federal
Reserve did not object to, unless other circumstances required prior
notice.
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The change in the final rule is intended to avoid confusion on the
part of a large bank holding company that has received an objection to
its capital plan regarding whether it would be able to make a capital
distribution. Under the final rule, consistent with the proposed rule,
the Federal Reserve will evaluate a capital distribution using the same
standards it uses to evaluate a capital plan; thus, the Federal Reserve
would expect to disapprove a capital distribution request by a large
bank holding company that had received an objection to its capital plan
until the company had corrected the deficiencies that led to the
objection to the plan. As discussed in section IV.G. of this preamble,
the final rule provides a process for bank holding companies to
resubmit their capital plans to the Federal Reserve and for the Federal
Reserve to evaluate the re-submitted capital plans. If the Federal
Reserve provides its non-objection to a re-submitted capital plan, the
bank holding company generally may thereafter make capital
distributions consistent with the resubmitted capital plan.
In addition, there may be circumstances where the Federal Reserve
objects to some but not all of a large bank holding company's proposed
capital distributions as described in its capital plan. For example,
the Federal Reserve may object to a large bank holding company's
proposed payments of dividends on common stock, but notify the company
that the Federal Reserve does not object to payments on its preferred
stock. Unless changed circumstances would require approval of a capital
distribution as described below, the bank holding company in this
example may make payments on its preferred stock.
The proposed rule provided circumstances where prior notice would
be required for a capital distribution in circumstances where the
Federal Reserve had provided a non-objection to a capital plan. The
Board is modifying that requirement to require a large bank holding
company to obtain the Federal Reserve's prior approval with respect to
these capital distributions under the process set forth in the final
rule. The Federal Reserve expects that a large bank holding company
would apply the same rigorous capital planning process that it used to
develop its capital plan to its evaluation of capital distributions
that would cause the company to fall below its minimum capital
requirements, capital distributions that are above the amount described
in its capital plan, and capital distributions that follow a change in
circumstances. Similarly, the Federal Reserve will need significant
information to evaluate these types of proposed capital distributions.
Accordingly, the Board believes that a prior approval process would be
a more appropriate mechanism to evaluate these capital distributions.
Under the final rule, a large bank holding company generally will
need to obtain prior approval from the Federal Reserve before making
capital distributions if:
(i) After giving effect to the capital distribution, the bank
holding company will not meet a minimum regulatory capital ratio or a
tier 1 common ratio of at least 5 percent;
(ii) The Federal Reserve notifies the company that the Federal
Reserve has determined that the capital distribution will result in a
material adverse change to the organization's capital or liquidity
[[Page 74642]]
structure or that the company's earnings were materially
underperforming projections;
(iii) The dollar amount of the capital distribution will exceed the
amount described in the capital plan to which the Federal Reserve had
issued a non-objection; or
(iv) The capital distribution will occur during a period in which
the Federal Reserve is reviewing, or has requested resubmission of, the
bank holding company's capital plan.\37\ Commenters requested that the
Board provide clarity on a large bank holding company's ability to make
capital distributions in the following two periods: (1) During the
period beginning when a large bank holding company resubmits its
capital plan and the plan is under review by the Federal Reserve, and
(2) during the first quarter of a calendar year if a large bank holding
company receives an objection to its capital plan for the upcoming
planning period, but where the Federal Reserve had previously issued a
non-objection to capital distributions in the current quarter and
planning period based on a prior capital plan. In the first case, the
answer depends on whether the Federal Reserve has objected to the bank
holding company's capital plan. If the Federal Reserve has objected to
the capital plan, the bank holding company may not make any capital
distribution, except for any distribution to which the Federal Reserve
did not object. If the Federal Reserve has not objected to the capital
plan and the resubmission is required because of a change in
circumstances, the bank holding company must obtain the Federal
Reserve's approval before making a capital distribution.
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\37\ The Board clarified in the final rule that prior notice is
required during the period when the Board has requested
resubmission, but the bank holding company has not yet resubmitted
its capital plan.
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In the second case, during the first quarter of a calendar year, a
large bank holding company may make a capital distribution to which the
Federal Reserve did not object, unless the final rule would otherwise
require the company to obtain approval of the capital distribution or
the Federal Reserve has otherwise notified the company that it may not
make the distribution.\38\ For instance, assuming the criteria for
resubmission of a capital plan have not been triggered, if the Federal
Reserve issued a non-objection to a firm's capital plan through the
first quarter of Year 2 but objected to the capital plan submitted by
that firm for the second quarter of Year 2 through the first quarter of
Year 3, that firm would still be able to make all planned capital
distributions in the first quarter of Year 2, unless the Federal
Reserve specifically objected to any remaining first quarter
distributions.
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\38\ See section 225.8(e)(2)(iv) of Regulation Y.
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Several commenters suggested that the Board adopt an exception to
the prior notice requirements that permits a large bank holding company
to increase its capital distributions to take advantage of changes in
market conditions. The Board has adopted a modification to the rule to
provide a limited exception to the prior approval requirements if:
(A) The bank holding company is, and after the capital distribution
would remain, well capitalized as defined in section 225.2(r) of
Regulation Y (12 CFR 225.2(r));
(B) The bank holding company's performance and capital levels are,
and after the capital distribution would remain, consistent with the
projections under expected conditions set forth in its capital plan;
(C) The annual aggregate dollar amount of all capital distributions
(beginning on April 1 of a calendar year and ending on March 31 of the
following calendar year) would not exceed the total amounts described
in the company's capital plan for which the bank holding company
received a notice of non-objection by more than 1.00 percent multiplied
by the bank holding company's tier 1 capital, as reported to the
Federal Reserve on the bank holding company's first quarter FR Y-9C;
(D) The bank holding company provides the appropriate Reserve Bank
with notice 15 calendar days prior to a capital distribution that
includes the elements described in section V.B. of this preamble, and
(E) The Federal Reserve does not object to the transaction proposed
in the notice. In determining whether to object to the proposed
transaction, the Federal Reserve will apply the criteria under which it
reviews requests related to proposed capital distributions that require
Federal Reserve approval.
The Federal Reserve may notify the bank holding company in writing
that it may not take advantage of this exception. Examples of factors
that the Federal Reserve would consider in notifying a large bank
holding company that it may not take advantage of the exception
include, but are not limited to, the bank holding company's risk
profile and its actual financial performance relative to baseline
projections in its capital plan.
B. Contents of Request for Approval and Procedures for Review
Under the final rule, a large bank holding company that requests
approval of a capital distribution to the Federal Reserve must include
the following information in its request:
(i) The capital plan to which the Federal Reserve had previously
issued a non-objection or an attestation that there have been no
changes to the capital plan;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(iv) Any additional information requested by the Federal Reserve
(which may include, among other information, an assessment of the bank
holding company's capital adequacy under a revised stress scenario
provided by the Federal Reserve, a revised capital plan, and supporting
data).
In addition, any request submitted for a capital distribution where
the bank holding company would not meet a minimum regulatory capital
ratio or a tier 1 common ratio of at least five percent after giving
effect to the distribution must also include a plan for restoring the
bank holding company's capital to an amount above a minimum level
within 30 days and a rationale for why the capital distribution would
be appropriate.
The Federal Reserve will act on a request for prior approval within
30 calendar days after the receipt of a request that contains all of
the information set forth above.\39\ If the Federal Reserve requests
that the bank holding company provide an assessment of its capital
adequacy under a revised stress scenario, the Federal Reserve will not
consider the 30-day period to begin until the bank holding company
provides the requested information.
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\39\ As noted above, bank holding companies that qualify for the
exception to the prior approval requirement need to provide 15 days
prior notice of a qualifying capital distribution. Because the final
rule provides the Federal Reserve with discretion to act on a
shorter timeframe, the final rule does not include the proposed
rule's provision permitting the Federal Reserve to shorten the 30-
day period.
---------------------------------------------------------------------------
The final rule provides that the Board will notify the bank holding
company in writing of the reasons for a decision to disapprove any
proposed capital distribution. In reviewing a request under this
section, the Federal Reserve will apply the considerations and
principles under which it evaluates
[[Page 74643]]
capital plans. In addition, the Board may disapprove the transaction if
the bank holding company does not provide the information required to
be submitted. Within 10 calendar days of receipt of a disapproval, the
bank holding company could submit a written request for a hearing.
If the bank holding company requested a hearing, the Board will
order a hearing within 10 calendar days of receipt of the request if it
finds that material facts are in dispute, or if it otherwise appears
appropriate. Any hearing conducted will be held in accordance with the
Board's Rules of Practice for Formal Hearings (12 CFR part 263). At the
conclusion of any hearing, the Board will by order approve or
disapprove the proposed capital action on the basis of the record of
the hearing.
VI. Conforming Amendments To Section 225.4(b) of Regulation Y
In addition to the capital planning and approval requirements
discussed above, the Board is making conforming changes to section
225.4(b) of Regulation Y, which currently requires prior notice to the
Federal Reserve of certain purchases and redemptions of a bank holding
company's equity securities.\40\ Because such approval of certain
capital distributions will be separately required in the rule at
section 225.8 of Regulation Y, the Board is amending section 225.4(b)
to provide that section 225.4(b) shall not apply to any bank holding
company that is subject to section 225.8.
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\40\ See 12 CFR 225.4(b).
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VII. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that an agency prepare and make available for public
comment an initial regulatory flexibility analysis in connection with a
notice of proposed rulemaking.\41\ The regulatory flexibility analysis
otherwise required under section 604 of the RFA is not required if an
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities (defined for purposes
of the RFA to include banks and bank holding companies with assets less
than or equal to $175 million) and publishes its certification and a
short, explanatory statement in the Federal Register along with its
rule. As of December 31, 2010, there were approximately 4,493 small
bank holding companies.
---------------------------------------------------------------------------
\41\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------
The agencies solicited public comment on the rule in a notice of
proposed rulemaking. The agencies did not receive any comments
regarding burden to small banking organizations.
As discussed above, the final rule applies to every top-tier bank
holding company domiciled in the United States with $50 billion or more
in total consolidated assets. Bank holding companies that are subject
to the final rule therefore substantially exceed the $175 million asset
threshold at which a banking entity would qualify as a small bank
holding company, and the final rule will not apply to any small bank
holding company for purposes of the RFA. The Board does not believe
that the proposed rule duplicates, overlaps, or conflicts with any
other Federal rules. In light of the foregoing, the Board does not
believe that the final rule would have a significant economic impact on
a substantial number of small entities.
B. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3501 et seq.), the Board 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 Board reviewed the
final rule under the authority delegated to the Board by OMB. The OMB
control number for this information collection is 7100-0342.
The Board received 16 comment letters, none of which specifically
addressed the PRA analysis. Commenters did however requested that the
Board provide more guidance on the nature and scope of the data
requirements (as required by 225.8(d)(3)(i)-(vi)) and to provide any
data templates at the time the final rule becomes effective. Commenters
also asked that the Federal Reserve be mindful to avoid duplicative
data requests. In response to these comments, the Board has published a
separate Federal Register notice that clarifies the nature and scope of
the data requirements, including the data templates, and solicited
public comments on this information collection (Capital Assessments and
Stress Testing; FR Y-14A/Q; OMB No. 7100-0341).\42\ In doing so, the
Board is removing the majority of the burden for the data reporting
requirements found in 225.8(d)(3) from the information collection
associated with this rule and accounting for this burden under the new
FR Y-14A/Q information collection.
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\42\ 76 FR 55288 (September 7, 2011). The comment period ended
on November 7, 2011.
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Title of Information Collection: Recordkeeping and Reporting
Requirements Associated with Regulation Y (Capital Plans) (Reg Y-13).
Frequency of Response: Recordkeeping requirements, annually.
Reporting requirements, varied--the capital plan exercise would be done
at least annually, capital plan resubmissions and prior approval
requirements would be event-generated.
Affected Public: The final rule applies to every top-tier bank
holding company domiciled in the United States that has $50 billion or
more in total consolidated assets (large U.S. bank holding companies).
As of September 30, 2011, there were approximately 34 large U.S. bank
holding companies.
General Description of Information Collection: This information
collection is mandatory and the recordkeeping requirement to maintain
the Capital Plan is in effect until either a bank holding company is no
longer operational or until further notice by the Board. Section 616(a)
of the Dodd-Frank Act amended section 5(b) of the Bank Holding Company
Act (BHC Act) (12 U.S.C. 1844(b)) to specifically authorize the Board
to issue regulations and orders relating to capital requirements for
bank holding companies. The Board is also authorized to collect and
require reports from bank holding companies pursuant to section 5(c) of
the BHC Act (12 U.S.C. 1844(c)). Additionally, the Board's rulemaking
authority for the information collection requirements associated with
Reg Y-13 is found in sections 908 and 910 of the International Lending
Supervision Act, as amended (12 U.S.C. 3907 and 3909). Additional
support for Reg Y-13 is found in sections 165 and 166 of the Dodd-Frank
Act (12 U.S.C. 5365 and 5366).
The capital plan information submitted by the covered bank holding
company would consist of confidential and proprietary modeling
information and highly sensitive business plans, such as acquisition
plans submitted to the Federal Reserve for approval. Therefore, it
appears the information would be subject to withholding under exemption
4 of the Freedom of Information Act (5 U.S.C. 552(b)(4)).
Abstract: Section 225.8(d)(1)(i) will require a bank holding
company to develop and maintain an initial capital plan. The level of
detail and analysis expected in a capital plan would vary based on the
bank holding company's size, complexity, risk profile, scope of
operations, and the effectiveness of its
[[Page 74644]]
processes for assessing capital adequacy. Section 225.8(d)(2) provides
the list of mandatory elements to be included in the capital plan.
Section 225.8(d)(1)(ii) will require a bank holding company to
submit its complete capital plan to the appropriate Reserve Bank and
the Board each year by the 5th of January, or such later date as
directed by the appropriate Reserve Bank after consultation with the
Board.
Section 225.8(d)(1)(iii) will require the bank holding company's
board of directors or a designated committee to review and approve the
bank holding company's capital plan prior to its submission to the
appropriate Federal Reserve Bank under section 225.8(d)(1)(ii).
In connection with submissions of capital plans to the Federal
Reserve, bank holding companies would be required pursuant to section
225.8(d)(3) to provide certain data to the Federal Reserve. Data
templates, and any other data requests, would be designed to minimize
burden on the bank holding company and to avoid duplication. Data
required by the Federal Reserve could include, but would not be limited
to, information regarding the bank holding company's financial
condition, structure, assets, risk exposure, policies and procedures,
liquidity, and management. In addition, section 225.8(d)(4) would
require the bank holding company to update and resubmit its capital
plan within 30 days of the occurrence of certain events.
Within 10 calendar days of receipt of a notice of objection by the
Board of the bank holding company's capital plan, pursuant to section
225.8(e)(3), the bank holding company may submit a written request for
reconsideration or hearing, including an explanation of why
reconsideration should be granted.
In certain circumstances, large bank holding companies would be
required, pursuant to section 225.8(f)(1), to obtain approval from the
Federal Reserve before making capital distributions.\43\ As listed in
section 225.8(f)(3), such an approval request would be required to
contain the following information: the bank holding company's current
capital plan or an attestation that there have been no changes to its
current capital plan; the purpose of the transaction; a description of
the capital action, including for redemptions or repurchases of
securities, the gross consideration to be paid and the terms and
sources of funding for the transaction, and for dividends, the amount
of the dividend(s); and any additional information requested by the
appropriate Reserve Bank or Board, which may include, among other
information, an assessment of the bank holding company's capital
adequacy under a revised stress scenario provided by the Federal
Reserve, a revised capital plan, and supporting data.
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\43\ The final rule provides an exception to the prior approval
requirements section 225.8(f)(2) for an institution that is well
capitalized and meets certain other requirements.
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Under section 225.8(f)(5), if the Federal Reserve disapproves of a
bank holding company's capital distribution, the bank holding company
within 10 calendar days of receipt of a notice of disapproval by the
Board may submit a written request for a hearing.
Estimated Burden
Number of Respondents: 34 (19 CCAR firms and 15 non-CCAR firms).
Estimated Burden per Response
--.8(d)(1)(i) and (ii) Recordkeeping and Reporting, 12,000 hours
--.8(d)(1)(iii) Recordkeeping, 100 hours
--.8(d)(3)(i)-(vi) CCAR firm Reporting, 100 hours
--.8(d)(3)(i)-(vi) Non-CCAR firm Reporting, 1,000 hours
--.8(d)(4) Reporting, 100 hours
--.8(e)(3)(i) Reporting, 16 hours
--.8(f)(1), (2) and (3) Reporting, 3,400 hours
--.8(f)(5) Reporting, 16 hours
Total Estimated Annual Burden: 432,764 hours.
The Board has a continuing interest in the public's opinions of
collections of information. At any time, comments regarding the burden
estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551; and to the Office of Management and
Budget, Paperwork Reduction Project (7100-0342), Washington, DC 20503.
List of Subjects in 12 CFR Part 225
Administrative Practice and Procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends subpart A of part 225 of chapter II
of title 12 of the Code of Federal Regulations as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
Subpart A--General Provisions
0
2. Section 225.4 is amended by adding paragraph (b)(7):
Sec. 225.4 Corporate practices.
* * * * *
(b) * * *
(7) Exception for certain bank holding companies. This section
225.4(b) shall not apply to any bank holding company that is subject to
Sec. 225.8 of Regulation Y (12 CFR 225.8).
* * * * *
0
3. Add Sec. 225.8 to read as follows:
Sec. 225.8 Capital planning.
(a) Purpose. This section establishes capital planning and prior
notice and approval requirements for capital distributions by certain
bank holding companies.
(b) Scope and effective date. (1) This section applies to every
top-tier bank holding company domiciled in the United States:
(i) With total consolidated assets greater than or equal to $50
billion computed on the basis of the average of the company's total
consolidated assets over the course of the previous four calendar
quarters, as reflected on the bank holding company's consolidated
financial statement for bank holding companies (FR Y-9C (the
calculation shall be effective as of the due date of the bank holding
company's most recent FR Y-9C required to be filed under 12 CFR
225.5(b))); or
(ii) That is subject to this section, in whole or in part, by order
of the Board based on the institution's size, level of complexity, risk
profile, scope of operations, or financial condition.
(2) Beginning on December 30, 2011, the provisions of this section
shall apply to any bank holding company that is subject to this section
pursuant to paragraph (b)(1) of this section, provided that:
(i) Until July 21, 2015, this section will not apply to any bank
holding company subsidiary of a foreign banking organization that is
currently relying on Supervision and Regulation Letter SR 01-01 issued
by the Board (as in effect on May 19, 2010); and
[[Page 74645]]
(ii) A bank holding company that becomes subject to this section
pursuant to paragraph (b)(1)(i) of this section after the 5th of
January of a calendar year shall not be subject to the requirements of
paragraphs (d)(1)(ii), (d)(4), and (f)(1)(iii) of this section until
January 1 of the next calendar year.
(3) Nothing in this section shall limit the authority of the
Federal Reserve to issue a capital directive or take any other
supervisory or enforcement action, including action to address unsafe
or unsound practices or conditions or violations of law.
(c) Definitions. For purposes of this section, the following
definitions apply:
(1) Capital action means any issuance of a debt or equity capital
instrument, any capital distribution, and any similar action that the
Federal Reserve determines could impact a bank holding company's
consolidated capital.
(2) Capital distribution means a redemption or repurchase of any
debt or equity capital instrument, a payment of common or preferred
stock dividends, a payment that may be temporarily or permanently
suspended by the issuer on any instrument that is eligible for
inclusion in the numerator of any minimum regulatory capital ratio, and
any similar transaction that the Federal Reserve determines to be in
substance a distribution of capital.
(3) Capital plan means a written presentation of a bank holding
company's capital planning strategies and capital adequacy process that
includes the mandatory elements set forth in paragraph (d)(2) of this
section.
(4) Capital policy means a bank holding company's written
assessment of the principles and guidelines used for capital planning,
capital issuance, usage and distributions, including internal capital
goals; the quantitative or qualitative guidelines for dividend and
stock repurchases; the strategies for addressing potential capital
shortfalls; and the internal governance procedures around capital
policy principles and guidelines.
(5) Minimum regulatory capital ratio means any minimum regulatory
capital ratio that the Federal Reserve may require of a bank holding
company, by regulation or order, including the bank holding company's
leverage ratio and tier 1 and total risk-based capital ratios as
calculated under Appendices A, D, E, and G to this part (12 CFR part
225), or any successor regulation.
(6) Planning horizon means the period of at least nine quarters,
beginning with the quarter preceding the quarter in which the bank
holding company submits its capital plan, over which the relevant
projections extend.
(7) Tier 1 capital has the same meaning as under Appendix A to this
part or any successor regulation.
(8) Tier 1 common capital means tier 1 capital less the non-common
elements of tier 1 capital, including perpetual preferred stock and
related surplus, minority interest in subsidiaries, trust preferred
securities and mandatory convertible preferred securities.
(9) Tier 1 common ratio means the ratio of a bank holding company's
tier 1 common capital to total risk-weighted assets. This definition
will remain in effect until the Board adopts an alternative tier 1
common ratio definition as a minimum regulatory capital ratio.
(10) Total risk-weighted assets has the same meaning as under
Appendices A, E, and G to this part, or any successor regulation.
(d) General requirements--(1) Annual capital planning. (i) A bank
holding company must develop and maintain a capital plan.
(ii) A bank holding company must submit its complete capital plan
to the appropriate Reserve Bank and the Board each year by the 5th of
January, or such later date as directed by the Board or the appropriate
Reserve Bank, after consultation with the Board.
(iii) The bank holding company's board of directors or a designated
committee thereof must at least annually and prior to submission of the
capital plan under paragraph (d)(1)(ii) of this section:
(A) Review the robustness of the bank holding company's process for
assessing capital adequacy,
(B) Ensure that any deficiencies in the bank holding company's
process for assessing capital adequacy are appropriately remedied; and
(C) Approve the bank holding company's capital plan.
(2) Mandatory elements of capital plan. A capital plan must contain
at least the following elements:
(i) An assessment of the expected uses and sources of capital over
the planning horizon that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions, including:
(A) Estimates of projected revenues, losses, reserves, and pro
forma capital levels, including any minimum regulatory capital ratios
(for example, leverage, tier 1 risk-based, and total risk-based capital
ratios) and any additional capital measures deemed relevant by the bank
holding company, over the planning horizon under expected conditions
and under a range of stressed scenarios, including any scenarios
provided by the Federal Reserve and at least one stressed scenario
developed by the bank holding company appropriate to its business model
and portfolios;
(B) A calculation of the pro forma tier 1 common ratio over the
planning horizon under expected conditions and under a range of
stressed scenarios and discussion of how the company will maintain a
pro forma tier 1 common ratio above 5 percent under expected conditions
and the stressed scenarios required under paragraphs (d)(2)(i)(A) and
(ii) of this section;
(C) A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(D) A description of all planned capital actions over the planning
horizon.
(ii) A detailed description of the bank holding company's process
for assessing capital adequacy, including:
(A) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain capital commensurate with
its risks, maintain capital above the minimum regulatory capital ratios
and above a tier 1 common ratio of 5 percent, and serve as a source of
strength to its subsidiary depository institutions;
(B) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain sufficient capital to
continue its operations by maintaining ready access to funding, meeting
its obligations to creditors and other counterparties, and continuing
to serve as a credit intermediary;
(iii) The bank holding company's capital policy; and
(iv) A discussion of any expected changes to the bank holding
company's business plan that are likely to have a material impact on
the firm's capital adequacy or liquidity.
(3) Data collection. Upon the request of the Board or appropriate
Reserve Bank, the bank holding company shall provide the Federal
Reserve with information regarding--
(i) The bank holding company's financial condition, including its
capital;
(ii) The bank holding company's structure;
(iii) Amount and risk characteristics of the bank holding company's
on- and off-balance sheet exposures, including exposures within the
bank holding company's trading account, other trading-related exposures
(such as counterparty-credit risk exposures) or other items sensitive
to changes in market factors, including, as
[[Page 74646]]
appropriate, information about the sensitivity of positions to changes
in market rates and prices;
(iv) The bank holding company's relevant policies and procedures,
including risk management policies and procedures;
(v) The bank holding company's liquidity profile and management;
and
(vi) Any other relevant qualitative or quantitative information
requested by the Board or the appropriate Reserve Bank to facilitate
review of the bank holding company's capital plan under this section.
(4) Re-submission of a capital plan. (i) A bank holding company
must update and re-submit its capital plan to the appropriate Reserve
Bank within 30 calendar days of the occurrence of one of the following
events:
(A) The bank holding company determines there has been or will be a
material change in the bank holding company's risk profile, financial
condition, or corporate structure since the bank holding company
adopted the capital plan;
(B) The Board or the appropriate Reserve Bank objects to the
capital plan; or
(C) The Board or the appropriate Reserve Bank, after consultation
with the Board, directs the bank holding company in writing to revise
and resubmit its capital plan for any of the following reasons:
(1) The capital plan is incomplete or the capital plan, or the bank
holding company's internal capital adequacy process, contains material
weaknesses;
(2) There has been or will likely be a material change in the bank
holding company's risk profile (including a material change in its
business strategy or any risk exposure), financial condition, or
corporate structure;
(3) The stressed scenario(s) developed by the bank holding company
is not appropriate to its business model and portfolios, or changes in
financial markets or the macro-economic outlook that could have a
material impact on a bank holding company's risk profile and financial
condition require the use of updated scenarios; or
(4) The capital plan or the condition of the bank holding company
raise any of the issues described in paragraph (e)(2)(ii) of this
section.
(ii) The Board or the appropriate Reserve Bank, after consultation
with the Board, may, at its discretion, extend the 30-day period in
paragraph (d)(4)(i) of this section for up to an additional 60 calendar
days.
(iii) Any updated capital plan must satisfy all the requirements of
this section; however, a bank holding company may continue to rely on
information submitted as part of a previously submitted capital plan to
the extent that the information remains accurate and appropriate.
(e) Review of capital plans by the Federal Reserve--(1)
Considerations and inputs. (i) The Board or the appropriate Reserve
Bank, after consultation with the Board, will consider the following
factors in reviewing a bank holding company's capital plan:
(A) The comprehensiveness of the capital plan, including the extent
to which the analysis underlying the capital plan captures and
addresses potential risks stemming from activities across the firm and
the company's capital policy;
(B) The reasonableness of the bank holding company's assumptions
and analysis underlying the capital plan and its methodologies for
reviewing the robustness of its capital adequacy process; and
(C) The bank holding company's ability to maintain capital above
each minimum regulatory capital ratio and above a tier 1 common ratio
of 5 percent on a pro forma basis under expected and stressful
conditions throughout the planning horizon, including but not limited
to any stressed scenarios required under paragraphs (d)(2)(i)(A) and
(ii) of this section.
(ii) The Board or the appropriate Reserve Bank, after consultation
with the Board, will also consider the following information in
reviewing a bank holding company's capital plan:
(A) Relevant supervisory information about the bank holding company
and its subsidiaries;
(B) The bank holding company's regulatory and financial reports, as
well as supporting data that would allow for an analysis of the bank
holding company's loss, revenue, and reserve projections;
(C) As applicable, the Federal Reserve's own pro forma estimates of
the firm's potential losses, revenues, reserves, and resulting capital
adequacy under expected and stressful conditions, including but not
limited to any stressed scenarios required under paragraphs
(d)(2)(i)(A) and (ii) of this section, as well as the results of any
stress tests conducted by the bank holding company or the Federal
Reserve; and
(D) Other information requested or required by the appropriate
Reserve Bank or the Board, as well as any other information relevant,
or related, to the bank holding company's capital adequacy.
(2) Federal Reserve action on a capital plan. (i) The Board or the
appropriate Reserve Bank, after consultation with the Board, will
object, in whole or in part, to the capital plan or provide the bank
holding company with a notice of non-objection to the capital plan:
(A) By March 31 of the calendar year in which a capital plan was
submitted pursuant to paragraph (d)(1)(ii) of this section, and
(B) By the date that is 75 calendar days after the date on which a
capital plan was resubmitted pursuant to paragraph (d)(4) of this
section.
(ii) The Board or the appropriate Reserve Bank, after consultation
with the Board, may object to a capital plan if it determines that:
(A) The bank holding company has material unresolved supervisory
issues, including but not limited to issues associated with its capital
adequacy process;
(B) The assumptions and analysis underlying the bank holding
company's capital plan, or the bank holding company's methodologies for
reviewing the robustness of its capital adequacy process, are not
reasonable or appropriate;
(C) The bank holding company has not demonstrated an ability to
maintain capital above each minimum regulatory capital ratio and above
a tier 1 common ratio of 5 percent, on a pro forma basis under expected
and stressful conditions throughout the planning horizon; or
(D) The bank holding company's capital planning process or proposed
capital distributions otherwise constitute an unsafe or unsound
practice, or would violate any law, regulation, Board order, directive,
or any condition imposed by, or written agreement with, the Board. In
determining whether a capital plan or any proposed capital distribution
would constitute an unsafe or unsound practice, the appropriate Reserve
Bank would consider whether the bank holding company is and would
remain in sound financial condition after giving effect to the capital
plan and all proposed capital distributions.
(iii) The Board or the appropriate Reserve Bank, after consultation
with the Board, will notify the bank holding company in writing of the
reasons for a decision to object to a capital plan.
(iv) If the Board or the appropriate Reserve Bank, after
consultation with the Board, objects to a capital plan and until such
time as the Board or the appropriate Reserve Bank, after consultation
with the Board, issues a non-objection to the bank holding company's
capital plan, the bank holding company may not make any capital
distribution, other than those capital distributions with respect to
[[Page 74647]]
which the Board or the appropriate Reserve Bank has indicated in
writing its non-objection.
(3) Request for reconsideration or hearing. Within 10 calendar days
of receipt of a notice of objection to a capital plan by the Board or
the appropriate Reserve Bank:
(i) A bank holding company may submit a written request to the
Board requesting reconsideration of the objection, including an
explanation of why reconsideration should be granted. Within 10
calendar days of receipt of the bank holding company's request, the
Board will notify the company of its decision to affirm or withdraw the
objection to the bank holding company's capital plan or a specific
capital distribution; or
(ii) As an alternative to paragraph (e)(3)(i) of this section, a
bank holding company may submit a written request to the Board for a
hearing. Any hearing shall follow the procedures described in paragraph
(f)(5)(ii)-(iii) of this section.
(f) Approval requirements for certain capital actions--(1)
Circumstances requiring approval. Notwithstanding a notice of non-
objection under paragraph (e)(2)(i) of this section a bank holding
company may not make a capital distribution under the following
circumstances, unless it receives approval from the Board or
appropriate Reserve Bank pursuant to paragraph (f)(4) of this section:
(i) After giving effect to the capital distribution, the bank
holding company would not meet a minimum regulatory capital ratio or a
tier 1 common ratio of at least 5 percent;
(ii) The Board or the appropriate Reserve Bank, after consultation
with the Board, notifies the company in writing that the Federal
Reserve has determined that the capital distribution would result in a
material adverse change to the organization's capital or liquidity
structure or that the company's earnings were materially
underperforming projections;
(iii) Except as provided in paragraph (f)(2) of this section, the
dollar amount of the capital distribution will exceed the amount
described in the capital plan for which a non-objection was issued
under this section; or
(iv) The capital distribution would occur after the occurrence of
an event requiring resubmission under paragraphs (d)(4)(A) and (C) of
this section and before the Federal Reserve acted on the resubmitted
capital plan.
(2) Exception for well capitalized bank holding companies. (i) A
bank holding company may make a capital distribution for which the
dollar amount exceeds the amount described in the capital plan for
which a non-objection was issued under this section if the following
conditions are satisfied:
(A) The bank holding company is, and after the capital distribution
would remain, well capitalized as defined in Sec. 225.2(r) of
Regulation Y (12 CFR 225.2(r));
(B) The bank holding company's performance and capital levels are,
and after the capital distribution would remain, consistent with its
projections under expected conditions as set forth in its capital plan
under paragraph (d)(2)(i) of this section;
(C) The annual aggregate dollar amount of all capital distributions
(beginning on April 1 of a calendar year and ending on March 31 of the
following calendar year) would not exceed the total amounts described
in the company's capital plan for which the bank holding company
received a notice of non-objection by more than 1.00 percent multiplied
by the bank holding company's tier 1 capital, as reported to the
Federal Reserve on the bank holding company's first quarter FR Y-9C;
(D) The bank holding company provides the appropriate Reserve Bank
with notice 15 calendar days prior to a capital distribution that
includes the elements described in paragraph (f)(3) of this section;
and
(E) The Board or the appropriate Reserve Bank, after consultation
with the Board, does not object to the transaction proposed in the
notice. In determining whether to object to the proposed transaction,
the Board or the appropriate Reserve Bank, after consultation with the
Board, shall apply the criteria described in paragraph (f)(4)(iv) of
this section.
(ii) The exception in this paragraph (f)(2) shall not apply if the
Board or the appropriate Reserve Bank notifies the bank holding company
in writing that it may not take advantage of this exception.
(3) Contents of request. (i) A request for a capital distribution
under this section shall be filed with the appropriate Reserve Bank and
the Board and shall contain the following information:
(A) The bank holding company's current capital plan or an
attestation that there have been no changes to the capital plan since
it was last submitted to the Federal Reserve;
(B) The purpose of the transaction;
(C) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(D) Any additional information requested by the Board or the
appropriate Reserve Bank (which may include, among other things, an
assessment of the bank holding company's capital adequacy under a
revised stress scenario provided by the Federal Reserve, a revised
capital plan, and supporting data).
(ii) Any request submitted with respect to a capital distribution
described in paragraph (f)(1)(i) of this section shall also include a
plan for restoring the bank holding company's capital to an amount
above a minimum level within 30 days and a rationale for why the
capital distribution would be appropriate.
(4) Approval of certain capital distributions. (i) A bank holding
company must obtain approval from the Board or the appropriate Reserve
Bank, after consultation with the Board, before making a capital
distribution described in paragraph (f)(1) of this section.
(ii) A request for a capital distribution under this section must
be filed with the appropriate Reserve Bank and contain all the
information set forth in paragraph (f)(3) of this section.
(iii) The Board or the appropriate Reserve Bank, after consultation
with the Board, will act on a request under this paragraph (f)(4)
within 30 calendar days after the receipt of a complete request under
paragraph (f)(4)(ii) of this section. The Board or the appropriate
Reserve Bank may, at any time, request additional information that it
believes is necessary for its decision.
(iv) In acting on a request under this paragraph, the Board or
appropriate Reserve Bank will apply the considerations and principles
in paragraph (e) of this section. In addition, the Board or the
appropriate Reserve Bank may disapprove the transaction if the bank
holding company does not provide all of the information required to be
submitted under paragraphs (f)(3) and (f)(5)(iii) of this section.
(5) Disapproval and hearing. (i) The Board or the appropriate
Reserve Bank will notify the bank holding company in writing of the
reasons for a decision to disapprove any proposed capital distribution.
Within 10 calendar days after receipt of a disapproval by the Board,
the bank holding company may submit a written request for a hearing.
(ii) The Board will order a hearing within 10 calendar days of
receipt of the request if it finds that material facts are in dispute,
or if it otherwise appears appropriate. Any hearing conducted under
this paragraph shall be held in
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accordance with the Board's Rules of Practice for Formal Hearings (12
CFR part 263).
(iii) At the conclusion of the hearing, the Board will by order
approve or disapprove the proposed capital distribution on the basis of
the record of the hearing.
By order of the Board of Governors of the Federal Reserve
System, November 21, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-30665 Filed 11-28-11; 4:15 pm]
BILLING CODE 6210-01-P