[Federal Register Volume 78, Number 161 (Tuesday, August 20, 2013)]
[Proposed Rules]
[Pages 51101-51115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20143]
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 6
[Docket ID OCC-2013-0008]
RIN 1557-AD69
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 217
[Regulation H and Q; Docket No. R-1460]
RIN 7100-AD 99
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE01
Regulatory Capital Rules: Regulatory Capital, Enhanced
Supplementary Leverage Ratio Standards for Certain Bank Holding
Companies and Their Subsidiary Insured Depository Institutions
AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
seeking comment on a proposal that would strengthen the agencies'
leverage ratio standards for large, interconnected U.S. banking
organizations. The proposal would apply to any U.S. top-tier bank
holding company (BHC) with at least $700 billion in total consolidated
assets or at least $10 trillion in assets under custody (covered BHC)
and any insured depository institution (IDI) subsidiary of these BHCs.
In the revised capital approaches adopted by the agencies in July, 2013
(2013 revised capital approaches), the agencies established a minimum
supplementary leverage ratio of 3 percent (supplementary leverage
ratio), consistent with the minimum leverage ratio adopted by the Basel
Committee on Banking Supervision (BCBS), for banking organizations
subject to the advanced approaches risk-based capital rules. In this
notice of proposed rulemaking (proposal or proposed rule), the agencies
are proposing to establish a ``well capitalized'' threshold of 6
percent for the supplementary leverage ratio for any IDI that is a
subsidiary of a covered BHC, under the agencies' prompt corrective
action (PCA) framework. The Board also proposes to establish a new
leverage buffer for covered BHCs above the minimum supplementary
leverage ratio requirement of 3 percent (leverage buffer). The leverage
buffer would function like the capital conservation buffer for the
risk-based capital ratios in the 2013 revised capital approaches. A
covered BHC that maintains a leverage buffer of tier 1 capital in an
amount greater than 2 percent of its total leverage exposure would not
be subject to limitations on distributions and discretionary bonus
payments. The proposal would take effect beginning on January 1, 2018.
The agencies seek comment on all aspects of this proposal.
DATES: Comments must be received by October 21, 2013.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules: Regulatory Capital, Enhanced
Supplementary Leverage Ratio Standards for Certain Bank Holding
Companies and Their Subsidiary Insured Depository Institutions'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to
http://www.regulations.gov. Enter ``Docket ID OCC-2013-0008'' in the
Search Box and click ``Search''. Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: [email protected].
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2013-0008'' in your comment.
[[Page 51102]]
In general, OCC will enter all comments received into the docket and
publish them on the Regulations.gov Web site without change, including
any business or personal information that you provide such as name and
address information, email addresses, or phone numbers. Comments
received, including attachments and other supporting materials, are
part of the public record and subject to public disclosure. Do not
enclose any information in your comment or supporting materials that
you consider confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2013-0008'' in the Search
box and click ``Search''. Comments can be filtered by Agency using the
filtering tools on the left side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
viewing public comments, viewing other supporting and related
materials, and viewing the docket after the close of the comment
period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1460, 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 docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert de V. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on
weekdays.
FDIC: You may submit comments, identified by RIN 3064-AE01, by any
of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on the Agency
Web site.
Email: [email protected]. Include the RIN 3064-AE01 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7:00 a.m. and 5:00 p.m.
Public Inspection: All comments received must include the agency
name and RIN 3064-AE01 for this rulemaking. All comments received will
be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.
FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic Advisor, (202) 649-6981; Nicole
Billick, Risk Expert, (202) 649-7932, Capital Policy; or Ron
Shimabukuro, Senior Counsel; or Carl Kaminski, Senior Attorney,
Legislative and Regulatory Activities Division, (202) 649-5490, Office
of the Comptroller of the Currency, 400 7th Street SW., Washington, DC
20219.
Board: Anna Lee Hewko, Deputy Associate Director, (202) 530-6260;
Constance M. Horsley, Manager, (202) 452-5239; Juan C. Climent, Senior
Supervisory Financial Analyst, (202) 872-7526; or Holly Kirkpatrick,
Senior Financial Analyst, (202) 452-2796, Capital and Regulatory
Policy, Division of Banking Supervision and Regulation; or Benjamin
McDonough, Senior Counsel, (202) 452-2036; April C. Snyder, Senior
Counsel, (202) 452-3099; Christine Graham, Senior Attorney, (202) 452-
3005; or David Alexander, Senior Attorney, (202) 452-2877, Legal
Division, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: George French, Deputy Director, [email protected]; Bobby R.
Bean, Associate Director, [email protected]; Ryan Billingsley, Chief,
Capital Policy Section, [email protected]; Karl Reitz, Chief,
Capital Markets Strategies Section, [email protected]; Capital Markets
Branch, Division of Risk Management Supervision,
[email protected] or (202) 898-6888; or Mark Handzlik,
Counsel, [email protected]; or Michael Phillips, Counsel,
[email protected]; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
The recent financial crisis showed that some financial companies
had grown so large, leveraged, and interconnected that their failure
could pose a threat to overall financial stability. The sudden
collapses or near-collapses of major financial companies were among the
most destabilizing events of the crisis. As a result of the imprudent
risk taking of major financial companies and the severe consequences to
the financial system and the economy associated with the disorderly
failure of these companies, the U.S. government (and many foreign
governments in their home countries) intervened on an unprecedented
scale to reduce the impact of, or prevent, the failure of these
companies and the attendant consequences for the broader financial
system.
A perception continues to persist in the markets that some
companies remain ``too big to fail,'' posing an ongoing threat to the
financial system. First, the existence of the ``too big to fail''
problem reduces the incentives of shareholders, creditors and
counterparties of these companies to
[[Page 51103]]
discipline excessive risk-taking by the companies. Second, it produces
competitive distortions because companies perceived as ``too big to
fail'' can often fund themselves at a lower cost than other companies.
This distortion is unfair to smaller companies, damaging to fair
competition, and tends to artificially encourage further consolidation
and concentration in the financial system.
An important objective of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act) is to mitigate the
threat to financial stability posed by systemically-important financial
companies.\1\ The agencies have sought to address this problem through
enhanced supervisory programs, including heightened supervisory
expectations for large, complex institutions and stress testing
requirements. The Dodd-Frank Act further addresses this problem with a
multi-pronged approach: a new orderly liquidation authority for
financial companies (other than banks and insurance companies); the
establishment of the Financial Stability Oversight Council (Council)
empowered with the authority to designate nonbank financial companies
for Board oversight; stronger regulation of major BHCs and nonbank
financial companies designated for Board oversight; and enhanced
regulation of over-the-counter (OTC) derivatives, other core financial
markets, and financial market utilities.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
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This proposal would build on these efforts by increasing leverage
standards for the largest and most interconnected U.S. banking
organizations. The agencies have broad authority to set regulatory
capital standards.\2\ As a general matter, the agencies' authority to
set regulatory capital requirements for the institutions they regulate
derives from the International Lending Supervision Act (ILSA)\3\ and
the PCA provisions \4\ of Federal Deposit Insurance Corporation
Improvement Act (FDICIA). In establishing ILSA, Congress codified its
intentions, providing, ``It is the policy of the Congress to assure
that the economic health and stability of the United States and the
other nations of the world shall not be adversely affected or
threatened in the future by imprudent lending practices or inadequate
supervision.''\5\ ILSA encourages the agencies to work with their
international counterparts to establish effective and consistent
supervisory policies and practices and specifically provides the
agencies authority to set broadly applicable minimum capital levels \6\
as well as individual capital requirements.\7\ Additionally, ILSA
specifically calls on U.S. regulators to encourage governments, central
banks, bank regulatory authorities, and other major banking countries
to work toward maintaining, and where appropriate, strengthening the
capital bases of banking institutions involved in international
banking.\8\ With its focus on international lending and the safety of
the broader financial system, ILSA provides the agencies with the
authority to consider an institution's interconnectedness and other
systemic factors when setting capital standards.
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\2\ The agencies have authority to establish capital
requirements for depository institutions under the prompt corrective
action provisions of the Federal Deposit Insurance Act (12 U.S.C.
1831o). In addition, the Federal Reserve has broad authority to
establish various regulatory capital standards for BHCs under the
Bank Holding Company Act and the Dodd-Frank Act. See, for example,
sections 165 and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and 12
U.S.C. 5371).
\3\ 12 U.S.C. 3901-3911.
\4\ 12 U.S.C. 1831o.
\5\ 12 U.S.C. 3901(a).
\6\ ``Each appropriate Federal banking agency shall cause
banking institutions to achieve and maintain adequate capital by
establishing levels of capital for such banking institutions and by
using such other methods as the appropriate Federal banking agency
deems appropriate.'' 12 U.S.C. 3907(a)(1).
\7\ Each appropriate Federal banking agency shall have the
authority to establish such minimum level of capital for a banking
institution as the appropriate Federal banking agency, in its
discretion, deems to be necessary or appropriate in light of the
particular circumstances of the banking institution.'' 12 U.S.C.
3907(a)(2).
\8\ 12 U.S.C. 3907(b)(3)(C).
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As part of the overall prudential framework for bank capital, the
agencies have long expected institutions to maintain capital well above
regulatory minimums and have monitored banking organizations' capital
adequacy through the supervisory process in accordance with this
expectation. Additionally, this expectation is codified for IDIs in the
statutory PCA requirements, which require the agencies to establish
ratio thresholds for both leverage and risk-based capital that banks
have to meet to be considered ``well capitalized.''
Additionally, section 165 of the Dodd-Frank Act requires the Board
to impose a package of enhanced prudential standards on BHCs with total
consolidated assets of $50 billion or more and nonbank financial
companies the Council has designated for supervision by the Board.\9\
The prudential standards for covered companies required under section
165 of the Dodd-Frank Act must include enhanced leverage requirements.
In general, the Dodd-Frank Act directs the Board to implement enhanced
prudential standards that strengthen existing micro-prudential
supervision and regulation of individual companies and incorporate
macro-prudential considerations so as to reduce threats posed by
covered companies to the stability of the financial system as a whole.
The enhanced standards must increase in stringency based on the
systemic footprint and risk characteristics of individual covered
companies. When differentiating among companies for purposes of
applying the standards established under section 165, the Board may
consider the companies' size, capital structure, riskiness, complexity,
financial activities, and any other risk-related factors the Board
deems appropriate.
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\9\ See 12 U.S.C. 5365; 77 FR 593 (January 5, 2012); and 77 FR
76627 (December 28, 2012).
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In the agencies' experience, strong capital is an important
safeguard that helps financial institutions navigate periods of
financial or economic stress. Maintenance of a strong base of capital
at the largest, systemically important institutions is particularly
important because capital shortfalls at these institutions can
contribute to systemic distress and can have material adverse economic
effects. Further, higher capital standards for these institutions would
place additional private capital at risk before the Federal deposit
insurance fund and the Federal government's resolution mechanisms would
be called upon, and reduce the likelihood of economic disruptions
caused by problems at these institutions. The agencies believe that
higher standards for the supplementary leverage ratio would reduce the
likelihood of resolutions, and would allow regulators more time to
tailor resolution efforts in the event those are needed. By further
constraining their use of leverage, higher leverage standards could
offset possible funding cost advantages that these institutions may
enjoy as a result of the ``too big to fail'' problem, as discussed
above.
A. Scope of the Proposal
In November 2011, the BCBS\10\ released a document entitled, Global
systemically important banks: assessment methodology and the additional
loss absorbency
[[Page 51104]]
requirement,\11\ which sets out a framework for a new capital surcharge
for global systemically important banks (BCBS framework). The BCBS
framework is intended to strengthen the capital position of the global
systemically important banking organizations (G-SIBs) beyond the
requirements for other banking organizations by expanding the capital
conservation buffer for these organizations.
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\10\ The BCBS is a committee of banking supervisory authorities,
which was established by the central bank governors of the G-10
countries in 1975. It currently consists of senior representatives
of bank supervisory authorities and central banks from Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. Documents issued by the BCBS are available through the Bank
for International Settlements Web site at http://www.bis.org.
\11\ Available at http://www.bis.org/publ/bcbs207.pdf.
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The BCBS framework incorporates five broad characteristics of a
banking organization that the agencies consider to be good proxies for,
and correlated with, systemic importance--size, complexity,
interconnectedness, lack of substitutes, and cross-border activity. The
Board believes that the criteria and methodology used by the BCBS to
identify G-SIBs are consistent with the criteria it must consider under
the DFA when tailoring enhanced prudential standards based on the
systemic footprint and risk characteristics of individual covered
companies.
In November 2012 the FSB and BCBS published a list of banks that
meet the BCBS definition of a G-SIB based on year-end 2011 data.\12\
Each of these organizations has more than $700 billion in consolidated
assets or more than $10 trillion in assets under custody. For the
reasons described in this notice, the agencies are proposing to modify
the 2013 revised capital approaches \13\ to implement enhanced leverage
standards for the largest, most interconnected U.S. BHCs (that have
been, and are likely to continue to be identified as G-SIBs) and their
subsidiary IDIs.\14\ Accordingly, the agencies propose to use these
thresholds to identify covered BHCs and their IDI subsidiaries to which
the higher leverage requirements would apply. Over time, as the G-SIB
risk-based capital framework is implemented in the United States or
revised by the BCBS, the agencies may consider modifying the scope of
application of the proposed leverage requirements. In addition,
independent of the G-SIB capital framework implementation, the agencies
will continue to evaluate the proposed applicability thresholds and may
consider revising them to ensure they remain appropriate.
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\12\ The U.S. banking organizations that are currently
identified as G-SIBs and that would be subject to the proposal are
Citigroup Inc., JP Morgan Chase & Co., Bank of America Corporation,
The Bank of New York Mellon Corporation, Goldman Sachs Group, Inc.,
Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
Available at http://www.financialstabilityboard.org/publications/r_121031ac.pdf.
\13\ The 2013 revised capital approaches would revise and
replace the agencies' risk-based and leverage capital standards and
establish a 3 percent minimum supplementary leverage ratio for
banking organizations subject to the agencies' advanced approaches
risk-based capital rules. The Board adopted the 2013 revised capital
approaches as final on July 2, 2013. See http://www.federalreserve.gov/newsevents/press/bcreg/20130702a.htm. The OCC
adopted the 2013 revised capital approaches as final on July 9,
2013. See http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-110.html. The FDIC adopted the 2013 revised capital
approaches on an interim basis on July 9, 2013.
\14\ Under the 2013 revised capital approaches, a ``subsidiary''
is defined as a company controlled by another company, and a person
or company ``controls'' a company if it: (1) owns, controls, or
holds with power to vote 25 percent or more of a class of voting
securities of the company; or (2) consolidates the company for
financial reporting purposes. See section 2 of the 2013 revised
capital approaches.
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B. The Supplementary Leverage Ratio
The 2013 revised capital approaches comprehensively revise and
strengthen the capital regulations applicable to banking organizations.
The 2013 revised capital approaches strengthen the definition of
regulatory capital, increase the minimum risk-based capital
requirements for all banking organizations, and modify the way banking
organizations are required to calculate risk-weighted assets. The 2013
revised capital approaches also establish a minimum tier 1 leverage
ratio requirement \15\ of 4 percent applicable to all IDIs, which is
the ``generally applicable'' leverage ratio for purposes of section 171
of the Dodd-Frank Act. Accordingly, the minimum tier 1 leverage
requirement for depository institution holding companies is also 4
percent.\16\
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\15\ The generally applicable leverage ratio under the 2013
revised capital approaches is the ratio of a banking organization's
tier 1 capital to its average total consolidated assets as reported
on the banking organization's regulatory report minus amounts
deducted from tier 1 capital.
\16\ 12 U.S.C. 5371.
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In addition, for advanced approaches banking organizations, the
2013 revised capital approaches establish a minimum requirement of 3
percent of tier 1 capital to total leverage exposure (supplementary
leverage ratio). Total leverage exposure includes all on-balance sheet
assets and many off-balance sheet exposures for banking organizations
subject to the agencies' advanced approaches risk-based capital rules.
The supplementary leverage ratio is consistent with the minimum
leverage ratio requirement adopted by the BCBS (Basel III leverage
ratio).\17\
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\17\ See BCBS, ``Basel III: A Global Regulatory Framework for
More Resilient Banks and Banking Systems'' (December 2010),
available at http://www.bis.org/publ/bcbs189.htm.
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Because total leverage exposure includes off-balance sheet
exposures, for any given company with material off-balance sheet
exposures, the minimum amount of capital required to meet the
supplementary leverage ratio would substantially exceed the amount of
capital that would be required to meet the generally applicable
leverage ratio, assuming that both ratios were set at the same level.
Based on recent supervisory estimates, the 6 percent proposed
supplementary leverage ratio for subsidiary IDIs of covered BHCs
corresponds to roughly an 8.6 percent generally applicable leverage
ratio, while the proposed 5 percent buffer level of the supplementary
leverage ratio for covered BHCs corresponds to a roughly 7 percent
generally applicable leverage ratio, as shown in Table 1.
Table 1--Generally Applicable Leverage Ratio Equivalents for Various Values of the Supplementary Leverage Ratio
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Supplementary leverage ratio level:
Leverage concept -------------------------------------------------------------------------------------------------
3% 4% 5% 6% 7% 8%
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Implied generally applicable ratio*................... 4.3% 5.7% 7.2% 8.6% 10.0% 11.4%
Current BHC minimum**................................. 4
Current IDI minimum................................... 4
Current IDI well-capitalized threshold................ 5
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*Assumes total leverage exposure for the supplementary leverage ratio is $143 for every $100 of current generally applicable leverage exposure based on
a group of advanced approaches banking organizations as of 3Q 2012. Amounts by which total leverage exposure exceeds balance sheet amounts will vary
across banking organizations depending on the composition of their off-balance sheet assets.
**Under the 2013 revised capital approaches, the minimum leverage ratio for BHCs is 4 percent.
[[Page 51105]]
The introduction of the Basel III leverage ratio as a minimum
standard is an important step in improving the BCBS framework for
international capital standards (Basel capital framework), and the BCBS
described it as a backstop to the risk-based capital ratios and an
overall constraint on leverage. The agencies believe the leverage
requirement should produce a simple and transparent measure of capital
adequacy that will be credible to market participants and ensure a
meaningful amount of capital is available to absorb losses. The Basel
III leverage ratio is a non-risk-based measure of capital adequacy that
measures both on- and off-balance sheet exposures relative to tier 1
capital.\18\ This is particularly important for large, complex
organizations that often have substantial off-balance sheet exposures.
The financial crisis demonstrated the risks from off-balance sheet
exposures that can require capital support, especially during a period
of stress. The agencies note that the BCBS has committed to collecting
additional data and potentially recalibrating the Basel III leverage
ratio requirements. The agencies will review any modifications to the
Basel III leverage ratio made by the BCBS and consider proposing
revisions to the U.S. requirements, as appropriate.
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\18\ The BCBS recently published a consultative paper seeking
comment on a number of specific changes to the supplementary
leverage ratio denominator. If and when any of these changes are
finalized, the agencies would consider the appropriateness of their
application in the United States.
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II. Proposed Revisions to Strengthen the Supplementary Leverage Ratio
Standards
A. Factors Contributing to the Proposed Revisions
In developing this proposal, the agencies considered various
factors, including comments regarding the supplementary leverage ratio
when the agencies proposed revisions to their capital standards in
2012,\19\ and the calibration objectives and methodologies of the
agencies in developing the risk-based capital and leverage requirements
in the 2013 revised capital approaches.
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\19\ See 77 FR 52792 (August 30, 2012) (2012 proposal).
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Some commenters on the supplementary leverage ratio in the 2012
proposal recommended that the agencies implement a higher minimum
requirement. These commenters argued that the risk-based capital ratios
are less transparent and more subject to manipulation than leverage
ratios and therefore should not be the binding requirement. Other
commenters recommended that the agencies wait to implement a
supplementary leverage ratio until the BCBS completes any refinements
to the Basel III leverage ratio.\20\ Some commenters stated that if a
leverage ratio is the binding regulatory capital requirement, banking
organizations may have incentives to increase their holdings of riskier
assets.
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\20\ If the BCBS finalizes changes in the definition of the
total leverage exposure measure, the agencies will consider the
appropriateness of incorporating those changes into the definition
of the supplementary leverage ratio and its appropriate levels for
purposes of U.S. regulation. Any such changes would be based on a
notice and comment rulemaking process.
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In calibrating the revised risk-based capital framework, the BCBS
identified those elements of regulatory capital that would be available
to absorb unexpected losses on a going-concern basis. The BCBS agreed
that an appropriate regulatory minimum level for the risk-based capital
requirements should force banking organizations to hold enough loss-
absorbing capital to provide market participants a high level of
confidence in their viability. The BCBS also determined that a buffer
above the minimum risk-based capital requirements would enhance
stability, and that such a buffer should be calibrated to allow banking
organizations to absorb a severe level of loss, while still remaining
above the regulatory minimum requirements. The buffer is conceptually
similar, but not identical in function, to the PCA ``well capitalized''
category for IDIs.
The BCBS's approach for determining the minimum level of the Basel
III leverage ratio was different than the calibration approach
described above for the risk-based capital ratios. The BCBS used the
most loss-absorbing measure of capital, common equity tier 1 capital,
as the basis for calibration for the risk-based capital ratios, but not
for the Basel III leverage ratio. In addition, the BCBS did not
calibrate the minimum Basel III leverage ratio to meet explicit loss
absorption and market confidence objectives as it did in calibrating
the minimum risk-based capital requirements and did not implement a
capital conservation buffer level above the minimum leverage ratio.
Rather, the BCBS focused on calibrating the Basel III leverage ratio to
be a backstop to the risk-based capital ratios and an overall
constraint on leverage. The agencies believe that while the
establishment of the Basel III leverage ratio internationally is an
important achievement, further steps could be taken to ensure that the
risk-based and leverage capital requirements effectively work together
to enhance the safety and soundness of the largest, most systemically
important banking organizations.
An estimated half of the covered BHCs that were BHCs in 2006 would
have met or exceeded a 3 percent minimum supplementary leverage ratio
at the end of 2006, and the other half were quite close to the minimum.
This suggests that the minimum requirement would not have placed a
significant constraint on the pre-crisis buildup of leverage at the
largest institutions. Based on their experience during the financial
crisis, the agencies believe that there could be benefits to financial
stability and reduced costs to the deposit insurance fund by requiring
these banking organizations to meet a well-capitalized standard or
capital buffer in addition to the 3 percent minimum supplementary
leverage ratio requirement.
The agencies have also considered the complementary nature of
leverage capital requirements and risk-based capital requirements as
well as the potential complexity and burden of additional leverage
standards. From a safety-and-soundness perspective, each type of
requirement offsets potential weaknesses of the other, and the two sets
of requirements working together are more effective than either would
be in isolation. In this regard, the agencies note that the 2013
revised capital approaches strengthen U.S. banking organizations' risk-
based capital requirements considerably more than it strengthens their
leverage requirements. Relative to the new supplementary leverage ratio
in the 2013 revised capital approaches, the tier 1 risk-based capital
requirements under the 2013 revised capital approaches will be
proportionately stronger than was the case under the previous
rules.\21\ At the same time, the degree to which banking organizations
could potentially benefit from active management of risk-weighted
assets before they breach the leverage requirements may be greater.
Such potential behavior suggests that the increase in stringency of the
leverage and risk-based standards should be more closely calibrated to
each other so that they remain in an
[[Page 51106]]
effective complementary relationship. This was an important factor the
agencies considered in identifying the proposed levels for the well-
capitalized and buffer levels of the supplementary leverage ratio.
---------------------------------------------------------------------------
\21\ See section 10 of the 2013 revised capital approaches. The
agencies' current risk-based capital rules are at 12 CFR part 3,
appendix A and 12 CFR part 167 (OCC); 12 CFR part 208, appendix A
and 12 CFR part 225, appendix A (Board); and 12 CFR part 325,
appendix A and 12 CFR part 390, subpart Z (FDIC). The agencies'
current leverage rules are at 12 CFR 3.6(b) and 3.6(c), and 12 CFR
167.6 (OCC); 12 CFR part 208, appendix B and 12 CFR part 225,
appendix D (Board); and 12 CFR 325.3 and 12 CFR 390.467 (FDIC).
---------------------------------------------------------------------------
This proportionality rationale applies to all banking organizations
and to both the generally applicable and supplementary leverage ratios.
However, the agencies believe it is appropriate to weigh the burden and
complexity of imposing a leverage buffer and enhanced PCA standards
against the benefits to financial stability and addressing the concern
that some institutions benefit from a real or perceived implicit
Federal safety net subsidy or may be viewed as ``too big to fail.'' The
agencies are therefore proposing to apply enhanced leverage standards
only to those U.S. banking organizations that pose the greatest
potential risk to financial stability, which are covered BHCs and their
subsidiary IDIs.
In this regard, the proposed heightened standards for the
supplementary leverage ratio for covered BHCs and their subsidiary IDIs
should provide meaningful incentives to encourage these banking
organizations to conserve capital, thereby reducing the likelihood of
their instability or failure and consequent negative external effects
on the financial system. The calibration of the proposed heightened
standards is based on consideration of all of the factors described in
this section.
B. Description of the Proposed Revisions
In the 2013 revised capital approaches, the agencies established a
minimum supplementary leverage ratio requirement of 3 percent for
advanced approaches banking organizations based on the Basel III
leverage ratio. The supplementary leverage ratio is defined as the
simple arithmetic mean of the ratio of the banking organization's tier
1 capital to total leverage exposure calculated as of the last day of
each month in the reporting quarter.
Under this proposal, a covered BHC would be subject to a leverage
buffer of tier 1 capital in addition to the minimum supplementary
leverage ratio requirement established in the 2013 revised capital
approaches. Similar to the capital conservation buffer in the 2013
revised capital approaches, under the proposal, a covered BHC that
maintains a leverage buffer of tier 1 capital in an amount greater than
2 percent of its total leverage exposure would not be subject to
limitations on its distributions and discretionary bonus payments.\22\
If the BHC maintains a leverage buffer of 2 percent or less, it would
be subject to increasingly stricter limitations on such payouts. The
proposed leverage buffer would follow the same general mechanics and
structure as the capital conservation buffer contained in the 2013
revised capital approaches.\23\ The leverage buffer constraints on
distributions and discretionary bonus payments would be independent of
any constraints imposed by the capital conservation buffer or other
supervisory or regulatory measures.
---------------------------------------------------------------------------
\22\ See section 11(a)(4) of the 2013 revised capital
approaches.
\23\ See section 11(a) of the 2013 revised capital approaches.
---------------------------------------------------------------------------
In the 2013 revised capital approaches, the agencies incorporated
the 3 percent supplementary leverage ratio minimum requirement into the
PCA framework as an adequately capitalized threshold for IDIs subject
to the agencies' advanced approaches risk-based capital rules, but did
not establish an explicit well-capitalized threshold for this ratio.
Under the proposal, an IDI that is a subsidiary of a covered BHC would
be required to satisfy a 6 percent supplementary leverage ratio to be
considered well capitalized for PCA purposes. The leverage ratio
thresholds under the 2013 revised capital approaches and this proposal
are shown in Table 2.
Table 2--PCA Levels in the 2013 Revised Capital Approaches for Advanced Approaches Banking Organizations That Are IDIs and Proposed Well-Capitalized
Level for Subsidiary IDIs of Covered BHCs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed supplementary
Generally applicable Supplementary leverage ratio leverage ratio for
PCA category leverage ratio (percent) (percent) subsidiary IDIs of covered
BHCs (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized.............................................. >= 5 Not applicable >= 6.
Adequately Capitalized........................................ >= 4 >= 3 >= 3.
Undercapitalized.............................................. < 4 < 3 < 3.
Significantly Undercapitalized................................ < 3 Not applicable Not applicable.
Critically Undercapitalized................................... Tangible equity (defined as Not applicable Not applicable.
tier 1 capital plus non-tier
1 perpetual preferred stock)
to Total Assets <= 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The supplementary leverage ratio includes many off-balance sheet assets in its denominator; the generally applicable leverage ratio does not. See
the supplementary leverage ratio under section I.B. of this preamble for additional information.
Consistent with the transition provisions set forth in subpart G of
the 2013 revised capital approaches, the agencies propose to adopt the
leverage buffer for covered BHCs and the 6 percent well-capitalized
threshold for subsidiary IDIs of covered BHCs beginning on January 1,
2018.
The agencies note that by setting the minimum supplementary
leverage ratio plus leverage buffer at 5 percent for covered BHCs and
the well-capitalized
[[Page 51107]]
threshold for subsidiary IDIs of covered BHCs at 6 percent, the
proposal would be structurally consistent with the current relationship
between the generally applicable leverage ratio requirements applicable
to IDIs and BHCs under section 10 of the 2013 revised capital
approaches. Under the 2013 revised capital approaches, IDIs must
maintain a 5 percent generally applicable leverage ratio to be well
capitalized for PCA purposes, whereas BHCs must maintain a minimum 4
percent generally applicable leverage ratio under separate BHC
regulations.
Under this proposed rule, the well-capitalized supplementary
leverage ratio standard for subsidiary IDIs of covered BHCs would
become a more stringent requirement than the current 5 percent well-
capitalized standard under PCA with respect to the generally applicable
leverage ratio. Accordingly, the agencies are considering eliminating
the 5 percent well-capitalized standard for the generally applicable
leverage ratio for subsidiary IDIs of covered BHCs if the agencies
finalize the 6 percent well-capitalized threshold for the supplementary
leverage ratio as proposed.
C. Required Capital and Credit Availability
In developing this proposal, the agencies analyzed its potential
impact on the amount of capital the covered organizations would be
required to hold and, in general terms, factors relevant to the
potential effects on credit availability.
Some perspective on the potential effects of the proposed rule can
be gained by considering information obtained from the Board's
Comprehensive Capital Analysis and Review (CCAR) process in which all
of the agencies participate. This information reflects banking
organizations' own projections of their Basel III capital ratios under
the supervisory baseline scenario, including institutions' own
assumptions about earnings retention and other strategic actions. It
does not reflect supervisory views. In the 2013 CCAR, all 8 covered
BHCs met the 3 percent supplementary leverage ratio as of third quarter
2012, and almost all projected that their supplementary leverage ratios
would exceed 5 percent at year-end 2017.
If the proposed supplementary leverage ratio thresholds had been in
effect as of third quarter 2012, covered BHCs under the proposal that
did not meet a 5 percent supplementary leverage ratio would have needed
to increase their tier 1 capital by about $63 billion to meet that
ratio. The incremental capital needs associated with higher
supplementary leverage ratios need to be evaluated in the context of
the proposed 2018 effective date and institutions' efforts to build
their capital to meet Basel III requirements and for other purposes.
Given these capital-building activities, it is likely that incremental
capital needs to meet a 5 percent supplementary leverage ratio would be
significantly less as the effective date approaches than if the
requirements had been in place in September 2012. While projections and
future economic conditions are subject to considerable uncertainty,
covered BHCs' 2013 CCAR projections are currently the best available
evidence on which to base an estimate of the ultimate incremental
capital needs of the proposed rule. Based on these projections,
achieving the proposed 5 percent supplementary leverage ratio for
covered BHCs appears generally in line with current and planned capital
strengthening initiatives and within the financial capacity of these
organizations.
Because CCAR is focused on the consolidated capital of BHCs, BHCs
did not project future Basel III leverage ratios for their IDIs. To
estimate the impact of the proposal on the lead IDIs of covered BHCs,
the agencies assumed that an IDI has the same ratio of total leverage
exposure to total assets as its BHC. Using this assumption and CCAR
2013 projections, all 8 lead IDIs of covered BHCs are estimated to meet
the 3 percent supplementary leverage ratio as of third quarter 2012. If
the proposed supplementary leverage ratio thresholds had been in effect
as of third quarter 2012, the lead IDIs that did not meet a 6 percent
ratio would have needed to increase their tier 1 capital by about $89
billion to meet that ratio.\24\ The agencies believe that the CCAR
projections made by covered BHCs under the proposal in many cases
reflect similar anticipated capital trends at these BHCs' lead IDIs and
that affected IDIs under the proposal would be able to effectively
manage their capital structures to meet a 6 percent supplementary
leverage ratio at year-end 2017.
---------------------------------------------------------------------------
\24\ The $89 billion estimate was calculated by assuming that
CCAR results were proportionally applied based upon the total assets
of the lead IDI relative to the BHC.
---------------------------------------------------------------------------
In short, the agencies' assessment of the capital impact of the
proposed rule is that it would formalize and preserve a strengthening
of U.S. systemically important banking organizations' capital that is
already underway and anticipated to continue.
The agencies considered a number of broad considerations relevant
to the potential effects of the proposal on credit availability.
Roughly speaking, banking organizations fund themselves with debt and
equity, and both funding sources support lending. The agencies believe
the effect of higher banking organization capital requirements on
lending would likely depend on a number of factors. First, if the
higher capital requirement is less than the banking organization's
planned capital holdings, the higher capital requirement may not
directly affect lending. If the higher capital requirement does exceed
planned capital levels, but the increase in capital does not increase
overall funding costs (perhaps because the risk premium demanded by
counterparties is sufficiently reduced), the higher capital requirement
may not affect lending. If actual capital held increases and this
causes overall funding costs to increase, and if these costs are passed
on to borrowers, then there would likely be an increase in the cost of
credit that could affect lending, in an amount that depends on the
materiality of the increase in the cost of funding.
The proposed rule would permit covered BHCs and their IDI
subsidiaries to fund themselves more than 90 percent with debt while
still satisfying the proposed leverage thresholds. In the extreme, if
an organization had to increase its actual capital holdings by a full 3
percentage points of its total leverage exposures, corresponding to the
establishment of a 6 percent well-capitalized threshold above the 3
percent adequately-capitalized threshold, the remainder of its funding
sources would be expected to carry the same or possibly lower cost
(lower if counterparty-demanded risk premiums come down) while a small
percentage of its funding sources, in an amount equal to 3 percent of
total leverage exposure, could come at a higher cost reflecting the
replacement of debt with equity. The agencies note that to the extent
that higher capital standards increase the cost of credit and reduce
the volume of lending, this effect should be weighed against the
potential long-term benefits to the availability of credit resulting
from a better capitalized and more stable banking system that is less
prone to crises. Historically, banking crises are often followed by
long periods of diminished lending and economic growth.
III. Request for Comment
The agencies seek comment on all aspects of the proposed
strengthening of the leverage standards for covered BHCs and their
subsidiary IDIs. Comments are
[[Page 51108]]
requested about the potential advantages of the proposal in
strengthening the individual safety and soundness of these banking
organizations and the stability of the financial system. Comments are
also requested about the calibration and capital impact of the
proposal, including whether the proposal maintains an appropriately
complementary relationship between the risk-based and leverage capital
requirements, and the nature and extent of any costs to the affected
institutions or the broader economy. While the proposal references the
supplementary leverage ratio defined in the 2013 revised capital
approaches, comments are also sought about alternative definitions.
Finally, the agencies seek commenters' views about future rulemaking
efforts that should be considered for simplification or other
improvements to the agencies' regulatory capital rules generally.
Question 1: How would proposed strengthening of the supplementary
leverage ratio for covered BHCs and their subsidiary IDIs contribute to
financial stability and thus economic growth?
Question 2: Would the proposed strengthening of the leverage ratio
mitigate public-policy concerns about the regulatory treatment of
banking organizations that may pose risks to the broader economy?
Question 3: The agencies solicit commenters' views on what economic
data suggest about leverage ratios and risk-based capital ratios as
predictors of bank distress and thus tools to prevent the failure of
large systemically-important banking organizations.
Question 4: Would the proposal create any risk-reducing incentives
and around what specific activities? Would the proposal create
incentives for subject banking organizations to take additional risk
and if so, would this effect be expected to limit the safety-and-
soundness benefits of the proposal?
Question 5: What are commenters' views on the proposed calibration
of the leverage standards? Is the proposed 6 percent well-capitalized
standard for subsidiary IDIs and the proposed 5 percent minimum
supplementary leverage ratio plus leverage buffer for covered BHCs
appropriate or should these requirements be higher or lower? In
particular with regard to covered BHCs, what are the advantages and
disadvantages of establishing the minimum supplementary leverage ratio
plus leverage buffer at 5 percent for all covered BHC's versus
establishing the amount between 4 and 5.5 percent according to each
covered BHC's risk-based capital surcharge (that is, to reflect the
minimum supplementary leverage ratio of 3 percent plus between 1 and
2.5 percent depending upon each covered BHC's risk-based capital
surcharge)? With respect to the subsidiary IDIs of covered BHCs, the
agencies seek commenters' views on what, if any, specific challenges
these institutions would face in meeting the proposed well-capitalized
threshold of 6 percent beginning on January 1, 2018.
Question 6: The agencies solicit commenters' views on whether a
strengthened leverage ratio requirement would enhance the competitive
position of U.S. banking organizations relative to foreign banking
organizations by enhancing the relative safety of the U.S. banking
system. Alternatively, could the proposed strengthened leverage ratio
requirement place U.S. banking organizations at a competitive
disadvantage relative to foreign banking organizations and if so, in
what areas?
Question 7: How would this proposal affect counterparty incentives
and behavior?
Question 8: The agencies seek commenters' views on the
macroeconomic implications of the proposal, particularly the potential
effects the proposal could have on the allocation of credit and the
volume of lending. For example, could a strengthened leverage ratio
requirement as proposed cause a shift in favor of lending to
individuals and businesses as opposed to markets- based activity by
banking organizations? If covered BHCs were better capitalized as a
group, to what extent would this improve their ability to serve as a
source of credit to the economy during periods of economic stress?
Conversely, to what extent would the proposal create incentives for
banking organizations to shrink or otherwise modify their activities?
Question 9: What are the incremental costs to banking organizations
of the proposed rule compared to the costs of currently anticipated and
planned capitalization initiatives?
Question 10: The agencies are interested in comment on the
appropriate measure of capital that should be used as the numerator of
the supplementary leverage ratio. Among the many measures of capital
used by banks, regulators and the market, the agencies considered the
following measures: (1) Common equity tier 1 capital, (2) tier 1
capital, (3) total capital, and (4) tangible equity (as these terms are
defined in the agencies' capital regulations as of the date of the
issuance of this proposed rule, including the 2013 revised capital
approaches). What are the advantages and disadvantages of each of these
as well as alternative measures?
Question 11: What, if any, alternatives to the definition of total
leverage exposure should be considered and why?
Question 12: In light of the proposed enhanced leverage requirement
and ongoing standardized risk-based capital floors, should the agencies
consider, in some future regulatory action, simplifying or eliminating
portions of the advanced approaches rule if they are unnecessary or
duplicative? Are there opportunities to simplify the standardized risk-
based capital framework that would be consistent with safety and
soundness or other policy objectives?
Question 13: The proposed scope of application is U.S. top-tier
BHCs with more than $700 billion in total assets or more than $10
trillion in assets under custody and their subsidiary IDIs. Should the
proposed requirements also be applied to other advanced approaches
banking organizations? Why or why not? Should all IDI subsidiaries of a
covered BHC be subject to the proposed well-capitalized standard, and
if not, why? Please provide specific factors and the associated
rationale the agencies should consider in establishing any exemption
from the proposed well-capitalized standard.
IV. Regulatory Analysis:
A. Paperwork Reduction Act (PRA)
There is no new collection of information pursuant to the PRA (44
U.S.C. 3501 et seq.) contained in this proposed rule.
B. Regulatory Flexibility Act Analysis
OCC
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency to provide an initial regulatory flexibility
analysis (IRFA) with a proposed rule or to certify that the rule will
not have a significant economic impact on a substantial number of small
entities (defined for purposes of the RFA to include banking entities
with total assets of $175 million or less, and, after July 22, 2013,
total assets of $500 million or less).
As described in sections I. and II. of this preamble, the proposal
would strengthen the supplementary leverage ratio standards for U.S.
top-tier bank holding companies with total assets of more than $700
billion or assets under custody of more than $10 trillion and their IDI
subsidiaries. Using the Small Business Administration's (SBA) recently
issued size standards, as of
[[Page 51109]]
December 31, 2012, the OCC supervised approximately 1,291 small
entities.\25\ Because the proposed rule only applies to large
internationally active banks, it does not impact any OCC-supervised
small entities. Therefore, the OCC does not believe that the proposed
rule will result in a significant economic impact on a substantial
number of small entities under its supervisory jurisdiction.
---------------------------------------------------------------------------
\25\ The OCC based the estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which as of July 21, 2013 will be
$500 million and $35.5 million, respectively. Consistent with the
General Principles of Affiliation, 13 CFR 121.103(a), the OCC counts
the assets of affiliated financial institutions when determining
whether to classify a banking organization as a ``small entity'' for
the purposes of the Regulatory Flexibility Act. The OCC used
December 31, 2012, to determine size because the SBA has provided
that a ``financial institution's assets are determined by averaging
the assets reported on its four quarterly financial statements for
the preceding year.'' See, footnote 8 to the SBA's Table of Size
Standards.
---------------------------------------------------------------------------
The OCC certifies that the proposed rule would not have a
significant economic impact on a substantial number of small national
banks and small Federal savings associations.
Board
The Board is providing an initial regulatory flexibility analysis
with respect to this proposed rule. As discussed above, this proposed
rule is designed to enhance the safety and soundness of U.S. top-tier
bank holding companies with at least $700 billion in consolidated
assets or at least $10 trillion in assets under custody (covered BHCs),
and the IDI subsidiaries of covered BHCs. Under regulations issued by
the SBA, a small entity includes a depository institution, bank holding
company, or savings and loan holding company with total assets of $500
million or less (a small banking organization).\26\ As of March 31,
2013, there were approximately 636 small state member banks. As of
December 31, 2012, there were approximately 3,802 small bank holding
companies.\27\
---------------------------------------------------------------------------
\26\ See 13 CFR 121.201. Effective July 22, 2013, the SBA
revised the size standards for banking organizations to $500 million
in assets from $175 million in assets. 78 FR 37409 (June 20, 2013).
\27\ Under the prior SBA threshold of $175 million in assets, as
of March 31, 2013 the Board supervised approximately 369 small state
member banks. As of December 31, 2012, there were approximately
2,259 small bank holding companies.
---------------------------------------------------------------------------
The proposal would apply only to very large bank holding companies
and their IDI subsidiaries. Currently, no small top-tier bank holding
company would meet the threshold criteria provided in this NPR, so
there would be no additional projected compliance requirements imposed
on small bank holding companies. One covered bank holding company has
one small state member bank subsidiary, which would be covered by this
proposal. The Board expects that this entity would rely on its parent
banking organization for compliance and would not bear additional
costs. The Board is aware of no other Federal rules that duplicate,
overlap, or conflict with the proposed rule. The Board believes that
the proposed rule will not have a significant economic impact on small
banking organizations supervised by the Board and therefore believes
that there are no significant alternatives to the proposed rule that
would reduce the economic impact on small banking organizations
supervised by the Board.
The Board welcomes comment on all aspects of its analysis. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
FDIC
The RFA requires an agency to provide an IRFA with a proposed rule
or to certify that the rule will not have a significant economic impact
on a substantial number of small entities (defined for purposes of the
RFA to include banking entities with total assets of $175 million or
less, and, after July 22, 2013, total assets of $500 million or
less).\28\
---------------------------------------------------------------------------
\28\ Effective July 22, 2013, the SBA revised the size standards
for banking organizations to $500 million in assets from $175
million in assets. 78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
As described in sections I. and II. of this preamble, the proposal
would strengthen the supplementary leverage ratio standards for U.S.
top-tier bank holding companies with total assets of more than $700
billion or assets under custody of more than $10 trillion and their
IDIs subsidiaries. As of March 31, 2013, based on a $175 million
threshold, 1 (out of 2,453) small state nonmember bank and no (out of
159) small state savings associations were subsidiaries of a covered
BHC. As of March 31, 2013, based on a $500 million threshold, 2 (out of
3,398) small state nonmember banks and no (out of 316) small state
savings associations were subsidiaries of a covered BHC. Therefore, the
FDIC does not believe that the proposed rule will result in a
significant economic impact on a substantial number of small entities
under its supervisory jurisdiction.
The FDIC certifies that the NPR would not have a significant
economic impact on a substantial number of small FDIC-supervised
institutions.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 (UMRA) requires federal
agencies to prepare a budgetary impact statement before promulgating a
rule that includes a federal mandate that may result in the expenditure
by state, local, and tribal governments, in the aggregate, or by the
private sector of $100 million or more (adjusted annually for
inflation) in any one year. The current inflation-adjusted expenditure
threshold is $141 million. If a budgetary impact statement is required,
section 205 of the UMRA also requires an agency to identify and
consider a reasonable number of regulatory alternatives before
promulgating a rule.
In conducting the regulatory analysis, UMRA requires each federal
agency to provide:
The text of the draft regulatory action, together with a
reasonably detailed description of the need for the regulatory action
and an explanation of how the regulatory action will meet that need;
An assessment of the potential costs and benefits of the
regulatory action, including an explanation of the manner in which the
regulatory action is consistent with a statutory mandate and, to the
extent permitted by law, promotes the President's priorities and avoids
undue interference with State, local, and tribal governments in the
exercise of their governmental functions;
An assessment, including the underlying analysis, of
benefits anticipated from the regulatory action (such as, but not
limited to, the promotion of the efficient functioning of the economy
and private markets, the enhancement of health and safety, the
protection of the natural environment, and the elimination or reduction
of discrimination or bias) together with, to the extent feasible, a
quantification of those benefits;
An assessment, including the underlying analysis, of costs
anticipated from the regulatory action (such as, but not limited to,
the direct cost both to the government in administering the regulation
and to businesses and others in complying with the regulation, and any
adverse effects on the efficient functioning of the economy, private
markets (including productivity, employment, and competitiveness),
health, safety, and the natural environment), together with, to the
extent feasible, a quantification of those costs;
An assessment, including the underlying analysis, of costs
and benefits of potentially effective and
[[Page 51110]]
reasonably feasible alternatives to the planned regulation, identified
by the agencies or the public (including improving the current
regulation and reasonably viable non-regulatory actions), and an
explanation why the planned regulatory action is preferable to the
identified potential alternatives;
An estimate of any disproportionate budgetary effects of
the federal mandate upon any particular regions of the nation or
particular State, local, or tribal governments, urban or rural or other
types of communities, or particular segments of the private sector; and
An estimate of the effect the rulemaking action may have
on the national economy, if the OCC determines that such estimates are
reasonably feasible and that such effect is relevant and material.
Need for Regulatory Action
For the reasons set forth in the Supplementary Information section,
the agencies are proposing to strengthen the agencies' leverage ratio
standards for large, interconnected U.S. banking organizations. The
agencies believe that the maintenance of a strong base of capital at
the largest and most systemically important institutions is
particularly important because capital shortfalls at these institutions
can contribute to systemic distress and can have material adverse
economic effects. Further, higher capital standards for these
institutions would place additional private capital at risk before the
federal deposit insurance fund and the federal government's resolution
mechanisms would be called upon, and reduce the likelihood of economic
disruptions caused by problems at these institutions.
The Proposed Rule
The proposed rule would require the covered banking organizations
to maintain higher supplementary leverage ratios. The supplementary
leverage ratio is the ratio of tier 1 capital to total leverage
exposure, where total leverage exposure is the sum of (1) on-balance
sheet assets less amounts deducted from tier 1 capital, (2) potential
future exposure from derivative contracts, (3) ten percent of the
bank's notional amount of unconditionally cancellable commitments, and
(4) the notional amount of all other off-balance sheet exposures except
securities lending, securities borrowing, reverse repurchase
transactions, derivatives, and unconditionally cancellable commitments.
The regulatory metric will be the mean of the supplementary leverage
ratios calculated as of the last day of each month in the reporting
quarter. For instance, the supplementary leverage ratio (SLR)
calculated when the 2013 revised capital approaches go into effect on
January 1, 2018, will be as follows:
[GRAPHIC] [TIFF OMITTED] TP20AU13.072
The SLR, which captures off-balance sheet and on-balance sheet
assets in the denominator, would supplement the current U.S. leverage
ratio, which is the ratio of tier 1 capital to on-balance sheet assets.
The U.S. leverage ratio applies to all national banks and federal
savings associations, and must be at least four percent for an
institution to be ``adequately capitalized'' and five percent to be
``well capitalized'' under the OCC's prompt corrective action
regulations.\29\ The proposed rule would set a six percent SLR
threshold for IDIs to be well-capitalized.\30\
---------------------------------------------------------------------------
\29\ 12 CFR part 6.
\30\ Given the usual fluctuations in capital and assets, well-
capitalized banks would, in particular, hold their SLR at least
slightly above the six percent threshold level.
---------------------------------------------------------------------------
The following table shows the transition table for leverage ratio
requirements. The last row of the table indicates the proposed
supplemental leverage ratio.
Transition Schedule for Leverage Requirements
[In Percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
PCA
Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, --------------------
2014 2015 2016 2017 2018 2019 Adq. Well
--------------------------------------------------------------------------------------------------------------------------------------------------------
Applies to All Banks:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Minimum Common Equity + Conservation Buffer.................. 4.0 4.5 5.125 5.75 6.375 7.0 4.5 6.5
Minimum Tier 1 + Conservation Buffer......................... 5.5 6.0 6.625 7.25 7.875 8.5 6 8
Minimum Total Capital + Conservation Buffer.................. 8.0 8.0 8.625 9.25 9.875 10.5 8 10
U. S. Leverage Ratio......................................... 4.0 4.0 4.0 4.0 4.0 4.0 4 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Advanced Approaches Banks:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maximum Countercyclical Buffer............................... ......... ......... 0.625 1.25 1.875 2.5 ........ .........
Basel III Supplemental Leverage Ratio........................ ......... Start to ......... ......... 3.0 3.0 ........ .........
Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. Banking Organizations with $700 billion in total assets or $10 trillion in custody assets
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Rule Supplemental Basel III Leverage Ratio for Well ......... ......... ......... ......... 6 6 3 6
Capitalized Banks...........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 51111]]
Institutions Affected by the Proposed Rule
The proposed rule currently would apply to eight U.S. banking
organizations, which have at least $700 billion in consolidated assets
or at least $10 trillion in assets under custody. These thresholds
capture the eight U.S. bank holding companies that the Financial
Stability Board designated as G-SIBs on November 1, 2012.\31\ Of the
eight U.S. bank holding companies that would be subject to the rule,
six have subsidiary IDIs that are supervised by the OCC.
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\31\ To measure custody assets, the OCC used custody and
safekeeping accounts non-managed assets (RCFDB898) from Call Report
Schedule RC-T: Fiduciary and Related Services.
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Estimated Costs and Benefits of the Proposed Rule
The proposed rule could affect costs in two ways: (1) the cost of
the additional capital institutions will need to meet the higher
minimum leverage ratio, and (2) potential spillover costs into various
markets for bank products and economic growth in general. Under the
2013 revised capital approaches, all advanced approach banks must
compute a supplementary leverage ratio. Therefore, the OCC estimates
that there are no additional compliance costs associated with
establishing systems to determine the proposed supplementary leverage
ratio.
Benefits of the Proposed Rule
The proposed rule would produce the following benefits:
It would increase the amount of loss absorbing capital
held by covered BHCs and their IDI subsidiaries.
Consequently, it would increase the likelihood that loss
absorbing capital in the U.S. banking system will dampen negative
economic shocks as they pass through the U.S. financial system, thereby
diminishing the negative effect of the shock on growth in the broader
U.S. and global economies.
It would help mitigate the threat to financial stability
posed by systemically important financial companies.
It places additional private capital ahead of the deposit
insurance fund and the federal government's resolution mechanisms.
It offsets possible funding cost advantages that some
institutions may enjoy as a result of real or perceived implicit
federal support.
Costs of the Proposed Rule
To estimate the impact of the proposed rule on bank capital
requirements, the OCC estimated the amount of additional tier 1 capital
banks will need to meet the six percent supplementary leverage ratio
relative to the amount of tier 1 capital currently reported. To
estimate new capital ratios and requirements, the OCC used data from a
quantitative impact study (QIS) from the fourth quarter of 2012 and
data from the Board's most recent Comprehensive Capital Analysis and
Review (CCAR) program. These data collection exercises gather holding
company data.
The estimates based on QIS data are likely to be conservative. They
include denominator elements that are relevant internationally but that
are not part of the domestic rule. Their inclusion for the purposes of
this analysis along with the CCAR data generates a range of cost
estimates.
To estimate the effect of the proposed rule on IDIs, the OCC
adjusted bank-level Call Report data by applying scalars created by
comparing QIS and CCAR holding company data to Y9 data. In particular,
the adjustment factor for each IDI's reported tier 1 capital is equal
to the ratio of the holding company's Basel III tier 1 capital reported
in the QIS and CCAR to the holding company's tier 1 capital reported in
Y9 data. Similarly, the adjustment factor for each IDI's reported
average assets for leverage ratio purposes is equal to the ratio of the
holding company's Basel III leverage exposure reported in the QIS or
CCAR to the holding company's average assets for leverage ratio
purposes reported in Y9 data. In effect, this approach assumes (1) that
the ratio of tier 1 capital as determined under the 2013 revised
capital approaches to tier 1 capital determined under previous rules is
the same at the bank and the bank holding company, and (2) that the
ratio of the denominator of the supplemental leverage ratio to the
denominator of the leverage ratio is the same at the bank and the bank
holding company.
The following tables show the OCC's estimates, using QIS and CCAR
data, of the total shortfall in tier 1 capital at various levels of the
supplementary leverage ratio for the six covered BHCs that control OCC-
regulated IDIs. As the tables show, at the five percent supplementary
leverage ratio for holding companies, QIS and CCAR data suggest that
the capital shortfall will range between $63 billion and $113
billion.\32\ After making the scalar adjustments to estimate IDI data,
at the six percent supplementary leverage ratio for IDIs, QIS and CCAR
data suggest that the bank-level capital shortfall will range between
$84 billion and $123 billion.
---------------------------------------------------------------------------
\32\ Because the 2013 revised capital approaches require
advanced approaches banks to maintain a minimum supplementary
leverage ratio of at least 3 percent, and all covered BHCs are
advanced approaches banks, the OCC estimates the capital shortfall
related to the proposed rule as the difference between the leverage
ratio threshold shown and any shortfall at the 3 percent ratio. With
QIS data, there is a shortfall at the three percent ratio of
approximately $5 billion. Thus, the shortfall shown is approximately
$5 billion less than the actual shortfall. There is no adjustment
with CCAR data as this data shows no shortfall at the three percent
threshold.
---------------------------------------------------------------------------
To estimate the cost to IDIs of additional capital associated with
the proposed supplemental leverage ratio requirement, the OCC examined
the effect of this requirement on capital structure and the overall
cost of capital. \33\ The cost of financing a bank or any firm is the
weighted average cost of its various financing sources, which amounts
to a weighted average cost of capital reflecting many different types
of debt and equity financing. Because interest payments on debt are tax
deductible, a more leveraged capital structure reduces corporate taxes,
thereby lowering funding costs, and the weighted average cost of
financing tends to decline as leverage increases. Thus, an increase in
required equity capital would require a bank to deleverage and--all
else equal--would increase the cost of capital for that bank.
---------------------------------------------------------------------------
\33\ See, Merton H. Miller, (1995), ``Do the M & M propositions
apply to banks?'' Journal of Banking & Finance, Vol. 19, pp. 483-
489.
---------------------------------------------------------------------------
This increased cost would be tax benefits foregone: the additional
capital requirement (between $84 billion and $123 billion), multiplied
by the interest rate on the debt displaced and by the effective
marginal tax rate for the banks affected by the proposed rule. The
effective marginal corporate tax rate is affected not only by the
statutory federal and state rates, but also by the probability of
positive earnings (since there is no tax benefit when earnings are
negative), and the offsetting effects of personal taxes on required
bond yields. Graham (2000) considers these factors and estimates a
median marginal tax benefit of $9.40 per $100 of interest. So, using an
estimated interest rate on debt of 6 percent, the OCC estimates that
the annual tax benefits foregone on between $84 billion and $123
billion of capital switching from debt to equity is between $474
million and $694 million per year ($474 million = $84 billion * 0.06
(interest rate) * 0.094 (median marginal tax savings)).\34\
---------------------------------------------------------------------------
\34\ See, John R. Graham, (2000), ``How Big Are the Tax Benefits
of Debt?'' Journal of Finance, Vol. 55, No. 5, pp. 1901-1941. Graham
points out that ignoring the offsetting effects of personal taxes
would increase the median marginal tax rate to $31.5 per $100 of
interest.
---------------------------------------------------------------------------
[[Page 51112]]
The OCC does not anticipate any additional compliance costs for
banks or costs to the agencies. Thus, the overall cost estimate for
OCC-regulated banking organizations under the proposed rule is between
$474 million and $694 million per year.
Potential Costs
In addition to costs associated with increasing minimum capital
levels, the proposed rule could affect competition, and it could have
some effect on lending and other bank activities.
Because the proposed rule would not take effect until January 1,
2018, institutions subject to the proposed rule would have roughly four
years to accumulate the additional capital needed to meet the new
requirements. In most instances, this transition period should allow
for institutions to adjust smoothly to the proposed requirements,
should they become final in their current form, without disruption to
bank lending and other banking activities.
The proposed rule would strengthen the capital position of covered
U.S. banking organizations. If other foreign and domestic banks did not
follow suit, the market share of these covered institutions might
conceivably expand because they might be relatively well-positioned to
invest and make acquisitions, especially in a downturn.
However, the direct effect of the proposed rule on competition is
more likely to be to reduce the market share of the covered
institutions. If they met with any difficulty in accumulating or
raising additional tier 1 capital, then they would have to decrease the
size of their supplementary leverage ratio denominator to meet the new
standards. Such an adjustment to the denominator could affect on-
balance sheet assets, exposure to derivative contracts, or commitments
and other off-balance sheet exposures.\35\ Should such an adjustment to
the denominator be necessary at one or more institutions affected by
the proposed rule, it is likely that another unrestricted financial
institution would provide these products or services, which could
mitigate any associated disruption to financial markets in general.
---------------------------------------------------------------------------
\35\ Affected banking organizations do have some potential for
lost revenue should they elect to shed assets as part of their
strategy to meet the new minimum supplementary leverage ratio
requirement.
---------------------------------------------------------------------------
This potential shift in banking activities away from institutions
affected by the proposed rule, while not likely, does highlight the
potential for the proposed rule to have some effect on competition,
both foreign and domestic. Again, should affected banking organizations
need to contract their banking activities in order to meet the new
supplementary leverage ratio, foreign-owned G-SIBs or other large U.S.
banking organizations would likely expand to take their place.. The
proposed rule is not likely to have an adverse effect on financial
markets generally, but it could affect the competitive standing of
particular institutions.
U.S. Banking Organizations With OCC-Regulated IDIs Short of the Supplementary Leverage Ratio, QIS Data, December
31, 2012
[$ in thousands]
----------------------------------------------------------------------------------------------------------------
Annual cost of
BHC Tier 1 Proposed rule BHC capital for
Supplementary leverage ratio capital shortfall marginal marginal
shortfall shortfall
----------------------------------------------------------------------------------------------------------------
3%..................................................... $5,137,830 $0 $0
4%..................................................... 21,786,760 16,648,930 93,900
5%..................................................... 118,503,000 113,365,170 639,380
6%..................................................... 235,270,200 230,132,370 1,297,947
7%..................................................... 361,547,477 356,409,647 2,010,150
8%..................................................... 497,877,831 492,740,001 2,779,054
9%..................................................... 634,208,185 629,070,355 3,547,957
----------------------------------------------------------------------------------------------------------------
U.S. Banking Organizations With OCC-Regulated IDIs Short of the Supplementary Leverage Ratio, CCAR Data,
September 30, 2012
[$ in thousands]
----------------------------------------------------------------------------------------------------------------
Annual cost of
BHC Tier 1 Proposed rule BHC capital for
Supplementary leverage ratio capital shortfall marginal marginal
shortfall shortfall
----------------------------------------------------------------------------------------------------------------
3%..................................................... $0 $0 $0
4%..................................................... 7,528,091 7,528,091 42,458
5%..................................................... 62,722,407 62,722,407 353,754
6%..................................................... 167,020,534 167,020,534 941,996
7%..................................................... 281,777,638 281,777,638 1,589,226
8%..................................................... 405,078,110 405,078,110 2,284,641
9%..................................................... 528,378,583 528,378,583 2,980,055
----------------------------------------------------------------------------------------------------------------
Comparison Between the Proposed Rule and the Baseline
Under the baseline scenario, minimum supplementary leverage
requirements set forth in the 2013 revised capital approaches would
continue to take effect. Thus, under the baseline, the minimum
supplementary leverage ratio requirement of three percent would take
effect, and the only costs associated with the supplemental leverage
ratio requirement would be those related to the 2013 revised capital
approaches.\36\ Under the baseline, however, there would also be no
added
[[Page 51113]]
benefits stemming from the protection provided by additional tier 1
capital.
---------------------------------------------------------------------------
\36\ The OCC estimates this cost to be between zero and $29
million.
---------------------------------------------------------------------------
Comparison Between the Proposed Rule and Alternatives
The above tables provide several alternative scenarios for varying
requirements of the supplementary leverage ratio. As these tables
suggest, increasing the supplementary leverage ratio increases the
total amount of additional tier 1 capital required and the
corresponding cost of the proposal. Similarly, decreasing the total
asset and total custody asset size thresholds that determine
applicability of the proposed rule would capture a larger number of
institutions, and would thereby increase the capital costs of the
proposed rule. Increasing the total asset and total custody asset size
thresholds capture a smaller number of institutions, and would thereby
decrease the costs of the proposed rule. The benefits from additional
protection provided by the additional tier 1 capital would also
increase with the supplementary leverage ratio. While the optimal
leverage ratio is the subject of some debate, the BCBS selected 3
percent as a test minimum during the parallel run period between
January 1, 2013, and January 1, 2017. During the parallel run period,
the BCBS will assess whether the leverage ratio definition and
regulatory minimum are appropriate. The agencies have indicated in the
proposed rule that they will review any modifications to the Basel III
leverage ratio made by the BCBS.
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the proposed rule in a simple and straightforward manner, and invite
comment on the use of plain language. 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 this section format adequate? If not, which of the
sections should be changed and how?
What other changes can the agencies incorporate to make
the regulation easier to understand?
End of the Common Preamble.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 5
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements, Securities.
12 CFR Part 6
National banks.
12 CFR Part 165
Administrative practice and procedure, Savings associations.
12 CFR Part 167
Capital, Reporting and recordkeeping requirements, Risk, Savings
associations.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Risk.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble and under the
authority of 12 U.S.C. 93a, 1831o, and 5412(b)(2)(B), the Office of the
Comptroller of the Currency proposes to amend part 6 of chapter I of
title 12, Code of Federal Regulations as follows:
PART 6--PROMPT CORRECTIVE ACTION
0
1. Revise the authority of part 6 to read as follows:
Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).
0
2. In Sec. 6.4, remove and reserve paragraphs (a) and (b) and revise
paragraph (c) to read as follows:
Sec. 6.4 Capital measures and capital category definition.
* * * * *
(c) Capital categories applicable on and after January 1, 2015. On
January 1, 2015, and thereafter, for purposes of the provisions of
section 38 and this part, a national bank or Federal savings
association shall be deemed to be:
(1) Well capitalized if:
(i) [Reserved]
(ii) [Reserved]
(iii) [Reserved]
(iv) Leverage Measure:
(A) The national bank or Federal savings association has a leverage
ratio of 5.0 percent or greater; and
(B) With respect to a national bank or Federal savings association
that is a subsidiary of a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statement for Bank Holding Companies
(FR Y-9C) or more than $10 trillion in assets under custody as reported
on the company's most recent Banking Organization Systemic Risk Report
(Y-15), on January 1, 2018 and thereafter, the national bank or Federal
savings association has a supplementary leverage ratio of 6.0 percent
or greater; and
(v) [Reserved]
(2) [Reserved]
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, chapter II of
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
3. The authority citation for part 208 is revised to read as follows:
[[Page 51114]]
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x,
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371;
15 U.S.C. 78b, 78I(b), 781(i), 780-4(c)(5), 78q, 78q-1, and 78w,
1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106 and 4128.
0
4. In Sec. 208.41, remove the alphabetical paragraph designations and
arrange definitions in alphabetical order and add in alphabetical order
a definition of ``covered BHC'' to read as follows:
Sec. 208.41 Definitions for purposes of this subpart.
* * * * *
Covered BHC means a covered BHC as defined in Sec. 217.2 of
Regulation Q (12 CFR 217.2).
* * * * *
0
5. Revise Sec. 208.43 to read as follows:
Sec. 208.43 Capital measures and capital category definitions.
(a) Capital measures.
(1) [Reserved]
(2) Capital measures applicable after January 1, 2015. On January
1, 2015, and thereafter, for purposes of section 38 and this subpart,
the relevant capital measures are:
(i) [Reserved]
(ii) [Reserved]
(iii) [Reserved]
(iv) Leverage Measure:
(A) [Reserved]
(B) [Reserved]
(C) With respect to any bank that is a subsidiary (as defined in
Sec. 217.2 of Regulation Q (12 CFR 217.2)) of a covered BHC, on
January 1, 2018, and thereafter, the supplementary leverage ratio.
(b) [Reserved]
(c) Capital categories applicable to advanced approaches banks and
to all member banks on and after January 1, 2015. On January 1, 2015,
and thereafter, for purposes of section 38 and this subpart, a member
bank is deemed to be:
(1) ``Well capitalized'' if:
(i) [Reserved]
(ii) [Reserved]
(iii) [Reserved]
(iv) Leverage Measure:
(A) The bank has a leverage ratio of 5.0 percent or greater; and
(B) Beginning on January 1, 2018, with respect to any bank that is
a subsidiary of a covered BHC under the definition of ``subsidiary'' in
section 2 of part 217 (12 CFR 217.2), the bank has a supplementary
leverage ratio of 6.0 percent or greater; and
(v) [Reserved]
(2) [Reserved]
6. Add part 217 to read as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
Sec.
Subpart A--General Provisions
217.1 Purpose, applicability, reservations of authority, and timing.
217.2 Definitions.
Subpart B--Capital Ratio Requirements and Buffers
217.11 Capital conservation buffer and countercyclical capital
buffer amount.
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5371.
Subpart A--General Provisions
Sec. 217.1 Purpose, applicability, reservations of authority, and
timing.
(a) [Reserved]
(b) [Reserved]
(c) [Reserved]
(d) [Reserved]
(e) [Reserved]
(f) Timing. (1) Subject to the transition provisions in subpart G
of this part, an advanced approaches Board-regulated institution that
is not a savings and loan holding company must:
(i) [Reserved]
(ii) [Reserved]
(iii) Beginning on January 1, 2014, calculate and maintain minimum
capital ratios in accordance with subparts A, B, and C of this part,
provided, however, that such Board-regulated institution must:
(A) [Reserved]
(B) [Reserved]
(C) Beginning January 1, 2018, a covered BHC as defined in Sec.
217.2 is subject to the lower of the maximum payout amount as
determined under paragraph (a)(2)(ii) of Sec. 217.11 and the maximum
leverage payout amount as determined under paragraph (c)(3) of Sec.
217.11.
Sec. 217.2 Definitions.
Covered BHC means a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statement for Bank Holding Companies
(FR Y-9C) or more than $10 trillion in assets under custody as reported
on the company's most recent Banking Organization Systemic Risk Report
(FR Y-15).
Subpart B--Capital Ratio Requirements and Buffers
Sec. 217.11 Capital conservation buffer and countercyclical capital
buffer amount.
(a) Capital conservation buffer.
(1) [Reserved]
(2) Definitions. For purposes of this section, the following
definitions apply:
(i) [Reserved]
(ii) [Reserved]
(iii) [Reserved]
(iv) [Reserved]
(v) Maximum leverage payout ratio. The maximum leverage payout
ratio is the percentage of eligible retained income that a covered BHC
can pay out in the form of distributions and discretionary bonus
payments during the current calendar quarter. The maximum leverage
payout ratio is based on the covered BHC's leverage buffer, calculated
as of the last day of the previous calendar quarter, as set forth in
Table 2.
(vi) Maximum leverage payout amount. A covered BHC's maximum
leverage payout amount for the current calendar quarter is equal to the
covered BHC's eligible retained income, multiplied by the applicable
maximum leverage payout ratio, as set forth in Table 2.
(3) [Reserved]
(4) Limits on distributions and discretionary bonus payments.
(i) [Reserved]
(ii) A Board-regulated institution that has a capital conservation
buffer that is greater than 2.5 percent plus 100 percent of its
applicable countercyclical capital buffer, in accordance with paragraph
(b) of this section, and, if applicable, that has a leverage buffer
that is greater than 2.0 percent, in accordance with paragraph (c) of
this section, is not subject to a maximum leverage payout amount under
this section.
(iii) Negative eligible retained income. Except as provided in
paragraph (a)(4)(iv) of this section, a Board-regulated institution may
not make distributions or discretionary bonus payments during the
current calendar quarter if the Board-regulated institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent, or, if
applicable, leverage buffer was less than 2.0 percent, as of the end of
the previous calendar quarter.
(iv) [Reserved]
(v) [Reserved]
(b) [Reserved]
(c) Leverage buffer. (1) General. A covered BHC is subject to the
lower of
[[Page 51115]]
the maximum payout amount as determined under paragraph (a)(2)(ii) of
this section and the maximum leverage payout amount as determined under
paragraph (a)(2)(vi) of this section.
(2) Composition of the leverage buffer. The leverage buffer is
composed solely of tier 1 capital.
(3) Calculation of leverage buffer. (i) A covered BHC's leverage
buffer is equal to the covered BHC's supplementary leverage ratio minus
3 percent, calculated as of the last day of the previous calendar
quarter based on the covered BHC's most recent Consolidated Financial
Statement for Bank Holding Companies (FR Y-9C).
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the
covered BHC's supplementary leverage ratio is less than or equal to 3
percent, the covered BHC's leverage buffer is zero.
Table 2 to Sec. 217.11--Calculation of Maximum Leverage Payout Amount
------------------------------------------------------------------------
Maximum leverage payout ratio (as a
Leverage buffer percentage of eligible retained
income)
------------------------------------------------------------------------
Greater than 2.0 percent......... No payout ratio limitation applies.
Less than or equal to 2.0 60 percent.
percent, and greater than 1.5
percent.
Less than or equal to 1.5 40 percent.
percent, and greater than 1.0
percent.
Less than or equal to 1.0 20 percent.
percent, and greater than 0.5
percent.
Less than or equal to 0.5 percent 0 percent.
------------------------------------------------------------------------
Federal Deposit Insurance Corporation
12 CFR chapter III
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to add part 324 of chapter III of Title
12, Code of Federal Regulations to read as follows:
PART 324--CAPITAL ADEQUACY
Sec.
Subparts A-G [Reserved]
Subpart H--Prompt Corrective Action
324.403 Capital measures and capital category definitions.
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
Subparts A-G [Reserved]
Subpart H--Prompt Corrective Action
Sec. 324.403 Capital measures and capital category definitions.
(a) [Reserved]
(b) Capital categories. For purposes of section 38 of the FDI Act
and this subpart, an FDIC-supervised institution shall be deemed to be:
(1) ``Well capitalized'' if it:
(i) [Reserved]
(ii) [Reserved]
(iii) [Reserved]
(iv) [Reserved]
(v) Beginning on January 1, 2018 and thereafter, an FDIC-supervised
institution that is a subsidiary of a covered BHC will be deemed to be
``well capitalized'' if the FDIC-supervised institution satisfies
paragraphs (b)(1)(i)-(iv) of this paragraph and has a supplementary
leverage ratio of 6.0 percent or greater. For purposes of this
paragraph, a covered BHC means a U.S. top-tier bank holding company
with more than $700 billion in total assets as reported on the
company's most recent Consolidated Financial Statement for Bank Holding
Companies (FR Y-9C) or more than $10 trillion in assets under custody
as reported on the company's most recent Banking Organization Systemic
Risk Report (FR Y-15); and
(vi) [Reserved]
(2) [Reserved]
Dated: July 9, 2013.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 8, 2013.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 9th day of July, 2013.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2013-20143 Filed 8-19-13; 8:45 am]
BILLING CODE P