[Federal Register Volume 80, Number 229 (Monday, November 30, 2015)]
[Proposed Rules]
[Pages 74926-74964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29740]
[[Page 74925]]
Vol. 80
Monday,
No. 229
November 30, 2015
Part IV
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Parts 217 and 252
Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding
Company Requirements for Systemically Important U.S. Bank Holding
Companies and Intermediate Holding Companies of Systemically Important
Foreign Banking Organizations; Regulatory Capital Deduction for
Investments in Certain Unsecured Debt of Systemically Important U.S.
Bank Holding Companies; Proposed Rule
Federal Register / Vol. 80 , No. 229 / Monday, November 30, 2015 /
Proposed Rules
[[Page 74926]]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Parts 217 and 252
[Regulations Q and YY; Docket No. R-1523]
RIN 7100-AE37
Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding
Company Requirements for Systemically Important U.S. Bank Holding
Companies and Intermediate Holding Companies of Systemically Important
Foreign Banking Organizations; Regulatory Capital Deduction for
Investments in Certain Unsecured Debt of Systemically Important U.S.
Bank Holding Companies
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Board is inviting comment on a proposed rule to promote
financial stability by improving the resolvability and resiliency of
large, interconnected U.S. bank holding companies and the U.S.
operations of large, interconnected foreign banking organizations
pursuant to section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) and related deduction
requirements for all banking organizations subject to the Board's
capital rules. Under the proposed rule, a U.S. top-tier bank holding
company identified by the Board as a global systemically important
banking organization (covered BHC) would be required to maintain
outstanding a minimum amount of loss-absorbing instruments, including a
minimum amount of unsecured long-term debt, and related buffer.
Similarly, the proposed rule would require the top-tier U.S.
intermediate holding company of a global systemically important foreign
banking organization with $50 billion or more in U.S. non-branch assets
(covered IHC) to maintain outstanding a minimum amount of intra-group
loss-absorbing instruments, including a minimum amount of unsecured
long-term debt, and related buffer. The proposed rule would also impose
restrictions on the other liabilities that a covered BHC or covered IHC
may have outstanding. Finally, the proposed rule would require state
member banks, bank holding companies, and savings and loan holding
companies that are subject to the Board's capital rules to apply a
regulatory capital deduction treatment to their investments in
unsecured debt issued by covered BHCs.
DATES: Comments should be received by February 1, 2016.
ADDRESSES: You may submit comments, identified by Docket No. R-1523 and
RIN 7100 AE-37, by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room 3515, 1801 K Street (between 18th and 19th Streets
NW.) Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Constance M. Horsley, Assistant
Director, (202) 452-5239, Thomas Boemio, Senior Project Manager, (202)
452-2982, Juan C. Climent, Manager, (202) 872-7526, Felton Booker,
Senior Supervisory Financial Analyst, (202) 912-4651, Sean Healey,
Senior Financial Analyst, (202) 912-4611, or Mark Savignac, Senior
Financial Analyst, (202) 475-7606, Division of Banking Supervision and
Regulation; or Laurie Schaffer, Associate General Counsel, (202) 452-
2272, Benjamin McDonough, Special Counsel, (202) 452-2036, Jay Schwarz,
Senior Counsel, (202) 452-2970, Will Giles, Counsel, (202) 452-3351,
Mark Buresh, Senior Attorney, (202) 452-5270, or Greg Frischmann,
Senior Attorney, (202) 452-2803, Legal Division, Board of Governors of
the Federal Reserve System, 20th and C Streets NW., Washington, DC
20551. For the hearing impaired only, Telecommunications Device for the
Deaf (TDD) users may contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Addressing Too-Big-to-Fail
B. Approaches to Resolution
C. Overview of the Proposal
D. Consultation with the FDIC, the Council, and Foreign
Authorities
E. The FSB's Proposal on Total Loss-Absorbing Capacity for GSIBs
F. Overview of Statutory Authority
II. External TLAC and LTD Requirements for U.S. GSIBs
A. Scope of Application
B. Calibration of the External TLAC and LTD Requirements
C. Core Features of Eligible External TLAC
D. External TLAC Buffer
E. Core Features of Eligible External LTD
F. Costs and Benefits
III. Internal TLAC and LTD Requirements for U.S. Intermediate
Holding Companies of Foreign Banking Organizations
A. Scope of Application
B. Calibration of the Internal TLAC and LTD Requirements
C. Core Features of Eligible Internal TLAC
D. Internal TLAC Buffer
E. Core Features of Eligible Internal LTD
IV. Clean Holding Company Requirements
A. Third-Party Short-Term Debt Instruments
B. Qualified Financial Contracts with Third Parties
C. Guarantees that Are Subject to Cross-Defaults
D. Upstream Guarantees and Offset Rights
E. Cap on Other Third-Party Liabilities
F. Disclosure Requirements
V. Consideration of Reporting Requirements for Eligible External and
Internal TLAC and LTD
VI. Consideration of Domestic Internal TLAC Requirement
VII. Regulatory Capital Deduction for Investments in the Unsecured
Debt of Covered BHCs
VIII. Transition Periods
IX. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Riegle Community Development and Regulatory Improvement Act
of 1994
D. Solicitation of Comments on the Use of Plain Language
I. Introduction
A. Addressing Too-Big-to-Fail
An important objective of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) \1\ is to mitigate risks to
the financial stability of the United States that could arise from the
material financial distress or failure of large, interconnected
financial companies, including by ending market perceptions that
certain financial companies are ``too big to fail'' and would therefore
receive extraordinary government support to prevent their failure. Such
perceptions reduce the
[[Page 74927]]
incentives of the shareholders, creditors, and counterparties of such a
company to discipline excessive risk-taking by the company. Such
perceptions also tend to fuel further growth by the largest financial
companies, making them even more systemically important and leading to
more financial sector concentration than would exist in the absence of
market expectations of government support. Finally, such perceptions
can produce competitive distortions by allowing the largest, most
interconnected financial companies to fund themselves more cheaply than
their smaller competitors can. These distortions are unfair to smaller
companies and detrimental to competition.
---------------------------------------------------------------------------
\1\ The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L.
111- 203).
---------------------------------------------------------------------------
The Dodd-Frank Act establishes a framework to address the financial
stability risks associated with major financial companies. The Act
seeks to enhance financial stability through two approaches. First, the
Act seeks to reduce major financial companies' probability of failure
by requiring the Board to subject them to enhanced capital, liquidity,
and other prudential requirements and to heightened supervision.\2\
Second, the Act seeks to reduce the risk that such a company's failure,
were it to occur, would pose to the financial stability of the United
States through resolution-planning requirements and a new statutory
resolution framework for major financial companies.\3\ These approaches
have also been followed in international regulatory reform efforts
since the 2007-2009 financial crisis, which have been coordinated
through the Basel Committee on Banking Supervision (BCBS) \4\ and the
Financial Stability Board (FSB),\5\ at the direction of the Heads of
State of the Group of Twenty (G20 Leaders).\6\
---------------------------------------------------------------------------
\2\ See 12 U.S.C. 5365(a)(1)(A).
\3\ See 12 U.S.C. 5381-5394.
\4\ The BCBS is a committee of banking supervisory authorities
established by the central bank governors of the Group of Ten
countries in 1975. The committee's membership consists of senior
representatives of bank supervisory authorities and central banks
from Argentina, Australia, Belgium, Brazil, Canada, China, France,
Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States. The BCBS usually meets at the
Bank for International Settlements (BIS) in Basel, Switzerland,
where its permanent Secretariat is located.
\5\ The FSB was established in 2009 to coordinate at the
international level the work of national financial authorities and
international standard-setting bodies and to develop and promote the
implementation of effective regulatory, supervisory, and other
financial sector policies in the interest of financial stability.
The FSB brings together national authorities responsible for
financial stability in 24 countries and jurisdictions, as well as
international financial institutions, sector-specific international
groupings of regulators and supervisors, and committees of central
bank experts. See generally Financial Stability Board, available at
http://www.financialstabilityboard.org.
\6\ The Group of Twenty was established in 1999 to bring
together industrialized and developing economies to discuss key
issues in the global economy. Members include finance ministers and
central bank governors from Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Indonesia, Italy, Japan, Mexico,
Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the
United Kingdom, and the United States and the European Union.
---------------------------------------------------------------------------
The Board has made considerable progress in implementing the first
approach by reducing the probability that a major financial company
will fail. Along with the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC), the Board has implemented
stronger capital standards \7\ and a new liquidity standard called the
liquidity coverage ratio.\8\ The Board also has adopted leverage and
risk-based capital surcharges for U.S. global systemically important
banking organizations (GSIBs),\9\ established a robust stress testing
framework for large banking organizations,\10\ and created a Large
Institution Supervision Coordinating Committee to strengthen the
supervision of the most systemically important financial institutions
operating in the United States.\11\
---------------------------------------------------------------------------
\7\ The Board and the OCC issued a joint final rule on October
11, 2013 (78 FR 62018) and the FDIC issued a substantially identical
interim final rule on September 10, 2013 (78 FR 55340). The FDIC
adopted the interim final rule as a final rule with no substantive
changes on April 14, 2014. 79 FR 20754.
\8\ 79 FR 61440 (October 10, 2014).
\9\ See 80 FR 49082 (Aug. 14, 2015) (GSIB risk-based capital
surcharge); 79 FR 24528 (May 1, 2014) (enhanced supplementary
leverage ratio). The eight firms currently identified as U.S. GSIBs
are Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan
Chase & Co., Morgan Stanley, State Street Corporation, and Wells
Fargo & Company.
\10\ 12 CFR 252.32 and 252.35.
\11\ See Large Institution Supervision Coordinating Committee,
available at http://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.
---------------------------------------------------------------------------
To further enhance firm-specific resiliency during periods of
severe stress, the Board has also issued guidance on recovery planning
to the most systemically important U.S. banking organizations.\12\ In
addition, the Board has implemented a broad set of other enhanced
prudential standards for bank holding companies and foreign banking
organizations with total consolidated assets of $50 billion or
more.\13\ Internationally, the BCBS has adopted a substantial set of
post-crisis reforms, developed with significant participation from the
Board and other U.S. bank regulatory agencies, which align well with
the bank regulatory reforms implemented in the United States.
---------------------------------------------------------------------------
\12\ See Supervision and Regulation Letter 14-8, ``Consolidated
Recovery Planning for Certain Large Domestic Bank Holding
Companies'' (September 25, 2014).
\13\ 79 FR 17240 (March 27, 2014).
---------------------------------------------------------------------------
U.S. regulators have also made substantial progress with respect to
the second approach by implementing the Dodd-Frank Act's framework for
resolution-planning for major financial companies. The Dodd-Frank Act
provides significant new authorities to the FDIC and the Board to
address the failure of large, interconnected financial companies.\14\
First, Section 165(d) of the Dodd-Frank Act requires bank holding
companies with total consolidated assets of at least $50 billion and
nonbank financial companies designated for supervision by the Board to
prepare resolution plans, also known as ``living wills,'' that describe
how they could be resolved in an orderly manner under the U.S.
Bankruptcy Code if they were to fail.\15\ The Board and the FDIC have
established resolution-planning requirements to implement section
165(d).\16\
---------------------------------------------------------------------------
\14\ 12 U.S.C. 5365, 5384, and 5385.
\15\ 12 U.S.C. 5365(d).
\16\ 76 FR 67323 (November 1, 2011).
---------------------------------------------------------------------------
Second, Title II of the Dodd-Frank Act (Title II) establishes an
alternative resolution framework for the largest financial companies,
the Orderly Liquidation Authority. In general, if a major U.S. bank
holding company or non-bank financial company were to fail, it would be
resolved under the U.S. Bankruptcy Code.\17\ Congress recognized,
however, that such a company might fail under extraordinary
circumstances that would prevent it from being resolved in bankruptcy
without serious adverse effects on the financial stability of the
United States.\18\ Title II therefore provides the Secretary of the
Treasury, upon recommendation from other government agencies, with the
authority to place a major financial company into an FDIC receivership,
rather than bankruptcy.\19\ The set of resolution powers created by
Title II form a critical post-crisis toolkit for mitigating the
negative effects that could follow from the failure of a systemically
important financial institution.
---------------------------------------------------------------------------
\17\ See, e.g., 12 U.S.C. 5382(c), 5383(a)(2)(F) and (b)(4).
Insurance companies, depository institutions, and broker dealers are
resolved under different resolution mechanisms.
\18\ See 12 U.S.C. 5384.
\19\ See 12 U.S.C. 5383(b).
---------------------------------------------------------------------------
Since 2012, the largest bank holding companies and foreign banking
organizations with U.S. operations have submitted annual resolution
plans to the
[[Page 74928]]
Board and the FDIC as required by section 165(d). The Board and the
FDIC review the resolution plans, provide feedback on their
shortcomings, and set expectations for subsequent iterations of the
plans that are intended to improve the organizations' resolvability.
Each annual plan review cycle has yielded valuable information that is
being used to assess and mitigate potential obstacles to orderly
resolution under the U.S. Bankruptcy Code and to plan for the
contingency of a resolution under Title II. The Board and the FDIC also
consult regularly on regulatory actions intended to improve GSIB
resolvability, including this proposed rule.
B. Approaches to Resolution
Resolution of large financial firms will involve either a single-
point-of-entry (SPOE) resolution strategy or a multiple-point-of-entry
(MPOE) resolution strategy.\20\ Most of the U.S. GSIBs are developing
plans that facilitate an SPOE approach, including in their 2015
resolution plans.
---------------------------------------------------------------------------
\20\ See FDIC, ``Resolution of Systemically Important Financial
Institutions: The Single Point of Entry Strategy'' (6741-01-P)
(December 10, 2013), available at http://www.fdic.gov/news/board/2013/2013-12-10_notice_dis-b_fr.pdf.
---------------------------------------------------------------------------
In an SPOE resolution of a banking organization, only the top-tier
bank holding company would enter a resolution proceeding. The losses
that caused the banking organization to fail would be passed up from
the subsidiaries that incurred the losses and would then be imposed on
the equity holders and unsecured creditors of the holding company,
which would have the effect of recapitalizing the subsidiaries of the
banking organization. An SPOE resolution could avoid losses to the
third-party creditors of the subsidiaries and could thereby allow the
subsidiaries to continue normal operations, without entering resolution
or taking actions (such as asset firesales) that could pose a risk to
the financial stability of the United States. The expectation that the
holding company's equity holders and unsecured creditors would absorb
the banking organization's losses in the event of its failure would
also help to maintain the confidence of the operating subsidiaries'
creditors and counterparties, reducing their incentive to engage in
potentially destabilizing funding runs. An SPOE resolution would avoid
the need for separate proceedings for separate legal entities run by
separate authorities across multiple jurisdictions and the associated
destabilizing complexity.\21\
---------------------------------------------------------------------------
\21\ See 78 FR 76614 (December 18, 2013).
---------------------------------------------------------------------------
Certain structural features of the U.S. GSIBs facilitate SPOE
resolution. In the United States, the top-tier parent company of a
large banking organization generally does not itself engage in material
operations. Rather, it generally acts primarily as a holding company,
by, for example, measuring and managing the consolidated risks of the
organization, undertaking capital and liquidity planning, coordinating
the operations of its subsidiaries, and raising equity capital and
long-term debt to fund those operations. Its assets therefore consist
largely of cash, liquid securities, and equity and debt investments in
its subsidiaries. As a result of this organizational structure, in the
context of SPOE resolution the liabilities of the parent holding
company are generally ``structurally subordinated'' to the liabilities
of the operating subsidiaries.\22\ Strengthening the loss-absorbing
capacity of the parent holding company therefore improves the
resiliency of the banking organization as a whole.
---------------------------------------------------------------------------
\22\ Generally, in an insolvency proceeding, direct third-party
claims on a parent holding company's subsidiaries would be superior
to the parent holding company's equity claims on the subsidiaries.
---------------------------------------------------------------------------
The alternative to an SPOE resolution is a multiple-point-of-entry
(MPOE) resolution. An MPOE resolution would entail separate resolutions
of different legal entities within the financial firm and could
potentially be executed by multiple resolution authorities across
multiple jurisdictions. The SPOE approach to resolution appears to
offer substantial advantages, because it facilitates the continued
operations of subsidiaries of a GSIB, reducing the material risk that
the failure of the organization could have on U.S. financial stability.
U.S. regulators nevertheless are cognizant of the need to prepare for
other plausible contingencies, including the MPOE resolution of a GSIB.
While this proposal is primarily focused on implementing the SPOE
resolution strategy, it would also substantially improve the prospects
for a successful MPOE resolution of a GSIB by requiring U.S. GSIBs and
the IHCs of foreign GSIBs to maintain substantially more loss-absorbing
capacity.
C. Overview of the Proposal
The Board is inviting comment on this notice of proposed rulemaking
to improve the resolvability and resiliency of U.S. banking
organizations. The proposal would require the parent holding companies
of U.S. GSIBs to maintain outstanding minimum levels of total loss-
absorbing capacity and long-term unsecured debt, and a related buffer.
The proposal would also require the top-tier U.S. intermediate holding
companies of foreign GSIBs to maintain outstanding minimum levels of
total loss-absorbing capacity and long-term unsecured debt instruments
issued to their foreign parent company, and related buffer. The
proposal would subject the operations of the parent holding companies
of U.S. GSIBs and the top-tier U.S. intermediate holding companies of
foreign GSIBs to ``clean holding company'' limitations to further
improve their resolvability and the resiliency of their operating
subsidiaries. Finally, the proposal would require banking organizations
subject to the Board's capital requirements to make certain deductions
from capital.
This proposal would further the goals of improving the resiliency
and resolvability of GSIBs. Separately, the Board and the FDIC are
continuing to work to mitigate the resolvability risks related to
potential disorderly unwinds of financial contracts. Other actions for
consideration include ensuring the adequacy of ``internal bail-in''
mechanisms through which operating subsidiaries can pass losses up to
their parent holding company and the holding company can recapitalize
the subsidiaries.
1. External Total Loss-Absorbing Capacity and Long-Term Debt
Requirements for Covered U.S. Bank Holding Companies
Under this proposal, a ``covered BHC'' would be required to
maintain outstanding minimum levels of eligible external total loss-
absorbing capacity (external TLAC requirement) and eligible external
long-term debt (external LTD requirement). The term ``external'' refers
to the fact that the requirement would apply to loss-absorbing
instruments issued by the covered BHC to third-party investors, and the
instrument would be used to pass losses from the banking organization
to those investors in case of failure. This is in contrast to
``internal'' loss-absorbing capacity, which could be used to transfer
losses among legal entities within a banking organization (for
instance, from the operating subsidiaries to the parent holding
company).
The term ``covered BHC'' would be defined to include any U.S. top-
tier bank holding company identified as a GSIB under the Board's rule
establishing risk-based capital surcharges for GSIBs (``GSIB surcharge
rule'').\23\ Under the external TLAC requirement, a covered
[[Page 74929]]
BHC would be required to maintain outstanding eligible external total
loss-absorbing capacity (``eligible external TLAC'') in an amount not
less than the greater of 18 percent of the covered BHC's total risk-
weighted assets and 9.5 percent of the covered BHC's total leverage
exposure.\24\ An external TLAC buffer that is similar to the capital
conservation buffer in the Board's Regulation Q would apply in addition
to the risk-weighted assets component of the external TLAC requirement.
---------------------------------------------------------------------------
\23\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
\24\ The risk-weighted assets component of the external TLAC
requirement would be phased in as follows: It would be equal to 16
percent of the covered BHC's risk-weighted assets beginning on
January 1, 2019, and would be equal to 18 percent of the covered
BHC's risk-weighted assets beginning on January 1, 2022.
---------------------------------------------------------------------------
Under the external LTD requirement, a covered BHC would be required
to maintain outstanding eligible external long-term debt instruments
(``eligible external LTD'') in an amount not less than the greater of 6
percent plus the surcharge applicable under the GSIB surcharge rule
(expressed as a percentage) of total risk-weighted assets and 4.5
percent of total leverage exposure.\25\
---------------------------------------------------------------------------
\25\ Total leverage exposure is defined in 12 CFR
217.10(c)(4)(ii).
---------------------------------------------------------------------------
A covered BHC's eligible external TLAC would be defined to be the
sum of (a) the tier 1 regulatory capital of the covered BHC issued
directly by the covered BHC and (b) the covered BHC's eligible external
LTD, as defined below.
A covered BHC's eligible external LTD would generally be defined to
be debt that is issued directly by the covered BHC, is unsecured, is
``plain vanilla,'' \26\ and is governed by U.S. law. Eligible external
LTD with a remaining maturity of between one and two years would be
subject to a 50 percent haircut for purposes of the external LTD
requirement, and eligible external LTD with a remaining maturity of
less than one year would not count toward the external LTD requirement.
---------------------------------------------------------------------------
\26\ The term ``plain vanilla'' is defined in detail in section
II.E.3 and excludes structured notes and most instruments that
contain derivative-linked features.
---------------------------------------------------------------------------
2. Internal Total Loss-Absorbing Capacity and Long-Term Debt
Requirements for Covered U.S. Intermediate Holding Companies
Under this proposal, a ``covered IHC'' would be required to
maintain outstanding minimum levels of eligible internal total loss-
absorbing capacity (``internal TLAC requirement'') and eligible
internal long-term debt (``internal LTD requirement''). The term
``internal'' refers to the fact that these instruments would be
required to be issued internally within the foreign banking
organization, from the covered IHC to a foreign parent entity. The term
``covered IHC'' would be defined to include any U.S. intermediate
holding company that (a) is required to be formed under the Board's
enhanced prudential standards rule \27\ and (b) is controlled by a
foreign banking organization that would be designated as a GSIB under
the Board's capital rules if it were subject to the Board's GSIB
surcharge on a consolidated basis (``foreign GSIB'').
---------------------------------------------------------------------------
\27\ The Board's enhanced prudential standards rule generally
requires any foreign banking organization with total consolidated
non-branch U.S. assets of $50 billion or more to form a single U.S.
intermediate holding company over its U.S. subsidiaries. 12 CFR
252.153; 79 FR 17329 (May 27, 2014).
---------------------------------------------------------------------------
Under the internal TLAC requirement, the amount of eligible
internal total loss-absorbing capacity (``eligible internal TLAC'')
that a covered IHC would be required to maintain outstanding would
depend on whether the covered IHC (or any of its subsidiaries) is
expected to go into resolution in a failure scenario, rather than being
maintained as a going concern while a foreign parent entity is instead
resolved. In general, this means that the stringency of the internal
TLAC and LTD requirements for a given covered IHC would be a function
of whether the foreign GSIB parent of the covered IHC has an SPOE or an
MPOE resolution strategy.
Covered IHCs that are not expected to enter resolution themselves
would be required to maintain eligible internal TLAC in an amount not
less than the greater of: (a) 16 percent of the covered IHC's total
risk-weighted assets; \28\ (b) for covered IHCs that are subject to the
supplementary leverage ratio,\29\ 6 percent of the covered IHC's total
leverage exposure; and (c) 8 percent of the covered IHC's average total
consolidated assets, as computed for purposes of the U.S. tier 1
leverage ratio.\30\
---------------------------------------------------------------------------
\28\ The risk-weighted assets component of the internal TLAC
requirement would be phased in as follows: It would be equal to 14
percent of the covered IHC's risk-weighted assets beginning on
January 1, 2019, and would be equal to 16 percent of the covered
IHC's risk-weighted assets beginning on January 1, 2022.
\29\ Under the IHC rule, U.S. intermediate holding companies
with total consolidated assets of $250 billion or more or on-balance
sheet foreign exposure equal to $10 billion or more are required to
meet a minimum supplementary leverage ratio of 3 percent. 12 CFR
252.153(e)(2); 79 FR 17329 (March 27, 2014).
\30\ The final rule imposes the same leverage capital
requirements on U.S. intermediate holding companies as it does on
U.S. bank holding companies. 12 CFR 252.153(e)(2); 79 FR 17329
(March 27, 2014). These leverage capital requirements include the
generally-applicable leverage ratio and the supplementary leverage
ratio for U.S. intermediate holding companies that meet the scope of
application for that ratio.
---------------------------------------------------------------------------
Covered IHCs that are expected to enter resolution themselves would
be required to maintain outstanding eligible internal TLAC in an amount
not less than the greater of: (a) 18 percent of the covered IHC's total
risk-weighted assets; \31\ (b) 6.75 percent of the covered IHC's total
leverage exposure (if applicable); and (c) 9 percent of the covered
IHC's average total consolidated assets, as computed for purposes of
the U.S. tier 1 leverage ratio.
---------------------------------------------------------------------------
\31\ The risk-weighted assets component of the internal TLAC
requirement for covered IHCs of MPOE firms would be phased in as
follows: It would be equal to 16 percent of the covered IHC's risk-
weighted assets beginning on January 1, 2019, and would be equal to
18 percent of the covered IHC's risk-weighted assets beginning on
January 1, 2022.
---------------------------------------------------------------------------
For all covered IHCs, an internal TLAC buffer that is similar to
the capital conservation buffer in the Board's Regulation Q would apply
in addition to the risk-weighted assets component of the internal TLAC
requirement.
Under the internal LTD requirement, a covered IHC would be required
to maintain outstanding eligible internal long-term debt instruments
(``eligible internal LTD'') in an amount not less than the greater of:
(a) 7 percent of total risk-weighted assets; (b) 3 percent of the total
leverage exposure (if applicable); and (c) 4 percent of average total
consolidated assets, as computed for purposes of the U.S. tier 1
leverage ratio.
A covered IHC's eligible internal TLAC would generally be defined
to be the sum of (a) the tier 1 regulatory capital issued from the
covered IHC to a foreign parent entity that controls the covered IHC
and (b) the covered IHC's eligible internal LTD, as defined below.
A covered IHC's eligible internal LTD would generally be subject to
the same requirements as would apply to eligible external LTD: It would
be required to be debt that is issued directly from the covered IHC, is
unsecured, is plain vanilla, and is governed by U.S. law. Eligible
internal LTD with a remaining maturity of between one and two years
would be subject to a 50 percent haircut for purposes of the internal
LTD requirement, and eligible internal LTD with a remaining maturity of
less than one year would not count toward the internal LTD requirement.
However, several features distinguish eligible internal LTD from
eligible external LTD: It would be required to be issued to a parent
foreign entity that controls the covered IHC, to be contractually
subordinated to all third-party liabilities of the covered IHC, and to
include a contractual trigger pursuant
[[Page 74930]]
to which the Board could require the covered IHC to cancel the eligible
internal LTD or convert or exchange it into tier 1 common equity on a
going-concern basis (that is, without the covered IHC's entry into a
resolution proceeding) if: (a) The Board determines that the covered
IHC is ``in default or in danger of default''; and (b) any of the
following circumstances apply (i) the top-tier foreign banking
organization or any subsidiary outside the United States is placed into
resolution proceedings, (ii) the home country supervisory authority
consents to the cancellation, exchange, or conversion, or does not
object to the cancellation, exchange, or conversion following 48 hours'
notice, or (iii) the Board has made a written recommendation to the
Secretary of the Treasury that the FDIC should be appointed as receiver
of the covered IHC.
3. Clean Holding Company Requirements
The Board is proposing to prohibit or limit covered BHCs from
directly entering into certain financial arrangements that could impede
an entity's orderly resolution. In an SPOE resolution of a U.S. GSIB,
the covered BHC will go into a resolution proceeding while its
subsidiaries continue their normal operations. These prohibitions and
limitations would support the orderly resolution of a covered BHC,
whether in an SPOE resolution or in an MPOE resolution involving the
resolution of the covered BHC. The proposed requirements would also
enhance the resiliency of the U.S. GSIB by reducing the covered BHC's
complexity and reliance on short-term funding.
Under the Board's clean holding company proposal, a covered BHC
would be prohibited from issuing short-term debt instruments to third
parties (including deposits); entering into ``qualified financial
contracts'' (QFCs) with third parties; having liabilities that are
subject to ``upstream guarantees'' from the covered BHC's subsidiaries
or that are subject to contractual offset rights for its subsidiaries'
creditors; or issuing guarantees of its subsidiaries' liabilities, if
the issuance of the guarantee would result in the covered BHC's
insolvency or entry into resolution operating as a default event on the
part of the subsidiary. Additionally, the proposal would cap the value
of a covered BHC's liabilities (other than those related to eligible
external TLAC and eligible external LTD) that can be pari passu with or
junior to its eligible external LTD at 5 percent of the value of its
eligible external TLAC. Finally, the proposal would require covered
BHCs to make certain public disclosures of the fact that their
unsecured debt would be expected to absorb losses ahead of other
liabilities, including the liabilities of the covered BHC's
subsidiaries, in a failure scenario.
An SPOE resolution of a foreign GSIB in its home jurisdiction would
allow the GSIB's covered IHC to continue operating without itself
entering into a resolution proceeding. However, to prepare for a
scenario in which a covered IHC would enter U.S. resolution
proceedings, the Board is proposing to prohibit covered IHCs from
entering into certain financial arrangements that can impede such a
resolution.
4. Consideration of Domestic Internal TLAC Requirement
The SPOE resolution strategy assumes (a) that losses will be passed
up from the subsidiaries that initially incur them to the covered BHC
or covered IHC and (b) that they then will be passed on to either the
external TLAC holders (in the case of a covered BHC) or a foreign
parent entity (in the case of a covered IHC). This proposal would work
to satisfy the second of these assumptions, but it does not address the
first. As discussed further below, however, the Board is seeking
comment on whether, and if so how, the Board should regulate the
mechanisms used by a covered BHC or covered IHC to transfer losses up
from the operating subsidiaries that incur them to the covered BHC or
covered IHC.
5. Regulatory Capital Deduction for Investments in the Unsecured Debt
of Covered BHCs
To limit the potential for financial sector contagion in the event
of the failure of a covered BHC, state member banks, certain bank
holding companies and savings and loan holding companies with total
consolidated assets of at least $1 billion, and intermediate holding
companies formed pursuant to the Board's enhanced prudential standards
for foreign banking organizations would be required to apply a
regulatory capital deduction treatment to any investments in unsecured
debt instruments issued by covered BHCs (including unsecured debt
instruments that do not qualify as eligible external LTD).
D. Consultation With the FDIC, the Council, and Foreign Authorities
In developing this proposal, the Board consulted with the FDIC, the
Financial Stability Oversight Council (Council), and other U.S.
financial regulatory agencies. The proposal reflects input that the
Board received during this consultation process. The Board also intends
to consult with the FDIC, the Council, and other financial regulatory
agencies after it reviews comments on the proposal. Furthermore, the
Board has consulted with, and expects to continue to consult with,
foreign financial regulatory authorities regarding this proposal and
the establishment of other standards that would maximize the prospects
for the cooperative and orderly cross-border resolution of failed
GSIBs.
E. The FSB's Proposal on Total Loss-Absorbing Capacity for GSIBs
In 2013, the G20 Leaders called on the FSB to develop proposals on
the adequacy of the loss-absorbing capacity of global systemically
important financial institutions (``SIFIs'').\32\ In November 2014, the
FSB published for consultation a set of principles and a term sheet to
implement those principles in the form of an internationally negotiated
minimum standard for the total loss-absorbing capacity (``TLAC'') of
GSIBs.\33\ Under the FSB's proposed standard, GSIBs would be subject to
a TLAC requirement equal to the greater of (a) a figure between 16
percent and 20 percent of a banking organization's risk-weighted assets
(with the specific figure within that range to be agreed upon later)
and (b) twice the Basel III tier 1 leverage ratio requirement. The
FSB's proposed standard also contains an expectation that a GSIB would
meet at least one-third of its TLAC requirement with eligible long-term
debt (``LTD'') rather than equity.
---------------------------------------------------------------------------
\32\ The Group of 20, ``G20 Leaders' Declaration'' (September
2013), available at https://g20.org/wp-content/uploads/2014/12/Saint_Petersburg_Declaration_ENG_0.pdf.
\33\ See ``Adequacy of loss-absorbing capacity of global
systemically important banks in resolution'' (November 10, 2014),
available at http://www.financialstabilityboard.org/wp-content/uploads/TLAC-Condoc-6-Nov-2014-FINAL.pdf.
---------------------------------------------------------------------------
This proposal is generally consistent with the FSB's proposed
standard, although it includes a required LTD component that is more
stringent than the expectation in the FSB's proposed standard.
The Board considered whether to structure this proposal solely as a
TLAC requirement--that is, as a single minimum requirement that could
be satisfied by any mixture of capital and eligible LTD--without a
specific LTD requirement. In the absence of an LTD requirement, a TLAC
requirement would permit each covered firm to reduce its expected
systemic impact
[[Page 74931]]
either by reducing its probability of default through increased going-
concern capital or by reducing the harm it would cause if it were to
fail through increased gone-concern LTD.\34\
---------------------------------------------------------------------------
\34\ See ``Calibrating the GSIB Surcharge'' at 3 (July 20,
2015), available at www.federalreserve.gov/aboutthefed/boardmeetings/gsib-methodology-paper-20150720.pdf.
---------------------------------------------------------------------------
This proposal includes a separate LTD requirement in order to
address the too-big-to-fail problem. Unlike existing equity, LTD can be
used as a fresh source of capital subsequent to failure. Imposing an
LTD requirement would help to ensure that a covered firm would have a
known and observable quantity of loss-absorbing capacity at the point
of failure. Unlike common equity, that loss-absorbing capacity would
not be at substantial risk of volatility or depletion before the
covered BHC is placed into a resolution proceeding. Thus, the proposed
LTD requirements would more assuredly enhance the prospects for the
successful resolution of a failed GSIB and thereby better address the
too-big-to-fail problem than would TLAC requirements alone.
F. Overview of Statutory Authority
The Board is issuing this proposal under the authority provided by
section 165 of the Dodd-Frank Act.\35\ Section 165 instructs the Board
to impose enhanced prudential standards on bank holding companies with
total consolidated assets of $50 billion or more ``[i]n order to
prevent or mitigate risks to the financial stability of the United
States that could arise from the material financial distress or
failure, or ongoing activities, of large, interconnected financial
institutions.'' \36\ These enhanced prudential standards must increase
in stringency based on the systemic footprint and risk characteristics
of individual covered firms.\37\ In addition to requiring the Board to
impose enhanced prudential standards of several specified types,
section 165 authorizes the Board to establish ``such other prudential
standards as the Board of Governors, on its own or pursuant to a
recommendation made by the Council, determines are appropriate.'' \38\
---------------------------------------------------------------------------
\35\ 12 U.S.C. 5365.
\36\ 12 U.S.C. 5365(a)(1).
\37\ 12 U.S.C. 5365(a)(1)(B), (b)(3)(A)-(D).
\38\ 12 U.S.C. 5365(b)(1)(B)(iv).
---------------------------------------------------------------------------
The enhanced prudential standards in this proposal are appropriate
because they are intended to prevent or mitigate risks to the financial
stability of the United States that could arise from the material
financial distress, failure, or ongoing activities of a GSIB. In
particular, the proposed requirements would improve the resolvability
of U.S. GSIBs under either the U.S. Bankruptcy Code or Title II and
improve their resiliency. The proposed requirements would also improve
the resiliency of covered IHCs and their subsidiaries, and thereby
increase the likelihood that a failed foreign GSIB with significant
U.S. operations would be successfully resolved under an SPOE approach
without the failure of the U.S. subsidiaries or, failing that, that the
foreign GSIB's U.S. operations could be separately resolved in an
orderly manner.
In addition to the authority identified above, section 165 of the
Dodd-Frank Act also authorizes the Board to establish ``enhanced public
disclosures'' and ``short-term debt limits.'' \39\ The proposal
includes disclosure requirements and limits on the ability of covered
BHCs and covered IHCs to issue short-term debt.
---------------------------------------------------------------------------
\39\ 12 U.S.C. 5365(b)(1)(B)(ii) and (iii).
---------------------------------------------------------------------------
Finally, the Board has tailored this proposal to apply only to
those companies whose disorderly resolution would likely pose the
greatest risk to the financial stability of the United States: The U.S.
GSIBs and the U.S. intermediate holding companies of foreign GSIBs.\40\
---------------------------------------------------------------------------
\40\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------
Question 1: The Board invites comment on all aspects of this
section.
II. External TLAC and LTD Requirements for U.S. GSIBs
A. Scope of Application (Section 252.60 of the Proposed Rule)
The proposed rule would apply to all ``covered BHCs.'' The term
``covered BHC'' would be defined to include any U.S. top-tier bank
holding company identified as a GSIB under the Board's GSIB surcharge
rule.\41\ Under the GSIB surcharge rule, a U.S. top-tier bank holding
company subject to the advanced approaches rule must determine whether
it is a GSIB by applying a multifactor methodology established by the
Board.\42\ This methodology evaluates a banking organization's systemic
importance on the basis of its attributes in five broad categories:
Size, interconnectedness, cross-jurisdictional activity,
substitutability, and complexity.
---------------------------------------------------------------------------
\41\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
\42\ 12 CFR part 217, subpart E.
---------------------------------------------------------------------------
Accordingly, the methodology provides a tool for identifying as
GSIBs those banking organizations that pose elevated risks. The
proposal's focus on GSIBs is in keeping with the Dodd-Frank Act's
mandate that more stringent prudential standards be applied to the most
systemically important bank holding companies.\43\
---------------------------------------------------------------------------
\43\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------
Under the GSIB surcharge rule's methodology, eight U.S. bank
holding companies would currently be identified as GSIBs. Those eight
top-tier bank holding companies would therefore be covered BHCs under
this proposal.\44\ In addition, because the GSIB surcharge methodology
is dynamic, other banking organizations could become subject to the
proposed rule in the future.
---------------------------------------------------------------------------
\44\ The eight firms currently identified as U.S. GSIBs are Bank
of America Corporation, The Bank of New York Mellon Corporation,
Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co.,
Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
---------------------------------------------------------------------------
Question 2: The Board invites comment on alternative approaches for
determining the scope of application of the proposed external TLAC and
LTD requirements.
B. Calibration of the External TLAC and LTD Requirements (Sections
252.62 and 252.63 of the Proposed Rule)
Under the proposal's external TLAC requirement, a covered BHC would
be required to maintain outstanding eligible external TLAC in an amount
not less than the greater of 18 percent of the covered BHC's total
risk-weighted assets \45\ and 9.5 percent of the covered BHC's total
leverage exposure under the supplementary leverage ratio rule. As
described below, an external TLAC buffer would apply in addition to the
risk-weighted assets component of the external TLAC requirement.
---------------------------------------------------------------------------
\45\ A covered BHC would calculate risk-weighted assets for
purposes of the external TLAC requirement using the same methodology
it uses to calculate risk-weighted assets under the Board's
regulatory capital rules. See 12 CFR part 217, subparts D and E. The
Board's regulatory capital rules require an advanced approaches
banking organization (generally, a banking organization with $250
billion or more in total consolidated assets or $10 billion or more
in total on-balance sheet foreign exposure) that has successfully
completed its parallel run to calculate each of its risk-based
capital ratios using the standardized approach and the advanced
approaches, and directs the banking organization to use the lower of
each ratio as its governing ratio. See 12 CFR 217.10.
The risk-weighted assets component of the external TLAC
requirement would be phased in as follows: It would be equal to 16
percent of the covered BHC's risk-weighted assets beginning on
January 1, 2019, and would be equal to 18 percent of the covered
BHC's risk-weighted assets beginning on January 1, 2022.
---------------------------------------------------------------------------
Under the proposal's external LTD requirement, a covered BHC would
be required to maintain outstanding eligible external LTD in an amount
not less than the greater of 6 percent plus the surcharge applicable
under the GSIB
[[Page 74932]]
surcharge rule (expressed as a percentage) of total risk-weighted
assets and 4.5 percent of total leverage exposure. Covered BHCs would
be prohibited from redeeming or repurchasing eligible external LTD
prior to its stated maturity date without obtaining prior approval from
the Board where the redemption or repurchase would cause the covered
BHC's eligible external LTD to fall below its external LTD requirement.
The calibration of the proposed external TLAC requirement is based
in part on an analysis of the historical loss experience of major
financial institutions during financial crises. First, a targeted
analysis of losses of U.S. financial firms during the 2007-2009
financial crisis was performed. The analysis considered the loss
experiences of the 19 bank holding companies that participated in the
Supervisory Capital Assessment Program (SCAP).\46\ This analysis
combined the losses actually sustained by those firms during the 2007-
2008 period with their 2009 SCAP loss projections \47\ and the
government recapitalization support that they received in order to
estimate the level of losses that would likely have been sustained in
the absence of extraordinary government intervention in the financial
system, which likely prevented substantial losses that each firm would
otherwise have incurred as a result of the material financial distress
or failure of major counterparties. The purpose of a TLAC requirement
is to ensure that GSIBs have sufficient loss-absorbing capacity to
absorb significant losses and then be recapitalized to the level
necessary for them to face the market on a going-concern basis without
public-sector support. Therefore, the sum of losses and public-sector
recapitalization provides a good comparator for a TLAC requirement.
---------------------------------------------------------------------------
\46\ See Press Release, ``Federal Reserve, OCC, and FDIC release
results of the Supervisory Capital Assessment Program'' (May 7,
2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm.
\47\ See ``The Supervisory Capital Assessment Program: Overview
of Results'' (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
---------------------------------------------------------------------------
The analysis found that the bank holding company with the most
severe loss experience incurred estimated losses and recapitalization
needs of roughly 19 percent of risk-weighted assets. The risk-weighted
assets component of the proposed external TLAC requirement is
consistent with this high-water mark from the global financial crisis.
This historical analysis provides further confirmation of the
appropriateness of the proposed calibration.
Additionally, a quantitative study of the experiences of 13 U.S.
and foreign GSIBs and other major financial firms that incurred
substantial losses during the 2007-2009 financial crisis and the
Japanese financial crisis of the 1990s was conducted. With respect to
each firm, the study considered both the peak losses incurred by the
firm (measured in terms of total comprehensive income) over the loss
period and public-sector capital support, incorporating both direct
capital injections and asset relief transactions.
The study examined losses and recapitalization in terms of both
risk-weighted assets and total assets, which is relevant to the total
leverage exposure component of the external TLAC requirement. The
proposed calibration of the external TLAC requirement is consistent
with the findings of this historical survey. The risk-weighted assets
component of the proposed requirement exceeds a substantial majority of
the loss-and-recapitalization experiences surveyed, while the total
leverage exposure component of the proposed requirement is slightly
higher than the most severe experience surveyed. These are appropriate
results in light of the Dodd-Frank Act's focus on the mitigation of
risks that could arise from the material financial distress or failure
of the largest, most systemic financial institutions.
The proposed external LTD requirement was calibrated primarily on
the basis of a ``capital refill'' framework. According to the capital
refill framework, the objective of the external LTD requirement is to
ensure that each covered BHC has a minimum amount of eligible external
LTD such that, if the covered BHC's going-concern capital is depleted
and the covered BHC fails and enters resolution, the eligible external
LTD will be sufficient to absorb losses and fully recapitalize the
covered BHC by replenishing its going-concern capital. Fulfilling this
objective is vital to the use of eligible external LTD to facilitate
the orderly resolution of a covered BHC, because it is a prerequisite
to an orderly SPOE resolution that the resolved firm have sufficient
going-concern capital post-resolution to maintain market confidence in
its solvency so that other market participants continue to do business
with it.
The proposed external LTD requirement was calibrated in accordance
with this framework. In terms of risk-weighted assets, a covered BHC's
common equity tier 1 capital level is an amount equal to a minimum
requirement of 4.5 percent of risk-weighted assets plus a capital
conservation buffer, which is itself equal to 2.5 percent plus a firm-
specific surcharge determined under the GSIB surcharge rule (expressed
as a percentage) of risk-weighted assets.\48\ Thus, a covered BHC with
a GSIB surcharge of 2 percent would have a common equity tier 1 capital
minimum plus buffers of 9 percent.
---------------------------------------------------------------------------
\48\ Under the Board's capital rules, the capital conservation
buffer can be increased by an additional 2.5 percent of risk-
weighted assets through the activation of a countercyclical capital
buffer. The proposed external LTD requirement does not incorporate
any countercyclical capital buffer because it is likely that no such
buffer would be active under the economic circumstances most likely
to be associated with the failure and resolution of a covered BHC.
---------------------------------------------------------------------------
Under the proposal, a covered BHC would be subject to an external
LTD requirement equal to 7 percent of risk-weighted assets plus the
applicable GSIB surcharge minus a 1 percentage point allowance for
balance-sheet depletion. This results in a requirement of 6 percent
plus the applicable GSIB surcharge (expressed as a percentage) of risk-
weighted assets. Without the 1 percentage point allowance for balance-
sheet depletion, the risk-weighted assets component of a covered BHC's
external LTD requirement would require it to maintain outstanding an
amount of eligible external LTD equal to its common equity tier 1
capital minimum requirement plus buffers. The 1 percentage point
allowance for balance-sheet depletion is appropriate under the capital
refill theory because the losses that the covered BHC incurs leading to
its failure will deplete its risk-weighted assets as well as its
capital. Accordingly, the pre-failure losses would result in a smaller
balance sheet for the covered BHC at the point of failure, meaning that
a smaller dollar amount of capital would be required to restore the
covered BHC's pre-stress capital level. Although the specific amount of
eligible external LTD necessary to restore a covered BHC's pre-stress
capital level in light of the diminished size of its post-failure
balance sheet will vary slightly in light of the varying GSIB
surcharges applicable to the covered BHCs, the Board is proposing to
apply a uniform 1 percentage point allowance for balance-sheet
depletion so as to avoid undue regulatory complexity.
The application of the capital refill framework to the leverage
ratio component of the external LTD requirement is analogous. Under the
enhanced supplementary leverage ratio applicable to U.S. GSIBs, a
covered BHC's tier 1 leverage ratio minimum plus buffer is 5 percent of
its total
[[Page 74933]]
leverage exposure. Under the proposal, a covered BHC would be subject
to an external LTD requirement equal to 4.5 percent of its total
leverage exposure. This requirement, which incorporates a balance-sheet
depletion allowance of 0.5 percentage points, is appropriate to ensure
that a covered BHC that has depleted its tier 1 capital and failed will
be able to refill its leverage ratio minimum requirement and buffer
through the cancellation or the exchange or conversion into equity of
its eligible external LTD.
The proposed calibration of the external LTD requirement was also
informed by an analysis of the extreme loss tail of the distribution of
income for large U.S. bank holding companies over the past several
decades. This analysis closely resembled the analysis that informed the
calibration of the minimum risk-based capital requirements in the
revised capital framework, but it involved looking farther into the
tail of the income distribution.
Question 3: The Board invites comment on all aspects of the
calibration of the proposed external TLAC and LTD requirements. In
particular, the Board invites comment on the probable impact of the
proposed requirements on covered BHCs and on markets for senior
unsecured debt instruments.
C. Core Features of Eligible External TLAC (Section 252.63(b) of the
Proposed Rule)
Under the proposal, a covered BHC's eligible external TLAC would be
defined to be the sum of (a) the tier 1 regulatory capital (common
equity tier 1 capital and additional tier 1 capital, excluding any tier
1 minority interests) issued directly by the covered BHC and (b) the
covered BHC's eligible external LTD, as defined below.\49\ Tier 2
capital that meets the definition of eligible external LTD would count
toward the external TLAC requirement.
---------------------------------------------------------------------------
\49\ Although eligible external LTD with a remaining maturity
between one and two years would be subject to a 50 percent haircut
for purposes of the external LTD requirement, such eligible external
LTD would continue to count at full value for purposes of the
external TLAC requirement. As discussed below, eligible external LTD
with a remaining maturity of less than one year would not count
toward either the external TLAC requirement or the external LTD
requirement.
---------------------------------------------------------------------------
The requirement that regulatory capital be issued out of the
covered BHC itself (rather than by a subsidiary) is intended to ensure
that the total required amount of loss-absorbing capacity would be
available to absorb losses incurred anywhere in the banking
organization (through downstreaming of resources from the BHC to the
subsidiary that has incurred the losses, if necessary). Regulatory
capital that is issued by a subsidiary lacks this key feature of being
available to flexibly absorb losses incurred by other subsidiaries.
Question 4: The Board invites comment on all aspects of the
proposed definition of eligible external TLAC.
Question 5: In particular, the Board invites comment on the
proposed requirement that regulatory capital be issued directly by the
covered BHC in order to count as eligible external TLAC. Should the
definition of eligible external TLAC be broadened to include minority
interests?
Question 6: Should eligible external LTD with a remaining maturity
between one and two years be subject to a 50 percent haircut for
purposes of the external TLAC requirement, by analogy to the treatment
of such eligible external LTD for purposes of the external LTD
requirement?
Question 7: Do covered BHCs have outstanding tier 2 capital
instruments that would not count as eligible external LTD? What
features of such tier 2 capital instruments are inconsistent with the
definition of eligible external LTD? Should such tier 2 capital
instruments count as eligible external TLAC?
D. External TLAC Buffer (Section 252.63(c) of the Proposed Rule)
An external TLAC buffer would apply in addition to the risk-
weighted assets component of the external TLAC requirement. A covered
BHC's external TLAC buffer would be equal to the sum of 2.5 percent
plus the GSIB surcharge applicable to the covered BHC under method 1 of
the GSIB surcharge rule \50\ plus any applicable countercyclical
capital buffer. The external TLAC buffer would be required to be filled
solely with common equity tier 1 capital, and a covered BHC's breach of
its external TLAC buffer would subject it to limits on capital
distributions and discretionary bonus payments in accordance with Table
1. Thus, the external TLAC buffer would be analogous to the capital
conservation buffer applicable under the Board's Regulation Q, except
that it would apply in addition to the external TLAC requirement rather
than in addition to minimum risk-based capital requirements under
Regulation Q and would incorporate only the applicable method 1 GSIB
surcharge (rather than the greater of the applicable method 1 GSIB
surcharge and the applicable method 2 GSIB surcharge).
---------------------------------------------------------------------------
\50\ 80 FR 49082 (Aug. 14, 2015).
Table 1--Calculation of Maximum External TLAC Payout Amount
------------------------------------------------------------------------
Maximum external TLAC
payout ratio (as a
External TLAC buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the external TLAC buffer...... No payout ratio limitation
applies.
Less than or equal to the external TLAC 60 percent.
buffer, and greater than 75 percent of the
external TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
external TLAC buffer, and greater than 50
percent of the external TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
external TLAC buffer, and greater 25
percent of the external TLAC buffer.
Less than or equal to 25 percent of the 0 percent.
external TLAC buffer.
------------------------------------------------------------------------
In order to determine whether it has met the external TLAC
requirement and the external TLAC buffer, a covered BHC would calculate
an outstanding TLAC amount and an external TLAC buffer level. In
keeping with the definition of eligible external TLAC, a covered BHC's
outstanding TLAC amount would be equal to the sum of its common equity
tier 1 capital, its additional tier 1 capital, and its eligible
external LTD. The covered BHC's external TLAC buffer level would be
equal to the sum of its common equity tier 1 capital ratio minus that
portion (if any) of its common equity tier 1 capital ratio (expressed
as a percentage) that is used to meet the risk-weighted assets
[[Page 74934]]
component of the external TLAC requirement. To calculate its external
TLAC buffer level, a covered BHC would subtract from its common equity
tier 1 capital ratio the greater of 0 percent and the following figure:
The risk-weighted assets component of the covered BHC's external TLAC
requirement minus the ratio of its additional tier 1 capital to its
risk-weighted assets (additional tier 1 capital ratio) and minus its
eligible external LTD.
In order to comply with the external TLAC requirement, the covered
BHC would need to have an outstanding TLAC amount sufficient to meet
both the risk-weighted assets component and the total leverage exposure
component. In order to avoid limitations on capital distributions and
discretionary bonus payments pursuant to Table 1, the covered BHC would
also have to have an external TLAC buffer level in excess of its
external TLAC buffer.
For example, suppose that a covered BHC called ``BHC A'' has a
common equity tier 1 capital ratio of 10 percent, an additional tier 1
capital ratio of 2 percent, and an eligible external LTD amount equal
to 8 percent of its risk-weighted assets. Suppose further that BHC A is
subject to an external TLAC requirement of 18 percent and an external
TLAC buffer of 5 percent of risk-weighted assets. BHC A would meet its
external TLAC requirement because the sum of its common equity tier 1
capital ratio, its additional tier 1 capital ratio, and the ratio of
its eligible external TLAC to risk-weighted assets would be equal to
20, which is greater than 18. Moreover, BHC A would have an external
TLAC buffer level equal to 10 - (18 - 2 - 8) = 2. Because 2 is less
than 50 percent and more than 25 percent of the applicable 5 percent
external TLAC buffer, BHC A would be subject to a maximum external TLAC
payout ratio of 20 percent of eligible retained income.
Although the proposed external TLAC buffer must be met only with
common equity tier 1 capital, under the proposal, any covered BHC that
meets existing capital requirements and the existing capital
conservation buffer would not need to increase its common equity tier 1
capital to meet its external TLAC requirement and its external TLAC
buffer. This is because (a) a covered BHC could meet its external TLAC
requirement solely through the issuance of eligible external LTD, (b) a
covered BHC could use the same common equity tier 1 capital that it
uses to meet existing minimum capital requirements and the existing
capital conservation buffer to meet the proposed external TLAC
requirement and external TLAC buffer, and (c) a covered BHC's external
TLAC buffer would always be less than or equal to its existing capital
conservation buffer.\51\ A covered BHC could thus use its existing
common equity tier 1 capital to meet the external TLAC buffer while
issuing eligible external LTD as necessary to meet its external TLAC
requirement.
---------------------------------------------------------------------------
\51\ This is because, as discussed above, the external TLAC
buffer and the existing capital conservation buffer would have the
same components except that the external TLAC buffer would include
only the applicable method 1 GSIB surcharge, while the existing
capital conservation buffer includes the greater of the applicable
method 1 GSIB surcharge and the applicable method 2 GSIB surcharge.
---------------------------------------------------------------------------
The rationale for the external TLAC buffer is similar to the
rationale for the capital conservation buffer established by the
Board's Regulation Q. During the 2007-2009 financial crisis, some
banking organizations continued to pay dividends and substantial
discretionary bonuses even as their financial condition weakened. These
capital distributions weakened the financial system and exacerbated the
crisis. The external TLAC buffer would be intended to encourage covered
BHCs to practice sound capital conservation and thus to enhance the
resilience of covered BHCs and of the financial system as a whole. The
external TLAC buffer would pursue this goal by providing covered BHCs
with incentives to hold sufficient capital to reduce the risk that
their eligible external TLAC would fall below the minimum external TLAC
requirement during a period of financial stress.
Question 8: The Board invites comment on the organization and
placement of the external TLAC buffer. For example, would the external
TLAC buffer be easier to understand if it were incorporated directly
into the Board's regulatory capital rules (Regulation Q)?
Question 9: The Board invites comment on an alternative calibration
of the total leverage exposure component of the proposed external TLAC
requirement pursuant to which covered BHCs would be subject to an
external TLAC requirement equal to 7.5 percent of total leverage
exposure and a capital conservation buffer equal to 2 percent of total
leverage exposure would apply in addition to that external TLAC
requirement, by analogy to the enhanced supplementary leverage ratio.
E. Core Features of Eligible External LTD (Section 252.61 of the
Proposed Rule)
Under the proposal, a covered BHC's eligible external LTD would be
defined to be debt that is paid in and issued directly by the covered
BHC, is unsecured, has a maturity of greater than one year from the
date of issuance, is ``plain vanilla,'' and is governed by U.S. law.
Eligible external LTD with a remaining maturity of between one and two
years would be subject to a 50 percent haircut for purposes of the
external LTD requirement, and eligible external LTD with a remaining
maturity of less than one year would not count toward the external LTD
requirement.
As discussed below, the general purpose of these requirements is to
ensure the adequacy of eligible external LTD instruments to absorb
losses in a resolution of the covered BHC.
1. Issuance by the Covered BHC
Eligible external LTD would be required to be paid in and issued
directly by the covered BHC itself--that is, by the banking
organization's top-tier holding company. Thus, debt instruments issued
by a subsidiary would not qualify as eligible external LTD, even if
they do qualify as regulatory capital.
This restriction would serve two purposes. First, as with the
requirement that regulatory capital be issued directly by the covered
BHC in order to count as eligible external TLAC, this restriction helps
to ensure that eligible external LTD can be used to absorb losses
incurred anywhere in the banking organization. By contrast, loss-
absorbing debt issued by a subsidiary would lack this flexibility and
would generally be available only to absorb losses incurred by that
particular subsidiary.
Second, issuance directly from the covered BHC would enable the use
of the eligible external LTD in an SPOE resolution of the covered BHC.
Under the SPOE approach, only the covered BHC itself would enter
resolution. The covered BHC's eligible external LTD would be used to
absorb losses incurred throughout the banking organization, enabling
the recapitalization of operating subsidiaries that had incurred losses
and enabling those subsidiaries to continue operating on a going-
concern basis. For this approach to be implemented successfully, the
eligible external LTD must be issued directly by the covered BHC. Debt
issued by a subsidiary generally cannot be used to absorb losses even
at the issuing subsidiary itself unless that subsidiary enters a
resolution proceeding, which would be contrary to the SPOE approach
and, in the case of a material operating subsidiary of a covered BHC,
would likely present risks to financial stability.
Question 10: The Board invites comment on the benefits or drawbacks
[[Page 74935]]
of permitting long-term debt issued by a subsidiary of a covered BHC to
count as eligible external LTD and on whether there are other means to
ensure that the debt be available to absorb losses incurred anywhere
within the banking organization.
2. Unsecured
Eligible external LTD would be required to be unsecured, not
guaranteed by the covered BHC or a subsidiary of the covered BHC, and
not subject to any other arrangement that legally or economically
enhances the seniority of the instrument (such as a credit enhancement
provided by an affiliate). The primary rationale for this restriction
is to ensure that eligible external LTD can serve its intended purpose
of absorbing losses incurred by the banking organization in resolution.
To the extent that a creditor is secured, it can avoid suffering losses
by seizing the collateral that secures the debt. This would thwart the
purpose of eligible external LTD by leaving losses with the covered BHC
(which would lose the collateral) rather than imposing them on the
eligible external LTD creditor (which could take the collateral).
A secondary purpose of the restriction is to prevent eligible
external LTD from contributing to the asset firesales that can occur
when a financial institution fails and its secured creditors seize and
liquidate collateral. Asset firesales can drive down the value of the
assets being sold, which can undermine financial stability by
transmitting contagion from the failed firm to other entities that hold
similar assets.
Finally, the requirement that eligible external LTD be unsecured
ensures that losses can be imposed on that debt in resolution in
accordance with the standard creditor hierarchy in bankruptcy, under
which secured creditors are paid ahead of unsecured creditors.
Question 11: The Board invites comment on whether eligible external
LTD should be required to be contractually subordinated to the general
unsecured liabilities of the covered BHC (such as senior unsecured
debt). If so, should the subordination requirement apply to all or only
to some portion of the debt used to satisfy the external LTD
requirement?
3. ``Plain Vanilla''
Eligible external LTD instruments would be required to be ``plain-
vanilla'' instruments. The purpose of this requirement is to ensure
that eligible external LTD can be effectively used to absorb losses in
resolution by prohibiting exotic features that could create complexity
and thereby diminish the prospects for an orderly resolution.
These prohibitions would help to ensure that a covered BHC's
eligible external LTD represents loss-absorbing capacity with a
definite value that can be quickly determined in resolution. In a
resolution proceeding, claims represented by such plain-vanilla debt
instruments are more easily ascertainable and relatively certain
compared to more complex and volatile instruments. Permitting these
features could engender uncertainty as to the level of the covered
BHC's loss-absorbing capacity and could increase the complexity of the
resolution proceeding, both of which could undermine market
participants' confidence in an SPOE resolution and potentially result
in a disorderly resolution. This could occur, for instance, if
creditors and counterparties of the covered BHC's subsidiaries decided
to reduce their exposures to the subsidiaries of the failed covered BHC
by engaging in a funding run.
Eligible external LTD instruments also would be prohibited from:
(a) Being structured notes; (b) having a credit-sensitive feature; (c)
including a contractual provision for conversion into or exchange for
equity in the covered BHC; or (d) including a provision that gives the
holder a contractual right to accelerate payment (including automatic
acceleration), other than a right that is exercisable on a one or more
dates specified in the instrument, in the event of the insolvency of
the covered BHC, or the covered BHC's failure to make a payment on the
instrument when due.\52\
---------------------------------------------------------------------------
\52\ This restriction would be subject to an exception that
would permit eligible external LTD instruments to give the holder a
future put right as of a date certain, subject to the remaining
maturity provisions discussed below.
---------------------------------------------------------------------------
For purposes of this proposal, a ``structured note'' is a debt
instrument that (a) has a principal amount, redemption amount, or
stated maturity that is subject to reduction based on the performance
of any asset,\53\ entity, index, or embedded derivative or similar
embedded feature; (b) has an embedded derivative or similar embedded
feature that is linked to one or more equity securities, commodities,
assets, or entities; (c) does not specify a minimum principal amount
due upon acceleration or early termination; or (d) is not classified as
debt under U.S. generally accepted accounting principles. The proposed
definition of a structured note is not intended to include non-dollar-
denominated instruments or instruments whose interest payments are
linked to an interest rate index (for example, a floating-rate note
linked to the federal funds rate or to LIBOR) that satisfy the proposed
requirements in all other respects.
---------------------------------------------------------------------------
\53\ Assets would include loans, debt securities, and other
financial instruments.
---------------------------------------------------------------------------
Structured notes would not count as eligible external LTD because
they contain features that could make their valuation uncertain,
volatile, or unduly complex, and because they are typically customer
liabilities (as opposed to investor liabilities). To promote resiliency
and market discipline, it is important that covered BHCs have a minimum
amount of loss-absorbing capacity whose value is easily ascertainable
at any given time. Moreover, in an orderly resolution of a covered BHC,
debt instruments that will be subjected to losses must be able to be
valued accurately and with minimal risk of dispute. The requirement
that eligible external LTD not contain the features associated with
structured notes advances these goals.
Eligible external LTD would be prohibited from including
contractual provisions for conversion into or exchange for equity prior
to the covered BHC's resolution because the fundamental objective of
the external LTD requirement is to ensure that covered BHCs will have
at least a fixed minimum amount of loss-absorbing capacity available to
absorb losses upon the covered BHC's entry into resolution. Debt
instruments that could convert into equity prior to resolution may not
serve this goal, since by doing so they would reduce the amount of debt
that will be available to absorb losses in resolution.
Finally, eligible external LTD would be prohibited from having a
credit-sensitive feature or giving the holder of the instrument a
contractual right to the acceleration of payment of principal or
interest at any time prior to the instrument's stated maturity (an
``acceleration clause''), other than upon the occurrence of either an
insolvency event or a payment default event, except that eligible
external LTD instruments would be permitted to give the holder a put
right as of a future date certain, subject to the remaining maturity
provisions discussed below. This proposed prohibition is similar to but
moderately less stringent than the analogous restriction on tier 2
regulatory capital. The main difference between eligible external LTD
and tier 2 capital in this regard is that tier 2 capital is also
prohibited from containing payment default event acceleration
clauses.\54\
[[Page 74936]]
However, the Board is considering whether to instead impose a
restriction on eligible external LTD that is identical to the one
applicable to tier 2 capital by also prohibiting eligible external LTD
from containing payment default event clauses.
---------------------------------------------------------------------------
\54\ See 12 CFR 217.20(d)(1)(vi).
---------------------------------------------------------------------------
This proposed restriction serves the same purpose as several of the
other proposed restrictions discussed above: to ensure that the
required amount of loss-absorbing capacity will indeed be available to
absorb losses in resolution if the covered BHC fails. Early
acceleration clauses, including cross-acceleration clauses, may
undermine this prerequisite to orderly resolution by triggering and
forcing the covered BHC to make payments prior to its entry into
resolution, potentially depleting the covered BHC's eligible external
LTD immediately prior to resolution. This concern does not apply to
acceleration clauses that are triggered by an insolvency event,
however, because the insolvency that triggers the clause would
generally occur concurrently with the covered BHC's entry into a
resolution proceeding, in which case the payment obligations would
generally be stayed and the debt would remain available to absorb
losses.
Senior debt instruments issued by covered BHCs commonly also
include payment default event clauses. These clauses provide the holder
with a contractual right to accelerate payment upon the occurrence of a
``payment default event''--that is, a failure by the covered BHC to
make a required payment when due. Payment default event clauses, which
are prohibited from tier 2 regulatory capital, raise more concerns than
insolvency event clauses because a payment default event may occur
(triggering acceleration) before the institution has entered a
resolution proceeding and a stay has been imposed. Such a pre-
resolution payment default event could cause a decline in the covered
BHC's loss-absorbing capacity.
Nonetheless, the proposal would permit eligible external LTD to be
subject to payment default event acceleration rights for two reasons.
First, default or acceleration rights upon a borrower's default on its
direct payment obligations are a standard feature of senior debt
instruments, such that a prohibition on such rights could be unduly
disruptive to the potential market for eligible external LTD. Second,
the payment default of a covered BHC on an eligible external LTD
instrument would likely be a credit event of such significance that
whatever diminished capacity led to the payment default event would
also be a sufficient trigger for an insolvency event acceleration
clause, in which case a prohibition on payment default event
acceleration clauses would have little or no practical effect.
Question 12: The Board invites comment on the proposed definition
of eligible external LTD, including whether such debt securities should
be allowed to include any of the features discussed above. The Board
also invites comment as to the impact that the proposed restrictions
would have on the bindingness of the proposal for covered BHCs or on
the markets for senior unsecured debt instruments of covered BHCs.
Please provide data supporting your answer.
Question 13: The Board invites comment on whether its proposed
definition of eligible external LTD should exclude debt that is subject
to a guarantee from any affiliate of the global systemically important
BHC.
Question 14: The Board invites comment on whether additional
restrictions should be imposed on instruments that qualify as eligible
external LTD in order to enhance the usefulness of eligible external
LTD in an orderly resolution of the covered BHC.
Question 15: Would an orderly resolution of a covered BHC be
facilitated by additional requirements intended to facilitate the
process of imposing losses on the claims of holders of eligible
external LTD? If so, what additional requirements (e.g., requiring
eligible external LTD to be held through a securities settlement
system, requiring internal data systems to facilitate the claims
process) are appropriate?
Question 16: The Board invites comment on whether currently
outstanding instruments that meet all other requirements should be
allowed to count as eligible external LTD despite containing features
that would be prohibited under the proposal. What is the amount of debt
instruments now outstanding that would fall into this category, and
what is the remaining maturity of those debt instruments? How
burdensome would it be for covered BHCs to modify the terms of any such
instruments to eliminate features that would be prohibited under the
proposal?
Question 17: The Board invites comment on whether eligible external
LTD should be permitted to include acceleration clauses that relate to
payment default events. The Board also invites comment on the impact of
excluding instruments with such acceleration clauses from the
definition of eligible external LTD, including any impact on debt
markets for senior unsecured debt instruments.
Question 18: The Board invites comment on whether debt instruments
that are convertible into equity (with or without a regulatory
conversion triggers) should be permitted to count as eligible external
TLAC even if they are excluded from eligible external LTD and on
whether such instruments would advance the objectives of an orderly
resolution of a covered BHC.
4. Minimum Remaining Maturity and Amortization (Section 252.62(b) of
the Proposed Rule)
Eligible external LTD with a remaining maturity of between one and
two years would be subject to a 50 percent haircut for purposes of the
external LTD requirement, and eligible external LTD with a remaining
maturity of less than one year would not count toward the external LTD
requirement.
The purpose of this restriction is to limit the debt that would
fill the external LTD requirement to debt that will be reliably
available to absorb losses in the event that the covered BHC fails and
enters resolution. Debt with a remaining maturity of less than one year
does not adequately serve this purpose because of the relatively high
likelihood that the debt will mature during the period between the time
when the covered BHC begins to experience extreme stress and the time
when it enters a resolution proceeding. If the debt matures during that
period, then the creditor will likely be unwilling to maintain its
exposure to the covered BHC and will therefore refuse to roll over the
debt or extend new credit and the distressed covered BHC will likely be
unable to replace the debt with new long-term debt that would be
available to absorb losses in resolution. This run-off dynamic could
result in the covered BHC's entering resolution with materially less
loss-absorbing capacity than would be required to recapitalize its
subsidiaries, potentially resulting in a disorderly resolution. To
protect against this outcome, eligible external LTD would cease to
count toward the external LTD requirement upon falling below one year
of remaining maturity so that the full required amount of loss-
absorbing capacity would be available in resolution even if the
resolution period were preceded by a year-long stress period.\55\
---------------------------------------------------------------------------
\55\ This requirement also accords with market convention, which
generally defines ``long-term debt'' as debt with maturity in excess
of one year.
---------------------------------------------------------------------------
For analogous reasons, eligible external LTD with a remaining
maturity of less than two years would be subject to a 50 percent
haircut for purposes of the external LTD requirement, meaning
[[Page 74937]]
that only 50 percent of the value of its principal amount would count
toward the external LTD requirement.\56\ This amortization provision is
intended to protect a covered BHC's loss-absorbing capacity against a
run-off period in excess of one year (as might occur during a financial
crisis or other protracted stress period) in two ways. First, it
requires covered BHCs that rely on eligible external LTD that is
vulnerable to such a run-off period (because it has a remaining
maturity of less than two years) to maintain additional loss-absorbing
capacity. Second, it incentivizes covered BHCs to reduce or eliminate
their reliance on loss-absorbing capacity with a remaining maturity of
less than two years, since by doing so they avoid being required to
issue additional eligible external LTD in order to account for the
haircut. A covered BHC could reduce its reliance on eligible external
LTD with a remaining maturity of less than two years by staggering its
issuance, by issuing eligible external LTD with a relatively long
initial maturity, or by redeeming and replacing eligible external LTD
once its remaining maturity falls below two years.
---------------------------------------------------------------------------
\56\ As discussed above, the proposed amoritization would apply
only to eligible external LTD, not to eligible external TLAC. Thus,
an eligible external LTD instrument that counts for only half value
toward the external LTD requirement because of the 50 percent
amortization provision would continue to count for full value toward
the external TLAC requirement, although debt with a remaining
maturity of less than one year would not count toward either
requirement.
---------------------------------------------------------------------------
The proposal also provides similar treatment for eligible external
LTD that could become subject to a ``put'' right--that is, a right of
the holder to require the issuer to redeem the debt on demand--prior to
reaching its stated maturity. Such an instrument would be treated as if
it were going to mature on the day on which it first became subject to
the put right, since on that day the creditor would be capable of
demanding payment and thereby subtracting the value of the instrument
from the covered BHC's loss-absorbing capacity.\57\
---------------------------------------------------------------------------
\57\ The remaining maturity would be calculated from the date
the put right would first be exerciseable regardless of whether the
put right would only be exerciseable on that date if another event
occurred (e.g., a credit rating downgrade).
---------------------------------------------------------------------------
Question 19: The Board invites comment on whether the proposed
treatment of eligible external LTD with a remaining maturity of less
than two years is appropriate. How would a different remaining maturity
requirement or amortization schedule better achieve the objectives of
the proposal?
Question 20: The Board invites comment on whether a specific
eligible external LTD issuance schedule or similar requirement should
be imposed on covered BHCs by regulation. If so, how should the
requirement be structured to maximize benefits and minimize costs?
Question 21: The Board invites comment on the proposed treatment of
debt instruments that could become subject to put rights in the future.
Should such instruments be excluded entirely from the definition of
eligible external LTD? If so, what impact would such a prohibition have
on markets for senior unsecured debt of covered BHCs?
5. Governing Law
Eligible long-term debt instruments should consist only of
liabilities that can be effectively used to absorb losses during the
resolution of a covered BHC under the U.S. Bankruptcy Code or Title II
without giving rise to material risk of successful legal challenge. To
this end, eligible external LTD must be governed by U.S. law, including
the U.S. Bankruptcy Code and Title II.
Question 22: The Board invites comment on the proposed governing
law requirement, including whether such a requirement is necessary or
appropriate. Should the proposed definition of eligible external LTD
permit instruments to be governed by or subject to non-U.S. law in any
respects? If so, how would that be consistent the purposes of the
proposed rule?
6. Contractual Subordination
The Board considered whether to require eligible external LTD
instruments to be contractually subordinated to the claims of general
creditors of a covered BHC. A contractual subordination requirement
could improve the market discipline imposed on a covered BHC by
increasing the clarity of treatment for eligible external LTD holders
relative to other creditors.
The proposal does not include a contractual subordination
requirement for several reasons. First, as discussed above, the
structural subordination of a covered BHC's creditors to the creditors
and counterparties of the covered BHC's subsidiaries already generally
ensures that the covered BHC's creditors would absorb losses ahead of
the creditors of the covered BHC's subsidiaries in an SPOE resolution
of the covered BHC.\58\ Second, the Board is proposing to subject
covered BHCs to clean holding company provisions that would limit the
amount of non- TLAC instruments that could be pari passu with or junior
to eligible external LTD, which will further address any concerns with
covered BHCs' unsecured creditor hierarchies.
---------------------------------------------------------------------------
\58\ As discussed above, in an insolvency proceeding, direct
third-party claims on a parent holding company's subsidiaries would
be superior to the parent holding company's equity claims on the
subsidiaries.
---------------------------------------------------------------------------
By limiting the criteria for eligible external LTD to those
necessary to achieve the objectives of the proposal, the proposal seeks
to retain the broadest possible market for eligible external LTD
instruments. Allowing covered BHCs to retain the flexibility to satisfy
the external LTD requirement with either senior or subordinated debt
instruments should allow covered BHCs to comply with the requirement
efficiently, to adapt to debt investors' risk preferences, and to avoid
re-issuances of outstanding long-term senior debt instruments that
would otherwise meet the criteria for eligible external LTD.
Question 23: Should the Board require that eligible external LTD be
contractually subordinated to the general unsecured liabilities of the
covered BHC.
F. Costs and Benefits
An analysis of the potential costs and benefits of the external
TLAC and LTD requirements was conducted. To evaluate the costs
attributable to the proposed requirements, this analysis estimated (a)
the extent by which the covered BHCs' required capital and currently
outstanding long-term debt fall short of the proposed requirements, (b)
the increase in each U.S. GSIB's ongoing cost of funding that would
result from meeting the proposed requirements, (c) the expected
increase in the interest rates that the U.S. GSIBs would charge to
borrowers to make up for their higher funding costs, and (d) any
decline in the gross domestic product (GDP) of the United States that
would result from these increased lending rates.
The following components relevant to the benefits of the proposed
requirements were evaluated: (a) The probability of a financial crisis
occurring in a given year, (b) the cumulative economic cost that a
financial crisis would impose if it were to occur, and (c) the extent
to which the proposed requirements would decrease the likelihood and
cost of a financial crisis.
The analysis concluded that the estimated benefits would outweigh
the estimated costs and that the proposed external TLAC and LTD
requirements would yield a substantial net benefit for the U.S.
economy.
[[Page 74938]]
1. Shortfall Analysis
To evaluate the U.S. GSIBs' shortfalls relative to the proposed
external TLAC and LTD requirements, information was collected on the
long-term debt that covered BHCs had outstanding as of year-end 2014.
Several assumptions were made for purposes of the shortfall
analysis. First, to provide an accurate estimate of shortfalls relative
to the proposed requirements using 2014 data, it was assumed that the
covered BHCs were already compliant with the other capital requirements
(including capital conservation buffers) that will be in effect as of
2019, when the proposed external TLAC and LTD requirements would begin
to take effect. This assumption was necessary to ensure that the
analysis would attribute to the proposed external TLAC and LTD
requirements only those costs that would result from those
requirements, as distinct from other requirements that the Board has
imposed but that were not fully phased in as of year-end 2014. As a
result of this assumption, a certain amount of ``capital catch-up'' was
allocated to five of the U.S. GSIBs to bring their capital levels into
alignment with the rules that will be in effect as of 2019.
Second, for purposes of this analysis, all of the U.S. GSIB debt
that met the primary attributes of eligible external LTD was treated as
eligible LTD, including issuance directly from the covered BHC,
remaining maturity of at least one year, and the absence of derivative-
linked features. Although these instruments may not meet every one of
the other proposed elements of eligible external LTD, it appears that
the cost of meeting any remaining elements would be relatively minor.
Under the proposal, covered BHCs would have an aggregate external
LTD requirement of approximately $680 billion. This amounts to
approximately 9.6 percent of aggregate risk-weighted assets and 4.9
percent of aggregate total leverage exposure for the covered BHCs. The
covered BHCs' aggregate shortfall relative to the proposed external
TLAC requirement was approximately $100 billion. The covered BHCs'
aggregate shortfall relative to the proposed external LTD requirement
was approximately $90 billion. For four of the covered BHCs, the risk-
weighted assets component of the external LTD requirement was binding;
for the other four covered BHCs, the supplementary leverage exposure
component was binding.
The covered BHCs' overall aggregate shortfall from the two proposed
requirements was approximately $120 billion, or 1.7 percent of
aggregate risk-weighted assets.\59\ The proposed external TLAC
requirement was the binding requirement for three of the covered BHCs,
while the proposed external LTD requirement was the binding requirement
for the other five covered BHCs. Two of the covered BHCs had no
shortfall under either requirement, while the largest overall shortfall
for any covered BHC amounted to 3.2 percent of its risk-weighted
assets.
---------------------------------------------------------------------------
\59\ This figure is less than the sum of the separate aggregate
shortfalls for the external TLAC requirement and the external LTD
requirement because of substantial overlap between the two
requirements (that is, because eligible external LTD would also
count toward the external TLAC requirement).
---------------------------------------------------------------------------
2. Cost-of-Funding Analysis
The analysis also considered the effect that filling the $120
billion shortfall through the issuance of additional eligible external
LTD would have on the covered BHCs' cost of funding. This analysis
relied on additional information about the amounts and costs of funding
of the debt that the covered BHCs and their subsidiaries currently have
outstanding.
Several additional assumptions were made at this stage of the
analysis. First, it was assumed that covered BHCs would fill their
shortfalls by replacing existing, ineligible debt with eligible
external LTD during the period prior to the effective date of the
proposed requirements, rather than by expanding their balance sheets by
issuing the new debt while maintaining existing liabilities
outstanding. Second, it was assumed that covered BHCs would minimize
the cost associated with meeting the proposed external TLAC and LTD
requirements by first replacing with eligible external LTD their
``near-eligible debt''--that is, their outstanding debt that comes
closest to meeting all requirements for eligible external LTD (and that
therefore entails a cost of funding almost as high as that associated
with eligible external LTD)--and by proceeding in this cost-minimizing
fashion until the proposed requirements were met. Thus, the marginal
cost of each additional dollar of eligible external LTD was assumed to
be the surplus of the funding cost associated with eligible external
LTD over the funding cost of the covered BHC's highest-cost remaining
ineligible debt. Finally, if total near-eligible liabilities were
insufficient to fill the shortfall, it was assumed that the covered BHC
proceeded to replace more senior, short-term liabilities, such as
deposits, with eligible external LTD.
Roughly $65 billion of the aggregate $120 billion shortfall could
be filled through the issuance of eligible external LTD in the place of
existing near-eligible debt, most of which takes the form of long-term
bonds issued by the covered BHCs' bank subsidiaries.\60\ Based on
market data, it was estimated that the spread between this near-
eligible debt and eligible external LTD is between 20 and 30 basis
points. The remaining $55 billion shortfall could then be filled
through the issuance of eligible external LTD in the place of existing
deposits or other lower-cost liabilities. It was estimated that the
spread between these liabilities and eligible external LTD is
approximately equal to the spread between the risk-free interest rate
and the eligible external LTD rate, which is estimated to be between
100 and 150 basis points.
---------------------------------------------------------------------------
\60\ For purposes of this analysis, structured notes were not
treated as near-eligible debt. Structured notes could be viewed as
near-eligible debt, but in many cases structured notes serve
different purposes than debt that was treated as near-eligible (such
as plain-vanilla bonds issued by covered BHCs' bank subsidiaries).
As a result, the analysis assumed that covered BHCs would not
replace their outstanding structured notes with eligible external
LTD. On the assumption that covered BHCs would indeed replace their
outstanding structured notes with eligible external LTD, covered
BHCs would be able to meet roughly $100 billion of the aggregate
$120 billion shortfall by replacing near-eligible debt with eligible
external LTD, which would result in a lower estimated cost impact
from the proposed requirements.
---------------------------------------------------------------------------
The figures at the low ends of these ranges--20 basis points for
replacing near-eligible debt and 100 basis points for replacing lower-
cost liabilities such as deposits--result in an aggregate increased
cost of funding for the covered BHCs of $680 million per year.
A more conservative estimate was produced using figures at the high
ends of these ranges and then further adjusted them upward to reflect a
potential supply effect of 30 basis points (that is, an increase in the
interest rate on eligible external LTD caused by the increase in the
supply of eligible external LT as a result of the proposed external LTD
requirement). The aggregate shortfall in eligible LTD amounts to
approximately 20 percent of the covered BHCs' current eligible LTD,
implying that the covered BHCs in the aggregate would need to increase
their outstanding eligible external LTD by 3 to 4 percent each year
through 2022, when the proposed requirements would be fully phased in.
On the basis of both internal analysis and an international survey of
market participants in which Board staff participated, it is estimated
that this increase in supply would increase spreads of covered BHCs'
[[Page 74939]]
eligible external LTD by approximately 30 basis points.
Using the resulting, higher figures--60 basis points for replacing
near-eligible debt and 200 basis points for replacing lower-cost
liabilities--resulted in an estimated aggregate increased cost of
funding for the covered BHCs of approximately $1.5 billion per year.
Thus, the aggregate increased cost of funding attributable to the
proposed external TLAC and LTD requirement are estimated to be in the
range of $680 million to $1.5 billion annually.
3. Increased Lending Rate Analysis
To arrive at a conservative estimate of the effect of the proposed
external TLAC and LTD requirements on lending rates, it was next
assumed that the U.S. GSIBs would maintain their current return-on-
equity levels by passing all of their increased funding costs on to
borrowers, holding constant their level of lending activity. The
increased lending rates that the U.S. GSIBs would charge to borrowers
were calculated by dividing both the low-end and the high-end estimated
cost-of-funding increases by the U.S. GSIBs' aggregate outstanding
loans of roughly $3.2 trillion. Under this analysis, covered BHCs would
employ an increased lending rate of 1.3 to 3.1 basis points as a result
of the proposed external TLAC and LTD requirements.
4. Macroeconomic Costs Analysis
In prior assessments of the economic impact of regulations on
banking organizations, increases in lending rates have been assumed to
produce a drag on GDP growth. However, the very modest lending rate
increases estimated above--from 1.3 to 3.1 basis points--do not rise to
the level of increase that could be expected to meaningfully affect
GDP. Thus, from the standpoint of the economy as a whole, it appears
that the costs associated with the proposed external TLAC and LTD
requirements would be minimal.
5. Macroeconomic Benefits Analysis
To estimate the benefits of the proposed requirements, the analysis
built on the framework considered in a recent study titled ``An
assessment of the long-term economic impact of stronger capital and
liquidity requirements'' (``LEI report'').\61\ The LEI report estimated
that, prior to the regulatory reforms undertaken since 2009, the
probability of a financial crisis occurring in a given year was between
3.5 percent and 5.2 percent and the cumulative cost was between 20
percent and 100 percent of annual economic output. Even assuming that
the lower ends of these ranges are accurate, these estimates reflect
the well-understood fact that financial crises impose very substantial
costs on the real economy. And the disorderly failures of major
financial institutions play a major role in causing and deepening
financial crises, as Congress recognized in enacting section 165 of the
Dodd-Frank Act.
---------------------------------------------------------------------------
\61\ Basel Committee on Banking Supervision, ``An assessment of
the long-term economic impact of stronger capital and liquidity
requirements'' (August 2010), available at http://www.bis.org/publ/bcbs173.pdf.
---------------------------------------------------------------------------
This proposal would materially reduce the risk that the failure of
a covered BHC would pose to the financial stability of the United
States by enhancing the prospects for the orderly resolution of such a
firm. Moreover, by ensuring that the losses caused by the failure of
such a firm are borne by private-sector investors and creditors (the
holders of the covered BHC's eligible external TLAC), this proposal
would materially reduce the probability that a covered BHC would fail
in the first place by giving the firm's shareholders and creditors
stronger incentives to discipline its excessive risk-taking. Both of
these reductions would promote financial stability and concomitantly
materially reduce the probability that a financial crisis would occur
in any given year. The proposed rule would therefore advance a key
objective of the Dodd-Frank Act and help protect the American economy
from the substantial potential losses associated with a higher
probability of financial crises.
Question 24: The Board invites comment on all aspects of the
foregoing evaluation of costs and benefits.
III. Internal TLAC and LTD Requirements for U.S. Intermediate Holding
Companies of Foreign Banking Organizations
A. Scope of Application (Section 252.160 of the Proposed Rule)
The proposed rule would apply to all ``covered IHCs.'' The term
``covered IHC'' would be defined to include any U.S. intermediate
holding company that (a) is required to be formed under the Board's
enhanced prudential standards rule (IHC rule) and (b) is controlled by
a foreign banking organization that would be designated as a GSIB under
either the Board's capital rules if it were subject to the Board's GSIB
surcharge on a consolidated basis or the BCBS assessment methodology
(foreign GSIB).
The purpose of these criteria is to identify those foreign banking
organizations that are global systemically important banking
organizations and that have substantial operations in the United
States. The Board's IHC rule identifies foreign banking organizations
with a substantial U.S. presence and requires them to form a single
U.S. intermediate holding company over their U.S. subsidiaries.\62\
Thus, the fact that a foreign banking organization is required to form
a U.S. intermediate holding company is an indicator of whether its U.S.
presence is substantial.
---------------------------------------------------------------------------
\62\ The IHC rule generally requires any foreign banking
organization with total consolidated non-branch U.S. assets of $50
billion or more to form a single U.S. intermediate holding company
over its U.S. subsidiaries. 12 CFR 252.153; 79 FR 17329 (May 27,
2014).
---------------------------------------------------------------------------
The Board's GSIB surcharge rule identifies the most systemically
important banking organizations. As discussed above with respect to
covered BHCs, its methodology evaluates a banking organization's
systemic importance on the basis of its size, interconnectedness,
cross-jurisdictional activity, substitutability, and complexity. The
firms that score the highest on these attributes are classified as
GSIBs. While the GSIB surcharge rule itself applies only to U.S. BHCs,
its methodology is equally well-suited to evaluating the systemic
importance of foreign banking organizations. The Board's methodology
for identifying GSIBs is aligned with that of the assessment
methodology for the GSIB surcharge framework developed by the BCBS.
Moreover, foreign jurisdictions collect information from banking
organizations in connection with that framework that parallels the
information collected by the Board for purposes of the Board's GSIB
surcharge rule.
Under the proposal, a foreign banking organization that controls a
U.S. intermediate holding company would be required to determine
whether it is a GSIB under that BCBS assessment methodology if the
foreign banking organization already prepares or reports, for any
purpose, the information necessary to determine whether it is a GSIB
under the BCBS assessment methodology. A foreign banking organization
that determines under this requirement that it is a GSIB would be a
foreign GSIB under the proposal.
A foreign banking organization that controls a U.S. intermediate
holding company also would be a foreign GSIB under the proposal if the
Board determines that the foreign banking organization has the
characteristics of a GSIB under the BCBS assessment methodology or the
Board's methodology for determining whether U.S. bank holding companies
are GSIBs for purposes of the Board's capital rules,
[[Page 74940]]
or if the Board determines that the U.S. intermediate holding company
would itself be a GSIB under the Board's methodology. The proposal
would therefore require each top-tier foreign banking organization that
controls an U.S. intermediate holding company to notify the Board by
January first of each year whether its home country supervisor (or
other appropriate home country regulatory authority) has adopted
standards consistent with the BCBS assessment methodology, whether the
organization prepares or reports the indicators used by the BCBS
assessment methodology, and if it does prepare or report such
indicators, whether the organization has determined that it has the
characteristics of a global systemically important banking organization
under the BCBS assessment methodology.\63\
---------------------------------------------------------------------------
\63\ Under the proposal, these notice and determination
requirements would apply to the ``top-tier foreign banking
organization.'' The proposal defines top-tier foreign banking
organization, with respect to a foreign bank, as the top-tier entity
that controls the foreign bank (if any) unless the Board specifies a
subsidiary of such entity as the ``top-tier foreign banking
organization.'' Thus, the definition would include the top-tier
entity that controls a foreign bank, which would be the foreign bank
if no entity controls the foreign bank, or the entity specified by
the Board that is a subsidiary of the top-tier entity.
---------------------------------------------------------------------------
As with covered BHCs, the proposal's focus on GSIBs is in keeping
with the Dodd-Frank Act's mandate that more stringent prudential
standards be applied to the most systemically important bank holding
companies.\64\ Furthermore, the use of the GSIB surcharge rule to
identify foreign GSIBs as well as U.S. GSIBs (and thus to identify both
covered BHCs and covered IHCs) promotes a level playing field between
U.S. and foreign banking organizations.
---------------------------------------------------------------------------
\64\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------
Question 25: The Board invites comment on alternative approaches
for determining the scope of application of the proposed internal TLAC
and LTD requirements. Should the Board apply the proposed internal TLAC
and LTD requirements to all U.S. intermediate holding companies
required to be formed under the IHC rule rather than limiting it to
U.S. intermediate holding companies that are controlled by foreign
GSIBs?
Question 26: Is the proposed method for determining whether a
foreign banking organization is a foreign GSIB--application of the
relevant portion of the Board's GSIB surcharge rule to the foreign
banking organization's balance sheet--an appropriate method for making
that determination? Would an alternative method for identifying foreign
GSIBs--such as looking to whether the foreign banking organization has
been classified as a GSIB by its home supervisory authority or by the
FSB--be more appropriate?
Question 27: What additional modifications, if any, would be
appropriate to the definition ``top-tier foreign banking organization''
to sufficiently explain the types of entities that may be considered
top-tier foreign banking organizations under the proposal?
B. Calibration of the Internal TLAC and LTD Requirements (Sections
252.162 and 252.164 of the Proposed Rule)
Under the internal TLAC requirement, the amount of eligible
internal total loss-absorbing capacity (``eligible internal TLAC'')
that a covered IHC would be required to maintain outstanding would
depend on whether the covered IHC (or any of its subsidiaries) is
expected to enter resolution if a foreign parent entity fails, rather
than being maintained as a going concern while a foreign parent entity
is resolved. If the home country resolution authority for the parent
foreign banking organization of the covered IHC provides a
certification to the Board indicating that the authority's planned
resolution strategy for the foreign banking organization does not
involve the covered IHC or any subsidiary of the covered IHC entering a
resolution proceeding in the United States, then the covered IHC would
be considered a ``non-resolution entity.'' \65\
---------------------------------------------------------------------------
\65\ If the home country resolution authority for the foreign
banking organization that controls the covered IHC subsequently
indicates that its planned resolution strategy for the foreign
banking organization does involve the covered IHC or its
subsidiaries being separately resolved in the United States, the
covered IHC would cease to be a non-resolution entity one year after
the Board provides the covered IHC with notice of the change.
---------------------------------------------------------------------------
Covered IHCs that are non-resolution entities would be required to
maintain outstanding eligible internal TLAC in an amount not less than
the greater of: (a) 16 percent of the covered IHC's total risk-weighted
assets; \66\ (b) for covered IHCs that are subject to the supplementary
leverage ratio,\67\ 6 percent of the covered IHC's total leverage
exposure; and (c) 8 percent of the covered IHC's average total
consolidated assets, as computed for purposes of the U.S. tier 1
leverage ratio.\68\ All other covered IHCs would be required to
maintain outstanding eligible internal TLAC in an amount not less than
the greater of: (a) 18 percent of the covered IHC's total risk-weighted
assets; \69\ (b) 6.75 percent of the covered IHC's total leverage
exposure (if applicable); and (c) 9 percent of the covered IHC's
average total consolidated assets, as computed for purposes of the U.S.
tier 1 leverage ratio.
---------------------------------------------------------------------------
\66\ The risk-weighted assets component of the internal TLAC
requirement would be phased in as follows: It would be equal to 14
percent of the covered IHC's risk-weighted assets beginning on
January 1, 2019, and would be equal to 16 percent of the covered
IHC's risk-weighted assets beginning on January 1, 2022.
\67\ Under the IHC rule, U.S. intermediate holding companies
with total consolidated assets of $250 billion or more or on-balance
sheet foreign exposure equal to $10 billion or more are required to
meet a minimum supplementary leverage ratio of 3 percent. 12 CFR
252.153(e)(2); 79 FR 17329 (March 27, 2014).
\68\ The final rule imposes the same leverage capital
requirements on U.S. intermediate holding companies as it does on
U.S. bank holding companies. 12 CFR 252.153(e)(2); 79 FR 17329
(March 27, 2014). These leverage capital requirements include the
generally-applicable leverage ratio and the supplementary leverage
ratio for U.S. intermediate holding companies that meet the scope of
application for that ratio.
\69\ The risk-weighted assets component of the internal TLAC
requirement for covered IHCs of MPOE firms would be phased in as
follows: It would be equal to 16 percent of the covered IHC's risk-
weighted assets beginning on January 1, 2019, and would be equal to
18 percent of the covered IHC's risk-weighted assets beginning on
January 1, 2022.
---------------------------------------------------------------------------
As described below, an internal TLAC buffer would apply to all
covered IHCs in addition to the applicable risk-weighted assets
component of the internal TLAC requirement.
Under the internal LTD requirement, a covered IHC would be required
to maintain outstanding eligible internal long-term debt instruments
(``eligible internal LTD'') in an amount not less than the greater of:
(a) 7 percent of total risk-weighted assets; (b) 3 percent of the total
leverage exposure (if applicable); and (c) 4 percent of average total
consolidated assets, as computed for purposes of the U.S. tier 1
leverage ratio. Covered IHCs would be prohibited from redeeming
eligible internal LTD prior to its stated maturity date without
obtaining prior approval from the Board where such redemption would
cause the covered IHC's eligible internal LTD to fall below its
internal LTD requirement.
The rationale for the proposed internal TLAC and LTD requirements
is generally parallel to the rationale for the proposed external TLAC
and LTD requirements, which is discussed above. Covered IHCs, other
than those that are non-resolution entities, would be subject to an
internal TLAC requirement with a risk-weighted assets component
identical to the risk-weighted assets component of the proposed
external TLAC requirement. They would be subject to a supplementary
leverage ratio component (if applicable) that is lower than the
supplementary leverage ratio component of the proposed
[[Page 74941]]
external TLAC requirement in recognition of the fact that covered IHCs
are not U.S. GSIBs and so would not be subject to the enhanced
supplementary leverage ratio that applies to U.S. GSIBs. Finally,
because some covered IHCs may not be subject to the supplementary
leverage ratio, a third component based on the U.S. tier 1 leverage
ratio was added to the internal LTD requirement. The proposed
calibration of this component is consistent with the proposed
calibration of the supplementary leverage ratio component.\70\
---------------------------------------------------------------------------
\70\ Generally, a bank holding company is subject to a 4 percent
on-balance sheet leverage ratio requirement and a 3 percent
supplementary leverage ratio requirement (if the supplementary
leverage ratio applies to the bank holding company). The proposed
calibration of the on-balance sheet leverage ratio component of the
proposed internal TLAC requirement, 8 percent, is twice the 4
percent requirement because the proposed calibration of the
supplementary leverage ratio requirement, 6 percent, is twice the 3
percent requirement. The aim was to ensure that covered IHCs that
are not subject to the supplementary leverage ratio would be subject
to a roughly analogous component under the internal TLAC
requirement.
---------------------------------------------------------------------------
Covered IHCs that are non-resolution entities would be subject to a
slightly lower internal TLAC requirement. Most foreign GSIBs are
expected to be resolved by their home jurisdiction resolution
authorities through an SPOE resolution and are therefore expected to be
non-resolution entities under the proposal. Were such an SPOE
resolution to succeed, the covered IHC would avoid entering resolution
and would continue as a going concern, with its eligible internal TLAC
and eligible internal LTD used to pass up the covered IHC's going-
concern losses to the parent foreign GSIB, to the extent necessary.
However, the Board also recognizes the need to plan for the contingency
in which the covered IHC enters a U.S. resolution proceeding. The
proposed calibration for such a covered IHC is based on the
desirability of providing support for the preferred SPOE resolution of
the foreign GSIB, which requires that the foreign GSIB be allowed to
have some internal loss-absorbing capacity at the parent level that can
be freely allocated to whichever subsidiaries have incurred the
greatest losses (including non-U.S. subsidiaries), balanced with the
need to ensure that sufficient loss-absorbing capacity is prepositioned
with the covered IHC to ensure that it can be kept operating as a going
concern or subjected to an orderly resolution in the United States if
the foreign GSIB is not subjected to an SPOE resolution.
By contrast, covered IHCs that are not designated as non-resolution
entities are more analogous to covered BHCs, which are themselves
resolution entities. For these covered IHCs, there is no need to apply
a diminished eligible internal TLAC requirement in order to support an
SPOE resolution of the parent foreign GSIB. These covered IHCs would
therefore be subject to eligible internal TLAC requirements in line
with the eligible external TLAC requirements that would apply to
covered BHCs, as discussed above.
The proposed internal LTD requirements are based on the capital
refill framework discussed above with respect to the proposed external
LTD requirements. Because covered IHCs are not U.S. GSIBs and are
therefore not subject to a GSIB surcharge or to the enhanced
supplementary leverage ratio, a covered IHC is subject to a common
equity tier 1 capital level of 7 percent of risk-weighted assets (4.5
percent plus a 2.5 percent capital conservation buffer) and, if the
supplementary leverage ratio applies to the covered IHC, to a tier 1
capital supplementary leverage ratio requirement of 3 percent of total
leverage exposure. Because some covered IHCs may not be subject to the
supplementary leverage ratio, a third component based on the U.S. tier
1 leverage ratio was added to the internal LTD requirement. The
applicable requirement under that leverage ratio is 4 percent of on-
balance sheet assets. The calibration of the proposed internal LTD
requirements derives from the application of the capital refill
framework described above to these requirements.
Question 28: The Board invites comment on all aspects of the
proposed calibration of the internal TLAC and LTD requirements,
including any impact on the internal funding structures of the covered
IHC's parent foreign bank.
Question 29: The Board invites comment on its proposed method for
identifying covered IHCs that are non-resolution entities.
Question 30: The Board invites comment on whether, instead of being
subject to differing internal TLAC requirements on the basis of whether
or not they are non-resolution entities, all covered IHCs should be
subject to either the lower proposed internal TLAC requirement or to
the higher proposed internal TLAC requirement.
Question 31: The Board invites comment on whether to eliminate the
proposed internal TLAC requirement and subject covered IHCs to the
proposed internal LTD requirement only.
C. Core Features of Eligible Internal TLAC (Section 252.164 of the
Proposed Rule)
The definition of eligible internal TLAC is similar to the
definition of eligible external TLAC. A covered IHC's eligible internal
TLAC would be defined to be the sum of (a) the tier 1 regulatory
capital (common equity tier 1 capital and additional tier 1 capital)
issued from the covered IHC to a foreign entity that directly or
indirectly controls the covered IHC (``foreign parent entity'') and (b)
the covered IHC's eligible internal LTD, as defined below.\71\ Similar
to the definition of eligible external TLAC, tier 2 capital that meets
the definition of eligible internal LTD would count toward the internal
TLAC requirement.
---------------------------------------------------------------------------
\71\ Although eligible internal LTD with a remaining maturity
between one and two years would be subject to a 50 percent haircut
for purposes of the internal LTD requirement, such eligible internal
LTD would continue to count at full value for purposes of the
internal TLAC requirement. As discussed below, eligible internal LTD
with a remaining maturity of less than one year would not count
toward either the internal TLAC requirement or the internal LTD
requirement.
---------------------------------------------------------------------------
The rationale for the requirement that regulatory capital be issued
directly by the covered IHC, rather than by a subsidiary of the IHC, in
order to count as eligible internal TLAC is identical to the rationale
for the analogous requirement for eligible external TLAC: To ensure
that the required quantity of loss-absorbing capacity will be available
to absorb losses incurred anywhere by any subsidiary of the IHC.
Regulatory capital that is issued by one subsidiary of the covered IHC
would not necessarily be available to absorb losses incurred by another
subsidiary.
Regulatory capital must meet one additional requirements in order
to count as eligible internal TLAC: It must be issued to a foreign
parent entity of the covered IHC. The requirement of issuance to a
foreign parent, rather than to a U.S. affiliate or to third parties,
would ensure that losses incurred by the U.S. intermediate holding
company of a foreign GSIB would be upstreamed to a foreign parent
rather than being transferred to other U.S. entities. This requirement
would minimize the risk that such losses pose to the financial
stability of the United States, regardless of whether the covered IHC
enters a resolution proceeding.
The requirement of issuance to a foreign parent that controls the
covered IHC, rather than to another foreign entity within the foreign
GSIB or to a third party, would prevent the conversion of eligible
internal TLAC into equity from effecting a change in
[[Page 74942]]
control over the covered IHC. A change in control could create
additional and undesirable regulatory and management complexity during
a failure scenario and would severely disrupt an SPOE resolution
strategy.
Question 32: The Board invites comment on all aspects of the
proposed definition of eligible internal TLAC.
Question 33: Should eligible internal LTD with a remaining maturity
between one and two years be subject to a 50 percent haircut for
purposes of the internal TLAC requirement, by analogy to the treatment
of such eligible internal LTD for purposes of the internal LTD
requirement?
D. Internal TLAC Buffer
An internal TLAC buffer would apply in addition to the risk-
weighted assets component of the internal TLAC requirement. The
internal TLAC buffer would be generally analogous to the proposed
external TLAC buffer described above, although the internal TLAC buffer
would not include a GSIB surcharge component because covered IHCs are
not subject to the GSIB surcharge rule. A covered IHC's internal TLAC
buffer would thus be equal to the sum of 2.5 percent plus any
applicable countercyclical capital buffer.
The internal TLAC buffer would be required to be filled solely with
common equity tier 1 capital, and a covered IHC's breach of its
internal TLAC buffer would subject it to limits on capital
distributions and discretionary bonus payments in accordance with Table
2. Thus, the internal TLAC buffer would be analogous to the capital
conservation buffer applicable under the Board's Regulation Q, except
that it would apply in addition to the internal TLAC requirement rather
than in addition to minimum risk-based capital requirements under
Regulation Q.
As discussed above with respect to the external TLAC buffer, a
covered IHC that already meets the applicable capital requirements and
the existing capital conservation buffer would not need to increase its
common equity tier 1 capital to meet its internal TLAC requirement and
its internal TLAC buffer.
Table 2--Calculation of Maximum Internal TLAC Payout Amount
------------------------------------------------------------------------
Maximum internal TLAC
payout ratio (as a
Internal TLAC buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the internal TLAC buffer...... No payout ratio limitation
applies.
Less than or equal to the internal TLAC 60 percent.
buffer, and greater than 75 percent of the
internal TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
internal TLAC buffer, and greater than 50
percent of the internal TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
internal TLAC buffer, and greater than 25
percent of the internal TLAC buffer.
Less than or equal to 25 percent of the 0 percent.
internal TLAC buffer.
------------------------------------------------------------------------
E. Core Features of Eligible Internal LTD (Section 252.161 of the
Proposed Rule)
A covered IHC's eligible internal LTD would generally be subject to
the same requirements as would apply to eligible external LTD: It would
be required to be debt that is paid in and issued directly from the
covered IHC, is unsecured, has a maturity of greater than one year from
the date of issuance, is ``plain vanilla,'' and is governed by U.S.
law. Eligible internal LTD with a remaining maturity of between one and
two years would be subject to a 50 percent haircut for purposes of the
internal LTD requirement, and eligible internal LTD with a remaining
maturity of less than one year would not count toward the internal LTD
requirement. The proposal would treat an instrument that could become
subject to a put right in the future as if the first day on which the
put right could be exercised were the instrument's stated maturity
date. The rationales for these proposed provisions are generally the
same as the rationales for the identical provisions in the context of
eligible external LTD, which are discussed above.\72\
---------------------------------------------------------------------------
\72\ In addition, the proposal requires that eligible internal
LTD be governed by U.S. law in order to clarify that the conversion,
exchange, and cancellation provisions of these instruments, which
would be held by foreign companies, are enforceable under U.S. law.
---------------------------------------------------------------------------
However, several additional requirements would apply to eligible
internal LTD. Eligible internal LTD would be required to be issued to a
foreign parent entity of the covered IHC, to be contractually
subordinated to all third-party liabilities of the covered IHC, and to
include a contractual trigger pursuant to which the Board could require
the covered IHC to cancel the eligible internal LTD or convert or
exchange it into tier 1 common equity on a going-concern basis under
certain specified conditions.
Question 34: The Board invites comment on the appropriateness of
subjecting eligible internal LTD to the same requirements as apply to
eligible external LTD.
Question 35: The Board invites comment on the requirement that
eligible internal LTD instruments be governed by U.S. law. Is this
requirement adequate to ensure that losses can be imposed on such
instruments under the U.S. Bankruptcy Code or Title II without undue
legal risk? Are additional requirements appropriate? In particular,
would a requirement that such instruments be subject to the contract
law of one or more States be appropriate? Is it appropriate to permit
such instruments to be governed by non-U.S. laws in any respects?
1. Issuance to a Foreign Parent Entity That Controls the Covered IHC
Eligible internal LTD would be required to be paid in and issued to
a foreign parent entity that controls the covered IHC. The rationale
for this requirement is the same as the rationale for the identical
requirement with respect to regulatory capital that counts as eligible
internal TLAC, which is discussed above.
Question 36: The Board invites comment on all aspects of the
requirement that eligible internal LTD be issued to a foreign parent
entity that controls the covered IHC. In particular, the Board invites
comment with respect to whether covered IHCs that are expected to enter
resolution themselves in a failure scenario should be permitted to
issue eligible internal LTD to third parties, as covered BHCs would.
Should internal LTD be required to be issued to the top-tier foreign
parent of the covered IHC?
2. Contractual Subordination
Eligible internal LTD would be required to be contractually
[[Page 74943]]
subordinated to all third-party liabilities of the covered IHC, with
the exception of liabilities that are related to eligible internal
TLAC. The exception for liabilities that are related to eligible
internal TLAC applies to instruments that were eligible internal TLAC
when issued and have ceased to be eligible solely because their
remaining maturity is less than one year, because they have become
subject to a put right, or because they could become subject to a put
right within one year, as well as to payables (such as dividend- or
interest-related payables) that are associated with such liabilities.
The proposed contractual subordination requirement would ensure
that the foreign parent generally would absorb the covered IHC's losses
ahead of the third-party creditors and counterparties of the covered
IHC and its subsidiaries. Such a requirement should reduce the risk of
third-party challenges to the recapitalization of the covered IHC and
reduce the risk that a change in control could result from the
recapitalization of the covered IHC. Both legal challenges to the
recapitalization and a change in control over the covered IHC could
create obstacles to an orderly resolution.
This requirement is more stringent than the requirements for
eligible external LTD, which is allowed to be senior unsecured debt and
to be senior to a limited amount of a capped amount of liabilities of
the covered BHC that do not count as eligible external LTD. The Board
is proposing to apply this more stringent requirement to eligible
internal LTD because the costs of doing so are likely to be less than
the costs of imposing an identical requirement on eligible external LTD
and are likely to be outweighed by the benefits described above. In
particular, the cost of imposing this contractual subordination
requirement on covered IHCs should be substantially lower than the cost
of imposing the same requirement on covered BHCs because a covered BHC
must issue its long-term debt to third-party market participants, some
of which do not invest in contractually subordinated debt instruments,
whereas a covered IHC would issue its long-term debt to a parent entity
in an internal transaction.\73\
---------------------------------------------------------------------------
\73\ While the Board does not propose to subject covered BHCs to
this contractual subordination requirement, it does propose to
impose a cap on the value of a covered BHC's non-eligible external
LTD-related liabilities that can be pari passu with or junior to its
eligible long-term debt. This aspect of the proposal is discussed
below.
---------------------------------------------------------------------------
Question 37: The Board invites comment on the appropriateness of
the proposed contractual subordination requirement for eligible
internal LTD.
3. Contractual Conversion Trigger
Eligible internal LTD would be required to include a contractual
trigger pursuant to which the Board could require the covered IHC to
cancel the eligible internal LTD or convert or exchange it into tier 1
common equity on a going-concern basis (that is, without the covered
IHC's entry into a resolution proceeding) if: (a) the Board determines
that the covered IHC is ``in default or in danger of default''; \74\
and (b) any of the following circumstances apply (i) the top-tier
foreign banking organization or any subsidiary outside of the United
States is placed into resolution proceedings, (ii) the home country
supervisory authority consents to the cancellation, exchange, or
conversion, or does not object to the cancellation, exchange, or
conversion following 48 hours' notice, or (iii) the Board has made a
written recommendation to the Secretary of the Treasury that the FDIC
should be appointed as receiver of the covered IHC under Title II.\75\
The terms in the debt instrument would have to be approved by the
Board.
---------------------------------------------------------------------------
\74\ The phrase ``in default or in danger of default'' would be
defined consistently with the standard provided by section 203(c)(4)
of Title II of the Dodd-Frank Act. See 12 U.S.C. 5383. Consistent
with section 203's definition of the phrase, a covered IHC would be
considered to be in default or in danger of default upon a
determination by the Board that (A) a case has been, or likely will
promptly be, commenced with respect to the [covered IHC] under the
U.S. Bankruptcy Code; (B) the covered IHC has incurred, or is likely
to incur, losses that will deplete all or substantially all of its
capital, and there is no reasonable prospect for the company to
avoid such depletion; (C) the assets of the [covered IHC] are, or
are likely to be, less than its obligations to creditors and others;
or (D) the [covered IHC] is, or is likely to be, unable to pay its
obligations (other than those subject to a bona fide dispute) in the
normal course of business.
\75\ See 12 U.S.C. 5383.
---------------------------------------------------------------------------
The principal purpose of this requirement is to ensure that losses
incurred by the covered IHC are shifted to a foreign parent without the
covered IHC's having to enter a resolution proceeding. If the covered
IHC's eligible internal LTD is sufficient to recapitalize the covered
IHC in light of the losses that the covered IHC has incurred, this goal
could be achieved through conversion of the eligible internal LTD into
equity upon the occurrence of the trigger conditions. The covered IHC's
entry into a resolution proceeding could pose a risk to the financial
stability of the United States, and so avoiding the need for such a
resolution proceeding would advance the Dodd-Frank Act's goal of
``mitigat[ing] risks to the financial stability of the United States
that could arise from the material financial distress'' of the covered
IHC.\76\
---------------------------------------------------------------------------
\76\ 12 U.S.C. 5365(a)(1).
---------------------------------------------------------------------------
The proposed trigger conditions represent a compromise between the
interests of home and host regulators. From the perspective of a host
regulator, it is desirable to have the power to impose losses on
eligible internal LTD quickly and easily upon a determination that the
hosted subsidiary is in danger of default, in order to remove those
losses from the host jurisdiction's financial system and thereby
promote financial stability in the host jurisdiction. The proposed
trigger conditions advance this interest by giving the Board the power
to do so upon a determination that the covered IHC is in danger of
default where the home jurisdiction supervisory authority either
consents or fails to object within 48 hours or where the home
jurisdiction resolution authority has placed the parent foreign banking
organization into resolution proceedings. At the same time, from the
perspective of a home regulator, it is desirable that host regulators
not impose losses on the top-tier parent entity except where doing so
is appropriate to prevent the failure of the hosted subsidiary, since
doing so drains loss-absorbing capacity from the top-tier parent entity
that may be needed to support other subsidiaries in the home
jurisdiction or in another host jurisdiction. The proposed trigger
conditions advance this interest by giving the home jurisdiction
supervisory authority the right to object to the triggering decision
within 48 hours, except where the home jurisdiction resolution
authority has placed the parent foreign banking entity into resolution
proceedings. The United States is home to numerous U.S. GSIBs and also
hosts substantial operations of numerous foreign GSIBs, making both
considerations relevant to U.S. interests. U.S. financial regulatory
agencies are discussing the application of similar standards by foreign
regulatory authorities in jurisdictions that host the operations of
U.S. GSIBs.
Question 38: The Board invites comment on all aspects of the
contractual conversion trigger requirement, including the
appropriateness of the requirement for foreign GSIBs with SPOE and MPOE
resolution strategies, whether an alternative to the ``in default or in
danger of default'' standard would be more appropriate, and any legal
risks associated with the Board's conversion of eligible internal LTD
into equity in order to recapitalize the covered IHC.
[[Page 74944]]
Question 39: The Board invites comment on its proposed method to
identify the home jurisdiction supervisory authority of a foreign GSIB
for purposes of issuing an internal debt conversion order.
Question 40: The Board invites comment on whether the conversion
condition that refers to the placement of a foreign banking
organization that controls the covered IHC or any subsidiary of the
top-tier-foreign banking organization being placed into resolution in
its home country is appropriate in scope.
IV. Clean Holding Company Requirements (sections 252.64 and 252.165 of
the proposed rule)
To further facilitate the resolution of a covered BHC, a covered
IHC, or a foreign parent entity of a covered IHC, the Board proposes to
prohibit both covered BHCs and covered IHCs (together, ``covered
holding companies'') from engaging in certain classes of transactions
that could pose an obstacle to the orderly SPOE resolution of a covered
holding company or increase the risk that financial market contagion
would result from the resolution of a covered holding company.
In particular, the Board proposes to prohibit covered holding
companies from having outstanding liabilities in the following
categories: Third-party debt instruments with an original maturity of
less than one year, including deposits (``short-term debt''); qualified
financial contracts with a third party (``third-party QFCs'');
guarantees of a subsidiary's liabilities if the covered holding
company's insolvency or entry into a resolution proceeding would create
default rights for a counterparty of the subsidiary; and liabilities
that are guaranteed by a subsidiary of the covered holding company
(``upstream guarantees'') or are subject to rights that would allow a
third party to offset its debt to a subsidiary upon the covered holding
company's default on an obligation owed to the third party.
Additionally, the Board proposes to cap the total value of each
covered BHC's non-TLAC-related third-party liabilities that are either
pari passu with or subordinated to any eligible external TLAC to 5
percent of the value of the covered BHC's eligible external TLAC. (As
discussed above, the Board proposes to prohibit covered IHCs from
having any non-TLAC-related third-party liabilities that are pari passu
with or subordinated to eligible internal LTD by requiring that
eligible internal LTD be contractually subordinated to all third-party
debt claims. Therefore, the proposed cap is not relevant to covered
IHCs.)
The proposed prohibitions and cap would apply only to the corporate
practices and liabilities of the covered holding company itself. They
would not directly restrict the corporate practices and liabilities of
the subsidiaries of the covered holding company.
These proposed clean holding company provisions would advance three
related goals of SPOE resolution. First, a successful SPOE resolution
proceeding requires the ability to impose losses on the creditors of
the covered holding company without causing material disruption to the
financial system. The proposed clean holding company restrictions would
advance this goal by minimizing the risk of short-term funding runs,
asset firesales, and severe losses to other large financial firms that
might otherwise be associated with an SPOE resolution of a covered
holding company.
Second, the clean holding company provisions would limit the extent
to which the subsidiaries of a covered holding company would experience
losses as a result of the failure of the covered holding company. In
particular, the prohibition on holding company liabilities that are
subject to upstream guarantees or offset rights would prevent a failed
covered holding company's creditors from passing their losses on to the
covered holding company's subsidiaries. This would serve SPOE
resolution's goal of ensuring that the failed holding company's
operating subsidiaries are able to continue their normal operations
throughout the resolution of the failed holding company by protecting
those subsidiaries from losses that might threaten their viability.
Third, SPOE resolution seeks to achieve the rapid recapitalization
of the material subsidiaries of a covered holding company with minimal
interruption to the ordinary operations of those subsidiaries. An
entity's complexity can pose a major obstacle to rapid and orderly
resolution. Limitations on the types of transactions that a covered
holding company may enter into serve to limit its legal and operational
complexity and thereby facilitate a prompt resolution and
recapitalization with minimal uncertainty and delay.
The proposed clean holding company provisions would also enhance
the overall resiliency of covered holding companies by removing
complexity from their balance sheets and limiting their reliance on
short-term funding.
A. Third-Party Short-Term Debt Instruments (Sections 252.64(a)(1) and
252.165(a) of the Proposed Rule)
The Board proposes to prohibit covered holding companies from
issuing debt instruments with an original maturity of less than one
year to a third party (as opposed to an affiliate of the covered
holding company). Such a liability would be considered to have an
original maturity of less than one year if it would provide the
creditor with the option to receive repayment within one year of the
creation of the liability, or if it would create such an option or an
automatic obligation to pay upon the occurrence of an event that could
occur within one year of the creation of the liability (other than an
event related to the covered holding company's insolvency). The
proposed prohibition would also cover short-term and demand deposits at
the covered holding company.\77\
---------------------------------------------------------------------------
\77\ For purposes of the proposal, deposits would include those
that are captured in line item 11 of schedule PC of FR Y-9LP.
---------------------------------------------------------------------------
One objective of SPOE resolution is to mitigate the risk of
destabilizing funding runs. A funding run occurs when the short-term
creditors of a financial company observe stress at that institution and
seek to minimize their exposures to it by refusing to roll over its
debts. The resulting liquidity stress can hasten the company's failure,
including by forcing it to engage in asset firesales to come up with
the liquidity to pay the short-term creditors. Because they reduce the
value of similar assets held by other firms, asset firesales are a key
channel for the propagation of stress throughout the financial system.
The short-term creditors of a failing GSIB may also run on other
counterparties that are similar to the failing firm in certain
respects, weakening those firms and forcing further firesales. And
depositors, who generally have the ability to demand their funds on
short notice, present analogous issues.
The Board's proposal seeks to mitigate these risks in two
complementary ways. First, although the operating subsidiaries of
covered holding companies rely on short-term funding, in an SPOE
resolution, their short-term creditors would not bear losses incurred
by the subsidiaries because those losses would instead be borne by the
external TLAC holders of the covered holding company. To the extent
that market participants view SPOE resolution as workable, the
subsidiaries' short-term creditors should have reduced incentives to
run because their direct counterparty will not default in such a
resolution. Second, the covered holding
[[Page 74945]]
companies themselves--which would (or, in the case of a covered IHC,
might) enter into resolution and default on certain of their debts in a
failure scenario--would be prohibited from relying on short-term
funding, reducing the run risk associated with the failure of such an
entity. This is a particularly important objective in light of the
likely liquidity needs of a GSIB during SPOE resolution, because a
short-term funding run on a covered holding company would drain
liquidity that might be needed to support the group's operating
subsidiaries.
The proposed prohibition applies to both secured and unsecured
short-term borrowings. Although secured creditors are less likely to
take losses in resolution than unsecured creditors, secured creditors
may nonetheless be unwilling to maintain their exposures to a covered
holding company that comes under stress. In particular, if the covered
holding company were to enter into a resolution proceeding, the
collateral used to secure the debt would be subject to a stay,
preventing the creditor from liquidating it immediately. (Qualified
financial contracts, which are not subject to a stay under the U.S.
Bankruptcy Code but which present other potential difficulties for SPOE
resolution, are discussed below.) The creditor would therefore face two
risks: The risk that the value of the collateral would decline before
it could be liquidated and the liquidity risk attributable to the fact
that the creditor would be stayed from liquidating the collateral for
some time. Knowing this, secured short-term creditors may well decide
to withdraw funding from a covered holding company that comes under
stress.
Additionally, many short-term lenders to GSIBs are themselves
maturity-transforming financial firms that are vulnerable to runs (for
instance, money market mutual funds). If such firms incur losses, then
they may be unable to meet their obligations to their own investors and
counterparties, which would cause further losses throughout the
financial system. Because SPOE resolution relies on imposing losses on
the covered holding company's creditors while protecting the creditors
and counterparties of its material operating subsidiaries, it is
desirable that the holding company's creditors be limited to those
entities that can be exposed to losses without materially affecting
financial stability. This proposal seeks to further enhance the
credibility of the SPOE approach by removing undue complexity from the
resolution of a covered holding company.
Finally, the proposed prohibition on short-term debt instruments
would promote the resiliency of covered holding companies as well as
their resolvability. As discussed above, reliance on short-term funding
creates the risk of a short-term funding run that could destabilize the
covered holding company by draining its liquidity and forcing it to
engage in capital-depleting asset firesales. The increase in covered
holding company resiliency yielded by the proposed prohibition provides
a secondary justification for the proposal.
Question 41: The Board invites comment on whether the proposed
prohibition would advance SPOE resolution by helping to minimize the
run risk and potential negative externalities associated with issuance
of short-term debt by covered holding companies. In particular, the
Board invites comment on the appropriate scope of the proposed
prohibition and whether the prohibition is sufficiently clear.
Question 42: The Board invites comment on whether the purpose of
the proposed prohibition would be served by a further requirement that
covered holding companies not redeem or buy back their liabilities
without prior regulatory approval, to prevent covered holding companies
from doing so to preserve their franchise in response to creditor
requests, which could hasten a failure by draining liquidity or
requiring asset firesales.
Question 43: The Board invites comment on the appropriate treatment
of pre-existing notes that would require redemption or create a put
right upon the occurrence of an event that could (but might not) occur
within one year of issuance.
B. Qualified Financial Contracts with Third Parties (Sections
252.64(a)(3) and 252.165(c) of the Proposed Rule)
Under the proposal, covered BHCs could only enter into qualified
financial contracts (QFCs) with their subsidiaries and covered IHCs
could only enter into QFCs with their affiliates. The proposal defines
QFCs by reference to Title II of the Dodd-Frank Act, which defines QFCs
to include securities contracts, commodities contracts, forward
contracts, repurchase agreements, and swap agreements.\78\
---------------------------------------------------------------------------
\78\ 12 U.S.C. 5390(c)(8)(D).
---------------------------------------------------------------------------
The failure of a large financial organization that is a party to a
material amount of third-party QFCs could pose a substantial risk to
the stability of the financial system. Specifically, it is likely that
many of that institution's QFC counterparties would respond to the
institution's default by immediately liquidating their collateral and
seeking replacement trades with other dealers, which could cause
firesale effects and propagate financial stress to other firms that
hold similar assets by depressing asset prices.
The proposed restriction on third-party QFCs would mitigate this
threat to financial stability by two means. First, covered holding
companies' operating subsidiaries, which are parties to large
quantities of QFCs, should remain solvent and not fail to meet any
ordinary course payment or delivery obligations during a successful
SPOE resolution. Therefore, assuming that the cross-default provisions
of the QFCs engaged in by the operating subsidiaries of covered holding
companies are appropriately structured, their QFC counterparties
generally would have no contractual right to terminate or liquidate
collateral on the basis of the covered holding company's entry into
resolution proceedings.\79\ Second, the covered holding companies
themselves would have no QFCs with external counterparties, and so
their entry into resolution proceedings would not result in QFC
terminations and related firesales. The proposed restriction on third-
party QFCs would therefore materially diminish the firesale risk and
contagion effects associated with the failure of a covered holding
company.
---------------------------------------------------------------------------
\79\ See International Swaps and Derivatives Association's
(``ISDA'') 2014 Resolution Stay Protocol (November 4, 2014).
---------------------------------------------------------------------------
Question 44: The Board invites comment with respect to whether the
prohibition on third-party QFCs should be subject to an exception for
derivatives contracts that are intended to hedge the exposures of the
covered holding company and, if so, the appropriate scope of any such
exception. The Board also invites comment on whether the definition of
``qualified financial contracts'' provides an appropriate scope for
this prohibition and, in particular, whether the scope should be
narrowed to permit covered holding companies to enter into certain
third-party QFCs or broadened to prohibit additional classes of
transactions.
Question 45: The Board invites comment on the appropriate treatment
of pre-existing third-party QFCs, some of which may be long-dated.
Should some or all pre-existing third-party QFCs be included in the
proposed restriction? Commenters are invited to provide information on
the characteristics of existing third-party QFCs to which a covered
holding company is a party.
[[Page 74946]]
C. Guarantees that Are Subject to Cross-Defaults (Sections 252.64(a)(4)
and 252.165(d) of the Proposed Rule)
The proposal would prohibit a covered holding company from
guaranteeing (including by providing credit support) with respect to
any liability between a direct or indirect subsidiary of the covered
holding company and an external counterparty if the covered holding
company's insolvency or entry into resolution (other than resolution
under Title II of the Dodd-Frank Act) would directly or indirectly
provide the subsidiary's counterparty with a default right.\80\
Guarantees by covered holding companies of liabilities that are not
subject to such cross-default rights would be unaffected by the
proposal.
---------------------------------------------------------------------------
\80\ The proposal defines the term ``default right'' broadly.
---------------------------------------------------------------------------
The proposed prohibition would advance the key SPOE resolution goal
of ensuring that a covered holding company's subsidiaries would
continue to operate normally upon the covered holding company's entry
into resolution. This goal would be jeopardized if the covered holding
company's entry into resolution or insolvency operated as a default by
the subsidiary and empowered the subsidiary's counterparties to take
default-related actions, such as ceasing to perform under the contract
or liquidating collateral. Were the counterparty to take such actions,
the subsidiary could face liquidity, reputational, or other stress that
could undermine its ability to continue operating normally, for
instance by prompting a short-term funding run on the subsidiary. The
proposed prohibition would be a complement to other work that has been
done or is underway to facilitate SPOE resolution through the stay of
cross-defaults, including the ISDA 2014 Resolution Stay Protocol.\81\
---------------------------------------------------------------------------
\81\ See ISDA 2014 Resolution Stay Protocol.
---------------------------------------------------------------------------
Question 46: The Board invites comment on the appropriate
definition of ``default right'' in the proposed regulations, and on
whether the definition of this term should specifically exclude
contracts that provide for termination on demand. The Board also
invites comment on whether, for the purposes of this proposal,
contractual provisions that require the parties to negotiate new terms
(e.g., Annex III (Term Loans) of the Global Master Securities Lending
Agreement) should be treated the same as a right to terminate on
demand.
Question 47: The Board invites comment on whether a covered holding
company should be permitted to guarantee the liabilities of its
subsidiaries if such liabilities permit a person to terminate the
contract on demand or at its option at a specified time, or from time
to time, without the need to show cause. Should a covered holding
company be permitted to guarantee any particular class or classes of
liabilities of its subsidiaries that include such provisions?
Question 48: The Board invites comment on whether a covered IHC
should be permitted to guarantee liabilities of affiliates of the
covered IHC that are not subsidiaries of the covered IHC, and whether
any prohibition should distinguish between the foreign banking
organization's non-U.S. operations and its U.S. branches and agencies.
Question 49: The Board invites comment on whether additional
limitations or exceptions for guarantees by covered holding companies
are necessary or appropriate.
D. Upstream Guarantees and Offset Rights (Sections 252.64(a)(2), (5)
and 252.165(b)(e) of the Proposed Rule)
The Board proposes to prohibit covered holding companies from
having outstanding liabilities that are subject to a guarantee from any
direct or indirect subsidiary of the holding company. SPOE resolution
relies on imposing all losses incurred by the group on the covered
holding company's eligible external TLAC holders while ensuring that
its operating subsidiaries continue to operate normally. This
arrangement could be undermined if a liability of the covered holding
company is subject to an upstream guarantee, because the effect of such
a guarantee is to subject the guaranteeing subsidiary (and, ultimately,
its creditors) to the losses that would otherwise be imposed on the
holding company's creditors. A prohibition on upstream guarantees would
facilitate the SPOE resolution strategy by increasing the certainty
that the covered holding company's eligible external TLAC holders will
be exposed to loss ahead of the creditors of its subsidiaries.
Upstream guarantees do not appear to be common among covered
holding companies. Section 23A of the Federal Reserve Act already
limits the ability of a U.S. insured depository institution to issue
guarantees on behalf of its parent holding company.\82\ The principal
effect of the proposed prohibition would therefore be to prevent the
future issuance of such guarantees by material non-bank subsidiaries.
---------------------------------------------------------------------------
\82\ Transactions subject to the quantitative limits of section
23A of the Federal Reserve Act and Regulation W include guarantees
issued by a bank on behalf of an affiliate. See 12 U.S.C.
371c(b)(7); 12 CFR 223.3(h).
---------------------------------------------------------------------------
For analogous reasons, the Board also proposes to prohibit covered
holding companies from issuing an instrument if the holder of the
instrument has a contractual right to offset its or its affiliates'
liabilities to the covered holding company's subsidiaries against the
covered holding company's liability under the instrument.\83\ The
prohibition would include all such offset rights regardless of whether
the right is provided in the instrument itself. Such offset rights are
another device by which losses that should flow to the covered holding
company's external TLAC holders in an SPOE resolution could instead be
imposed on operating subsidiaries and their creditors.
---------------------------------------------------------------------------
\83\ The prohibition for covered IHCs also would include
contractual rights to offset against the covered IHC because the
covered IHC itself may not enter resolution or insolvency
proceedings.
---------------------------------------------------------------------------
Question 50: The Board invites comment on the appropriate scope of
the ``upstream guarantee'' prohibition and on whether any exceptions to
the proposed prohibition on such guarantees are necessary or
appropriate. The Board also invites comment on the appropriate scope of
the offset rights prohibition, including whether the proposed
prohibition is adequate to achieve the goals expressed above. For
example, should this provision be limited to debt instruments that
provide contractual offset rights? The Board invites comment with
respect to whether any exceptions or limitations to the proposed
restrictions on such rights, such as a limitation of the restriction to
eligible external TLAC instruments, are necessary or appropriate.
Question 51: The Board invites comment on the types of instruments
that provide contractual offset rights and the amount of such
instruments issued by covered BHCs.
Question 52: The Board invites comment on whether arrangements
other than upstream guarantees and offset rights could also have the
effect of forcing the creditors of material operating subsidiaries to
take losses before holding company creditors (for instance, a
subsidiary's entry into a credit default swap referencing the debt of
the covered holding company) and, if so, whether they should also be
restricted by regulation. Finally, the Board invites comment on whether
the prohibition should be limited to certain material operating
subsidiaries rather than covering all subsidiaries of a covered holding
company and, if so, the
[[Page 74947]]
appropriate scope of the limitation on the types of subsidiaries.
E. Cap on Other Third-Party Liabilities (section 252.64(b) of the
proposed rule)
Finally, the Board proposes to limit the total value of certain
other liabilities of covered BHCs that could create obstacles to
orderly resolution to 5 percent of the value of the covered BHC's
eligible external TLAC. The cap would apply to non-contingent
liabilities to third parties (i.e., persons that are not affiliates of
the covered BHC) that would rank either pari passu with or junior to
the covered BHC's eligible LTD in the priority scheme of either the
U.S. Bankruptcy Code or Title II.\84\ The cap would not apply to
eligible external TLAC; to instruments that were eligible external TLAC
when issued and have ceased to be eligible (because their remaining
maturity is less than one year) as long as the holder of the instrument
does not have a currently exercisable put right; or to payables (such
as dividend- or interest-related payables) that are associated with
such liabilities.
---------------------------------------------------------------------------
\84\ See 11 U.S.C. 507; 12 U.S.C. 5390(b).
---------------------------------------------------------------------------
Because the Board proposes to require that a covered IHC's eligible
internal LTD be contractually subordinated to all of the covered IHC's
third-party liabilities, this proposed cap would have no relevance to
those firms. The Board accordingly does not propose to apply the cap to
covered IHCs.
Liabilities that would be expected to be subject to the cap include
debt instruments with derivative-linked features (i.e., structured
notes); external vendor and operating liabilities, such as for
utilities, rent, fees for services, and obligations to employees; and
liabilities arising other than through a contract (e.g., liabilities
created by a court judgment).
The liabilities subject to the cap fall into two groups: Those that
could be subjected to losses alongside eligible external TLAC without
potentially undermining SPOE resolution or financial stability, and
those that potentially could not.
The first group includes structured notes. The proposal defines
structured notes so as to avoid capturing debt instruments that pay
interest based on the performance of a single index but to otherwise
capture all debt instruments that have a principal amount, redemption
amount, or stated maturity, that is subject to reduction based on the
performance of any asset, entity, index, or embedded derivative or
similar embedded feature.\85\ Such liabilities could be subjected to
losses in resolution alongside eligible external TLAC, but the proposal
would cap them in light of their greater complexity relative to the
plain-vanilla debt that qualifies as external TLAC. In an orderly
resolution of a covered BHC, debt instruments that will be subjected to
losses should be able to be valued accurately and with minimal risk of
dispute. Structured notes contain features that could make their
valuation uncertain, volatile, or unduly complex. Additionally,
structured notes are often customer products sold to purchasers who are
primarily seeking exposure to a particular asset class and not seeking
credit exposure to the covered BHC, and the need to impose losses on a
financial institution's customers in resolution may create obstacles to
orderly resolution. The proposed cap on structured notes would promote
the resolvability of covered BHCs by limiting their issuance of
instruments that present these issues. The cap would not limit a
covered BHC's ability to issue structured notes out of subsidiaries.
---------------------------------------------------------------------------
\85\ In addition, the definition captures debt instruments that
have more than one embedded derivative (or similar embedded feature)
or are not treated as debt under generally accepted accounting
principles.
---------------------------------------------------------------------------
The second group includes, for example, vendor liabilities and
obligations to employees. Successful resolution may require that the
covered BHC continue to perform on certain of its unsecured liabilities
in order to ensure that it is not cut off from vital services and
resources. If these vital liabilities were pari passu with eligible
external LTD, protecting these vital liabilities from loss would entail
treating these liabilities differently from eligible external LTD of
the same priority, which could present both operational and legal risk.
The operational risk flows from the need to identify such liabilities
quickly in the context of a complex resolution proceeding, reducing the
covered holding company's complexity by capping the amount of these
liabilities that it can have outstanding mitigates this risk. The legal
risk flows from the no-creditor-worse-off principle, according to which
each creditor of a firm that enters resolution is entitled to recover
at least as much as it would have if the firm had simply been
liquidated under chapter 7 of the U.S. Bankruptcy Code.\86\ As
creditors of a given priority receive special treatment (that is, as
they are paid in full to ensure that the firm maintains access to vital
external services and resources), the pool of resources available to
other creditors of the same priority shrinks, making it more likely
that those creditors will recover less than they would have in
liquidation. Thus, imposing a cap on the total value of liabilities
that are pari passu with or junior to eligible external TLAC but that
might need to receive special treatment in resolution mitigates this
no-creditor-worse-off risk.
---------------------------------------------------------------------------
\86\ See, e.g., 11 U.S.C. 1129(a)(7); 12 U.S.C. 5390(d)(2).
---------------------------------------------------------------------------
The rationale for calibrating the proposed cap to 5 percent of a
covered BHC's eligible TLAC is as follows. The Board collected data
from the U.S. GSIBs and determined that covered BHCs have outstanding
certain third-party operational liabilities that may rank pari passu
with eligible LTD and that could not be eliminated without substantial
cost and complexity. These liabilities include (among other things) tax
payables, compensation payables, and accrued benefit plan obligations.
For the eight current U.S. GSIBs, the value of these operating
liabilities ranges from 1 percent to 4 percent of the sum of the
covered BHC's equity and long-term debt, which provides a reasonable
proxy for the amount of eligible external TLAC it would have under this
proposal. The cap was calibrated to allow these existing operational
liabilities while limiting the excessive growth of these and other
liabilities at the covered BHC so that the problems discussed in the
preceding paragraphs may be avoided. In particular, several covered
BHCs may need to limit the value of structured notes that they have
outstanding. This result would be consistent with the rationale for the
clean holding company requirements because, as noted above, such
structured notes are customer liabilities rather than vital operating
liabilities and because their presence at the holding company could
create undue complexity during resolution.
By subjecting the total value of a covered BHC's liabilities of
both types to a single cap, the Board's proposal gives covered BHCs
greater discretion to manage their own affairs than would a proposal
that applied separate, smaller caps to the two types of liability.
Question 53: The Board invites comment on the appropriate
definition of ``structured notes,'' and whether the provisions of the
definition are adequate to achieve the goals expressed above. The Board
invites comment on use and scope of the term ``assets'' as used in the
definition of structured note, and whether a different term would be
more appropriate in this context.
[[Page 74948]]
Question 54: Should liabilities subject to the proposed cap on
certain third-party liabilities be netted against reserves held with
respect to such liabilities for purposes of determining compliance with
the proposed cap?
Question 55: The Board invites comment on the appropriate size of
the proposed cap. The Board also invites comment as to the appropriate
scope of the cap, including the liabilities excluded from the cap and
the formulation of the proposed exemption for certain liabilities
associated with eligible external TLAC.
Question 56: The Board invites comment regarding whether a
grandfather of existing liabilities that would be subject to the
proposed cap would be appropriate. In particular, the Board invites
comment on the appropriate design of such a grandfather and the likely
impact on covered BHCs and debt markets of the failure to include such
a grandfather. Please support your response with data.
Question 57: The Board invites comment on the appropriate
accounting treatment to be used in determining the total value of the
liabilities subject to the cap, including whether and to what extent
guarantees by the resolution entity of the liabilities of its
subsidiaries should be subject to the cap.
Question 58: The Board invites comment on whether secured
liabilities and liabilities that otherwise represent a claim that would
be senior to eligible debt securities under bankruptcy proceedings or a
Title II resolution should be subject to the limit on unrelated
liabilities of the covered BHC.
Question 59: The Board invites comment on what, if any, additional
restrictions on corporate practices or operations of covered BHCs would
be appropriate.
F. Disclosure Requirements (Section 252.65 of the Proposed Rule)
The Board proposes to require each covered BHC to publicly disclose
a description of the financial consequences to unsecured debtholders of
the covered BHC's entry into a resolution proceeding in which the
covered BHC is the only entity that would enter resolution.
Consistent with the disclosure requirements imposed by the Board's
capital regulations, the covered BHC would be permitted to make this
disclosure on its Web site or in more than one public financial report
or other public regulatory report, provided that the covered BHC
publicly provides a summary table specifically indicating the
location(s) of this disclosure.\87\ Because the disclosure requirement
is primarily intended to inform holders of a covered BHC's eligible
external LTD that they are subject to loss ahead of other creditors of
the covered BHC or its subsidiaries, the proposal would also require
the covered BHC to disclose the required information in the offering
documents for all of its eligible external LTD.
---------------------------------------------------------------------------
\87\ See 12 CFR 217.62(a), 12 CFR 217.172(c)(1).
---------------------------------------------------------------------------
The Board has long supported meaningful public disclosure by
banking organizations, with the objective of improving market
discipline and encouraging sound risk-management practices.\88\ By
helping holders of eligible external LTD and other unsecured debt
issued by a covered BHC to understand that they will be allowed to
suffer losses in a resolution and generally will absorb losses ahead of
the creditors of the covered BHC's subsidiaries, the proposed
disclosure requirement should encourage potential investors to
carefully assess the covered BHC's risk profile when making investment
decisions. This careful assessment should lead to an improvement in the
market pricing of the unsecured debt of covered BHCs, including
eligible external LTD, providing supervisors and market participants
with more accurate market signals about the financial condition and
risk profile of the covered BHC.
---------------------------------------------------------------------------
\88\ See, e.g., 78 FR 62018, 62128-29 (October 11, 2013).
---------------------------------------------------------------------------
Question 60: The Board invites comment on the proposed disclosure
requirements, including whether additional disclosures would further
advance the goals of this proposal. In particular, the Board invites
comment on whether a covered BHC should be required to disclose that
the public section of its most recent resolution plan is available
online.
Question 61: The Board invites comment on whether the proposed
methods for a covered BHC to make the required disclosures are
appropriate and on whether covered BHCs should be permitted to use
additional methods to make the required disclosures.
Question 62: Should the Board require covered BHCs to provide
specific disclosure language that is designed to notify potential
investors of the resolution-related risks of investing in unsecured
debt instruments issued by covered BHCs? If so, what language would be
appropriate?
V. Consideration of Public Reporting Requirements for Eligible External
and Internal TLAC and LTD
The Board intends to propose for a comment a requirement that
covered BHCs and covered IHCs report publicly their amounts of eligible
external TLAC and LTD and eligible internal TLAC and LTD, respectively,
on a regular basis. By rendering each covered holding company's loss-
absorbing capacity transparent to regulators and market participants,
public reporting requirements would promote both supervision and market
discipline, which could be expected to disincentivize excessive risk-
taking by covered BHCs and covered IHCs and thereby mitigate risks to
the financial stability of the United States.
Question 63: The Board invites comment on its plan to propose a
reporting requirement for eligible external TLAC and LTD and eligible
internal TLAC and LTD.
VI. Consideration of Domestic Internal TLAC Requirement
Under the SPOE resolution strategy, severe losses must be passed up
from the operating subsidiaries that initially incur them to the
covered holding company, and then on to the eligible external TLAC
holders (in the case of a covered BHC) or the foreign parent (in the
case of a covered IHC). Both steps are necessary to achieve the key
goal of the SPOE resolution strategy: Allowing material operating
subsidiaries to continue to operate normally by ensuring that losses
that would otherwise fall on their creditors (potentially sparking
contagious runs and other generators of financial instability) will
instead be borne by the holders of the TLAC issued by the covered
holding company. The proposed rule is intended to ensure that covered
holding companies issue a sufficient amount of loss-absorbing resources
to absorb such losses, but the proposed rule does not ensure that firms
have in place adequate mechanisms for transferring severe losses up
from their operating subsidiaries to the covered holding company--that
is, domestic internal total loss-absorbing capacity (``domestic
internal TLAC'').
The Board is therefore considering the costs and benefits of
imposing domestic internal TLAC requirements between covered holding
companies and their subsidiaries. Such requirements could complement
this proposed rule and could enhance the prospects for a successful
SPOE resolution of a covered BHC or of the parent foreign GSIB of a
covered IHC.
[[Page 74949]]
The domestic internal TLAC framework that the Board is considering
would require identification of covered holding companies' material
operating subsidiaries (``covered subsidiaries''). The framework would
then subject each covered holding company to a domestic internal TLAC
requirement with respect to each of its covered subsidiaries. The size
of the requirement with respect to a given covered subsidiary would
depend on the subsidiary's total risk-weighted assets, its total
leverage exposure, or both.\89\
---------------------------------------------------------------------------
\89\ See generally 12 CFR 217.10.
---------------------------------------------------------------------------
Under the framework that the Board is considering, domestic
internal TLAC would be divided into two categories: ``contributable
resources'' and ``prepositioned resources.'' Contributable resources
would be assets that are held by the covered holding company and would
enable the covered holding company to make contributions to covered
subsidiaries that incur severe losses, which would have the effect of
recapitalizing those subsidiaries. The principal benefit of
contributable resources is that they avoid the ``misallocation risk''
associated with prepositioned resources: Whereas an investment that has
been prepositioned with a particular subsidiary cannot easily be used
to recapitalize a different subsidiary that incurs unexpectedly high
losses, contributable resources can be flexibly allocated among
subsidiaries in light of the losses they suffer. The rationale for
requiring that contributable resources be held by the covered holding
company (rather than allowing them to be held at its subsidiaries)
would be that it could help to avoid operational risks and other
potential limitations on the firm's ability to move the assets to the
parts of the organization that need them most.
To ensure that the contributable resources would retain sufficient
value to recapitalize a subsidiary, including under conditions of
severe market stress, a domestic internal TLAC framework could require
that the contributable resources requirement be met entirely or
substantially with assets that would qualify as high-quality liquid
assets (HQLA) under the U.S. liquidity coverage ratio rule.\90\
Requiring a firm's contributable resources to be made up of HQLA,
rather than a broader set of high-quality assets, would have two
further advantages beyond helping to ensure that the assets remain
valuable during a stress period. First, the contribution of such assets
to a subsidiary would provide the subsidiary with additional liquidity
as well as capital. Second, some subsidiaries are subject to
limitations on the kinds of assets they are permitted to hold (for
example, U.S. banks generally cannot hold equities).\91\ If a firm's
contributable resources consist of HQLA, then these limitations should
not pose an obstacle to recapitalization because the firm will be able
to convert the assets into cash and then contribute the cash to its
subsidiaries.
---------------------------------------------------------------------------
\90\ 79 FR 61440 (October 10, 2014).
\91\ See 12 U.S.C. 24(7).
---------------------------------------------------------------------------
Prepositioned resources would be a covered holding company's debt
and equity investments in a covered subsidiary (including investments
made indirectly through lower-tier parent entities of the covered
subsidiary). A covered holding company's equity investment in a
subsidiary would transfer losses from the subsidiary to the holding
company automatically, while a holding company's debt investment could
be used to absorb losses incurred by the subsidiary through forgiveness
of the debt, conversion of the debt into equity, or another
economically similar procedure. To qualify as prepositioned resources,
debt could be required to be unsecured, be plain vanilla, have a
remaining maturity of at least one year, and be of lower priority than
all third-party claims on the subsidiary. The rationale for these
restrictions would be to ensure that the loss-absorbing capacity will
indeed be available if and when it is needed, to reduce operational
risk by eliminating unnecessary complexity, and to mitigate possible
legal risk associated with insolvency law.
Question 64: The Board invites comment on all aspects of this
potential domestic internal TLAC framework. In particular, the Board
invites comment on whether the Board should impose domestic internal
TLAC requirements on covered holding companies. If so, how should the
Board regulate the following key elements: The definition of ``covered
subsidiary''; the calibration of the domestic internal TLAC requirement
with respect to each covered subsidiary; the division of domestic
internal TLAC between ``contributable resources'' and ``prepositioned
resources''; the definition of ``contributable resources,'' including
whether certain non-HQLA resources should be allowed to count toward
the requirement; the definition of ``prepositioned resources,''
including any minimum maturity and subordination requirements; and the
legal risks associated with passing losses from a subsidiary to a
holding company by means of the mechanisms described above in the
context of SPOE resolution, including risks under insolvency law, as
well as potential mitigants for these risks.
Question 65: The Board also seeks comment on whether, in a domestic
internal TLAC framework, contributable resources and prepositioned debt
should be required to be subject to a capital contribution agreement
that would impose upon the covered holding company a legal obligation
to recapitalize the subsidiary upon the occurrence of a trigger outside
the firm's discretion (such as the current or projected insolvency of
the subsidiary, or a government order), and on the appropriate design
of such a trigger. Finally, the Board invites comment on whether any
domestic internal TLAC framework proposed by the Board should treat
foreign subsidiaries of covered holding companies differently from
their domestic subsidiaries.
VII. Regulatory Capital Deduction for Investments in the Unsecured Debt
of Covered BHCs
Background
The Board's regulatory capital rules (Regulation Q) impose minimum
capital requirements on all state member banks, as well as on certain
bank holding companies, and certain savings and loan holding companies
(``Board-regulated institutions'').\92\ These minimum requirements take
the form of minimum ratios of various forms of regulatory capital to
different measures of assets.\93\ The risk-based ratios are the common
equity tier 1 ratio, the tier 1 risk-based capital ratio, and the total
risk-based capital ratio.\94\ Regulation Q also includes a leverage
ratio that measures the proportion of a Board-regulated institution's
tier 1 capital to its total
[[Page 74950]]
assets.\95\ In addition, certain internationally active Board-regulated
institutions are subject to a supplementary leverage ratio, which
incorporates certain off-balance sheet exposures into the measure of
total assets.\96\
---------------------------------------------------------------------------
\92\ See 12 CFR 217.1(c). Savings and loan holding companies
that are substantially engaged in insurance underwriting or
commercial activities are exempt temporarily from Regulation Q. See
12 CFR 217.1(c)(1)(iii); and 12 CFR 217.2, definition of ``Covered
savings and loan holding company.'' In addition, any bank holding
company that is subject to the Board's Small Bank Holding Company
Policy Statement (12 CFR part 225, appendix C) is exempt from
Regulation Q. See 12 CFR 217.1(c)(1)(ii). In addition, any savings
and loan holding company that meets the requirements of the Small
Bank Holding Company Policy Statement ``as if the savings and loan
holding company were a bank holding company and the savings
association were a bank'' is exempt from Regulation Q. See 12 CFR
217.1(c)(1)(iii).
At this time, the proposed capital deduction will not apply to
nonbank SIFIs. Following the finalization of the regulatory capital
framework applicable to one or more nonbank SIFIs, the Board would
determine whether, and how, the proposed capital deduction would
apply to such companies.
\93\ See 12 CFR 217.10.
\94\ See 12 CFR 217.10(a)(1) through (3).
\95\ See 12 CFR 217.10(a)(4).
\96\ See 12 CFR 217.10(a)(5).
---------------------------------------------------------------------------
In calculating its capital ratios under these rules, a Board-
regulated institution is required to deduct fully from regulatory
capital certain assets, such as goodwill and other intangible
assets.\97\ Certain other assets must be deducted from regulatory
capital to the extent they exceed a particular threshold, such as
mortgage servicing assets and certain deferred tax assets.\98\
---------------------------------------------------------------------------
\97\ See 12 CFR 217.22.
\98\ Id.
---------------------------------------------------------------------------
The regulatory capital rules include two broad categories of
deductions related to investments in capital instruments. First,
Regulation Q requires that a Board-regulated institution fully deduct
any investment in its own regulatory capital instruments and
investments in regulatory capital instruments held reciprocally with
another financial institution.\99\ Second, Regulation Q requires that a
Board-regulated institution deduct investments in capital instruments
issued by other financial institutions that would be regulatory capital
if issued by the Board-regulated institution.\100\ In this second case,
a Board-regulated institution may be required to fully deduct the
investment or may be required to deduct the investment above a
particular threshold, depending on the circumstances.\101\ In both
cases, the Board-regulated institution is required to make the
deduction from the category of regulatory capital for which the
instrument qualifies or would qualify if issued by the Board-regulated
institution.\102\ Thus, a Board-regulated institution that purchases
its own subordinated debt instrument that qualifies as tier 2 capital
must deduct the debt instrument from its tier 2 capital. Similarly, a
Board-regulated institution that owns less than 10 percent of the
common equity of an unaffiliated bank must deduct from its common
equity the amount, if any, by which the Board-regulated institution's
investment exceeds 10 percent of the Board-regulated institution's
common equity.
---------------------------------------------------------------------------
\99\ 12 CFR 217.22(c)(1).
\100\ See 12 CFR 217.22(c)(2).
\101\ See 12 CFR 217.22(c)(3) through (5).
\102\ See 12 CFR 217.22(c)(1) and (2).
---------------------------------------------------------------------------
Proposed deductions from regulatory capital
To address the potential contagion stemming from the failure of a
GSIB, the proposal would amend Regulation Q to require a Board-
regulated institution to deduct from its regulatory capital the amount
of any investment in, or exposure to, unsecured debt issued by a
covered BHC. In particular, for purposes of the deductions, a Board-
regulated institution would be required to treat unsecured debt issued
by a covered BHC in a similar manner to an investment in a tier 2
capital instrument.\103\ The form and amount of the deduction would
depend on the type of investment and various other factors, as
described below.
---------------------------------------------------------------------------
\103\ Unsecured debt issued by a covered BHC may or may not
qualify as tier 2 capital, depending on its characteristics. See 12
CFR 217.20(d). Similarly, unsecured debt issued by a covered BHC may
or may not qualify as eligible long term debt under this proposal,
depending on its characteristics. See Proposed 12 CFR 252.61,
252.161.
---------------------------------------------------------------------------
Analysis conducted by Board staff has not indicated that Board-
regulated institutions currently own a substantial amount of unsecured
debt issued by covered BHCs. The proposed deduction requirement would
substantially reduce the incentive of a Board-regulated institution to
invest in unsecured debt issued by a covered BHC, thereby increasing
the prospects for an orderly resolution of a covered BHC by reducing
the risk of contagion spreading to other Board-regulated institutions.
To implement the proposed deduction requirements for investments in
covered debt instruments, the proposal would add or amend certain
definitions in Regulation Q. The proposal would add new definitions of
``covered debt instrument'' and ``investment in a covered debt
instrument'' to Sec. 217.2 of Regulation Q. A ``covered debt
instrument'' would be defined as any unsecured debt security issued by
a global systemically important BHC, excluding any instrument that
qualifies as tier 2 capital. An ``investment in a covered debt
instrument'' would be defined as a net long position in a covered debt
instrument, including direct, indirect, and synthetic exposures to a
covered debt instrument. This definition would exclude underwriting
positions held for five or fewer business days for purposes of certain
deductions. In addition, the proposal would amend the definitions of
``indirect exposure'' and ``synthetic exposure'' in Regulation Q to add
exposures to covered debt instruments. Further, the definition of
``investment in the capital of an unconsolidated financial
institution'' would be amended to correct a typographical error.
In addition, as discussed more fully in the following section, the
proposal would revise Sec. 217.22(c), (f), and (h) of Regulation Q to
incorporate the proposed deductions for investments in covered debt
instruments. The proposed revisions to Regulation Q would take effect
on January 1, 2019, consistent with the other aspects of the proposal;
provided that the proposed correction to the definition of ``investment
in the capital of an unconsolidated financial institution'' would take
effect on April 1, 2016.
To be most effective, the proposed deduction approach for
investments in unsecured debt instruments of a covered BHC would apply
to all depository institution holding companies and insured depository
institutions covered by the capital rules issued by the Board, OCC, and
FDIC. The Board intends to consult with the OCC and FDIC on the
proposed deductions for covered debt instruments in Regulation Q
regarding consistent treatment among all banking organizations subject
to the regulatory capital rules.
Section-by-Section Discussion of the Proposed Deductions for Covered
Debt Instruments
Under the Board's current regulatory capital rules, a Board-
regulated institution must deduct any investment in its own capital
instruments and any investment in the capital of other financial
institutions that it holds reciprocally under Sec. 217.22(c)(1) and
(3) of Regulation Q.\104\ The proposal would amend Sec. 217.22(c)(1)
and (3) of Regulation Q to require, respectively, a covered BHC to
deduct from its tier 2 capital any investment in its own unsecured debt
instruments that are not tier 2 capital and the carrying value of any
investment in the unsecured debt issued by a covered BHC that is held
reciprocally with the covered BHC.
---------------------------------------------------------------------------
\104\ 12 CFR 217.22(c)(1) and 12 CFR 217.22(c)(3). The
definition of ``financial institution'' in the Board's regulatory
capital rules includes bank holding companies. Therefore, each
covered BHC is a ``financial institution'' for purposes of these
deductions. See 12 CFR 217.2.
---------------------------------------------------------------------------
Under Sec. 217.22(c)(4) and (5) of Regulation Q, a Board-regulated
institution must deduct certain investments in the capital of
unconsolidated financial institutions.\105\ The amount of the deduction
depends on whether or not the Board-regulated institution has a
``significant'' investment in the unconsolidated financial institution,
with ``significant'' defined as ownership of more than 10
[[Page 74951]]
percent of the common stock of the unconsolidated financial
institution.\106\
---------------------------------------------------------------------------
\105\ 12 CFR 217.22(c)(4) and (5).
\106\ 12 CFR 217.2, (``significant investment in the capital of
an unconsolidated financial institution'').
---------------------------------------------------------------------------
If the Board-regulated institution has a ``non-significant
investment'' in an unconsolidated financial institution, the Board-
regulated institution must deduct its investments in the capital of the
unconsolidated financial institution to the extent that the Board-
regulated institution's investment exceeds 10 percent of the Board-
regulated institution's common equity tier 1 capital.\107\ The proposal
would amend Sec. 217.22(c)(4) of Regulation Q to require a Board-
regulated institution with a non-significant investment in a covered
BHC to deduct any investment in unsecured debt issued by the covered
BHC in the same manner as if the unsecured debt were tier 2 capital.
---------------------------------------------------------------------------
\107\ See 12 CFR 217.22(c)(4).
---------------------------------------------------------------------------
If a Board-regulated institution has a significant investment in an
unconsolidated financial institution, the Board-regulated institution
must fully deduct under Sec. 217.22(c)(5) of Regulation Q any
investment in the capital instruments of the unconsolidated financial
institution that are not in the form of common stock.\108\ The proposal
would amend Sec. 217.22(c)(5) of Regulation Q to require a Board-
regulated institution with a significant investment in a covered BHC to
deduct any investment in unsecured debt issued by the covered BHC in
the same manner as if the unsecured debt were tier 2 capital.
---------------------------------------------------------------------------
\108\ See 12 CFR 217.22(c)(5).
---------------------------------------------------------------------------
For each of the proposed deductions, the same rules and standards
that apply to investments in capital instruments issued by financial
institutions would also apply to an investment in a covered debt
instrument. For example, the proposal would amend the ``corresponding
deduction approach'' in Sec. 217.22(c)(2) of Regulation Q to specify
that unsecured debt issued by a covered BHC would be treated as tier 2
capital for purposes of deductions from capital. Under the
corresponding deduction approach, a Board-regulated institution must
make deductions from the component of capital for which the underlying
instrument would qualify if it were issued by the Board-regulated
institution making the deduction.\109\ If the Board-regulated
institution does not have enough of the component of capital to carry
out the deduction, the corresponding deduction approach provides that
any amount of the investment not already deducted would be deducted
from the next higher, that is, more subordinated, component of
capital.\110\ If the next higher level is insufficient to effect the
remaining deduction and there is a higher level of capital, any amount
not already deducted is deducted from the highest level.\111\
---------------------------------------------------------------------------
\109\ See 12 CFR 217.22(c)(2).
\110\ See 12 CFR 217.22(c)(2); 12 CFR 217.22(f).
\111\ See 12 CFR 217.22(f).
---------------------------------------------------------------------------
Under Regulation Q, if a Board-regulated institution has an
investment in the tier 2 capital of an unconsolidated financial
institution that the Board-regulated institution is required to deduct
from capital, the Board-regulated institution must make the deduction
from its tier 2 capital. Under the proposal, if a Board-regulated
institution has a significant investment in a covered BHC and also owns
unsecured debt of the covered BHC, the Board-regulated institution
would be required to deduct the unsecured debt amount from its tier 2
capital. If the Board-regulated institution does not have sufficient
tier 2 capital to complete this deduction, then the Board-regulated
institution would be required to deduct any shortfall amount from its
additional tier 1 capital. If the Board-regulated institution does not
have sufficient additional tier 1 capital to complete this deduction,
the institution would deduct any remaining amount of the investment
from its common equity tier 1 capital.
The proposal would follow the same general approach as under the
current requirements in Regulation Q regarding the calculation of the
amount of any deduction and the treatment of guarantees and indirect
investments for purposes of the deductions. Under Regulation Q, the
amount of a Board-regulated institution's investment in its own capital
instrument or in the capital instrument of an unconsolidated financial
institution is the Board-regulated institution's net long position in
the capital instrument as calculated under Sec. 217.22(h) of
Regulation Q.\112\ Under Sec. 217.22(h) of Regulation Q, a Board-
regulated institution may net certain gross short positions in a
capital instrument against a gross long position in the instrument to
determine the net long position. The proposal would modify Sec.
217.22(h) of Regulation Q such that a Board-regulated institution would
follow the same procedures to determine its net long position in an
exposure to its own covered debt instrument or in a covered debt
instrument issued by an unconsolidated financial institution. The
calculation of the net long position, under the proposal, also would
take into account direct investments in unsecured debt instruments as
well as indirect exposures to covered debt instruments held through
investment funds in the same manner as under the regulatory capital
rules.
---------------------------------------------------------------------------
\112\ See 12 CFR 217.22(h).
---------------------------------------------------------------------------
With regard to an indirect exposure to a capital instrument in the
form of, for example, a direct exposure to an investment fund, a Board-
regulated institution has three options under Regulation Q to measure
its gross long position in the capital instrument.\113\ The proposal
would amend Sec. 217.22(h)(2)(ii) of Regulation Q to provide the same
three options to determine the gross long position in the form of an
indirect fund investment in a covered debt instrument.
---------------------------------------------------------------------------
\113\ See 12 CFR 217.22(h)(2).
---------------------------------------------------------------------------
The first option would be to deduct the entire carrying value of
the investment. The second option would be, with the prior approval of
the Board, for the Board-regulated institution to use a conservative
estimate of the amount of the investment in the unsecured debt
instrument held through a fund. The third option would be to multiply
the carrying value of the Board-regulated institution's investment in a
fund by either the exact percentage of the unsecured debt issued by a
covered BHC held by the investment fund or by the highest stated
prospectus limit for such investments held by the investment fund. In
each case, the amount of the gross long position may be reduced by the
Board-regulated institution's qualified short positions to reach the
net long position.\114\
---------------------------------------------------------------------------
\114\ 12 CFR 217.22(h)(1).
---------------------------------------------------------------------------
An investment in the unsecured debt of a covered BHC would be
defined in Sec. 217.2 of Regulation Q to include synthetic exposures
to covered debt instruments, including, for example, the issuance a
guarantee of such debt or selling a credit default swap referencing
such debt.\115\ For purposes of any deduction required for a Board-
regulated institution's investment in the capital of an unconsolidated
financial institution, the amount of unsecured debt issued by a covered
BHC would include any contractual obligations of the Board-regulated
institution to purchase such instruments, but would exclude positions
held in a bona fide underwriting capacity for five or fewer business
days.\116\
---------------------------------------------------------------------------
\115\ See 12 CFR 217.2 (``investment in the capital of an
unconsolidated financial institution'' and ``investment in the
Board-regulated institution's own capital instrument'').
\116\ See 12 CFR 217.2 (``investment in the capital of an
unconsolidated financial institution'').
---------------------------------------------------------------------------
Question 66: The Board invites comment on the appropriateness of
the proposed deduction for investments in a
[[Page 74952]]
covered BHC's unsecured debt instruments from regulatory capital,
including (a) its implementation through amendment of the Board's
regulatory capital rules and (b) whether such an approach would impact
underwriting and market making for unsecured debt instruments of
covered BHCs.
Question 67: The Board invites comment on whether holdings of a
covered BHC's debt instruments that result from dealing or market-
making activities should be exempt from the proposed deduction,
including costs and benefits of such an exemption.
Question 68: The Board invites comment on all aspects of the
proposed capital deduction treatment for investments by banking
organizations in debt instruments of a covered BHC, specifically,
whether the debt instruments required to be deducted should be all
unsecured debt directly issued by a covered BHC or only eligible long-
term debt? If the long-term debt instruments required to be deducted
were limited to eligible long-term debt, how best to identify eligible
long-term debt for the purposes of the deduction?
Questions 69: The Board invites comment on alternatives to the
proposed deduction approach, including a stringent risk-weighting
approach, integrating eligible long-term debt into the Basel III
threshold deduction system as a new class of regulatory capital, or an
outright prohibition of bank ownership of covered BHC's unsecured debt
instruments.
Question 70: The Board invites comment on whether to expand the
proposed capital deduction treatment to cover investments by banking
organizations in debt instruments issued by nonbank financial companies
supervised by the Board and non-U.S. GSIBs.
VIII. Transition Periods
The Board proposes to generally require firms that are covered BHCs
as of the date on which the final rule is issued to achieve compliance
with the rule as of January 1, 2019. However, the Board proposes to
phase in the risk-weighted assets component of the external TLAC
requirement in two stages. A 16 percent requirement would apply as of
January 1, 2019. The requirement would then increase to 18 percent as
of January 1, 2022. The purpose of the proposed transition period is to
minimize the effect of the implementation of the proposal on credit
availability and credit costs in the U.S. economy.
Firms that become covered BHCs after the date on which the final
rule is issued would be required to comply by the later of three years
after becoming covered BHCs and the effective date applicable to firms
that are covered BHCs as of the date on which the final rule is issued.
Foreign GSIBs that are required to form U.S. intermediate holding
companies as of the date on which the final rule is issued would
similarly be required to achieve compliance as of January 1, 2019.
However, the Board proposes to phase in the risk-weighted assets
component of the internal TLAC requirement applicable to covered IHCs
that are expected to enter resolution in a failure scenario in two
stages. A 16 percent requirement would apply as of January 1, 2019. The
requirement would then increase to 18 percent as of January 1, 2022.
Where a foreign banking organization becomes subject to a
requirement to form a covered IHC after the date on which the final
rule is issued,\117\ that covered IHC would be required to comply with
the rule's requirements by the later of three years after the date on
which the foreign banking organization first becomes subject to the
requirement to form the U.S. intermediate holding company and the
effective date applicable to foreign GSIBs that are required to form
U.S. intermediate holding companies as of the date on which the final
rule is issued. The Board may accelerate or extend this transition
period in writing.
---------------------------------------------------------------------------
\117\ This could occur where a foreign banking organization that
is already required to form a U.S. intermediate holding company
becomes a foreign GSIB (rendering its U.S. intermediate holding
company a covered IHC) or where a foreign GSIB first becomes
required to form a U.S. intermediate holding company (which would be
a covered IHC upon formation).
---------------------------------------------------------------------------
Board-regulated institutions would be required to comply with the
proposed regulatory capital deduction for investments in the unsecured
debt of a covered BHC as of January 1, 2019.
Question 71: The Board invites comments on all aspects of the
transition period, including whether the proposed phase-in period for
the risk-weighted assets components of the proposed external and
internal TLAC requirements is appropriate. Would it be appropriate to
instead require compliance with those higher requirements as of January
1, 2019?
Question 72: The Board invites comment with respect to whether a
grandfather provision is necessary or appropriate for any existing
instruments. What types and volumes of outstanding long-term debt
instruments of covered BHCs would fail to meet the proposed
requirements for eligible external or internal LTD? How burdensome
would it be for covered holding companies to modify the terms of such
instruments to align with the proposed requirements?
IX. Regulatory Analysis
A. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 through 3521). The Board
reviewed the proposed rule under the authority delegated to the Board
by OMB. The disclosure requirements are found in Sec. 252.65 and the
reporting requirements are found in Sec. 252.153(b)(5). These
information collection requirements would implement section 165 of the
Dodd Frank Act, as described in the Abstract below. In accordance with
the requirements of the PRA, 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 proposed rule would revise the Reporting, Recordkeeping, and
Disclosure Requirements Associated with Enhanced Prudential Standards
(Regulation YY) (Reg YY; OMB No. 7100-0350). In addition, as permitted
by the PRA, the Board proposes to extend for three years, with
revision, the Reporting, Recordkeeping, and Disclosure Requirements
Associated with Enhanced Prudential Standards (Regulation YY) (Reg YY;
OMB No. 7100-0350).
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
(b) The accuracy of the Board's estimates of the burden of the
information collections, including the validity of the methodology and
assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
[[Page 74953]]
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section. A copy of the comments may
also be submitted to the OMB desk officer: By mail to U.S. Office of
Management and Budget, 725 17th Street NW., #10235, Washington, DC
20503 or by facsimile to 202-395-5806, Attention, Federal Reserve Desk
Officer.
Proposed Revision, With Extension, of the Following Information
Collection
Title of Information Collection: Reporting, Recordkeeping, and
Disclosure Requirements Associated with Enhanced Prudential Standards
(Regulation YY).
Agency Form Number: Reg YY.
OMB Control Number: 7100-0350.
Frequency of Response: Annual, semiannual, quarterly, one-time, and
on occasion.
Affected Public: Businesses or other for-profit.
Respondents: State member banks, U.S. bank holding companies,
savings and loan holding companies, nonbank financial companies,
foreign banking organizations, U.S. intermediate holding companies,
foreign saving and loan holding companies, and foreign nonbank
financial companies supervised by the Board.
Abstract: Section 165 of the Dodd-Frank Act requires the Board to
implement enhanced prudential standards for bank holding companies with
total consolidated assets of $50 billion or more, including global
systemically important foreign banking organizations with $50 billion
or more in U.S. non-branch assets. Section 165 of the Dodd-Frank Act
also permits the Board to establish such other prudential standards for
such banking organizations as the Board determines are appropriate.
Disclosure Requirements
Section 252.65 of the proposed rule would require a global
systemically important BHC to publicly disclose a description of the
financial consequences to unsecured debtholders of the global
systemically important BHC entering into a resolution proceeding in
which the global systemically important BHC is the only entity that
would be subject to the resolution proceeding. A global systemically
important BHC must provide the disclosure required of this section: (1)
In the offering documents for all of its eligible debt securities; and
(2) either on the global systemically important BHC's Web site, or in
more than one public financial report or other regulatory reports,
provided that the global systemically important BHC publicly provides a
summary table specifically indicating the location(s) of this
disclosure.
Reporting Requirements
Section 252.153(b)(5) of the proposed rule would require each top-
tier foreign banking organization that controls a U.S. intermediate
holding company to submit to the Board by January 1 of each calendar
year through the U.S. intermediate holding company: (1) Notice of
whether the home country supervisor (or other appropriate home country
regulatory authority) of the top-tier foreign banking organization of
the U.S. intermediate holding company has adopted standards consistent
with the BCBS assessment methodology for identifying global
systemically important banking organizations; and (2) notice of whether
the top-tier foreign banking organization prepares or reports the
indicators used by the BCBS assessment methodology to identify a
banking organization as a global systemically important banking
organization and, if it does, whether the top-tier foreign banking
organization has determined that it has the characteristics of a global
systemically important banking organization under the BCBS assessment
methodology.
Estimated Paperwork Burden for Proposed Revisions
Estimated Number of Respondents:
Disclosure Burden
Section 252.65--8 respondents.
Reporting Burden
Section 252.153(b)(5)--15 respondents.
Estimated Burden per Response:
Disclosure Burden
Section 252.65--1 hour (annual), 5 hours (one-time burden).
Reporting Burden
Section 252.153(b)(5)--1 hour (annual).
Total estimated one-time burden: 40 hours.
Current estimated annual burden for Reporting, Recordkeeping, and
Disclosure Requirements Associated with Enhanced Prudential Standards
(Regulation YY): 118,546 hours.
Proposed revisions estimated annual burden: 23 hours.
Total estimated annual burden: 118,609 hours.
B. Regulatory Flexibility Act
The Board is providing an initial regulatory flexibility analysis
with respect to this proposed rule. The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA), generally requires that an agency prepare and
make available an initial regulatory flexibility analysis in connection
with a notice of proposed rulemaking. Under regulations issued by the
Small Business Administration, a small entity includes a depository
institution, bank holding company, or savings and loan holding company
with assets of $550 million or less (small banking organizations).\118\
As of June 30, 2015, there were 628 small state member banks. As of
June 30, 2015, there were approximately 180 small savings and loan
holding companies and 3,351 small bank holding companies.
---------------------------------------------------------------------------
\118\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------
This proposed rule is designed to improve the resolvability of
covered BHCs and covered IHCs by requiring such institutions maintain
outstanding a minimum amount of loss-absorbing instruments, including a
minimum amount of unsecured long-term debt, and imposing restrictions
on the corporate practices and liabilities of such organizations. The
proposed rule is also designed to help reduce the potential contagion
stemming from the failure of a GSIB by requiring state member banks,
bank holding companies, savings and loan holding companies, and
intermediate holding companies subject to the Board's capital rules to
deduct from their regulatory capital investments in unsecured debt
issued by covered BHCs.
The majority of the provisions of the proposed rule would apply to
a top-tier bank holding company domiciled in the United States with $50
billion or more in total consolidated assets and has been identified as
a GSIB, and to a U.S. intermediate holding company of a foreign GSIB.
Bank holding companies and U.S. intermediate holding companies of
foreign GSIBs that are subject to the proposed rule therefore
substantially exceed the $550 million asset threshold at which a
banking entity would qualify as a small banking organization. However,
small state member banks would be subject to the provisions of the
proposed rule that impose regulatory capital deductions for investments
in eligible external long-term debt of covered BHCs. The provisions of
the proposed rule related
[[Page 74954]]
to regulatory capital deductions generally would not apply to small
savings and loan holding companies and small bank holding companies.
The proposed regulatory capital deductions for investments in the
unsecured debt of covered BHCs would require small state member banks
to deduct holdings of unsecured debt issued by a covered BHC from
regulatory capital, in a similar manner as small state member banks
must deduct investments in tier 2 capital instruments from their
regulatory capital, as described in Part VII. State member banks would
be required to make internal reporting changes to comply with the
proposed capital rules and corresponding reporting requirements. As
described in Part VII, these requirements would reduce the incentives
of a small state member bank to invest in the unsecured debt of a
covered BHC, and thereby increase the prospect for an orderly
resolution not a covered BHC.
Depository institutions do not presently report their holdings in
the unsecured debt of U.S. GSIBs. However, regulatory reports filed by
depository institutions provide a listing of the holdings by such
institutions of ``other domestic debt,'' which would include holdings
of unsecured debt issued by U.S. GSIBs. Therefore, the reported
holdings of ``other domestic debt'' held by small depository
institutions provides a conservative estimate of the amount of
unsecured debt of GSIBs held by such institutions.
As of June 30, 2015, such institutions held ``other domestic debt''
equal to approximately 0.5 percent of their total assets. Excluding
depository institutions that report no holdings of ``other domestic
debt,'' such depository institutions held ``other domestic debt'' equal
to only 2.2 percent of their total assets. The low level of reported
holdings of ``other domestic debt'' by such institutions supports the
view that the proposed regulatory capital deductions would not have a
material impact on small state member banks. In addition, in light of
the reported holdings of ``other domestic debt'' by small depository
institutions, such institutions should be able to replace their
holdings of unsecured debt by GSIBs without a material economic impact.
The proposed rule does not appear to duplicate, overlap, or
conflict with any other Federal rules. In light of the foregoing, the
Board does not believe that the proposed rule, if adopted in final
form, would have a significant economic impact on a substantial number
of small entities. Nonetheless, the Board invites comment on whether
the proposed rule would impose undue burdens on, or have unintended
consequences for, small organizations, and whether there are ways such
potential burdens or consequences could be minimized in a manner
consistent with the purpose of the proposed rule. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period.
C. Riegle Community Development and Regulatory Improvement Act of 1994
In determining the effective date and administrative compliance
requirements for new regulations that impose additional reporting,
disclosure, or other requirements on state member banks, the Board is
required to consider, consistent with the principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, and the benefits of
such regulations.\119\ In addition, new regulations that impose
additional reporting disclosures or other new requirements on insured
depository institutions generally must take effect on the first day of
a calendar quarter which begins on or after the date on which the
regulations are published in final form.\120\
---------------------------------------------------------------------------
\119\ See Section 302 of the Riegle Community Development and
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802.
\120\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
The proposed regulatory capital deductions applicable to state
member banks would take effect on the first day of a calendar quarter.
The proposed rule would provide state member banks a reasonable period
of time to make the incremental internal reporting changes necessary to
comply with the proposed revisions to the regulatory capital rules. The
proposed revisions to the regulatory capital rules would also be
reflected in amendments to the Board's regulatory reporting forms, and
the instructions to such forms. The internal reporting changes are
expected to be minimal because the banking organizations subject to the
proposed rule are already required to track similar information to
comply with current capital rules and reporting requirements.
As described above in Part IX.B, depository institutions do not
presently report their holdings in the unsecured debt of U.S. GSIBs,
but do report holdings of ``other domestic debt,'' which would include
holdings of unsecured debt issued by U.S. GSIBs. Therefore, the
reported holdings of ``other domestic debt'' held by depository
institutions provides a conservative estimate of the amount of
unsecured debt of GSIBs held by such institutions.
As of June 30, 2015, state member banks held ``other domestic
debt'' equal to approximately 0.57 percent of their total assets.
Excluding state member banks that report no holdings of ``other
domestic debt,'' such depository institutions held ``other domestic
debt'' equal to only 0.77 percent of their total assets. The reported
holdings of ``other domestic debt'' by such institutions supports the
view that the incremental administrative reporting burden imposed by
the proposed revisions to the Board's regulatory capital rules on such
institutions is expected to be minimal. These administrative burdens
are offset by the safety and soundness and financial stability benefits
that will accrue to the financial system as a result of the proposed
rule, as described herein.
D. Solicitation of Comments on the Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed rule in a
simple and straightforward manner, and invites comment on the use of
plain language. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the proposed rule more clearly?
Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
Is the section format adequate? If not, which of the
sections should be changed and how?
What other changes can the Board incorporate to make the
regulation easier to understand?
List of Subjects in 12 CFR Part 252
12 CFR Chapter II
Administrative practice and procedure, Banks, banking, Federal
[[Page 74955]]
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System proposes to amend 12 CFR parts 217 and 252
as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).
0
1. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
2. In Sec. 217.2:
0
a. Add the definition of ``Covered debt instrument'' in alphabetical
order;
0
b. Revise the definition of ``Indirect exposure'';
0
c. Add the definition of ``Investment in a covered debt instrument,''
in alphabetical order;
0
d. Revise the definition of ``Investment in the capital of an
unconsolidated financial institution''; and
0
e. Revise the definition of ``Synthetic exposure;''
The additions and revisions read as follows:
Sec. 217.2 Definitions.
* * * * *
Covered debt instrument means an unsecured debt security issued by
a global systemically important BHC, including direct, indirect, or
synthetic exposures to such a debt security, other than an unsecured
debt security that qualifies as tier 2 capital pursuant to Sec.
217.20(d).
* * * * *
Indirect exposure means an exposure that arises from the Board-
regulated institution's investment in an investment fund which holds an
investment in the Board-regulated institution's own capital instrument,
an investment in the capital of an unconsolidated financial
institution, or an investment in a covered debt instrument.
* * * * *
Investment in a covered debt instrument means a Board-regulated
institution's net long position calculated in accordance with Sec.
217.22(h) in a covered debt instrument, including direct, indirect, and
synthetic exposures to the debt instrument, excluding for purposes of
Sec. 217.22(c)(4) and (5) any underwriting positions held by the
Board-regulated institution for five or fewer business days.
* * * * *
Investment in the capital of an unconsolidated financial
institution means a net long position calculated in accordance with
Sec. 217.22(h) in an instrument that is recognized as capital for
regulatory purposes by the primary supervisor of an unconsolidated
regulated financial institution or in an instrument that is part of the
GAAP equity of an unconsolidated unregulated financial institution,
including direct, indirect, and synthetic exposures to the capital
instruments, excluding underwriting positions held by the Board-
regulated institution for five or fewer business days.
* * * * *
Synthetic exposure means an exposure whose value is linked to the
value of an investment in the Board-regulated institution's own capital
instrument, to the value of an investment in the capital of an
unconsolidated financial institution, or to the value of an investment
in a covered debt instrument.
* * * * *
0
3. In Sec. 217.22, revise paragraphs (c) and its footnotes, (f), and
(h) to read as follows:
Sec. 217.22 Regulatory capital adjustments and deductions.
* * * * *
(c) Deductions from regulatory capital related to investments in
capital instruments \23\--(1) Investment in the Board-regulated
institution's own capital or covered debt instruments. A Board-
regulated institution must deduct an investment in the Board-regulated
institution's own capital instruments or an investment in the Board-
regulated institution's own covered debt instruments as follows:
---------------------------------------------------------------------------
\23\ The Board-regulated institution must calculate amounts
deducted under paragraphs (c) through (f) of this section after it
calculates the amount of ALLL includable in tier 2 capital under
Sec. 217.20(d)(3).
---------------------------------------------------------------------------
(i) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own common stock instruments from its
common equity tier 1 capital elements to the extent such instruments
are not excluded from regulatory capital under Sec. 217.20(b)(1);
(ii) A Board-regulated institution must deduct an investment in the
Board-regulated institution's own additional tier 1 capital instruments
from its additional tier 1 capital elements;
(iii) A Board-regulated institution must deduct an investment in
the Board-regulated institution's own tier 2 capital instruments from
its tier 2 capital elements; and
(iv) A Board-regulated institution that is a global systemically
important BHC must deduct an investment in the Board-regulated
institution's own covered debt instruments from its tier 2 capital
elements. If the Board-regulated institution does not have a sufficient
amount of tier 2 capital to effect this deduction, the Board-regulated
institution must deduct the shortfall amount from the next higher (that
is, more subordinated) component of regulatory capital.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial
institutions (as described in paragraph (c)(4) of this section), and
non-common stock significant investments in the capital of
unconsolidated financial institutions (as described in paragraph (c)(5)
of this section). Under the corresponding deduction approach, a Board-
regulated institution must make deductions from the component of
capital for which the underlying instrument would qualify if it were
issued by the Board-regulated institution itself, as described in
paragraphs (c)(2)(i) through (iii) of this section. If the Board-
regulated institution does not have a sufficient amount of a specific
component of capital to effect the required deduction, the Board-
regulated institution must deduct the shortfall amount from its capital
according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution,
the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated
to all creditors of the financial institution and is senior in
liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common
[[Page 74956]]
equity tier 1, additional tier 1 or tier 2 capital instruments under
Sec. 217.20, the Board-regulated institution must treat the instrument
as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial
institution, and senior in a receivership, insolvency, liquidation, or
similar proceeding only to common shareholders; and
(C) A tier 2 capital instrument if it is a covered debt instrument
or if it is not included in GAAP equity but considered regulatory
capital by the primary supervisor of the financial institution.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 217.300(c)), the Board-regulated
institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital)
prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. A Board-regulated institution must deduct an investment
in the capital of another financial institution that the Board-
regulated institution holds reciprocally with another financial
institution and an investment in any covered debt instrument that the
Board-regulated institution holds reciprocally with another financial
institution, where such reciprocal cross holdings result from a formal
or informal arrangement to swap, exchange, or otherwise intend to hold
each other's capital instruments, by applying the corresponding
deduction approach in paragraph (c)(2) of this section.
(4) Non-significant investments in the capital of unconsolidated
financial institutions. (i) If a Board-regulated institution has a non-
significant investment in the capital of an unconsolidated financial
institution, the Board-regulated institution must deduct any such
investment and must deduct, if the unconsolidated financial institution
is a global systemically important BHC, any investment in a covered
debt instrument issued by the unconsolidated financial institution, to
the extent that the combined amount of the investment in capital and
the investment in covered debt instruments exceed 10 percent of the sum
of the Board-regulated institution's common equity tier 1 capital
elements minus all deductions from and adjustments to common equity
tier 1 capital elements required under paragraphs (a) through (c)(3) of
this section (the 10 percent threshold for non-significant investments)
by applying the corresponding deduction approach in paragraph (c)(2) of
this section.\24\ The deductions described in this paragraph are net of
associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the Board, a Board-
regulated institution that underwrites a failed underwriting, for the
period of time stipulated by the Board, is not required to deduct from
capital a non-significant investment in the capital of an
unconsolidated financial institution or an investment in a covered debt
instrument pursuant to this paragraph (c)(4) to the extent the
investment is related to the failed underwriting.\25\
---------------------------------------------------------------------------
\24\ With the prior written approval of the Board, for the
period of time stipulated by the Board, a Board-regulated
institution is not required to deduct a non-significant investment
in the capital instrument of an unconsolidated financial institution
or an investment in a covered debt instrument pursuant to this
paragraph if the financial institution is in distress and if such
investment is made for the purpose of providing financial support to
the financial institution, as determined by the Board.
\25\ Any non-significant investment in the capital of an
unconsolidated financial institution or any investment in a covered
debt instrument that is not required to be deducted under this
paragraph (c)(4) or otherwise under this section must be assigned
the appropriate risk weight under subparts D, E, or F of this part,
as applicable.
---------------------------------------------------------------------------
(ii) The amount to be deducted under this section from a specific
capital component is equal to:
(A) The Board-regulated institution's aggregate non-significant
investments in the capital of an unconsolidated financial institution
and, if applicable, any investments in a covered debt instrument
subject to deduction under this paragraph (c)(4), exceeding the 10
percent threshold for non-significant investments, multiplied by
(B) The ratio of the Board-regulated institution's aggregate non-
significant investments in the capital of an unconsolidated financial
institution (in the form of such capital component) to the Board-
regulated institution's total non-significant investments in
unconsolidated financial institutions, with an investment in a covered
debt instrument being treated as tier 2 capital for this purpose.
(5) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. If a
Board-regulated institution has a significant investment in the capital
of an unconsolidated financial institution, the Board-regulated
institution must deduct from capital any such investment and any
covered debt instrument issued by the unconsolidated financial
institution that is held by the Board-regulated institution other than
an investment in the form of common stock by applying the corresponding
deduction approach in paragraph (c)(2) of this section.\26\ The
deductions described in this section are net of associated DTLs in
accordance with paragraph (e) of this section. In addition, with the
prior written approval of the Board, for the period of time stipulated
by the Board, a Board-regulated institution that underwrites a failed
underwriting is not required to deduct a significant investment in the
capital of an unconsolidated financial institution or an investment in
covered debt instruments pursuant to this paragraph (c)(5) if such
investment is related to such failed underwriting.
---------------------------------------------------------------------------
\26\ With prior written approval of the Board, for the period of
time stipulated by the Board, a Board-regulated institution is not
required to deduct a significant investment in the capital of an
unconsolidated financial institution or an investment in a covered
debt instrument under this paragraph (c)(5) or otherwise under this
section if such investment is made for the purpose of providing
financial support to the financial institution as determined by the
Board.
---------------------------------------------------------------------------
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
Board-regulated institution does not have a sufficient amount of a
specific component of capital to effect the full amount of any
deduction from capital required under paragraph (d) of this section,
the Board-regulated institution must deduct the shortfall amount from
the next higher (that is, more subordinated) component of regulatory
capital. Any investment by a Board-regulated institution in a covered
debt instrument must be treated as an investment in the tier 2 capital
of the global systemically important BHC for purposes of this
paragraph.
* * * * *
(h) Net long position. (1) For purposes of calculating the amount
of a Board-regulated institution's investment in the Board regulated
institution's own capital instrument, investment in the capital of an
unconsolidated financial institution, and investment in a covered debt
instrument, the Board-regulated institution's net long position is its
gross long position in the underlying instrument determined in
accordance with paragraph (h)(2) of this section, as
[[Page 74957]]
adjusted to recognize any short position by the Board-regulated
institution in the same instrument subject to paragraph (h)(3) of this
section.
(2) Gross long position. A gross long position is determined as
follows:
(i) For an equity exposure that is held directly by the Board-
regulated institution, the adjusted carrying value of the exposure as
that term is defined in Sec. 217.51(b);
(ii) For an exposure that is held directly and that is not an
equity exposure or a securitization exposure, the exposure amount as
that term is defined in Sec. 217.2; and
(iii) For each indirect exposure, the Board-regulated institution's
carrying value of its investment in an investment fund or,
alternatively:
(A) A Board-regulated institution may, with the prior approval of
the Board, use a conservative estimate of the amount of its indirect
investment in the Board-regulated institution's own capital
instruments, its indirect investment in the capital of an
unconsolidated financial institution, or its indirect investment in a
covered debt instrument held through a position in an index, as
applicable; or
(B) A Board-regulated institution may calculate the gross long
position for an indirect exposure by multiplying the Board-regulated
institution's carrying value of its investment in the investment fund
by either:
(1) The highest stated investment limit (in percent) for an
investment in the Board-regulated institution's own capital
instruments, an investment in the capital of an unconsolidated
financial institution, or an investment in a covered debt instrument,
as applicable, as stated in the prospectus, partnership agreement, or
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings of the investment in the
Board-regulated institution's own capital instruments, investment in
the capital of an unconsolidated financial institution, or investment
in an covered debt instrument, as applicable; and
(iv) For a synthetic exposure, the amount of the Board-regulated
institution's loss on the exposure if the reference capital instrument
were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument under paragraph (h)(1) of this section, the following
criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position must have a residual maturity
of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the Board-regulated
institution's Call Report, for a state member bank, or FR Y-9C, for a
bank holding company or savings and loan holding company, as
applicable, if the Board-regulated institution has a contractual right
or obligation to sell the long position at a specific point in time and
the counterparty to the contract has an obligation to purchase the long
position if the Board-regulated institution exercises its right to
sell, this point in time may be treated as the maturity of the long
position such that the maturity of the long position and short position
are deemed to match for purposes of the maturity requirement, even if
the maturity of the short position is less than one year; and
(iii) For an investment in a Board-regulated institution's own
capital instrument under paragraph (c)(1) of this section, an
investment in a capital of an unconsolidated financial institution
under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and
an investment in a covered debt instrument under paragraphs (c)(1),
(c)(4), and (c)(5) of this section:
(A) The Board-regulated institution may only net a short position
against a long position in an investment in the Board-regulated
institution's own capital instrument or own covered debt instrument
under paragraph (c)(1) of this section if the short position involves
no counterparty credit risk;
(B) A gross long position in an investment in the Board-regulated
institution's own capital instrument, an investment in the capital
instrument of an unconsolidated financial institution, or an investment
in a covered debt instrument due to a position in an index may be
netted against a short position in the same index;
(C) Long and short positions in the same index without maturity
dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or
synthetic position in an investment in the Board-regulated
institution's own capital instrument, an investment in the capital
instrument of an unconsolidated financial institution, or an investment
in a covered debt instrument can be decomposed to provide recognition
of the hedge. More specifically, the portion of the index that is
composed of the same underlying instrument that is being hedged may be
used to offset the long position if both the long position being hedged
and the short position in the index are reported as a trading asset or
trading liability (whether on- or off-balance sheet) on the Board-
regulated institution's Call Report, for a state member bank, or FR Y-
9C, for a bank holding company or savings and loan holding company, as
applicable, and the hedge is deemed effective by the Board-regulated
institution's internal control processes, which have not been found to
be inadequate by the Board.
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY).
0
4. The authority citation for part 252 is revised to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a(g), 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3904, 3906-
3909, 4808, 5361, 5365, 5366, 5367, 5368, 5371.
0
5. In Sec. 252.2, redesignate paragraphs (t) through (z) as paragraphs
(aa) through (gg) and redesignate paragraphs (n) through (s) as (t)
through (y); and add new paragraphs (n) through (s) and (z).
The additions read as follows:
Sec. 252.2 Definitions.
* * * * *
(n) Global methodology means the assessment methodology and the
higher loss absorbency requirement for global systemically important
banks issued by the Basel Committee on Banking Supervision, as updated
from time to time.
(o) Global systemically important banking organization means a
global systemically important bank, as such term is defined in the
global methodology.
(p) Global systemically important foreign banking organization
means a top-tier foreign banking organization that is identified as a
global systemically important foreign banking organization under Sec.
252.153(b)(4) of this part.
(q) Home country, with respect to a foreign banking organization,
means the country in which the foreign banking organization is
chartered or incorporated.
(r) Home country resolution authority, with respect to a foreign
banking organization, means the governmental entity or entities that
under the laws of the foreign banking organization's home county has
responsibility for the resolution of the top-tier foreign banking
organization.
(s) Home country supervisor, with respect to a foreign banking
organization, means the governmental entity or entities that under the
laws of the foreign banking organization's home county has
responsibility for the
[[Page 74958]]
supervision and regulation of the top-tier foreign banking
organization.
* * * * *
(z) Top-tier foreign banking organization, with respect to a
foreign bank, means the top-tier foreign banking organization or,
alternatively, a subsidiary of the top-tier foreign banking
organization designated by the Board.
* * * * *
0
6. Add subpart G to read as follows:
Subpart G--External Long-term Debt Requirement, External Total
Loss-absorbing Capacity Requirement and Buffer, and Restrictions on
Corporate Practices for U.S. Global Systemically Important Banking
Organizations
Sec.
252.60 Applicability.
252.61 Definitions.
252.62 External long-term debt requirement.
252.63 External total loss-absorbing capacity requirement and
buffer.
252.64 Restrictions on corporate practices of U.S. global
systemically important banking organizations.
252.65 Disclosure requirements.
Sec. 252.60 Applicability.
(a) General applicability. This subpart applies to any U.S. bank
holding company that is identified as a global systemically important
BHC.
(b) Initial applicability. A global systemically important BHC
shall be subject to the requirements of this subpart beginning on the
later of:
(1) January 1, 2019; or
(2) 1095 days (three years) after the date on which the company
becomes a global systemically important BHC.
Sec. 252.61 Definitions.
For purposes of this subpart:
Additional tier 1 capital has the same meaning as in 12 CFR
217.20(c).
Common equity tier 1 capital has the same meaning as in 12 CFR
217.20(b).
Common equity tier 1 capital ratio has the same meaning as in 12
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
Common equity tier 1 minority interest has the same meaning as in
12 CFR 217.2.
Default right (1) Means any:
(i) Right of a party, whether contractual or otherwise (including
rights incorporated by reference to any other contract, agreement or
document, and rights afforded by statute, civil code, regulation and
common law), to liquidate, terminate, cancel, rescind, or accelerate
the agreement or transactions thereunder, set off or net amounts owing
in respect thereto (except rights related to same-day payment netting),
exercise remedies in respect of collateral or other credit support or
property related thereto (including the purchase and sale of property),
demand payment or delivery thereunder or in respect thereof (other than
a right or operation of a contractual provision arising solely from a
change in the value of collateral or margin or a change in the amount
of an economic exposure), suspend, delay or defer payment or
performance thereunder, modify the obligations of a party thereunder or
any similar rights; and
(ii) Right or contractual provision that alters the amount of
collateral or margin that must be provided with respect to an exposure
thereunder, including by altering any initial amount, threshold amount,
variation margin, minimum transfer amount, the margin value of
collateral or any similar amount, that entitles a party to demand the
return of any collateral or margin transferred by it to the other party
or a custodian or that modifies a transferee's right to reuse
collateral or margin (if such right previously existed), or any similar
rights, in each case, other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party
to terminate the contract on demand or at its option at a specified
time, or from time to time, without the need to show cause.
Discretionary bonus payment has the same meaning as under 12 CFR
217.2.
Distribution has the same meaning as under 12 CFR 217.2.
Global systemically important BHC has the same meaning as in 12 CFR
217.2.
Eligible debt security means, with respect to a global systemically
important BHC, a debt instrument that:
(1) Is paid in, and issued by the global systemically important
BHC;
(2) Is not secured, not guaranteed by the global systemically
important BHC or a subsidiary of the global systemically important BHC,
and is not subject to any other arrangement that legally or
economically enhances the seniority of the instrument;
(3) Has a maturity of greater than 365 days (one year) from the
date of issuance;
(4) Is governed by the laws of the United States or any State
thereof;
(5) Does not provide the holder of the instrument a contractual
right to accelerate payment of principal or interest on the instrument,
except a right that is exercisable on one or more dates that are
specified in the instrument or in the event of (i) a receivership,
insolvency, liquidation, or similar proceeding of the global
systemically important BHC or (ii) a failure of the global systemically
important BHC to pay principal or interest on the instrument when due;
(6) Does not have a credit-sensitive feature, such as an interest
rate that is reset periodically based in whole or in part on the global
systemically important BHC's credit quality, but may have an interest
rate that is adjusted periodically independent of the global
systemically important BHC's credit quality, in relation to general
market interest rates or similar adjustments;
(7) Is not a structured note; and
(8) Does not provide that the instrument may be converted into or
exchanged for equity of the global systemically important BHC.
External TLAC buffer means, with respect to a global systemically
important BHC, the sum of 2.5 percent, any applicable countercyclical
capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and
the global systemically important BHC's method 1 capital surcharge.
GAAP means generally accepted accounting principles as used in the
United States.
GSIB surcharge has the same meaning as in 12 CFR 217.2.
Method 1 capital surcharge means, with respect to a global
systemically important BHC, the most recent method 1 capital surcharge
(expressed as a percentage) the global systemically important BHC was
required to calculate pursuant to subpart H of Regulation Q (12 CFR
217.400 through 217.406).
Outstanding eligible external long-term debt amount is defined in
Sec. 252.62(a).
Person has the same meaning as in 12 CFR 225.2.
Qualified financial contract has the same meaning as in Sec.
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)), including any
``swap'' defined in section 1a(47) of the Commodities Exchange Act (7
U.S.C. 1a(47)) and in any rules or regulations issued by the Commodity
Futures Trading Commission pursuant to such section; any ``security-
based swap'' defined in section 3(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)) and in any rules or regulations issued by the
Securities and Exchange Commission pursuant to such section; and any
securities contract, commodity contract, forward contract, repurchase
agreement, swap agreement, and any
[[Page 74959]]
similar agreement that the Federal Deposit Insurance Corporation
determines by regulation to be a qualified financial contract as
provided in 12 U.S.C. 5390(c)(8)(D)(i).
Structured note means a debt instrument that:
(1) Has a principal amount, redemption amount, or stated maturity
that is subject to reduction based on the performance of any asset,
entity, index, or embedded derivative or similar embedded feature;
(2) Has an embedded derivative or similar embedded feature that is
linked to one or more equity securities, commodities, assets, or
entities;
(3) Does not specify a minimum principal amount due upon
acceleration or early termination; or
(4) Is not classified as debt under GAAP.
Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
Total leverage exposure has the same meaning as in 12 CFR
217.10(c)(4)(ii).
Total risk-weighted assets means the greater of total risk-weighted
assets as calculated under 12 CFR 217, subpart D (the standardized
approach) or 12 CFR 217, subpart E (the advanced approaches).
Sec. 252.62 External long-term debt requirement.
(a) External long-term debt requirement. Except as provided under
paragraph (c) of this section, a global systemically important BHC must
maintain an outstanding eligible external long-term debt amount that is
no less than the amount equal to the greater of:
(1) The global systemically important BHC's total risk-weighted
assets multiplied by the sum of 6 percent plus the global systemically
important BHC's GSIB surcharge (expressed as a percentage); and
(2) 4.5 percent of the global systemically important BHC's total
leverage exposure.
(b) Outstanding eligible external long-term debt amount. (1) A
global systemically important BHC's outstanding eligible external long-
term debt amount is the sum of:
(i) One hundred (100) percent of the unpaid principal amount of the
outstanding eligible debt securities issued by the global systemically
important BHC that have a remaining maturity greater than or equal to
730 days (two years);
(ii) Fifty (50) percent of the unpaid principal amount of the
outstanding eligible debt securities issued by the global systemically
important BHC that have a remaining maturity of greater than or equal
to 365 days (one year) and less than 730 days (two years); and
(iii) Zero (0) percent of the unpaid principal amount of the
outstanding eligible debt securities issued by the global systemically
important BHC that have a remaining maturity of less than 365 days (one
year).
(2) For purposes of paragraph (b)(1) of this section, the remaining
maturity of an outstanding eligible debt security is calculated from
the earlier of:
(i) The final payment date of the principal, without respect to any
right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the
contractual right to request or require payment of principal, provided
that, with respect to a right that is exercisable on one or more dates
that are specified in the instrument only on the occurrence of an event
(other than an event of a receivership, insolvency, liquidation, or
similar proceeding of the global systemically important BHC, or a
failure of the global systemically important BHC to pay principal or
interest on the instrument when due), the date for the outstanding
eligible debt security under this paragraph (b)(2)(ii) will be
calculated as if the event has occurred.
(c) Redemption and repurchase. A global systemically important BHC
may not redeem or repurchase any outstanding eligible debt security
without the prior approval of the Board if, immediately after the
redemption or repurchase, the global systemically important BHC would
not meet its external long-term debt requirement under paragraph (a) of
this section, or its external total loss-absorbing capacity requirement
under Sec. 252.63(a).
Sec. 252.63 External total loss-absorbing capacity requirement and
buffer.
(a) External total loss-absorbing capacity requirement. A global
systemically important BHC must maintain an outstanding external total
loss-absorbing capacity amount that is no less than the amount equal to
the greater of:
(1)(i) From January 1, 2019 through December 31, 2021, 16 percent
of the global systemically important BHC's total risk-weighted assets;
and
(ii) Beginning January 1, 2022, 18 percent of the global
systemically important BHC's total risk-weighted assets; and
(2) 9.5 percent of the global systemically important BHC's total
leverage exposure.
(b) Outstanding external total loss-absorbing capacity amount. A
global systemically important BHC's outstanding external total loss-
absorbing capacity amount is the sum of:
(1) The global systemically important BHC's common equity tier 1
capital (excluding any common equity tier 1 minority interest);
(2) The global systemically important BHC's additional tier 1
capital (excluding any tier 1 minority interest); and
(3) The global systemically important BHC's outstanding eligible
external long-term debt amount plus 50 percent of the unpaid principal
amount of outstanding eligible debt securities issued by the global
systemically important BHC that have a remaining maturity, as
calculated in Sec. 252.62(b)(2), of greater than or equal to 365 days
(one year) but less than 730 days (two years).
(c) External TLAC buffer--(1) Composition of the External TLAC
buffer. The external TLAC buffer is composed solely of common equity
tier 1 capital.
(2) Definitions. For purposes of this paragraph, the following
definitions apply:
(i) Eligible retained income. The eligible retained income of a
global systemically important BHC is the global systemically important
BHC's net income for the four calendar quarters preceding the current
calendar quarter, based on the global systemically important BHC's FR
Y-9C, net of any distributions and associated tax effects not already
reflected in net income. Net income, as reported in the FR Y-9C,
reflects discretionary bonus payments and certain distributions that
are expense items (and their associated tax effects).
(ii) Maximum external TLAC payout ratio. The maximum external TLAC
payout ratio is the percentage of eligible retained income that a
global systemically important BHC can pay out in the form of
distributions and discretionary bonus payments during the current
calendar quarter. The maximum external TLAC payout ratio is based on
the global systemically important BHC's external TLAC buffer level,
calculated as of the last day of the previous calendar quarter, as set
forth in Table 1 to Sec. 252.63.
(iii) Maximum external TLAC payout amount. A global systemically
important BHC's maximum external TLAC payout amount for the current
calendar quarter is equal to the global systemically important BHC's
eligible retained income, multiplied by the applicable maximum external
TLAC
[[Page 74960]]
payout ratio, as set forth in Table 1 to Sec. 252.63.
(3) Calculation of the external TLAC buffer level. (i) A global
systemically important BHC's external TLAC buffer level is equal to the
global systemically important BHC's common equity tier 1 capital ratio
(expressed as a percentage) minus the greater of zero and the following
amount:
(A) (1) From January 1, 2019 through December 31, 2021, 16 percent;
and
(2) Beginning January 1, 2022, 18 percent; minus
(B) The ratio (expressed as a percentage) of the global
systemically important BHC's additional tier 1 capital (excluding any
tier 1 minority interest) to its total risk-weighted assets; and minus
(C) The ratio (expressed as a percentage) of the global
systemically important BHC's eligible external long-term debt amount to
total risk-weighted assets.
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the
ratio (expressed as a percentage) of a global systemically important
BHC's external total loss-absorbing capacity amount as calculated under
paragraph (b) of this section to its risk-weighted assets is less than
or equal to, from January 1, 2019, through December 31, 2021, 16
percent and beginning January 1, 2022, 18 percent, the global
systemically important BHC's external TLAC buffer level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A
global systemically important BHC shall not make distributions or
discretionary bonus payments or create an obligation to make such
distributions or payments during the current calendar quarter that, in
the aggregate, exceed the maximum external TLAC payout amount.
(ii) A global systemically important BHC with an external TLAC
buffer level that is greater than the external TLAC buffer is not
subject to a maximum external TLAC payout amount.
(iii) Except as provided in paragraph (c)(4)(iv) of this section, a
global systemically important BHC may not make distributions or
discretionary bonus payments during the current calendar quarter if the
global systemically important BHC's:
(A) Eligible retained income is negative; and
(B) External TLAC buffer level was less than the external TLAC
buffer as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (c)(4)(i)
through (iii) of this section, the Board may permit a global
systemically important BHC to make a distribution or discretionary
bonus payment upon a request of the global systemically important BHC,
if the Board determines that the distribution or discretionary bonus
payment would not be contrary to the purposes of this section, or to
the safety and soundness of the global systemically important BHC. In
making such a determination, the Board will consider the nature and
extent of the request and the particular circumstances giving rise to
the request.
Table 1 to Sec. 252.63--Calculation of Maximum External TLAC Payout
Amount
------------------------------------------------------------------------
Maximum External TLAC
payout ratio (as a
External TLAC buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the external TLAC buffer...... No payout ratio limitation
applies.
Less than or equal to the external TLAC 60 percent.
buffer, and greater than 75 percent of the
external TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
external TLAC buffer, and greater than 50
percent of the external TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
external TLAC buffer, and greater 25
percent of the external TLAC buffer.
Less than or equal to 25 percent of the 0 percent.
external TLAC buffer.
------------------------------------------------------------------------
(v)(A) A global systemically important BHC is subject to the lowest
of the maximum payout amounts as determined under 12 CFR
217.11(a)(2)(iii) and (iv) and the maximum external TLAC payout amount
as determined under this paragraph.
(B) Additional limitations on distributions may apply to a global
systemically important BHC under 12 CFR 225.4, 225.8, and 263.202.
Sec. 252.64 Restrictions on corporate practices of U.S. global
systemically important banking organizations.
(a) Prohibited corporate practices. A global systemically important
BHC may not directly:
(1) Issue any debt instrument with an original maturity of less
than 365 days (one year), including short term deposits and demand
deposits, to any person, unless the person is a subsidiary of the
global systemically important BHC;
(2) Issue any instrument, or enter into any related contract, with
respect to which the holder of the instrument has a contractual right
to offset debt owed by the holder or its affiliates to a subsidiary of
the global systemically important BHC against the amount, or a portion
of the amount, owed by the global systemically important BHC under the
instrument;
(3) Enter into a qualified financial contract with a person that is
not a subsidiary of the global systemically important BHC;
(4) Guarantee a liability of a subsidiary of the global
systemically important BHC if such liability permits the exercise of a
default right that is related, directly or indirectly, to the global
systemically important BHC becoming subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding other than a
receivership proceeding under Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394); or
(5) Enter into, or otherwise benefit from, any agreement that
provides for its liabilities to be guaranteed by any of its
subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an
unconsolidated basis, of unrelated liabilities of a global systemically
important BHC owed to persons that are not affiliates of the global
systemically important BHC may not exceed 5 percent of the systemically
important BHC's external total loss-absorbing capacity amount, as
calculated under Sec. 252.63(b).
(2) For purposes of paragraph (b)(1) of this section, an unrelated
liability is any non-contingent liability of the global systemically
important BHC owed to a person that is not an affiliate of the global
systemically important BHC other than:
(i) The instruments that satisfy the global systemically important
BHC's external total loss-absorbing capacity amount, as calculated
under Sec. 252.63(b);
[[Page 74961]]
(ii) Any dividend or other liability arising from the instruments
that satisfy the global systemically important BHC's external total
loss-absorbing capacity amount, as calculated under Sec. 252.63(b)(2);
(iii) An eligible debt security that does not provide the holder of
the instrument with a currently exercisable right to require immediate
payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a
liability that otherwise represents a claim that would be senior to
eligible debt securities in Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the
Bankruptcy Code (11 U.S.C. 507).
Sec. 252.65 Disclosure requirements.
(a) A global systemically important BHC must publicly disclose a
description of the financial consequences to unsecured debtholders of
the global systemically important BHC entering into a resolution
proceeding in which the global systemically important BHC is the only
entity that would be subject to the resolution proceeding.
(b) A global systemically important BHC must provide the disclosure
required by paragraph (a) of this section:
(1) In the offering documents for all of its eligible debt
securities; and
(2) Either:
(i) On the global systemically important BHC's Web site; or
(ii) In more than one public financial report or other public
regulatory reports, provided that the global systemically important BHC
publicly provides a summary table specifically indicating the
location(s) of this disclosure.
0
7. Add Sec. 252.153(b)(4), (5), and (6) to read as follows:
Sec. 252.153 U.S. intermediate holding company requirement for
foreign banking organizations with U.S. non-branch assets of $50
billion or more.
* * * * *
(b) * * *
(4) For purposes of this part, a top-tier foreign banking
organization that controls a U.S. intermediate holding company is a
global systemically important foreign banking organization if any of
the following conditions are met:
(i) The top-tier foreign banking organization determines, pursuant
to paragraph (b)(6) of this section, that the top-tier foreign banking
organization has the characteristics of a global systemically important
banking organization under the global methodology; or
(ii) The Board, using information reported by the top-tier foreign
banking organization or its U.S. subsidiaries, information that is
publicly available, and confidential supervisory information,
determines:
(A) That the top-tier foreign banking organization would be a
global systemically important banking organization under the global
methodology;
(B) That the top-tier foreign banking organization, if it were
subject to the Board's Regulation Q, would be identified as a global
systemically important BHC under Sec. 217.402 of the Board's
Regulation Q; or
(C) That the U.S. intermediate holding company, if it were subject
to Sec. 217.402 of the Board's Regulation Q, would be identified as a
global systemically important BHC.
(5) Each top-tier foreign banking organization that controls a U.S.
intermediate holding company shall submit to the Board by January 1 of
each calendar year through the U.S. intermediate holding company:
(i) Notice of whether the home country supervisor (or other
appropriate home country regulatory authority) of the top-tier foreign
banking organization of the U.S. intermediate holding company has
adopted standards consistent with the global methodology; and
(ii) Notice of whether the top-tier foreign banking organization
prepares or reports the indicators used by the global methodology to
identify a banking organization as a global systemically important
banking organization and, if it does, whether the top-tier foreign
banking organization has determined that it has the characteristics of
a global systemically important banking organization under the global
methodology pursuant to paragraph (b)(6) of this section.
(6) A top-tier foreign banking organization that controls a U.S.
intermediate holding company and prepares or reports for any purpose
the indicator amounts necessary to determine whether the top-tier
foreign banking organization is a global systemically important banking
organization under the global methodology must use the data to
determine whether the top-tier foreign banking organization has the
characteristics of a global systemically important banking organization
under the global methodology.
* * * * *
0
8. Add subpart P to read as follows:
Subpart P--Internal Long-Term Debt Requirement, Internal Total
Loss-absorbing Capacity Requirement and Buffer, and Restrictions on
Corporate Practices for Intermediate Holding Companies of Global
Systemic Foreign Banking Organizations
Sec.
252.160 Applicability.
252.161 Definitions.
252.162 Internal long-term debt requirement.
252.163 Internal debt conversion order.
252.164 Internal total loss-absorbing capacity requirement and
buffer.
252.165 Restrictions on corporate practices of intermediate holding
companies of foreign banking organizations.
Sec. 252.160 Applicability.
(a) General applicability. This subpart applies to a U.S.
intermediate holding company that is required to be established
pursuant to Sec. 252.153 and is controlled by a global systemically
important foreign banking organization (Covered IHC).
(b) Initial applicability. A Covered IHC is subject to the
requirements of this subpart beginning on the later of:
(1) January 1, 2019; and
(2) 1095 days (three years) after the earlier of date on which a:
(i) Global systemically important foreign banking organization is
required to establish a U.S. intermediate holding company pursuant to
Sec. 252.153; and
(ii) Foreign banking organization that is required to establish a
U.S. intermediate holding company pursuant to Sec. 252.153 becomes a
global systemically important foreign banking organization.
Sec. 252.161 Definitions.
For purposes of this subpart:
Additional tier 1 capital has the same meaning as in 12 CFR
217.20(c).
Average total consolidated assets means the denominator of the
leverage ratio as described in 12 CFR 217.10(b)(4).
Common equity tier 1 capital has the same meaning as in 12 CFR
217.20(b).
Common equity tier 1 capital ratio has the same meaning as in 12
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
Common equity tier 1 minority interest has the same meaning as in
12 CFR 217.2.
Covered IHC is defined in Sec. 252.160.
Default right (1) Means any:
(i) Right of a party, whether contractual or otherwise (including
rights incorporated by reference to any other contract, agreement or
document, and rights afforded by statute, civil code, regulation and
common law), to
[[Page 74962]]
liquidate, terminate, cancel, rescind, or accelerate such agreement or
transactions thereunder, set off or net amounts owing in respect
thereto (except rights related to same-day payment netting), exercise
remedies in respect of collateral or other credit support or property
related thereto (including the purchase and sale of property), demand
payment or delivery thereunder or in respect thereof (other than a
right or operation of a contractual provision arising solely from a
change in the value of collateral or margin or a change in the amount
of an economic exposure), suspend, delay or defer payment or
performance thereunder, modify the obligations of a party thereunder or
any similar rights; and
(ii) Right or contractual provision that alters the amount of
collateral or margin that must be provided with respect to an exposure
thereunder, including by altering any initial amount, threshold amount,
variation margin, minimum transfer amount, the margin value of
collateral or any similar amount, that entitles a party to demand the
return of any collateral or margin transferred by it to the other party
or a custodian or that modifies a transferee's right to reuse
collateral or margin (if such right previously existed), or any similar
rights, in each case, other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party
to terminate the contract on demand or at its option at a specified
time, or from time to time, without the need to show cause.
Discretionary bonus payment has the same meaning as under 12 CFR
217.2.
Distribution has the same meaning as under 12 CFR 217.2.
Eligible internal debt security means a debt instrument that:
(1) Is paid in, and issued by a Covered IHC to and remains held by
a company that is incorporated or organized outside of the United
States that directly or indirectly controls the Covered IHC;
(2) Is unsecured and would represent the most subordinated debt
claim in a receivership, insolvency, liquidation, or similar proceeding
of the Covered IHC;
(3) Has a maturity at issuance of greater than 365 days (one year)
from the date of issuance;
(4) Does not provide the holder of the instrument a contractual
right to accelerate payment of principal or interest on the instrument;
(5) Has a contractual provision that is approved by the Board that
provides for the immediate conversion or exchange of the instrument
into common equity tier 1 of the Covered IHC, or the cancellation of
the instrument, in either case upon issuance by the Board of an
internal debt conversion order;
(6) Is governed by the laws of the United States or any State
thereof; and
(7) Is not a structured note.
GAAP means generally accepted accounting principles as used in the
United States.
Internal debt conversion order, with respect to a Covered IHC,
means an order by the Board to immediately convert or exchange all
eligible internal debt securities of the Covered IHC to common equity
tier 1 capital or immediately cancel all eligible internal debt
securities of the Covered IHC.
Internal TLAC buffer means, with respect to a Covered IHC, the sum
of 2.5 percent and any applicable countercyclical capital buffer under
12 CFR 217.11(b) (expressed as a percentage).
Outstanding eligible internal long-term debt amount is defined in
Sec. 252.162(b).
Person has the same meaning as in 12 CFR 225.2.
Qualified financial contract has the same meaning as in section
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)) including, any
``swap'' defined in section 1a(47) of the Commodities Exchange Act (7
U.S.C. 1a(47)) and in any rules or regulations issued by the Commodity
Futures Trading Commission pursuant to such section; any ``security-
based swap'' defined in section 3(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)) and in any rules or regulations issued by the
Securities and Exchange Commission pursuant to such section; and any
securities contract, commodity contract, forward contract, repurchase
agreement, swap agreement, and any similar agreement that the Federal
Deposit Insurance Corporation determines by regulation to be a
qualified financial contract as provided in 12 U.S.C. 5390(c)(8)(D)(i).
Standardized total risk-weighted assets has the same meaning as in
12 CFR 217.2.
Structured note means a debt instrument that:
(1) Has a principal amount, redemption amount, or stated maturity
that is subject to reduction based on the performance of any asset,
entity, index, or embedded derivative or similar embedded feature;
(2) Has an embedded derivative or other similar embedded feature
that is linked to one or more equity securities, commodities, assets,
or entities;
(3) Does not specify a minimum principal amount due upon
acceleration or early termination; or
(4) Is not classified as debt under GAAP.
Supplementary leverage ratio has the same meaning as in 12 CFR
217.10(c)(4).
Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
Total leverage exposure has the same meaning as in 12 CFR
217.10(c)(4)(ii).
Total risk-weighted assets, with respect to a Covered IHC, is equal
to the Covered IHC's standardized total risk-weighted assets.
Sec. 252.162 Internal long-term debt requirement.
(a) Internal long-term debt requirement. A Covered IHC must have an
outstanding eligible internal long-term debt amount that is no less
than the amount equal to the greater of:
(1) 7 percent of the Covered IHC's total risk-weighted assets;
(2) If the Covered IHC is required to maintain a minimum
supplementary leverage ratio, 3 percent of the Covered IHC's total
leverage exposure; and
(3) 4 percent of the Covered IHC's average total consolidated
assets.
(b) Outstanding eligible internal long-term debt amount. A Covered
IHC's outstanding eligible internal long-term debt amount is the sum
of:
(1) One hundred (100) percent of the unpaid principal amount of the
outstanding eligible internal debt securities issued by the Covered IHC
that have a remaining maturity greater than or equal to 730 days (two
years); and
(2) Fifty (50) percent of the unpaid principal amount of the
outstanding eligible internal debt securities issued by the Covered IHC
that have a remaining maturity of greater than or equal to 365 days
(one year) and less than 730 days (two years); and
(3) Zero (0) percent of the unpaid principal amount of the
outstanding eligible internal debt securities issued by the Covered IHC
that have a remaining maturity of less than 365 days (one year).
(c) Redemption and repurchase. Without the prior approval of the
Board, a Covered IHC may not redeem or repurchase any outstanding
eligible internal debt security if, immediately after the redemption or
repurchase, the Covered IHC would not have an outstanding eligible
internal long-term debt amount that is sufficient to meet its internal
long-term debt requirement under paragraph (a) of this section.
[[Page 74963]]
Sec. 252.163 Internal debt conversion order.
(a) The Board may issue an internal debt conversion order if:
(1) The Board has determined that the Covered IHC is in default or
danger of default; and
(2) Any of the following circumstances apply:
(i) A foreign banking organization that directly or indirectly
controls the Covered IHC or any subsidiary of the top-tier foreign
banking organization has been placed into resolution proceedings
(including the application of statutory resolution powers) in its home
country;
(ii) The home country supervisor of the top-tier foreign banking
organization has consented or not promptly objected after notification
by the Board to the conversion, exchange, or cancellation of the
eligible internal debt securities of the Covered IHC; or
(iii) The Board has made a written recommendation to the Secretary
of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the Covered
IHC.
(b) For purposes of paragraph (a) of this section, the Board will
consider:
(1) A Covered IHC in default or danger of default if
(i) A case has been, or likely will promptly be, commenced with
respect to the Covered IHC under the Bankruptcy Code (11 U.S.C. 101 et
seq.);
(ii) The Covered IHC has incurred, or is likely to incur, losses
that will deplete all or substantially all of its capital, and there is
no reasonable prospect for the Covered IHC to avoid such depletion;
(iii) The assets of the Covered IHC are, or are likely to be, less
than its obligations to creditors and others; or
(iv) The Covered IHC is, or is likely to be, unable to pay its
obligations (other than those subject to a bona fide dispute) in the
normal course of business; and
(2) An objection by the home country supervisor to the conversion,
exchange or cancellation of the eligible internal debt securities to be
prompt if the Board receives the objection no later than 48 hours after
the Board requests such consent or non-objection from the home country
supervisor.
Sec. 252.164 Internal total loss-absorbing capacity requirement and
buffer.
(a) Internal total loss-absorbing capacity requirement. Except as
provided in paragraph (b) of this section, a Covered IHC must have an
outstanding internal total loss-absorbing capacity amount that is no
less than the amount equal to the greater of:
(1) (i) From January 1, 2019 through December 31, 2021, 16 percent
of the Covered IHC's total risk-weighted assets; and
(ii) Beginning January 1, 2022, 18 percent of the Covered IHC's
total risk-weighted assets;
(2) If the Board requires the Covered IHC to maintain a minimum
supplementary leverage ratio, 6.75 percent of the Covered IHC's total
leverage exposure; and
(3) Nine (9) percent of the Covered IHC's average total
consolidated assets.
(b) Internal total loss-absorbing capacity requirement for a
Covered IHCs that is a non-resolution entity. A Covered IHC that is a
non-resolution entity must have an outstanding internal total loss-
absorbing capacity no less than the amount equal to the greater of:
(1) (i) From January 1, 2019 through December 31, 2021, 14 percent
of the Covered IHC's total risk-weighted assets; and
(ii) Beginning January 1, 2022, 16 percent of the Covered IHC's
total risk-weighted assets;
(2) If the Board requires the Covered IHC to maintain a minimum
supplementary leverage ratio, 6 percent of the Covered IHC's total
leverage exposure; and
(3) Eight (8) percent of the Covered IHC's average total
consolidated assets.
(c) Internal Total loss-absorbing capacity amount. A Covered IHC's
internal total loss-absorbing capacity amount is equal to the sum of:
(1) The Covered IHC's common equity tier 1 capital (excluding any
common equity tier 1 minority interest) held by a company that is
incorporated or organized outside of the United States and that
directly or indirectly controls the Covered IHC;
(2) The Covered IHC's additional tier 1 capital (excluding any tier
1 minority interest) held by a company that is incorporated or
organized outside of the United States and that directly or indirectly
controls the Covered IHC; and
(3) The Covered IHC's outstanding eligible internal long-term debt
amount plus 50 percent of the unpaid principal amount of outstanding
eligible internal debt securities issued by the Covered IHC that have a
remaining maturity of greater than or equal to 365 days (one year) but
less than 730 days (two years).
(d) Identification of non-resolution entities. (1) A Covered IHC is
a non-resolution entity for purposes of this section if the home
country resolution authority for the top-tier foreign banking
organization that controls the Covered IHC has certified to the Board
that the authority's planned resolution strategy for the foreign
banking organization does not involve the Covered IHC or the
subsidiaries of the Covered IHC entering resolution, receivership,
insolvency or similar proceedings in the United States.
(2) A Covered IHC will cease to be a non-resolution entity 365 days
(one year) from the date the Board first provided notice to the Covered
IHC that the home country resolution authority for the top-tier foreign
banking organization that controls the Covered IHC has indicated that
the authority's planned resolution strategy for the foreign banking
organization involves the Covered IHC or one or more of the
subsidiaries of the Covered IHC entering resolution, receivership,
insolvency or similar proceedings in the United States.
(e) Internal TLAC buffer.--(1) Composition of the internal TLAC
buffer. The internal TLAC buffer is composed solely of common equity
tier 1 capital.
(2) Definitions. For purposes of this paragraph, the following
definitions apply:
(i) Eligible retained income. The eligible retained income of a
Covered IHC is its net income for the four calendar quarters preceding
the current calendar quarter, based on the Covered IHC's FR Y-9C, or
other applicable regulatory report as determined by the Board, net of
any distributions and associated tax effects not already reflected in
net income. Net income, as reported in the FR Y-9C, reflects
discretionary bonus payments and certain distributions that are expense
items (and their associated tax effects).
(ii) Maximum internal TLAC payout ratio. The maximum internal TLAC
payout ratio is the percentage of eligible retained income that a
Covered IHC can pay out in the form of distributions and discretionary
bonus payments during the current calendar quarter. The maximum
internal TLAC payout ratio is based on the Covered IHC's internal TLAC
buffer level, calculated as of the last day of the previous calendar
quarter, as set forth in Table 1 to Sec. 252.164.
(iii) Maximum internal TLAC payout amount. A Covered IHC's maximum
internal TLAC payout amount for the current calendar quarter is equal
to the Covered IHC's eligible retained income, multiplied by the
applicable maximum internal TLAC payout ratio, as set forth in Table 1
to Sec. 252.164.
(3) Calculation of the internal TLAC buffer level. (i) A Covered
IHC's internal TLAC buffer level is equal to the Covered IHC's common
equity tier 1 capital ratio (expressed as a percentage) minus the
greater of zero and the following amount:
(A) (1) From January 1, 2019, through December 31, 2021, 14 percent
for a
[[Page 74964]]
Covered IHC that is a non-resolution entity, and 16 percent for all
other Covered IHCs; and
(2) Beginning January 1, 2022, 16 percent for a Covered IHC that is
a non-resolution entity, and 18 percent for all other Covered IHCs;
minus
(B) The ratio (expressed as a percentage) of the Covered IHC's
additional tier 1 capital (excluding any tier 1 minority interest) held
by a company that is incorporated or organized outside of the United
States and that directly or indirectly controls the Covered IHC to its
total risk-weighted assets; and minus
(C) The ratio (expressed as a percentage) of the Covered IHC's
eligible internal long-term debt to total risk-weighted assets.
(ii) (A) Except as provided in paragraph (e)(3)(ii)(B) of this
section and notwithstanding paragraph (e)(3)(i) of this section, if the
ratio (expressed as a percentage) of the Covered IHC's internal total
loss-absorbing capacity amount, as calculated under Sec. 252.164(a),
to the Covered IHC's risk-weighted assets is less than or equal to,
from January 1, 2019, through December 31, 2021, 16 percent and
beginning January 1, 2022, 18 percent, the Covered IHC's internal TLAC
buffer level is zero.
(B) With respect to a Covered IHC that is a non-resolution entity,
notwithstanding paragraph (e)(3)(i) of this section, if the ratio
(expressed as a percentage) of the Covered IHC's internal total loss-
absorbing capacity amount, as calculated under Sec. 252.164(b), to the
Covered IHC's risk-weighted assets is less than or equal to, from
January 1, 2019, through December 31, 2021, 14 percent and beginning
January 1, 2022, 16 percent, the Covered IHC's internal TLAC buffer
level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A
Covered IHC shall not make distributions or discretionary bonus
payments or create an obligation to make such distributions or payments
during the current calendar quarter that, in the aggregate, exceed the
maximum internal TLAC payout amount.
(ii) A Covered IHC with an internal TLAC buffer level that is
greater than the internal TLAC buffer is not subject to a maximum
internal TLAC payout amount.
(iii) Except as provided in paragraph (e)(4)(iv) of this section, a
Covered IHC may not make distributions or discretionary bonus payments
during the current calendar quarter if the Covered IHC's:
(A) Eligible retained income is negative; and
(B) Internal TLAC buffer level was less than the internal TLAC
buffer as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (e)(4)(i)
through (iii) of this section, the Board may permit a Covered IHC to
make a distribution or discretionary bonus payment upon a request of
the Covered IHC, if the Board determines that the distribution or
discretionary bonus payment would not be contrary to the purposes of
this section, or to the safety and soundness of the Covered IHC. In
making such a determination, the Board will consider the nature and
extent of the request and the particular circumstances giving rise to
the request.
Table 1 to Sec. 252.164--Calculation of Maximum Internal TLAC Payout
Amount
------------------------------------------------------------------------
Maximum internal TLAC
payout ratio (as a
Internal TLAC buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the internal TLAC buffer...... No payout ratio limitation
applies
Less than or equal to the internal TLAC 60 percent.
buffer, and greater than 75 percent of the
internal TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
internal TLAC buffer, and greater than 50
percent of the internal TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
internal TLAC buffer, and greater 25
percent of the internal TLAC buffer.
Less than or equal to 25 percent of the 0 percent.
internal TLAC buffer.
------------------------------------------------------------------------
(v) (A) A Covered IHC is subject to the lowest of the maximum
payout amounts as determined under 12 CFR 217.11(a)(2)(iii) and (iv)
and the maximum internal TLAC payout amount as determined under this
paragraph.
(B) Additional limitations on distributions may apply to a Covered
IHC under 12 CFR 225.4, 225.8, and 263.202.
Sec. 252.165 Restrictions on corporate practices of intermediate
holding companies of foreign banking organizations.
A Covered IHC may not directly:
(a) Issue any debt instrument with an original maturity of less
than 365 days (one year), including short term deposits and demand
deposits, to any person, unless the person is an affiliate of the
covered IHC;
(b) Issue any instrument, or enter into any related contract, with
respect to which the holder of the instrument has a contractual right
to offset debt owed by the holder or its affiliates to the Covered IHC
or a subsidiary of the Covered IHC against the amount, or a portion of
the amount, owed by the Covered IHC under the instrument;
(c) Enter into a qualified financial contract with a person that is
not an affiliate of the Covered IHC;
(d) Guarantee a liability of an affiliate of the Covered IHC if
such liability permits the exercise of a default right that is related,
directly or indirectly, to the Covered IHC becoming subject to a
receivership, insolvency, liquidation, resolution, or similar
proceeding other than a receivership proceeding under Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 through 5394); or
(e) Enter into, or otherwise benefit from, any agreement that
provides for its liabilities to be guaranteed by any of its
subsidiaries.
By order of the Board of Governors of the Federal Reserve
System, November 17, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-29740 Filed 11-27-15; 8:45 am]
BILLING CODE P