[Federal Register Volume 84, Number 219 (Wednesday, November 13, 2019)]
[Rules and Regulations]
[Pages 61776-61804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23472]
[[Page 61775]]
Vol. 84
Wednesday,
No. 219
November 13, 2019
Part III
Department of Treasury
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Office of the Comptroller of the Currency
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12 CFR Parts 1, 3, 5, 6, et al.
Federal Reserve System
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12 CFR Parts 206, 208, 211, 215, et al.
Federal Deposit Insurance Corporation
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12 CFR Parts 303, 324, 337, 347, et al.
Regulatory Capital Rules; Final Rules
Federal Register / Vol. 84 , No. 219 / Wednesday, November 13, 2019 /
Rules and Regulations
[[Page 61776]]
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 3, 5, 6, 23, 24, 32, 34, 160, and 192
[Docket ID OCC-2018-0040]
RIN 1557-AE59
FEDERAL RESERVE SYSTEM
12 CFR Parts 206, 208, 211, 215, 217, 223, 225, 238, and 251
[Regulation Q; Docket No. R-1638]
RIN 7100-AF 29
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 324, 337, 347, 362, 365, and 390
RIN 3064-AE91
Regulatory Capital Rule: Capital Simplification for Qualifying
Community Banking Organizations
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: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation (collectively, the agencies) are adopting a final
rule that provides for a simple measure of capital adequacy for certain
community banking organizations, consistent with section 201 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act (final
rule). Under the final rule, depository institutions and depository
institution holding companies that have less than $10 billion in total
consolidated assets and meet other qualifying criteria, including a
leverage ratio (equal to tier 1 capital divided by average total
consolidated assets) of greater than 9 percent, will be eligible to opt
into the community bank leverage ratio framework (qualifying community
banking organizations). Qualifying community banking organizations that
elect to use the community bank leverage ratio framework and that
maintain a leverage ratio of greater than 9 percent will be considered
to have satisfied the generally applicable risk-based and leverage
capital requirements in the agencies' capital rules (generally
applicable rule) and, if applicable, will be considered to have met the
well-capitalized ratio requirements for purposes of section 38 of the
Federal Deposit Insurance Act. The final rule includes a two-quarter
grace period during which a qualifying community banking organization
that temporarily fails to meet any of the qualifying criteria,
including the greater than 9 percent leverage ratio requirement,
generally would still be deemed well-capitalized so long as the banking
organization maintains a leverage ratio greater than 8 percent. At the
end of the grace period, the banking organization must meet all
qualifying criteria to remain in the community bank leverage ratio
framework or otherwise must comply with and report under the generally
applicable rule. Similarly, a banking organization that fails to
maintain a leverage ratio greater than 8 percent would not be permitted
to use the grace period and must comply with the capital rule's
generally applicable requirements and file the appropriate regulatory
reports.
DATES: The final rule is effective on January 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: David Elkes, Risk Expert, Benjamin Pegg, Risk Expert, or Jung
Sup Kim, Risk Specialist, Capital and Regulatory Policy (202) 649-6370;
or Carl Kaminski, Special Counsel, or Daniel Perez, Senior Attorney, or
Rima Kundnani, Senior Attorney, Chief Counsel's Office, (202) 649-5490,
for persons who are deaf or hearing impaired, TTY, (202) 649-5597,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; Andrew Willis, Lead
Financial Institutions Policy Analyst, (202) 912-4323, or Christopher
Appel, Senior Financial Institutions Policy Analyst II, (202) 973-6862,
Division of Supervision and Regulation; or Mark Buresh, Senior Counsel,
(202) 452-270; or Andrew Hartlage, Counsel, (202) 452-6483, 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: Benedetto Bosco, Chief, Capital Policy Section,
[email protected]; Stephanie Lorek, Senior Capital Markets Policy
Analyst, [email protected]; Dushan Gorechan, Financial Analyst,
[email protected]; Kyle McCormick, Financial Analyst,
[email protected]; Capital Markets Branch, Division of Risk
Management Supervision, [email protected], (202) 898-6888; or
Michael Phillips, Counsel, [email protected]; Supervision Branch,
Legal Division, Federal Deposit Insurance Corporation, 550 17th Street
NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Summary of the Final Rule
II. Proposed Rule
A. Proposed Community Bank Leverage Ratio Framework
B. Summary of Comments
III. Final Rule
A. Qualifying Criteria for the Community Bank Leverage Ratio
Framework
1. Leverage Ratio of Greater Than 9 Percent
2. Total Consolidated Assets
3. Total Off-Balance Sheet Exposures
4. Total Trading Assets and Trading Liabilities
5. Advanced Approaches Banking Organizations
B. Definition of the Leverage Ratio's Numerator and Denominator
1. Numerator
2. Denominator
C. Calibration of the Leverage Ratio in Order To Qualify for the
Community Bank Leverage Ratio
D. Ability To Opt Into and Out of the Community Bank Leverage
Ratio Framework
E. Ongoing Compliance With the Community Bank Leverage Ratio
Framework
1. Meeting the Definition of a Qualifying Community Banking
Organization
2. Treatment of a Community Banking Organization That Falls
Below Certain Leverage Ratio Levels
F. FDIC Deposit Insurance Assessments Regulations
G. Other Affected Regulations
H. Effective Date of the Final Rule
IV. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995
E. Riegle Community Development and Regulatory Improvement Act
of 1994
F. The Congressional Review Act
I. Introduction
A. Background
On February 8, 2019, 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) published a notice of proposed rulemaking (the proposed rule
or proposal) \1\ to implement section 201 of the Economic Growth,
Regulatory Relief, and
[[Page 61777]]
Consumer Protection Act (Act), and proposed to establish a community
bank leverage ratio for qualifying community banking organizations as a
simple alternative methodology to measure capital adequacy. The
proposal was intended to simplify regulatory capital requirements and
provide material regulatory compliance burden relief to qualifying
community banking organizations that opt into the community bank
leverage ratio framework.
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\1\ 84 FR 3062 (February 8, 2019).
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Section 201 of the Act directs the agencies to develop a community
bank leverage ratio for qualifying community banking organizations of
not less than 8 percent and not more than 10 percent. The Act provides
that a qualifying community banking organization is a depository
institution or depository institution holding company with total
consolidated assets of less than $10 billion that satisfies such other
factors, based on its risk profile, that the agencies determine are
appropriate. Pursuant to section 201, a qualifying community banking
organization that exceeds the community bank leverage ratio level
established by the agencies shall be considered to have met: (i) The
generally applicable risk-based and leverage capital requirements in
the agencies' capital rules (generally applicable rule); (ii) the
capital ratio requirements in order to be considered well capitalized
under the agencies' prompt corrective action (PCA) framework (in the
case of insured depository institutions); and (iii) any other
applicable capital or leverage requirements. In addition, the Act
directs the agencies to establish procedures for the treatment of
qualifying community banking organizations that fall below the
community bank leverage ratio level established by the agencies.\2\
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\2\ The agencies note that, under existing PCA requirements
applicable to insured depository institutions, to be considered
``well capitalized'' a banking organization must demonstrate that it
is not subject to any written agreement, order, capital directive,
or as applicable, prompt corrective action directive, to meet and
maintain a specific capital level for any capital measure. See 12
CFR 6.4(b)(1)(iv) (OCC); 12 CFR 208.43(b)(1)(v) (Board); 12 CFR
324.403(b)(1)(v) (FDIC). The same legal requirements would continue
to apply under the community bank leverage ratio framework.
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Section 201 of the Act defines the community bank leverage ratio as
the ratio of a qualifying community banking organization's tangible
equity capital to its average total consolidated assets, both as
reported on the qualifying community banking organization's applicable
regulatory filing. In addition, the Act states that the agencies may
determine that a banking organization is not a qualifying community
banking organization based on the banking organization's risk profile.
This determination shall be based on consideration of off-balance sheet
exposures, trading assets and liabilities, total notional derivatives
exposures, and such other factors as the agencies determine
appropriate. The Act also specifies that the community bank leverage
ratio framework does not limit the agencies' authority in effect as of
the date of enactment of the Act.
The Act directs the agencies to consult with applicable state bank
supervisors in carrying out section 201 of the Act and to notify the
applicable state bank supervisor of any qualifying community banking
organization that exceeds, or does not exceed after previously
exceeding, the community bank leverage ratio. As part of this
consultation process, the agencies had a series of discussions with
state bank supervisors, before and after publication of the proposal,
that helped shape key elements of the community bank leverage ratio
framework in the final rule.
In response to the proposal, the agencies received approximately 50
public comment letters and approximately 500 form letters from
depository institutions, depository institution holding companies,
trade associations, and other interested parties. Commenters generally
supported the agencies' efforts to simplify the regulatory capital
requirements. However, as discussed in greater detail below, many
commenters indicated that certain aspects of the proposal were
burdensome or unnecessarily complex, and some commenters expressed
concern that banking supervisors would make the proposed community bank
leverage ratio the de facto minimum capital requirement for community
banking organizations, irrespective of whether they have opted into the
community bank leverage ratio framework. Commenters generally favored
greater simplicity in the community bank leverage ratio framework, and
recommended the removal of the proposal's separate PCA proxy levels.
After reviewing the comments, the agencies are making several
modifications to address commenters' concerns and further simplify the
community bank leverage ratio framework while retaining the quality and
quantity of regulatory capital in the banking system.
B. Summary of the Final Rule
In response to comments received on the proposal, the agencies are
making a number of changes in this final rule. In addition, the final
rule clarifies other important aspects of the community bank leverage
ratio framework. The key changes being made to the final rule include
the following:
Adoption of tier 1 capital, and therefore the existing
leverage ratio, into the community bank leverage ratio framework;
Removal of the qualifying criteria for mortgage servicing
assets and deferred tax assets arising from temporary differences;
Removal of the PCA proxy levels; and
Allowing a banking organization that elects to use the
community bank leverage ratio framework to be considered well-
capitalized during the two-quarter grace period if its leverage ratio
is 9 percent or less and greater than 8 percent.
Under the final rule, the numerator of the community bank leverage
ratio is the existing measure of tier 1 capital used by non-advanced
approaches banking organizations.3 4 Numerous commenters
described complexities that would be created with the proposed
introduction of a new measure of capital, tangible equity, in the
community bank leverage ratio framework and, therefore, the agencies
have adopted the commenters' recommendation to use tier 1 capital. The
use of tier 1 capital also has the benefit of including the existing
threshold deduction approaches for mortgage servicing assets (MSAs) and
deferred tax assets arising from temporary differences (temporary
difference DTAs) which enabled the agencies to remove the qualifying
criteria related to these exposures from the community bank leverage
ratio framework. Due to the adoption of tier 1 capital, the community
bank leverage ratio is generally calculated in the same
[[Page 61778]]
manner as the generally applicable rule's leverage ratio: Tier 1
capital divided by average total consolidated assets minus amounts
deducted from tier 1 capital. As a result, the final rule incorporates
and refers to the generally applicable rule's leverage ratio.
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\3\ Under the final rule, a qualifying community banking
organization that elects to use the community bank leverage ratio
framework will calculate its leverage ratio taking into account the
modifications made in relation to the capital simplifications rule
and current expected credit losses methodology (CECL) transitions
final rule. See 84 FR 35234 (July 22, 2019) and 84 FR 4222 (February
14, 2019), respectively. The agencies anticipate that the tier 1
capital amount used in the numerator of the calculation will reflect
any future modifications made to the tier 1 capital definition
applicable to non-advanced approaches banking organizations. See 84
FR 35234 (July 22, 2019).
\4\ For purposes of the community bank leverage ratio framework,
an electing banking organization is not required to calculate tier 2
capital and therefore would not be required to make any deductions
that would be taken from tier 2 capital or potentially tier 1
capital due to insufficient tier 2 capital. As part of the final
rule the agencies are amending 12 CFR 3.22(f) (OCC); 12 CFR
217.22(f) (Board); 12 CFR 324.22(f) (FDIC).
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Commenters also raised concerns that the PCA proxy levels included
in the proposal caused unnecessary complexity in the community bank
leverage ratio framework and requested that the framework include a
grace period to transition back to the generally applicable rule if a
banking organization's community bank leverage ratio was less than the
well-capitalized threshold. The agencies are incorporating this
feedback into the final rule by modifying the definition of a
``qualifying community banking organization'' to include the level of
the leverage ratio as a qualifying criterion.
The final rule provides that to be a ``qualifying community banking
organization,'' a banking organization must not be an advanced
approaches banking organization \5\ and must meet the following
qualifying criteria: (i) A leverage ratio of greater than 9 percent;
(ii) total consolidated assets of less than $10 billion; (iii) total
off-balance sheet exposures (excluding derivatives other than sold
credit derivatives and unconditionally cancelable commitments) of 25
percent or less of total consolidated assets; and (iv) the sum of total
trading assets and trading liabilities of 5 percent or less of total
consolidated assets. Consistent with section 201, the final rule
provides that qualifying community banking organizations that opt into
the community bank leverage ratio framework (electing banking
organization) will be deemed to have met the ``well capitalized'' ratio
requirements and be in compliance with the generally applicable rule.
Such banking organizations will not be required to calculate and report
risk-based capital ratios.
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\5\ An advanced approaches banking organization is generally
defined as a firm with at least $250 billion in total consolidated
assets or at least $10 billion in total on-balance sheet foreign
exposure, and depository institution subsidiaries of those firms.
Proposed rulemakings to tailor capital and liquidity requirements
applicable to large banking organizations may result in changing the
definition of advanced approaches banking organization. See 83 FR
66024 (December 21, 2018) and 84 FR 24296 (May 24, 2019).
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Notably, the agencies have retained the proposal's 9 percent
calibration for the leverage ratio in the community bank leverage ratio
framework. The agencies believe that a 9 percent calibration, in
conjunction with the final rule's qualifying criteria, will not result
in a reduction in the aggregate level of regulatory capital currently
held by electing banking organizations. Further, incorporating into the
community bank leverage ratio framework the existing leverage ratio and
the two-quarter grace period will facilitate the transition to and from
the generally applicable rule. Banking organizations opt into and out
of the framework through their Consolidated Reports of Condition and
Income (Call Report) or Form FR-Y9C.
If a qualifying community banking organization that has opted into
the community bank leverage ratio framework subsequently fails to
satisfy one or more of the qualifying criteria but continues to report
a leverage ratio of greater than 8 percent, the banking organization
could continue to use the community bank leverage ratio framework and
be deemed to meet the ``well capitalized'' capital ratio requirements
for a grace period of up to two quarters.\6\ As long as the banking
organization is able to return to compliance with all the qualifying
criteria within two quarters, it will continue to be deemed to meet the
``well capitalized'' ratio requirements and be in compliance with the
generally applicable rule. A banking organization will be required to
comply with the generally applicable rule and file the relevant
regulatory reports if the banking organization (i) is unable to restore
compliance with all qualifying criteria during the two-quarter grace
period (including coming into compliance with the greater than 9
percent leverage ratio requirement), (ii) reports a leverage ratio of 8
percent or less, or (iii) ceases to satisfy the qualifying criteria due
to consummation of a merger transaction.
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\6\ As a result of adopting the grace period construct, the
final rule does not include the agencies' proposed PCA proxy levels,
which would have allowed certain banking organizations that fell to
a leverage ratio of 9 percent or lower to remain in the community
bank leverage ratio framework indefinitely.
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The agencies believe that the final rule provides a simple
framework that simultaneously meets safety and soundness goals and
responds to the concerns conveyed through comments received on the
proposal. Additionally, the final rule meets the policy objectives
described in the proposal. First, the community bank leverage ratio
framework is available to a meaningful number of well-capitalized
banking organizations with less than $10 billion in total consolidated
assets. Second, the community bank leverage ratio requirement is
calibrated to maintain the overall amount of capital currently held by
qualifying community banking organizations. Third, banking
organizations with higher risk profiles remain subject to the generally
applicable rule to ensure that such banking organizations hold capital
commensurate with the risk of their exposures and activities.\7\
Fourth, the agencies maintain the authority to take supervisory action
under the PCA framework and other statutes and regulations based on a
banking organization's capital ratios and risk profile. The final rule
also provides regulatory compliance burden relief as the community bank
leverage ratio is simple to apply and allows a qualifying community
banking organization to avoid the burden of calculating and reporting
risk-based capital ratios under the generally applicable rule.
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\7\ 12 CFR 3.10(a)-(b) (OCC); 12 CFR 217.10(a)-(b) (Board); 12
CFR 324.10(a)-(b) (FDIC).
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II. Proposed Rule
A. Proposed Community Bank Leverage Ratio Framework
The agencies proposed the community bank leverage ratio framework
as a simple alternative methodology to measure capital adequacy for
qualifying community banking organizations, based on the requirements
of section 201 of the Act. Under the proposal, a qualifying community
banking organization would have been defined as a depository
institution or depository institution holding company that was not an
advanced approaches banking organization and that met the following
criteria (qualifying criteria), each as described further below:
Total consolidated assets of less than $10 billion;
Total off-balance sheet exposures (excluding derivatives
other than sold credit derivatives and unconditionally cancelable
commitments) of 25 percent or less of total consolidated assets;
Total trading assets plus trading liabilities of 5 percent
or less of total consolidated assets;
MSAs of 25 percent or less of tangible equity (as defined
in the proposal); and
Temporary difference DTAs of 25 percent or less of
tangible equity.
Under the proposal, the community bank leverage ratio would have
been calculated as the ratio of tangible equity to average total
consolidated assets. Tangible equity would have been defined as total
bank equity capital or total holding company equity capital, as
applicable, prior to including minority interests, and excluding
accumulated other comprehensive income (AOCI),
[[Page 61779]]
deferred tax assets arising from net operating loss and tax credit
carry forwards, goodwill, and other intangible assets (other than
MSAs), each as of the most recent calendar quarter and calculated in
accordance with a qualifying community banking organization's
regulatory reports. Average total consolidated assets would have been
calculated in a manner similar to the generally applicable rule's
leverage ratio denominator in that amounts deducted from the numerator
would also have been excluded from the denominator. Under the proposal,
a qualifying community banking organization could have elected to use
the community bank leverage ratio framework if its community bank
leverage ratio was greater than 9 percent.
The proposal would have permitted an electing banking organization
to remain in the community bank leverage ratio framework even in cases
where such an institution's community bank leverage ratio subsequently
fell to 9 percent or less. In this situation, the proposal would have
continued to provide for the agencies' supervisory actions under PCA
and other applicable statutes and regulations. Specifically, for
insured depository institutions, the proposal would have incorporated
community bank leverage ratio levels as proxies for the following PCA
categories: Adequately capitalized, undercapitalized and significantly
undercapitalized. If an electing banking organization had met certain
community bank leverage ratio levels, it would have been considered to
have met the capital ratio requirements within the applicable
corresponding PCA category and been subject to the same restrictions
that currently apply to any other insured depository institution in the
same PCA category.
After issuing the proposal, the agencies proposed a regulatory
capital schedule that would have been simpler than Schedules RC-R of
the Call Report and HC-R of Form FR Y-9C for use by electing banking
organizations. On this proposed reporting schedule, the community bank
leverage ratio calculation would have required a banking organization
to report significantly less information than under the generally
applicable rule.
B. Summary of Comments
Collectively, the agencies received approximately 50 public comment
letters and approximately 500 form letters on the proposal from
depository institutions, depository institution holding companies,
trade associations, and other interested parties. As further detailed
in the more comprehensive discussion of the final rule, commenters
generally supported the agencies' efforts to propose a simpler
regulatory capital framework but expressed concerns with some aspects
of the proposal.
Several commenters expressed concern that calibrating the community
bank leverage ratio at 9 percent is unnecessarily punitive and would
disqualify too many banking organizations from being able to use the
community bank leverage ratio framework. These commenters favored
calibrating the community bank leverage ratio at 8 percent. One
commenter suggested calibrating the community bank leverage ratio at 10
percent, the highest permitted by statute, because higher leverage
ratios may lower the adverse effects of crises on U.S. GDP, which
exceeds the costs that may arise from lower capital formation and lower
GDP.
Many commenters also expressed concern that the proposed PCA proxy
levels would have added unnecessary complexity to the community bank
leverage ratio framework, and therefore recommended their elimination
in the final rule. Some commenters expressed concern that the agencies
would not permit an insured depository institution with a community
bank leverage ratio at or below 9 percent to demonstrate that it is
well capitalized under the generally applicable rule before assigning
it a PCA category other than well capitalized. Other commenters
indicated that some of the qualifying criteria were unnecessary (such
as that for MSAs), overly complex to calculate (such as the off-balance
sheet exposures criterion), or did not appropriately reflect the risks
of underlying assets.
Multiple commenters suggested that the proposed numerator of the
community bank leverage ratio should be based on tier 1 capital, as
defined under the generally applicable rule, rather than on a new
``tangible equity'' measure. Commenters expressed concern that
examiners may penalize banking organizations for opting into or out of
the framework, and that the community bank leverage ratio could become
the de facto minimum capital requirement for all community banking
organizations.
III. Final Rule
A. Qualifying Criteria for the Community Bank Leverage Ratio Framework
The agencies received comments requesting that they eliminate or
modify certain of the qualifying criteria in the proposal, particularly
the MSA and the temporary difference DTA criteria. Many of these
commenters also suggested using tier 1 capital, as recently modified by
the agencies in a final rule (simplifications rule),\8\ as the
numerator of the leverage ratio. Several commenters noted that some of
the qualifying criteria, such as the proposed limit for MSAs, could
prevent many otherwise qualifying community banking organizations from
opting into the community bank leverage ratio framework. Finally, some
commenters suggested that the off-balance sheet criterion, as proposed,
would be overly burdensome for community banking organizations to
calculate and that certain elements included in this criterion should
be eliminated as they do not represent material risk to banking
organizations.
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\8\ See 84 FR 35243 (July 22, 2019). The agencies also are
adopting a final rule that permits banking organizations not subject
to the advanced approaches capital rule to implement the
simplifications rule in the quarter beginning January 1, 2020, or
wait until the quarter beginning April 1, 2020.
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After considering the comments, the agencies have decided to modify
the definition of ``qualifying community banking organization'' by
removing the MSA criterion and the temporary difference DTA criterion.
Exposures to MSAs and temporary difference DTAs will be addressed
through the use of tier 1 capital as the numerator, which requires
deduction of such assets to the extent they exceed certain regulatory
thresholds, rather than the proposed use of ``tangible equity.'' The
use of tier 1 capital as the numerator is discussed in more detail
below in this Supplementary Information. Under the final rule, a
qualifying banking organization must not be an advanced approaches
banking organization and must have:
A leverage ratio of greater than 9 percent;
Total consolidated assets of less than $10 billion;
Total off-balance sheet exposures (excluding derivatives
other than sold credit derivatives and unconditionally cancelable
commitments) of 25 percent or less of total consolidated assets, and
Total trading assets plus trading liabilities of 5 percent
or less of total consolidated assets.\9\
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\9\ Consistent with the proposal, the agencies have reserved the
authority to disallow the use of the community bank leverage ratio
framework by a depository institution or depository institution
holding company, based on the risk profile of the banking
organization. This authority is reserved under the general
reservation of authority included in the capital rule, in which the
community bank leverage ratio framework would be codified. See 12
CFR 3.1(d) (OCC); 12 CFR 217.1(d) (Board); 12 CFR 324.1(d) (FDIC).
In addition, for purposes of the capital rule and section 201 of the
Act, the agencies have reserved the authority to take action under
other provisions of law, including action to address unsafe or
unsound practices or conditions, deficient capital levels, or
violations of law or regulation. See 12 CFR 3.1(b) (OCC); 12 CFR
217.1(b) (Board); 12 CFR 324.1(b) (FDIC).
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[[Page 61780]]
1. Leverage Ratio of Greater Than 9 Percent
Under the proposal, a banking organization would have been required
to have a community bank leverage ratio of greater than 9 percent in
order to be eligible to opt into the community bank leverage ratio
framework. The final rule adopts the 9 percent calibration of the
community bank leverage ratio as proposed. The proposal also would have
allowed an electing banking organization to remain in the community
bank leverage ratio framework despite having a community bank leverage
ratio which subsequently fell to 9 percent or less. As discussed above,
the final rule eliminates the PCA proxy levels and, therefore, an
electing banking organization will generally be required to maintain a
leverage ratio of greater than 9 percent in order to be eligible to use
the community bank leverage ratio framework. A two-quarter grace
period, as discussed in further detail below, is available for a
banking organization that ceases to meet any of the qualifying
criteria, including a banking organization whose leverage ratio falls
to 9 percent or less, but is greater than 8 percent. During the grace
period, a banking organization may continue to be treated as a
qualifying community banking organization and is presumed to satisfy
the ``well capitalized'' ratio requirements and be in compliance with
the generally applicable rule without having to calculate and report
risk-based capital ratios.
2. Total Consolidated Assets
Under the proposal, a qualifying community banking organization
would be required to have less than $10 billion in total consolidated
assets as of the end of the most recent calendar quarter, in accordance
with the Act. Total consolidated assets would be calculated in
accordance with the reporting instructions to Schedule RC of the Call
Report or Schedule HC of Form FR Y-9C, as applicable.
A commenter indicated that the Act places no limit on the ability
of the agencies to apply the community bank leverage ratio framework to
institutions with $10 billion or more in total assets and suggested
that the agencies should apply the community bank leverage ratio
framework based on suitability for relief rather than on size
thresholds. The same commenter urged the agencies to take into account
acquisitions and to index applicability to incorporate inflation or
other relevant market measures.
The agencies have considered the concerns raised with regard to the
asset size threshold. The agencies continue to believe that the
community bank leverage ratio framework is appropriate for most banking
organizations with total consolidated assets of less than $10 billion
that meet the other qualifying criteria. The agencies believe that the
generally applicable rule is appropriate for larger banking
organizations and banking organizations with concentrations in off-
balance sheet exposures and trading assets and liabilities because such
banking organizations may present risks that are not appropriately
captured by the community bank leverage ratio framework. The agencies
recently finalized a rule to simplify the generally applicable rule,
and have proposed to modify and tailor several of the prudential
requirements applicable to banking organizations with $100 billion or
more in total consolidated assets.10 11 The agencies believe
these revisions reflect an appropriate tailoring of regulations based
on asset size and other risk characteristics to ensure that the
requirements remain appropriate for the risk profiles of different
banking organizations while also maintaining the safety and soundness
of the banking industry. As such, the agencies are finalizing without
modification the $10 billion in total assets size threshold.
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\10\ See 84 FR 35243 (July 22, 2019).
\11\ See 83 FR 66024 (December 21, 2018) and 84 FR 24296 (May
24, 2019).
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3. Total Off-Balance Sheet Exposures
Under the proposal, a qualifying community banking organization
would have been required to have total off-balance sheet exposures of
25 percent or less of its total consolidated assets, as of the end of
the most recent calendar quarter. The agencies included this qualifying
criterion in the community bank leverage ratio framework because the
proposed community bank leverage ratio included only on-balance sheet
assets in its denominator and thus would not have required a qualifying
community banking organization to hold capital against its off-balance
sheet exposures. This qualifying criterion was intended to reduce the
likelihood that a qualifying community banking organization with
significant off-balance sheet exposures would hold less capital under
the community bank leverage ratio framework than under the generally
applicable rule.
Under the proposal, total off-balance sheet exposures would have
been calculated as the sum of the notional amounts of certain off-
balance sheet items against which banking organizations would hold
capital under the generally applicable rule \12\ as of the end of the
most recent calendar quarter. Total off-balance sheet exposures would
have included:
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\12\ See 12 CFR 324.33 (FDIC); 12 CFR 217.33 (Federal Reserve);
12 CFR 3.33 (OCC).
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a. The unused portions of commitments (except for unconditionally
cancellable commitments);
b. Self-liquidating, trade-related contingent items that arise from
the movement of goods;
c. Transaction-related contingent items (i.e., performance bonds,
bid bonds and warranties);
d. Sold credit protection in the form of guarantees and credit
derivatives;
e. Credit-enhancing representations and warranties;
f. Off-balance sheet securitization exposures;
g. Letters of credit;
h. Forward agreements that are not derivative contracts; and
i. Securities lending and borrowing transactions.
Total off-balance sheet exposures would have excluded the notional
amount for all derivative contracts except credit derivatives for sold
credit protection. As stated in the proposal, the agencies believe that
the notional amount for derivatives (other than credit derivatives for
sold credit protection) is not an appropriate indicator of credit risk
and could inadvertently disqualify a banking organization from using
the community bank leverage ratio framework if the banking organization
is otherwise appropriately using derivatives to hedge its risks. The
proposed components of total off-balance sheet exposures would have
been generally consistent with off-balance sheet items that are
included in risk-weighted assets in the generally applicable rule,
except for securities lending and borrowing transactions. Securities
lending and borrowing transactions would have been assigned amounts in
accordance with the reporting instructions for these items in Schedules
RC-L of the Call Report or HC-L of Form FR Y-9C, as applicable. The
proposed calculation of total off-balance sheet exposures would have
been simpler than under the generally applicable rule, which requires
that off-balance sheet exposures be converted to
[[Page 61781]]
on-balance sheet equivalents for purposes of determining capital
requirements.
The agencies received several comments and requests for
clarification on the proposed limit for off-balance sheet exposures.
One commenter expressed concern that the process for categorizing off-
balance sheet exposures, such as off-balance sheet securitizations, was
overly complex, and the commenter would prefer that the off-balance
sheet filter instead identify specific transactions and products
routinely used by community banks that meet the off-balance sheet
exposure definition. Another commenter found the wording in the
proposed rule unclear and noted that it would be beneficial for the
agencies to reference the specific Schedule RC-L line items that would
be included in the 25 percent limitation for off-balance sheet line
items.
Several commenters expressed concern about the inclusion of
residential mortgage-related off-balance sheet items. One commenter
wrote that the agencies should not exclude banking organizations from
using the community bank leverage ratio framework due to any mortgage
origination-related hedging activity. The commenter expressed concern
that as proposed the criterion may capture certain exposures related to
routine functioning of the mortgage market. Another commenter noted
that mortgage sales to certain Federal Home Loan Banks (FHLBs) through
the Mortgage Partnership Finance Program could be captured by the off-
balance sheet qualifying criteria. A commenter suggested that FHLB
advances should be eliminated from the calculation because such
advances are typically secured at a significant discount relative to
underlying loan collateral. The commenter was concerned that a banking
organization may be disqualified from the community bank leverage ratio
framework due to its level of unfunded commitments and FHLB lines of
credit.
Finally, one commenter requested clarification on whether sales of
when-issued mortgage-backed security contracts are included in the 25
percent limitation, stating that these items should be excluded
because, in the commenter's view, they are of lower risk.
The agencies considered the commenters' concerns and have decided
to finalize the off-balance sheet qualifying criterion as proposed with
several clarifications. The agencies are clarifying that the off-
balance sheet qualifying criterion incorporates off-balance sheet
exposures currently required to be captured and reported by banking
organizations in Schedules RC-L and RC-R of the Call Report or HC-L and
HC-R of Form FR Y-9C which thereby permits these firms to leverage
their existing identification, measurement and reporting infrastructure
for these exposures. The agencies also are clarifying that banking
organizations are only required to identify off-balance sheet
securitizations to the extent that they are not already captured as
part of another off-balance sheet exposure category. For example, if a
banking organization issues a credit enhancing representation and
warranty that also meets the definition of a traditional
securitization, the final rule does not require that such an exposure
be separately identified as an off-balance sheet securitization
exposure because the exposure would already be captured through the
requirement to include credit enhancing representations and warranties
in the off-balance sheet qualifying criterion.
The agencies also are clarifying that hedging techniques related to
mortgage banking activities are generally only captured in the off-
balance sheet qualifying criterion to the extent such exposures are
treated as off-balance sheet exposures and subject to credit conversion
factors under the generally applicable rule. For this reason, typical
mortgage banking activities such as forward loan delivery commitments
between banking organizations and investors, which typically are
derivative contracts, were excluded from the off-balance sheet exposure
criterion in the proposal and are excluded under the final rule. Put
and call options on mortgage-backed securities are also typically
derivatives and excluded from this criterion under the final rule. A
contractual obligation for the future purchase of a ``to be announced''
(i.e., when-issued) mortgage securities contract, that does not meet
the definition of a derivative contract under the generally applicable
rule, would be captured in the off-balance sheet qualifying criterion
as it would be considered a forward agreement under the generally
applicable rule. In contrast, a contractual obligation for the future
sale (rather than purchase) of a ``to be announced'' mortgage
securities contract, that does not meet the definition of a derivative
contract under the generally applicable rule, would not be captured in
the off-balance sheet qualifying criterion as it would not be
considered a forward agreement under the generally applicable rule.
Banking organizations that sell mortgages to certain FHLBs through
the Mortgage Partnership Finance Program may provide a credit
enhancement to the FHLB. If these credit enhancements meet the
definition of a credit-enhancing representation and warranty or would
otherwise be considered an off-balance sheet securitization under the
generally applicable rule, then the exposure amount would be included
in the off-balance sheet qualifying criterion. Because these are credit
risk exposures that would be assigned risk-based capital under the
generally applicable rule, inclusion in the off-balance sheet
qualifying criterion is appropriate.
The agencies analyzed average off-balance sheet exposures for
banking organizations with less than $10 billion in total consolidated
assets and observed that the vast majority of such banking
organizations report off-balance sheet exposures totaling less than 25
percent of total consolidated assets, as of March 31, 2019.
Accordingly, the agencies have determined that both the definition and
calibration of the total off-balance sheet exposures qualifying
criterion should allow a meaningful number of banking organizations to
use the community bank leverage ratio framework without unduly
restricting lending practices. The criterion should help to prevent
banking organizations from engaging in substantial off-balance sheet
activity without a commensurate capital requirement.
4. Total Trading Assets and Trading Liabilities
Under the proposal, a qualifying community banking organization
would have been required to have total trading assets and trading
liabilities of 5 percent or less of its total consolidated assets, each
measured as of the end of the most recent calendar quarter. Total
trading assets and trading liabilities would have been calculated as
the sum of those exposures, in accordance with the reporting
instructions for these items on Schedules RC of the Call Report or HC
of Form FR-Y-9C, as applicable. A banking organization would divide the
sum of its total trading assets and trading liabilities by its total
consolidated assets to determine its percentage of total trading assets
and trading liabilities.
The agencies recognize the potential elevated levels of risk and
complexity that can be associated with certain trading activities. For
this reason, banking organizations with significant trading assets and
trading liabilities are subject to a market risk capital requirement
under the generally
[[Page 61782]]
applicable rule.\13\ In contrast, electing banking organizations would
not be required to calculate additional market risk capital
requirements and, as a result, the community bank leverage ratio
framework may not appropriately capitalize for material amounts of
trading assets and trading liabilities. In addition, elevated levels of
trading activity can produce a heightened level of earnings volatility,
which has implications for capital adequacy. Therefore, the agencies do
not believe it is appropriate to make the community bank leverage ratio
framework available to banking organizations with material market risk
exposure. However, the agencies do not believe that low levels of
trading activity should preclude a banking organization from using the
community bank leverage ratio framework.
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\13\ 12 CFR part 3, subpart F (OCC); 12 CFR part 217, subpart F
(Board); 12 CFR part 324, subpart F (FDIC).
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Based on the agencies' analysis, the vast majority of banking
organizations with less than $10 billion in total consolidated assets
have total trading assets and trading liabilities well below 5 percent
of their total consolidated assets, as of March 31, 2019. The agencies
believe that the proposed 5 percent threshold will help ensure that
banking organizations that engage in significant trading activity are
not subject to the community bank leverage ratio framework. Further,
this criterion is generally consistent with section 203 of the Act,
which excludes a community banking organization from proprietary
trading restrictions if its total trading assets and trading
liabilities are 5 percent or less of its total consolidated assets. The
agencies did not receive any comment with regard to the proposed
qualifying criterion for total trading assets and trading liabilities
and are finalizing this requirement as proposed.
5. Advanced Approaches Banking Organizations
Under the proposal, advanced approaches banking organizations would
not have been eligible to use the community bank leverage ratio
framework. The agencies received no comment on this requirement and
believe that, in general, section 201 of the Act is designed to provide
regulatory burden relief for banking organizations with less than $10
billion in total consolidated assets and that have a limited risk
profile.
A banking organization with less than $10 billion in total
consolidated assets may be subject to the advanced approaches rules if
it is a subsidiary of a much larger banking organization. While these
types of advanced approaches banking organizations may be relatively
small banking organizations, the agencies do not believe they share the
same type of risk characteristics as non-complex community banking
organization for which the community bank leverage ratio framework is
appropriate. Consequently, under the final rule, an advanced approaches
banking organization will not be eligible to use the community bank
leverage ratio framework, regardless of its size.
B. Definitions of the Leverage Ratio's Numerator and Denominator
1. Numerator
Under the proposal, the numerator of the community bank leverage
ratio would have been tangible equity, calculated as a banking
organization's total bank equity capital or total holding company
equity capital, as applicable, determined in accordance with the
reporting instructions to Schedule RC of the Call Report or Schedule HC
of Form FR Y-9C, prior to including minority interests, less: (i)
Accumulated other comprehensive income (AOCI), (ii) all intangible
assets (other than MSAs), and (iii) DTAs, net of any related valuation
allowances, that arise from net operating loss and tax credit
carryforwards, each as of the end of the most recent calendar quarter.
Tangible equity would not have included minority interests (equity of a
consolidated subsidiary that is not owned by the qualifying community
banking organization) because minority interests do not have the same
loss absorption capacity as other components of tangible equity at the
consolidated banking organization level.
The agencies received numerous comments in response to the proposed
use of tangible equity as the numerator of the community bank leverage
ratio. Many commenters noted that banking organizations are already
familiar with the current tier 1 capital calculation, and that tier 1
capital, therefore, should be used to calculate the community bank
leverage ratio instead of tangible equity. A commenter also argued that
the burden associated with implementing the community bank leverage
ratio framework would exceed the reporting relief provided by reduced
complexity. Several commenters expressed concerns that it would be too
complex for a banking organization to switch between the calculation of
tangible equity and tier 1 capital as it either opts into or out of the
community bank leverage ratio framework or no longer meets the
definition of a qualifying community banking organization. Several
commenters recommended the agencies instead use tier 1 capital for the
numerator, suggesting that this would not only simplify the calculation
when switching between frameworks but would also increase comparability
across all banking organizations. Commenters also preferred to use tier
1 capital for the numerator in order to ensure that certain
instruments, such as trust preferred securities (TruPS) and common
stock issued by bank subsidiaries, would count as regulatory capital
under the community bank leverage ratio framework, up to their current
limits. Finally, several commenters noted that use of tier 1 capital as
the numerator would avoid the need for revisions to state banking laws
that reference tier 1 capital, including but not limited to state law
lending limits.
Multiple commenters, although not explicitly expressing a
preference for using tier 1 capital as the numerator, did request that
certain adjustments be made to the proposed definition of tangible
equity. A commenter recommended that cumulative preferred stock with a
stated final maturity date be included as an eligible component of
tangible equity. Several commenters requested that the agencies allow
TruPS to count as tangible equity. A commenter recommended that the
agencies include common stock minority interest of up to 10 percent of
the numerator of the community bank leverage ratio where the subsidiary
holds risk-weighted assets of at least the amount of common stock
minority interest being included. Finally, some commenters expressed
concern that the CECL methodology under U.S. generally accepted
accounting principles could impact eligibility for the community bank
leverage ratio framework and recommended that the agencies provide for
an ongoing adjustment to the community bank leverage ratio numerator
that approximates the incremental regulatory capital impact of CECL
credit loss allowance levels over levels currently recorded under U.S.
generally accepted accounting principles.
Taking into account the concerns of commenters and seeking to
balance burden reduction with safety and soundness, the agencies have
decided to replace the proposed tangible equity measure with the
current calculation of tier 1 capital as the numerator of the community
bank leverage ratio. This change would align the final rule's
calculation of the leverage ratio with the generally applicable rule's
leverage
[[Page 61783]]
ratio, a calculation methodology with which banking organizations are
already familiar, and therefore would streamline adoption of the
community bank leverage ratio framework. In addition, the use of tier 1
capital in the community bank leverage ratio framework will enhance
comparability among banking organizations and remove the need for
separate qualifying criteria for MSAs and temporary difference DTAs, as
discussed previously. Based on the agencies' analysis, for the majority
of banking organizations with less than $10 billion in total
consolidated assets, the proposed tangible equity and the current tier
1 capital figures result in nearly the same amount of regulatory
capital. Finally, the use of tier 1 capital as the numerator of the
leverage ratio allows for the incorporation of changes from the
simplifications rule, which further simplifies the tier 1 capital
calculation by amending the treatment of MSAs, temporary difference
DTAs, investments in capital instruments, and minority interests.\14\
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\14\ See 84 FR 35234 (July 22, 2019).
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The agencies note that the generally applicable rule requires
deductions from tier 2 capital related to investments in capital
instruments of unconsolidated financial institutions when such
investments exceed certain limits and that such deductions can affect
the calculation of tier 1 capital.\15\ This corresponding deduction
approach requires a banking organization to make deductions from the
same component of capital for which the underlying instrument would
qualify if it was issued by the banking organization itself. In
addition, if a banking organization does not have a sufficient amount
of a specific regulatory capital component against which to effect the
deduction, the shortfall must be deducted from the next higher (that
is, more subordinated) regulatory capital component. Without any
revision to the corresponding deduction approach, an electing banking
organization with investments in tier 2 capital instruments of other
financial institutions could have been required to apply the
corresponding deduction approach potentially resulting in deductions
from tier 1 capital. Under the final rule, however, since the community
bank leverage ratio framework does not have a total capital
requirement, an electing banking organization is neither required to
calculate tier 2 capital nor make any deductions that would have been
taken from tier 2 capital under the generally applicable rule.
Therefore, if an electing banking organization has investments in the
capital instruments of an unconsolidated financial institution that
would qualify as tier 2 capital of the electing banking organization
under the generally applicable rule (tier 2 qualifying investments),
and the banking organization's total investments in the capital of
unconsolidated financial institutions exceed the threshold for
deduction, the banking organization is not required to deduct the tier
2 qualifying investments.
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\15\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board);
12 CFR 324.22(c)(2) (FDIC).
---------------------------------------------------------------------------
An electing banking organization is only required to make a
deduction from its common equity tier 1 capital or tier 1 capital if
the sum of its investments in the capital of an unconsolidated
financial institution is in a form that would qualify as common equity
tier 1 capital or tier 1 capital instruments of the electing banking
organization and exceeds the threshold for deduction. The agencies do
not believe this is a common occurrence and observed that as of March
31, 2019, very few community banking organizations made a deduction
from tier 2 capital. Therefore, the agencies believe it is appropriate
to clarify this aspect of the tier 1 calculation for qualifying
community banking organizations to ensure that it can be made as simply
as possible. Further, although the community bank leverage ratio
framework will not require qualifying community banking organizations
to make deductions from their regulatory capital calculations for
investments in tier 2 capital instruments issued by other financial
institutions, the agencies will continue to monitor such investments
and will address, on a case-by-case basis, any instances where such
activity potentially creates an unsafe or unsound practice or
condition.
With respect to a banking organization that has not elected the
community bank leverage ratio framework but invests in an instrument
(e.g., subordinated debt instrument) issued by an electing banking
organization that would qualify as tier 2 capital under the generally
applicable rule, the investing banking organization would continue to
treat the instrument as tier 2 capital notwithstanding the electing
banking organization's capital treatment of the instrument.
The agencies believe adoption of tier 1 capital, including the
adjustments described above, also addresses commenters' concerns about
the inclusion of TruPS,\16\ certain other preferred stock instruments,
and minority interests includable in the numerator of the leverage
ratio calculation by maintaining the same treatment that currently
applies under the generally applicable rule's calculation for tier 1
capital for non-advanced approaches banking organizations.
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\16\ Banking organizations that are currently grandfathered and
eligible to include TruPS in tier 1 capital can continue to include
TruPS in tier 1 capital under the community bank leverage ratio
framework, subject to existing limits. See 12 CFR 3.20(c)(3) (OCC);
12 CFR 217.20(c)(3) (Board); 12 CFR 324.20(c)(3) (FDIC). See 12 CFR
3.22(c)(2)(iii)(A) (OCC); 12 CFR 217.22(c)(2)(iii)(A) (Board); 12
CFR 324.22(c)(2)(iii)(A) (FDIC). See 12 CFR 217.300(c) (Board).
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2. Denominator
Under the proposal and consistent with the Act, the community bank
leverage ratio denominator would have been based on a banking
organization's average total consolidated assets. Specifically, average
total consolidated assets for purposes of the denominator would have
been calculated in accordance with the reporting instructions to
Schedules RC-K on the Call Report or HC-K on Form FR Y-9C, as
applicable, less the items deducted from the numerator, other than
AOCI. The proposed denominator therefore would have been similar, but
not identical, to the denominator of the generally applicable rule's
leverage ratio.
The agencies received a limited number of comments on the proposed
denominator for the community bank leverage ratio. A commenter
suggested the agencies consider seasonality in total assets and allow
for the use of four-quarter average total consolidated assets for the
denominator. The agencies note that the denominator as proposed would
be average total consolidated assets as described above, which would
have substantially maintained consistency with the current regulatory
capital calculation for average total consolidated assets. Another
commenter asked that the agencies consider allowing a deduction from
the denominator for pass-through reserve balances held with the Federal
Reserve System. The commenter argued that allowing this deduction would
refine this calculation for correspondent banking organizations to
align more closely their capital requirements to their risk and would,
in the commenter's view, not unduly discourage correspondent banking
organizations from assisting community banking organization clients
with holding proper reserve balances with the Federal Reserve System.
The agencies note that the leverage ratio in the generally
applicable rule is
[[Page 61784]]
designed to be a simple, non-risk-based on-balance sheet measure.
Adjusting the leverage ratio denominator as commenters suggested would
add unnecessary complexity to the measure. Therefore, the agencies are
finalizing the leverage ratio denominator as proposed, except that
items deducted from the denominator will align with the deductions from
tier 1 capital as the numerator rather than from the proposed tangible
equity measure as the numerator.
C. Calibration of the Leverage Ratio in Order To Qualify for the
Community Bank Leverage Ratio
The agencies proposed to permit a qualifying community banking
organization to elect to use the community bank leverage ratio
framework if the organization's community bank leverage ratio was
greater than 9 percent at the time of election. A qualifying community
banking organization with a community bank leverage ratio greater than
9 percent would have been considered to have met: (i) The requirements
of the generally applicable rule; (ii) the well-capitalized capital
ratio thresholds under the agencies' PCA framework for insured
depository institutions or the well-capitalized standards under the
Board's regulations for holding companies, as applicable; and (iii) any
other capital or leverage requirements to which the banking
organization is subject. Such qualifying community banking
organizations would not have been required to calculate capital ratios
under the generally applicable rule. Additionally, to have been
considered well capitalized under the proposed community bank leverage
ratio framework, and consistent with the agencies' PCA framework, a
qualifying community banking organization must not have been subject to
any written agreement, order, capital directive, or PCA directive to
meet and maintain a specific capital level for any capital measure.
In general, commenters stated that the community bank leverage
ratio requirement should be lowered to 8 percent, citing the lower end
of the range of the requirement under section 201 of the Act.
Commenters indicated that such a calibration would more closely track
the current well capitalized thresholds under PCA and would allow more
banking organizations to be eligible to use the community bank leverage
ratio framework. Several commenters wrote that the proposed community
bank leverage ratio requirement and qualifying criteria were
excessively conservative, particularly combined with the assumption
that the adoption of CECL would, in the commenters' view, reduce firms'
regulatory capital levels. A commenter suggested a banking organization
should have the option to phase in the impact of the day-one CECL
adjustment recorded in retained earnings over a five year period when
it elects to use the community bank leverage ratio framework to
calculate regulatory capital. A few commenters indicated that the
proposed community bank leverage ratio calibration would not factor in
the adjusted allowance for credit loss for up to 1.25 percent of risk-
weighted assets, which would be permitted under the generally
applicable rule for purposes of the total capital ratio, but would not
be relevant under the community bank leverage ratio. Finally, a
commenter recommended a dynamic calibration that would vary depending
on the business cycle to accommodate recovery and encourage lending in
a stressed environment.
After considering the comments received on calibration, the
agencies have decided to adopt a 9 percent leverage ratio as a
qualifying criterion for the community bank leverage ratio framework.
The agencies believe that a 9 percent calibration, with complementary
qualifying criteria for asset size, off-balance sheet assets, and
trading assets and trading liabilities, generally maintains the current
level of regulatory capital held by electing banking organizations and
supports the agencies' goals of reducing regulatory burden for as many
community banking organizations as possible. For example, even though
an 8 percent leverage ratio would have allowed more banking
organizations to opt into the community bank leverage ratio framework,
the reduced calibration could create an inappropriate incentive for
some qualifying community banking organizations to hold less regulatory
capital than they do today. Rather than lowering the minimum community
bank leverage ratio from 9 percent to 8 percent, the agencies
determined that it would be more appropriate to alleviate the potential
burden associated with switching regulatory capital frameworks as
capital levels fall by permitting an electing banking organization to
have its ratio drop below 9 percent temporarily (i.e., the two-quarter
grace period). This grace period will provide an electing banking
organization time to either comply with the qualifying criteria or to
prepare to comply with the generally applicable rule and file the
appropriate regulatory reports.
The agencies estimate that, as of the first quarter of 2019, the
vast majority of banking organizations with under $10 billion in total
consolidated assets would meet the definition of a qualifying community
banking organization and have a leverage ratio above 9 percent. Based
on reported data as of March 31, 2019, there are 5,221 insured
depository institutions with less than $10 billion in total
consolidated assets and 231 depository institution holding companies
with less than $10 billion in total consolidated assets that file the
form FR Y-9C.\17\ The agencies estimate that approximately 85 percent
of such insured depository institutions and approximately 76 percent of
such depository institution holding companies would qualify to use the
community bank leverage ratio framework under the 9 percent calibration
and other qualifying criteria. The agencies believe the community bank
leverage ratio framework in this final rule, including a 9 percent
calibration, meets the objectives described above.
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\17\ As of March 31, 2019, there are 4,261 depository
institution holding companies with less than $10 billion in total
consolidated assets. More than 95 percent of such holding companies
are not subject to the capital rule because they have less than $3
billion in total consolidated assets and meet certain additional
criteria to qualify for the Board's Small Bank Holding Company and
Savings and Loan Holding Company Policy Statement. See 12 CFR
217.1(c)(1)(ii) and (iii); 12 CFR part 225, appendix C; 12 CFR
238.9.
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In February of 2019, the agencies issued a final rule to amend the
generally applicable rule in response to CECL (CECL transitions final
rule).\18\ The CECL transitions final rule provides for an optional
three-year transition arrangement that will allow a banking
organization to phase in any adverse day-one regulatory capital effects
of CECL adoption on retained earnings, deferred tax assets, allowance
for credit losses, and average total consolidated assets. These day-one
regulatory capital effects will be phased in over the transition period
on a straight line basis. Under this final rule, the leverage ratio
under the community bank leverage ratio framework is generally
calculated in the same manner as the generally applicable rule's
leverage ratio. Accordingly, an electing banking organization is also
eligible to phase-in any adverse day-one regulatory capital effects of
CECL adoption on retained earnings, DTAs, allowance for credit losses,
and average total consolidated assets. Banking organizations will
retain their three-year transition period without reset (i.e., the
transition period cannot be extended) upon passage in or
[[Page 61785]]
out of the community bank leverage ratio framework.
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\18\ 84 FR 4222 (February 14, 2019).
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D. Ability To Opt Into and Out of the Community Bank Leverage Ratio
Framework
Under the proposal, a qualifying community banking organization
with a community bank leverage ratio greater than 9 percent could have
elected to use the community bank leverage ratio framework at any time.
Such a banking organization would have indicated its election by
completing a community bank leverage ratio reporting schedule in its
Call Report or Form FR Y-9C, as applicable. Also, under the proposal,
an electing banking organization would have been able to opt out of the
community bank leverage ratio framework and become subject to the
generally applicable rule by completing the associated reporting
requirements on Schedules RC-R of the Call Report or HC-R of Form FR Y-
9C, as applicable. Additionally, the agencies noted in the proposal
that an electing banking organization would have been able to opt out
of the community bank leverage ratio framework between reporting
periods by providing the capital ratios under the generally applicable
rule to its appropriate regulators at the time of opting out. A banking
organization that opted out of the community bank leverage ratio
framework would have been required to meet the qualifying criteria
included in the definition of a qualifying community banking
organization and have a community bank leverage ratio of greater than 9
percent to be able to opt back into the community bank leverage ratio
framework.
Several commenters suggested that the optionality aspect should be
further emphasized to both bankers and agency examiners. These
commenters expressed concern that banking organizations that do not opt
in could be seen as outliers and could be pressured to raise capital
and opt into the community bank leverage ratio framework, or that
procedural issues would make it too difficult in practice for banking
organizations to opt out.
The agencies have considered the comments and are finalizing the
election to use the community bank leverage ratio framework as
proposed. Due to the adoption of tier 1 capital and the leverage ratio
into the community bank leverage ratio framework, the agencies will
update accordingly the proposed reporting changes to the Call Report
and Form FR Y-9C. The agencies are further clarifying that the
community bank leverage ratio framework is an optional framework, based
on section 201 of the Act, which serves the purpose of removing the
burden of calculating and reporting risk-based capital ratios for
banking organizations that meet certain criteria. The agencies are also
clarifying that a banking organization can opt out of the community
bank leverage ratio framework at any time, without restriction, by
reverting to the generally applicable rule and providing the capital
ratios under the generally applicable rule to its appropriate
regulators at the time of opting out.
One commenter requested that the rule require that banking agencies
notify state bank regulators when a state-chartered electing banking
organization opts out of the framework between reporting periods. Under
the final rule, a qualifying community banking organization may opt
into or out of the community bank leverage ratio framework at any time
and for any reason. The agencies, therefore, are not including a
mandatory notification requirement in the final rule, as this could
discourage banking organizations from electing to apply and report
under the generally applicable rule. The agencies note that the Call
Report and Form FR Y-9C are available to the public and therefore
additional notice is not necessary.
As described above, a banking organization generally opts into and
out of the community bank leverage ratio framework through its Call
Report or Form FR Y-9C. As a result, a banking organization's
compliance with the community bank leverage ratio framework or the
generally applicable rule will be determined based upon the capital
framework it has elected in its last filed Call Report or Form FR Y-
9C.\19\
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\19\ See section I in this Supplementary Information for a
discussion on the interaction between the effective date of the
final rule and when a banking organization elects to use the
community bank leverage ratio framework.
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E. Ongoing Compliance With the Community Bank Leverage Ratio Framework
1. Meeting the Definition of a Qualifying Community Banking
Organization
Under the proposal, an electing banking organization that no longer
met the proposed qualifying criteria would have been required, within
two consecutive calendar quarters, either to meet the qualifying
criteria again or to demonstrate compliance with the generally
applicable rule. During the proposed grace period, the banking
organization could have continued to be treated as a qualifying
community banking organization and could have, therefore, continued
calculating and reporting a community bank leverage ratio to determine
its compliance with other statutes and regulations.
The agencies did not receive specific comments relating to the
mechanics of the proposed grace period. One commenter argued that a
six-month transition period would be too short for banking
organizations to sell MSAs, if necessary, or prepare for the different
treatment in the generally applicable rule. Other commenters noted that
the use of tier 1 capital would ease any transition back to the risk-
based capital requirements. The agencies continue to believe that this
limited grace period is appropriate to mitigate potential volatility in
capital and associated regulatory reporting requirements based on
temporary changes in a banking organization's risk profile from quarter
to quarter, while capturing more permanent changes in risk profile, and
are therefore finalizing the two-quarter grace period largely as
proposed. Under the final rule, the grace period begins as of the end
of the calendar quarter in which the electing banking organization
ceases to satisfy any of the qualifying criteria and will end after two
consecutive calendar quarters. For example, if the electing banking
organization no longer meets one of the qualifying criteria as of
February 15, and still does not meet the criteria as of the end of that
quarter, the grace period for such a banking organization will begin as
of the end of the quarter ending March 31. The banking organization may
continue to use the community bank leverage ratio framework as of June
30, but will need to comply fully with the generally applicable rule
(including the associated reporting requirements) as of September 30,
unless the banking organization once again meets all qualifying
criteria of the community bank leverage ratio framework, including a
leverage ratio of greater than 9 percent, by that date.
Under the proposal, an electing banking organization that ceased to
meet the qualifying criteria as a result of a business combination
would have received no grace period and immediately would have been
required to revert to the generally applicable rule. The agencies
continue to believe this approach is appropriate, as banking
organizations would need to consider the regulatory capital
implications of a planned business combination and be prepared to
comply with the applicable requirements. An electing banking
organization that expects that it would not meet the qualifying
criteria as a result of a business combination would
[[Page 61786]]
need to provide its pro forma capital ratios under the generally
applicable rule to its appropriate regulator as part of its merger
application, if applicable, and fully comply with the generally
applicable rule for the regulatory reporting period during which the
transaction is completed.
2. Treatment of a Community Banking Organization That Falls Below
Certain Leverage Ratio Levels
Under the proposal, an electing banking organization that had a
community bank leverage ratio greater than 9 percent would have been
considered well capitalized. In addition, an electing banking
organization would have been considered to have met the minimum capital
requirements under the generally applicable rule if its community bank
leverage ratio was 7.5 percent or greater.\20\ Under the proposal, an
electing banking organization could have chosen to stop using the
community bank leverage ratio framework and instead become subject to
the generally applicable rule. The proposal also provided an electing
banking organization with a declining community bank leverage ratio
(e.g., below 9 percent) with the option to remain in the community bank
leverage ratio framework indefinitely, rather than requiring the firm
to revert to the generally applicable rule. Under the proposal, an
electing banking organization that was an insured depository
institution and no longer exceeded the 9 percent community bank
leverage ratio would have been subject to community bank leverage ratio
levels that would serve as proxies for the adequately capitalized,
undercapitalized, and significantly undercapitalized PCA capital
categories.\21\
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\20\ Under the proposal, an electing banking organization that
is a depository institution holding company would no longer be
considered well capitalized if the holding company had a community
bank leverage ratio of 9 percent or less.
\21\ See, e.g., 12 U.S.C. 5371 (establishing a capital floor for
insured depository institutions and depository institution holding
companies); section 201 of the Act (requiring development of a
community bank leverage ratio for which a depository institution
exceeding that ratio would be considered to meet the requirements to
be treated as well capitalized under PCA); 12 U.S.C. 1831o (PCA).
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The agencies received comments and requests for clarification
regarding both the proposed PCA proxy levels and the grace period for a
banking organization that has a community bank leverage ratio at or
below 9 percent. One commenter requested that the agencies clarify when
PCA consequences begin to apply. Another commenter indicated that the
framework should require a banking organization that falls below the
well-capitalized level to immediately begin reporting capital ratios
under the generally applicable rule. Another commenter proposed that,
instead of instituting the PCA proxy levels, the agencies should give
qualifying banking organizations with a community bank leverage ratio
between 8 percent and 9 percent a two-quarter grace period after which
they would either need to restore their community bank leverage ratio
to greater than 9 percent or revert to the generally applicable rule.
The agencies also received comments in response to the proposal's
incorporation of community bank leverage ratio levels as proxies for
the adequately capitalized, undercapitalized, and significantly
undercapitalized PCA categories. In general, commenters noted that the
establishment of a new, separate PCA framework within the community
bank leverage ratio framework is not necessary or required under
section 201 of the Act, expressing concern that the community bank
leverage ratio framework could, in the future, function as the new, de
facto minimum capital requirement, particularly if it is difficult for
a banking organization to switch back to the generally applicable rule.
Commenters also noted community banking organizations' sensitivity to
several restrictions that could arise if the community banking
organization is determined to be less than well capitalized, including
restrictions on funding sources such as limits on brokered deposits,
and the inability to open branches or make acquisitions. Some
commenters suggested alternative calibration levels for the PCA proxy
levels.
In response to commenter concerns regarding the proposed PCA proxy
levels for electing banking organizations that no longer exceed a 9
percent leverage ratio, the agencies decided not to incorporate the
proposed PCA proxy levels in the final rule. Therefore, under the final
rule, banking organizations that are insured depository institutions
and that have a leverage ratio of greater than 9 percent are deemed to
have met the well capitalized capital ratio requirements for PCA
purposes. Further, the agencies included the requirement to have a
leverage ratio greater than 9 percent as a qualifying criterion in the
definition of a qualifying community banking organization.
Consequently, the two-quarter grace period described above also applies
depending on the level of an electing banking organization's leverage
ratio. Under the final rule, an electing banking organization that has
a leverage ratio that is greater than 8 percent and equal to or less
than 9 percent is allowed a two-quarter grace period after which it
must either (i) again meet all qualifying criteria or (ii) apply and
report the generally applicable rule. During this two-quarter period, a
banking organization that is an insured depository institution and that
has a leverage ratio that is greater than 8 percent would be considered
to have met the well-capitalized capital ratio requirements for PCA
purposes. An electing banking organization with a leverage ratio of 8
percent or less is not eligible for the grace period and must comply
with the generally applicable rule, i.e., for the quarter in which the
banking organization reports a leverage ratio of 8 percent or less. An
electing banking organization experiencing or anticipating such an
event would be expected to notify its primary federal supervisory
agency, which would respond as appropriate to the circumstances of the
banking organization.
A commenter asked that the proposed rule be revised to provide
expressly that for an otherwise qualifying community bank that is state
chartered to be disqualified from using the community bank leverage
ratio framework based on criteria other than the enumerated qualifying
criteria, such a determination must be made jointly by (1) the bank's
primary federal banking supervisory agency (either the FDIC or the
Board) and (2) the appropriate state bank supervisor. The agencies
expect to continue to work closely with the state bank supervisors,
particularly with respect to institutions that are supervised jointly.
However, the agencies are not revising the rule to require a joint
determination of the federal supervisor and the state supervisor
because such a requirement could prevent the federal supervisor from
applying the capital standards it believes to be appropriate.
Finally, a commenter requested clarification that a bank that is a
qualifying community bank may elect to use the community banking
organization leverage ratio framework even if its parent holding
company is not a qualifying community banking organization, or vice
versa. Consistent with the proposal, a non-advanced approaches
subsidiary insured depository institution may opt into the community
bank leverage ratio framework even if its parent holding company is not
a qualifying banking organization, and vice versa. The agencies do not
have safety and
[[Page 61787]]
soundness concerns with these scenarios and the agencies intended to
allow such elections in the proposal.
F. FDIC Deposit Insurance Assessments Regulations
The FDIC's deposit insurance assessments regulations also would be
affected by the finalized community bank leverage ratio framework. The
FDIC is considering, and is expected to adopt, a separate final rule to
apply the community bank leverage ratio framework to the deposit
insurance assessment system. The separate final rule amends the FDIC's
assessment regulations to price all qualifying community banks that
elect to use the community bank leverage ratio framework as small
banks, and continues to use the leverage ratio to determine assessment
rates for established small banks. The separate final rule additionally
clarifies that an electing bank that meets the definition of a
custodial bank will have no change to its custodial bank deduction or
reporting items required to calculate the deduction, and makes
technical amendments to ensure that the assessment regulations continue
to reference the PCA regulations for the definitions of capital
categories used in the deposit insurance assessment system. Because the
leverage ratio in this final rule is the same leverage ratio currently
being used for assessment purposes, the separate final rule does not
modify the FDIC's assessment methodology. The FDIC does not expect that
any changes to its deposit insurance assessment regulations pursuant to
this separate final rule will have a material impact on aggregate
assessment revenue or on rates paid by individual institutions.
G. Other Affected Regulations
Under the final rule, the community bank leverage ratio framework
incorporates tier 1 capital. Therefore, Federal banking regulations
outside of the regulatory capital rule (non-capital rules) can continue
to reference tier 1 capital. The final rule amends standards
referencing total capital so that an electing banking organization uses
tier 1 capital instead of total capital. The final rule amends
standards referencing risk-weighted assets so that an electing banking
organization uses average total consolidated assets (i.e., the
denominator of the leverage ratio) instead of risk-weighted assets.
In addition, certain of the agencies' non-capital rules refer to
``capital stock and surplus'' (or similar items) which is generally
defined as tier 1 capital and tier 2 capital plus the amount of
allowances for loan and lease losses not included in tier 2 capital.
The final rule amends standards referencing ``capital stock and
surplus'' (or similar items) so that an electing banking organization
uses tier 1 capital plus allowances for loan and lease losses (or
adjusted allowance for credit losses, as applicable). Thus, for
example, for purposes of compliance with section 23A of the Federal
Reserve Act, the Board's Regulation W should provide that for an
electing banking organization ``capital stock and surplus'' means tier
1 capital plus allowances for loan and lease losses (or adjusted
allowance for credit losses, as applicable).
H. Effective Date of the Final Rule
The final rule will be effective as of January 1, 2020, and banking
organizations can utilize the community bank leverage ratio framework
for purposes of filing their Call Report or Form FR Y-9C, as
applicable, for the first quarter for 2020 (i.e., as of March 31,
2020). A banking organization's compliance with capital requirements
for a quarter prior to the final rule's effective date shall be
determined according to the agencies' generally applicable rule until
the institution has filed their Call Report Form or FR Y-9C, as
applicable, for the first quarter of 2020 and has indicated whether or
not it has elected the community bank leverage ratio framework.
IV. Regulatory Analyses
A. Paperwork Reduction Act
The agencies' capital rule contains ``collections of information''
within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3501-3521). In accordance with the requirements of the PRA, the
agencies may not conduct or sponsor, and the respondent is not required
to respond to, an information collection unless it displays a
currently-valid Office of Management and Budget (OMB) control number.
The OMB control number for the OCC is 1557-0318, Board is 7100-0313,
and FDIC is 3064-0153. The information collections that are part of the
agencies' capital rule will not be affected by this final rule and
therefore no final submissions will be made by the FDIC or OCC to OMB
under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section
1320.11 of the OMB's implementing regulations (5 CFR 1320) in
connection with this rulemaking.\22\ The agencies note that firms that
elect to be subject to the community bank leverage ratio framework will
become exempt from certain collections of information that are part of
the agencies' regulatory capital rule. Because of uncertainty regarding
the number of firms that will elect to use the community bank leverage
ratio framework, the agencies have not revised their estimates
regarding the annual burden hours associated with such collections of
information to account for elections to use the community bank leverage
ratio framework. The agencies will reassess the annual burden hours
associated with these information collections once there is more
certainty regarding community bank leverage ratio elections.
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\22\ The OCC and FDIC submitted their information collections to
OMB at the proposed rule stage. However, these submissions were done
solely in an effort to apply a conforming methodology for
calculating the burden estimates and not due to the proposed rule.
OMB filed comments requesting that the agencies examine public
comment in response to the proposed rule and describe in the
supporting statement of its next collection any public comments
received regarding the collection as well as why (or why it did not)
incorporate the commenter's recommendation. In addition, OMB
requested that the OCC and the FDIC note the convergence of the
agencies on the single methodology. The agencies received no
comments on the information collection requirements. Since the
proposed rule stage, the agencies have conformed their respective
methodologies in a separate final rulemaking titled, Regulatory
Capital Rule: Implementation and Transition of the Current Expected
Credit Losses Methodology for Allowances and Related Adjustments to
the Regulatory Capital Rule and Conforming Amendments to Other
Regulations, 84 FR 4222 (February 14, 2019), and the FDIC and OCC
have had their submissions approved through OMB. As a result, the
agencies' information collections related to the regulatory capital
rules are currently aligned and therefore no submission will be made
to OMB.
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The final rule will also require changes to the Consolidated
Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041,
and FFIEC 051) and the Consolidated Financial Statements for Holding
Companies (FR Y-9C; OMB No. 7100-0128 (Board)), which will be addressed
in one or more separate Federal Register notices.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires an agency either to provide a final regulatory flexibility
analysis with a final rule for which a general notice of proposed
rulemaking is required or to certify that the final rule will not have
a significant economic impact on a substantial number of small
entities. The U.S. Small Business Administration (SBA) establishes size
standards that define which entities are small businesses for purposes
of the RFA.\23\
[[Page 61788]]
Under regulations issued by the SBA, the size standard to be considered
a small business for banking entities subject to the proposed rule is
$600 million or less in consolidated assets.\24\ Under 5 U.S.C. 605(b),
this analysis is not required if an agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities and publishes its certification and a brief explanatory
statement in the Federal Register along with its rule.
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\23\ U.S. SBA, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, available at
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
\24\ See 13 CFR 121.201.
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Pursuant to the RFA, the OCC specifically considers (a) whether the
final rule is likely to impact a substantial number of small entities;
and (b) whether the economic impact on a substantial number of small
entities is significant. To measure whether a rule would have a
``significant economic impact,'' the OCC focuses on the potential costs
of the rule on OCC-supervised small entities, consistent with guidance
on the RFA published by the Office of Advocacy of the SBA.\25\ As of
December 31, 2017, the OCC supervised approximately 898 small
entities.\26\
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\25\ See ``A Guide for Government Agencies; How to Comply with
the Regulatory Flexibility Act,'' pp. 18-20 (Aug. 2017), available
at https://www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf.
\26\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $600 million and $41.5
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 if the OCC should
classify an OCC-supervised institution a small entity. The OCC uses
December 31, 2017, to determine size because 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 of the U.S. Small Business Administration's Table of
Size Standards.
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Although the minimum required capital under the community bank
leverage ratio framework will, in most cases, be greater than that
required for the generally applicable risk-based and leverage capital
requirements, banks are not required to opt into the community bank
leverage ratio framework. In addition, banks that do elect to use the
community bank leverage ratio framework may, at any time, stop using
the community bank leverage ratio framework. Accordingly, the final
rule does not represent a regulatory increase in minimum regulatory
capital requirements, and the primary cost to institutions for
implementing the final rule will be administrative costs associated
with required updates to their capital reporting procedures and
reports.\27\
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\27\ The agencies intend to separately seek comment on the
proposed changes to regulatory filings for qualifying community
banking organizations that elect to use the community bank leverage
ratio framework.
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Banks that elect to use the community bank leverage ratio framework
will have to make updates to their capital reporting procedures and
reports. Banks will also have to make updates to existing policies and
procedures to ensure compliance with regulations that will be affected
by the final rule (e.g., lending limits). The total impact associated
with the final rule is the estimated annual tax benefit minus the
compliance costs of modifying policies and procedures. The OCC
estimates that each institution will spend no more than 160 hours to
modify their policies and procedures. To estimate costs, the OCC uses a
compensation rate of $114 per hour.\28\ Therefore, the OCC estimates
the cost per institution will not exceed $18,240 (160 hours x $114 per
hour).
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\28\ To estimate wages, the OCC reviewed May 2018 data for wages
(by industry and occupation) from the U.S. Bureau of Labor
Statistics (BLS) for credit intermediation and related activities
excluding non-depository credit intermediaries (NAICS 5220A1). To
estimate compensation costs associated with the rule, the OCC uses
$114 per hour, which is based on the average of the 90th percentile
for nine occupations adjusted for inflation (2.8 percent as of Q1
2019, according to the BLS), plus an additional 33.2 percent for
benefits (based on the percent of total compensation allocated to
benefits as of Q4 2018 for NAICS 522: Credit intermediation and
related activities).
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In general, the OCC classifies the economic impact of expected cost
(to comply with a rule) on an individual bank as significant if the
total estimated monetized costs in one year are greater than (1) 5
percent of the bank's total annual salaries and benefits or (2) 2.5
percent of the bank's total annual non-interest expense. Based on the
above criteria, the estimated cost of the rule could impose a
significant economic impact at 19 of the 898 small entities if they all
elected to opt into the community bank leverage ratio framework. The
OCC uses 5 percent to determine a substantial number of small entities.
Approximately 2 percent (19/898 = 2.1%) of small entities could be
significantly impacted by the rule, which is not a substantial number
of small entities.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
Board: An initial regulatory flexibility analysis (IRFA) was
included in the proposal in accordance with section 3(a) of the
Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the
IRFA, the Board requested comment on the effect of the proposed rule on
small entities and on any significant alternatives that would reduce
the regulatory burden on small entities. The Board did not receive any
comments on the IRFA. The RFA requires an agency to prepare a final
regulatory flexibility analysis (FRFA) unless the agency certifies that
the rule will not, if promulgated, have a significant economic impact
on a substantial number of small entities. In accordance with section
3(a) of the RFA, the Board has reviewed the final regulation. Based on
its analysis, and for the reasons stated below, the Board certifies
that the rule will not have a significant economic impact on a
substantial number of small entities.
Under regulations issued by the Small Business Administration, a
small entity includes a bank, bank holding company, or savings and loan
holding company with assets of $600 million or less and trust companies
with total assets of $41.5 million or less (small banking
organization).\29\ On average since the second quarter of 2018, there
were approximately 2,976 small bank holding companies, 133 small
savings and loan holding companies, and 555 small state member banks.
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\29\ See 13 CFR 121.201. Effective August 19, 2019, the Small
Business Administration revised the size standards for banking
organizations to $600 million in assets from $550 million in assets.
84 FR 34261 (July 18, 2019).
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As discussed, the Board is issuing this final rule to provide a
simple measure of capital adequacy for certain community banking
organizations. Under the final rule, depository institutions and
depository institution holding companies that have less than $10
billion in total consolidated assets and meet other qualifying
criteria, including a leverage ratio (equal to tier 1 capital divided
by average total consolidated assets) of greater than 9 percent, will
be eligible to opt into the community bank leverage ratio framework
and, as a result, will not be required to calculate the risk-based
capital ratios under the generally applicable capital rule.\30\
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\30\ In general, the Board's capital rule only applies to bank
holding companies and savings and loan holding companies that are
not subject to the Board's Small Bank Holding Company and Savings
and Loan Holding Company Policy Statement, which applies to bank
holding companies and savings and loan holding companies with less
than $3 billion in total assets that also meet certain additional
criteria. Very few bank holding companies and savings and loan
holding companies that are small entities would be impacted by the
final rule because very few such entities are subject to the Board's
capital rule.
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[[Page 61789]]
Although the final rule would provide some direct reduction in
compliance burden associated with the capital rule, much of that
reduction of compliance burden would be achieved through a separate
notice to amend the regulatory reports associated with the capital
rule. The Board does not expect that the final rule will result in a
material change in the level of capital maintained by small banking
organizations because (i) the framework is optional and (ii) a
substantial majority of small banking organizations maintain capital in
excess of both the generally applicable capital rule and the threshold
established under the final rule. A small number of firms may face
reduced capital requirements due to electing to use the community bank
leverage ratio framework rather than the existing risk-based and
leverage capital ratio framework. For example, the Board estimates that
454 small state member banks would be eligible for the community bank
leverage ratio framework and that 4 of these small state member may
face less stringent capital requirements as a result. The Board does
not expect the rule to have a significant economic impact on a
substantial number of small entities.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available for public comment a
final regulatory flexibility analysis describing the impact of the
proposed rule on small entities.\31\ However, a regulatory flexibility
analysis is not required if the agency certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities. The SBA has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million that are independently owned and operated or owned by a holding
company with less than or equal to $600 million in total assets.\32\
Generally, the FDIC considers a significant effect to be a quantified
effect in excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions.
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\31\ 5 U.S.C. 601 et seq.
\32\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended, by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
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For the reasons described below, the FDIC believes that the final
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the FDIC has conducted and is
providing a final regulatory flexibility analysis.
1. The Need for, and Objectives of, the Rule
The policy objective of the proposed rule is to conform the FDIC's
regulations to the statutory language established by the Act. On May
24, 2018, the Act amended provisions in the Dodd-Frank Wall Street
Reform and Consumer Protection Act \33\ as well as certain other
statutes administered by the agencies.\34\ Section 201 of the Act,
titled ``Capital Simplification for Qualifying Community Banks,''
directs the agencies to develop a community bank leverage ratio
(community bank leverage ratio) of not less than 8 percent and not more
than 10 percent for qualifying community banks. The Act defines a
qualifying community banking organization as a depository institution
or depository institution holding company with total consolidated
assets of less than $10 billion.
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\33\ Public Law 111-203, 124 Stat. 1376.
\34\ Public Law 115-174, 132 Stat. 1296.
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2. The Significant Issues Raised by the Public Comments in Response to
the Initial Regulatory Flexibility Analysis
No significant issues were raised by the public comments in
response to the initial regulatory flexibility analysis.
3. Response of the Agency to Any Comments Filed by the Chief Counsel
for Advocacy of the Small Business Administration in Response to the
Proposed Rule
No comments were filed by the Chief Counsel for Advocacy of the
Small Business Administration in response to the proposed rule.
4. A Description of and an Estimate of the Number of Small Entities to
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is
Available
As of March 31, 2019, the FDIC supervised 3,465 institutions, of
which 2,705 are considered small entities for the purposes of RFA. Of
these FDIC-supervised small entities, 2,297 (85 percent) meet or exceed
the qualifications for adopting the community bank leverage ratio
framework, as delineated above in Section III.A.\35\
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\35\ Consolidated Reports of Condition and Income for the
quarter ending March 31, 2019.
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Adoption of the community bank leverage ratio framework is
voluntary so it is uncertain how many small, FDIC-supervised entities
that qualify will choose to adopt. Each qualifying entity must weigh
the benefits of not being subject to risk-based capital requirements
against the costs of adhering to the higher leverage ratio requirements
under the community bank leverage ratio framework. As of March 2019,
237 (9 percent of) small, FDIC-supervised institutions would experience
a net decrease in required capital holdings as a result of qualifying
for and adopting the community bank leverage ratio framework. For
purposes of this analysis, the FDIC assumes that these 237 small, FDIC-
supervised institutions would adopt the community bank leverage ratio
framework and therefore be affected by the final rule. In order to
assess the maximum potential effects of the proposed rule, this
analysis also calculates the expected effects assuming that all 2,297
small, FDIC-supervised institutions that qualify would adopt the
community bank leverage ratio framework.
5. A Description of the Projected Reporting, Recordkeeping and Other
Compliance Requirements of the Rule
This analysis considers benefits and costs relative to a pre-
statutory baseline in which qualifying institutions must maintain a
tier 1 leverage ratio of five percent, a tier 1 risk-based capital
ratio of eight percent, a common equity tier 1 ratio of 6.5 percent and
a total capital ratio of 10 percent in order to be deemed well
capitalized for purposes of Prompt Corrective Action. Pursuant to the
capital conservation buffer that is part of the Basel III rule,
institutions must also maintain an additional 0.5 percentage points of
risk-weighted assets above the risk-based well-capitalized thresholds
to avoid potential limitations on dividends and other capital
distributions.\36\ Under the final rule, in contrast, qualifying
institutions would have the option to operate under a 9 percent
community bank leverage ratio framework and not be subject to risk-
based capital requirements.
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\36\ With the additional capital conservation buffer
requirements, the pre-statute baseline risk-based capital thresholds
are 7 percent for common equity tier 1 capital, 8.5 percent for tier
1 capital, and 10.5 percent for total capital.
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As previously discussed, 241 (9 percent of) small, FDIC-supervised
institutions would experience a net decrease in required capital
holdings as
[[Page 61790]]
a result of qualifying for and adopting the community bank leverage
ratio framework. For purposes of this analysis, the FDIC assumes that
these 241 small, FDIC-supervised institutions would adopt the community
bank leverage ratio framework and therefore be affected by the final
rule. In order to assess the maximum potential effects of the proposed
rule, this analysis also calculates the expected effects assuming that
all 2,277 small, FDIC-supervised institutions that qualify would adopt
the community bank leverage ratio framework.
No bank will be compelled to raise capital under the community bank
leverage ratio framework since the framework is optional. Moreover, as
of March 2019, the 2,277 qualifying small, FDIC-supervised institutions
held aggregate tier 1 capital in excess of 12 percent of their average
assets--well in excess of both the 5 percent required by the generally
applicable leverage ratio rules and the 9 percent threshold in the
community bank leverage ratio framework. Some of the 241 small, FDIC-
supervised banks whose capital requirements would be reduced under the
community bank leverage ratio framework might choose to reduce their
capital. However, these 241 banks also held aggregate tier 1 capital in
excess of 12 percent of their average assets, suggesting that most of
them already have the ability to operate with less capital but have
chosen not to. Given these facts, the FDIC does not believe that
adopting banks will change their leverage capital ratios significantly
in response to this rule.
It is possible that the elimination of risk-based capital
requirements by banks that choose to adopt the rule would increase
their incentives to hold higher-weighted assets, such as loans. To
provide a high-end estimate of the economic effect for RFA purposes,
this analysis will assume that every adopting bank responds to the rule
by permanently increasing its loan balances by 1 percent.
The analysis estimates the annual economic effect of a 1 percent
permanent increase in loan balances at adopting banks by multiplying
the increase by the net interest margin currently being earned by each
bank.\37\
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\37\ Defined as the annualized net interest income as a percent
of average earning assets, as reported on schedule RI. For
reference, the average net interest margin was 3.9 percent for
small, FDIC-insured institutions, for the quarter ending March 31,
2019.
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For each of the 237 banks that would experience a reduction in
capital requirements under the community bank leverage ratio framework,
this analysis calculates the expected economic effect to each bank by
multiplying 1 percent of the bank's loan balances by its net interest
margin. Under these assumptions, as of March 2019, only six banks would
experience an annual increase in net interest income that is
significant (i.e., greater than 2.5 percent of their total noninterest
income over the previous four quarters or 5 percent of their total
salaries and benefits paid over the previous four quarters). The
estimated aggregate increase in net interest income totals
approximately $600,000. The six banks would comprise only less than 0.3
percent of the 2,705 small entities covered by this rule. These effects
are not significant for a substantial number of small entities.
As an estimate of the maximum potential effects of the rule, the
analysis alternately assumes that all of the 2,297 qualifying small
FDIC-supervised banks that could adopt the framework choose to do so,
and that all increase their loan balances by 1 percent and earn their
current net interest margin on the new loans. This analysis results in
twelve banks experiencing an annual increase in net interest income
that is significant (i.e., greater than 2.5 percent of their total
noninterest income over the previous four quarters or 5 percent of
their total salaries and benefits paid over the previous four
quarters). The twelve banks comprise less than 0.54 percent of the
2,705 small entities covered by this rule. Thus, the plausible high-end
effects are still not significant for a substantial number of small
entities.
Although the preceding assumptions and analysis indicate that the
rule is unlikely to have significant economic effects on a substantial
number of small, FDIC-supervised institutions, the extent of the rule's
effects on capital and assets are uncertain. Therefore, the FDIC
believes, but does not certify, that the final rule will not have a
significant economic impact on a substantial number of small entities.
There are other non-quantified economic effects resulting from the
adoption of the community bank leverage ratio framework, such as
simplicity benefits and compliance cost-savings from not having to
comply with risk-based capital requirements going forward. Utilizing
the community bank leverage ratio framework is expected to reduce
reporting costs for small entities. Opting into the community bank
leverage ratio framework would enable institutions to eliminate the
reporting of many line items in schedule RC-R of their Call Reports,
resulting in a reduction in reporting costs for institutions.
Depository institutions also may benefit from reduced reporting costs
because by being able to employ those resources in ways the institution
believes is more beneficial. The FDIC does not have a reasonable basis
for quantifying the compliance cost savings associated with the rule,
but does not believe they will be significant for a substantial number
of small entities.
The quantified economic effects are expected to be significant for
less than half of a percent of small, FDIC-supervised institutions
covered by this rule. Even assuming broad adoption rates and an
increase in lending by all adopting institutions, the quantified
economic effects are only significant for less than half of a percent
of small, FDIC-supervised institutions.
6. A Description of the Steps the Agency Has Taken To Minimize the
Significant Economic Impact on Small Entities
As described above, the FDIC does not believe this rule will have a
significant economic impact on a substantial number of small entities.
Further, since the election of the community bank leverage ratio is
voluntary, the impacts are expected to be beneficial for institutions
that adopt it.
The agencies considered alternative calibrations, such as 8
percent. As discussed in Section III.C however, the agencies believe
that a 9 percent calibration, with complementary qualifying criteria
for asset size, off-balance sheet assets, and trading assets and
liabilities, should generally maintain the current level of regulatory
capital held by electing banking organizations while maintaining the
quality and quantity of regulatory capital in the banking system
consistent with the agencies' safety-and-soundness goals, while also
supporting the agencies' goals of reducing regulatory burden for as
many community banking organizations as possible. For example, even
though an 8 percent leverage ratio would allow more banking
organizations to opt into the community bank leverage ratio framework
it could incentivize a large number of qualifying community banking
organizations to hold less regulatory capital than they do today.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \38\ 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 final
[[Page 61791]]
rule in a simple and straightforward manner, and did not receive any
comments on the use of plain language.
---------------------------------------------------------------------------
\38\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
D. OCC Unfunded Mandates Reform Act of 1995
The OCC analyzed the final rule under the factors set forth in the
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the proposed rule includes a
Federal mandate that may result in the expenditure by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). Because the
rule does not specifically require banks to modify their policies and
procedures, the OCC has determined that there are no expenditures for
the purposes of UMRA. Therefore, the OCC concludes that the final rule
will not result in an expenditure of $100 million or more annually by
state, local, and tribal governments, or by the private sector.
E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\39\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each Federal banking agency
must consider, consistent with principles of safety and soundness and
the public interest, any administrative burdens that such regulations
would place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\40\
---------------------------------------------------------------------------
\39\ 12 U.S.C. 4802(a).
\40\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
The Federal banking agencies considered the administrative burdens
and benefits of the rule and its elective framework in determining its
effective date and administrative compliance requirements. As such, the
final rule will be effective on January 1, 2020.
F. The Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\41\ If a rule is deemed a ``major rule'' by the Office of
Management and Budget (OMB), the Congressional Review Act generally
provides that the rule may not take effect until at least 60 days
following its publication.\42\
---------------------------------------------------------------------------
\41\ 5 U.S.C. 801 et seq.
\42\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\43\ The OMB has determined that the final rule is not a
``major rule'' within the meaning of the Congressional Review Act. As
required by the Congressional Review Act, the agencies will submit the
final rule and other appropriate reports to Congress and the Government
Accountability Office for review.
---------------------------------------------------------------------------
\43\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 1
Banks, Banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 3
Administrative practice and procedure, Federal Reserve System,
National banks, Reporting and recordkeeping requirements.
12 CFR Part 5
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements, Securities.
12 CFR Part 6
Federal Reserve System, National banks.
12 CFR Part 23
National banks.
12 CFR Part 24
Community development, Credit, Investments, Low and moderate income
housing, National banks, Reporting and recordkeeping requirements,
Rural areas, Small businesses.
12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
12 CFR Part 34
Mortgages, National banks, Reporting and recordkeeping
requirements.
12 CFR Part 160
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 192
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 206
Banks, Banking, Interbank liability, Lending limits, Savings
associations.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
12 CFR Part 215
Credit, Penalties, Reporting and recordkeeping requirements.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Holding
companies, Reporting and recordkeeping requirements, Securities.
12 CFR Part 223
Banks, Banking, Federal Reserve System.
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 238
Savings and loan holding companies (Regulation LL).
[[Page 61792]]
12 CFR Part 251
Administrative practice and procedure, Banks, Banking,
Concentration limit, Federal Reserve System, Holding companies,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 303
Administrative practice and procedure, Bank deposit insurance,
Banks, Banking, Reporting and recordkeeping requirements, State non-
member banks, Savings associations.
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Reporting and recordkeeping requirements, State non-member
banks, Savings associations.
12 CFR Part 337
Banks, Banking, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 347
Authority delegations (Government agencies), Bank deposit
insurance, Banks, Banking, Credit, Foreign banking, Investments,
Reporting and recordkeeping requirements, U.S. Investments abroad.
12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, Banking,
Investments, Reporting and recordkeeping requirements.
12 CFR Part 365
Banks, Banking, Mortgages.
12 CFR Part 390
Administrative practice and procedure, Advertising, Aged, Civil
rights, Conflict of interests, Credit, Crime, Equal employment
opportunity, Fair housing, Government employees, Individuals with
disabilities, Reporting and recordkeeping requirements, Savings
associations.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the joint preamble, chapter I of title 12
of the Code of Federal Regulations is amended as follows:
PART 1--INVESTMENT SECURITIES
0
1. The authority citation for part 1 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
0
2. Section 1.2 is amended by revising paragraph (a) to read as follows:
Sec. 1.2 Definitions.
(a) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses as reported in the bank's Consolidated Report of
Condition and Income (Call Report); or
(2) For all other banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in part 3 of this chapter, as
applicable (or comparable capital guidelines of the appropriate Federal
banking agency), as reported in the bank's Call Report; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (a)(2)(i) of
this section, as reported in the bank's Call Report.
* * * * *
PART 3--CAPITAL ADEQUACY STANDARDS
0
3. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
Sec. 3.2 [Amended]
0
4. Section 3.2 is amended by removing the first definition of ``Non-
significant investment in the capital of an unconsolidated financial
institution''.
0
5. Section 3.10 is amended by revising paragraph (a) to read as
follows:
Sec. 3.10 Minimum capital requirements.
(a) Minimum capital requirements. (1) A national bank or Federal
savings association must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches national banks or Federal savings
associations or, for Category III OCC-regulated institutions, a
supplementary leverage ratio of 3 percent.
(vi) For Federal savings associations, a tangible capital ratio of
1.5 percent.
(2) A qualifying community banking organization (as defined in
Sec. 3.12), that is subject to the community bank leverage ratio
framework (as defined in Sec. 3.12), is considered to have met the
minimum capital requirements in this paragraph (a).
* * * * *
0
6. Add section 3.12 to read as follows:
Sec. 3.12 Community bank leverage ratio framework.
(a) Community bank leverage ratio framework. (1) Notwithstanding
any other provision in this part, a qualifying community banking
organization that has made an election to use the community bank
leverage ratio framework under paragraph (a)(3) of this section shall
be considered to have met the minimum capital requirements under Sec.
3.10, the capital ratio requirements for the well capitalized capital
category under Sec. 6.4(b)(1) of this chapter, and any other capital
or leverage requirements to which the qualifying community banking
organization is subject, if it has a leverage ratio greater than 9
percent.
(2) For purposes of this section, a qualifying community banking
organization means a national bank or Federal savings association that
is not an advanced approaches national bank or Federal savings
association and that satisfies all of the following criteria:
(i) Has a leverage ratio of greater than 9 percent;
(ii) Has total consolidated assets of less than $10 billion,
calculated in accordance with the reporting instructions to the Call
Report as of the end of the most recent calendar quarter;
(iii) Has off-balance sheet exposures of 25 percent or less of its
total consolidated assets as of the end of the most recent calendar
quarter, calculated as the sum of the notional amounts of the exposures
listed in paragraphs (a)(2)(iii)(A) through (I) of this section,
divided by total consolidated assets, each as of the end of the most
recent calendar quarter:
(A) The unused portion of commitments (except for unconditionally
cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through
[[Page 61793]]
(1) Guarantees; and
(2) Credit derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to the Call Report;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures; and
(iv) Has total trading assets plus trading liabilities, calculated
in accordance with the reporting instructions to the Call Report of 5
percent or less of the national bank's or Federal savings association's
total consolidated assets, each as of the end of the most recent
calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) For purposes of this paragraph (a)(3), a qualifying community
banking organization makes an election to use the community bank
leverage ratio framework by completing the applicable reporting
requirements of its Call Report.
(iii)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio framework may opt out
of the community bank leverage ratio framework by completing the
applicable risk-based and leverage ratio reporting requirements
necessary to demonstrate compliance with Sec. 3.10(a)(1) in its Call
Report or by otherwise providing this information to the OCC.
(B) A qualifying community banking organization that opts out of
the community bank leverage ratio framework pursuant to paragraph
(a)(3)(iii)(A) of this section must comply with Sec. 3.10(a)(1)
immediately.
(b) Calculation of the leverage ratio. A qualifying community
banking organization's leverage ratio is calculated in accordance with
Sec. 3.10(b)(4), except that a qualifying community banking
organization is not required to:
(1) Make adjustments and deductions from tier 2 capital for
purposes of Sec. 3.22(c); or
(2) Calculate and deduct from tier 1 capital an amount resulting
from insufficient tier 2 capital under Sec. 3.22(f).
(c) Treatment when ceasing to meet the qualifying community banking
organization requirements. (1) Except as provided in paragraphs (c)(5)
and (6) of this section, if a national bank or Federal savings
association ceases to meet the definition of a qualifying community
banking organization, the national bank or Federal savings association
has two reporting periods under its Call Report (grace period) to
either satisfy the requirements to be a qualifying community banking
organization or to comply with Sec. 3.10(a)(1) and report the required
capital measures under Sec. 3.10(a)(1) on its Call Report.
(2) The grace period begins as of the end of the calendar quarter
in which the national bank or Federal savings association ceases to
satisfy the criteria to be a qualifying community banking organization
provided in paragraph (a)(2) of this section. The grace period ends on
the last day of the second consecutive calendar quarter following the
beginning of the grace period.
(3) During the grace period, the national bank or Federal savings
association continues to be treated as a qualifying community banking
organization for the purpose of this part and must continue calculating
and reporting its leverage ratio under this section unless the national
bank or Federal savings association has opted out of using the
community bank leverage ratio framework under paragraph (a)(3) of this
section.
(4) During the grace period, the qualifying community banking
organization continues to be considered to have met the minimum capital
requirements under Sec. 3.10(a)(1), the capital ratio requirements for
the well capitalized capital category under Sec. 6.4(b)(1)(i)(A)
through (D) of this chapter, and any other capital or leverage
requirements to which the qualifying community banking organization is
subject, and must continue calculating and reporting its leverage ratio
under this section.
(5) Notwithstanding paragraphs (c)(1) through (4) of this section,
a national bank or Federal savings association that no longer meets the
definition of a qualifying community banking organization as a result
of a merger or acquisition has no grace period and immediately ceases
to be a qualifying community banking organization. Such a national bank
or Federal savings association must comply with the minimum capital
requirements under Sec. 3.10(a)(1) and must report the required
capital measures under Sec. 3.10(a)(1) for the quarter in which it
ceases to be a qualifying community banking organization.
(6) Notwithstanding paragraphs (c)(1) through (4) of this section,
a national bank or Federal savings association that has a leverage
ratio of 8 percent or less does not have a grace period and must comply
with the minimum capital requirements under Sec. 3.10(a)(1) and must
report the required capital measures under Sec. 3.10(a)(1) for the
quarter in which it reports a leverage ratio of 8 percent or less.
0
7. Section 3.22 is amended by revising paragraph (f) to read as
follows:
Sec. 3.22 Regulatory capital adjustments and deductions.
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
national bank or Federal savings association does not have a sufficient
amount of a specific component of capital to effect the required
deduction after completing the deductions required under paragraph (d)
of this section, the national bank or Federal savings association must
deduct the shortfall from the next higher (that is, more subordinated)
component of regulatory capital. Notwithstanding any other provision of
this section, a qualifying community banking organization (as defined
in Sec. 3.12) that has elected to use the community bank leverage
ratio framework pursuant to Sec. 3.12 is not required to deduct any
shortfall of tier 2 capital from its additional tier 1 capital or
common equity tier 1 capital.
* * * * *
PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES
0
8. The authority citation for part 5 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a-2, 215a-3, 481,
1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B).
0
9. Section 5.3 is amended by revising paragraph (e) to read as follows:
Sec. 5.3 Definitions.
* * * * *
(e) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's
Consolidated Report of Condition and Income (Call Report); or
(2) For all other national banks and Federal savings associations:
[[Page 61794]]
(i) A national bank's or Federal savings association's tier 1 and
tier 2 capital calculated under the OCC's risk-based capital standards
set forth in part 3 of this chapter, as applicable, as reported in the
bank's or savings association's Consolidated Reports of Condition and
Income (Call Reports) filed under 12 U.S.C. 161 or 12 U.S.C. 1464(v),
respectively; plus
(ii) The balance of the national bank's or Federal savings
association's allowances for loan and lease losses not included in the
institution's tier 2 capital, for purposes of the calculation of risk-
based capital reported in the institution's Call Reports, described in
paragraph (e)(2)(i) of this section.
* * * * *
0
10. Section 5.37 is amended by revising paragraph (c)(3) to read as
follows:
Sec. 5.37 Investment in national bank or Federal savings association
premises.
* * * * *
(c) * * *
(3) Capital and surplus means:
(i) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(A) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(B) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's Call
Report; or
(ii) For all other national banks and Federal savings associations:
(A) A national bank's or Federal savings association's tier 1 and
tier 2 capital calculated under part 3 of this chapter, as applicable,
as reported in the national bank's or Federal savings association's
Consolidated Reports of Condition and Income (Call Reports) filed under
12 U.S.C. 161 or 12 U.S.C. 1464(v), respectively; plus
(B) The balance of a national bank's or Federal savings
association's allowances for loan and lease losses not included in the
bank's or savings association's tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (c)(3)(ii)(A)
of this section, as reported in the national bank's or Federal savings
association's Call Reports filed under 12 U.S.C. 161 or 1464(v),
respectively.
* * * * *
0
11. Section 5.58 is amended by revising paragraph (h)(2) to read as
follows:
Sec. 5.58 Pass-through investments by a Federal savings association.
* * * * *
(h) * * *
(2) The Federal savings association is not investing more than 10
percent of its total capital (or, in the case of a Federal savings
association that is a qualifying community banking organization that
has elected to use the community bank leverage ratio framework, 10
percent of its tier 1 capital, as used under Sec. 3.12 of this
chapter) in one company;
* * * * *
PART 6--PROMPT CORRECTIVE ACTION
0
12. The authority citation for part 6 continues to read as follows:
Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).
0
13. Section 6.4 is amended by:
0
a. Revising the section heading;
0
b. Removing paragraph (b);
0
c. Redesignating paragraph (c) as paragraph (b);
0
d. Revising newly designated paragraph (b) introductory text and
paragraph (b)(1); and
0
e. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d),
respectively.
The revisions read as set forth below.
Sec. 6.4 Capital measures and capital categories.
(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this part, the relevant capital measures shall be:
(i) Total Risk-Based Capital Measure: the total risk-based capital
ratio;
(ii) Tier 1 Risk-Based Capital Measure: the tier 1 risk-based
capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier
1 risk-based capital ratio;
(iv) The Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches national bank or
advanced approaches Federal savings association, on January 1, 2018,
and thereafter, the supplementary leverage ratio; and
(2) For a qualifying community banking organization (as defined in
Sec. 3.12 of this chapter), that has elected to use the community bank
leverage ratio framework (as defined in Sec. 3.12 of this chapter),
the leverage ratio calculated in accordance with Sec. 3.12(b) of this
chapter is used to determine the well capitalized capital category
under paragraph (b)(1)(i) (A) through (D) of this section.
(b) Capital categories. For purposes of section 38 of the FDI Act
and this part, a national bank or Federal savings association shall be
deemed to be:
(1)(i) Well capitalized if:
(A) Total Risk-Based Capital Measure: The national bank or Federal
savings association has a total risk-based capital ratio of 10.0
percent or greater;
(B) Tier 1 Risk-Based Capital Measure: The national bank or Federal
savings association has a tier 1 risk-based capital ratio of 8.0
percent or greater;
(C) Common Equity Tier 1 Capital Measure: The national bank or
Federal savings association has a common equity tier 1 risk-based
capital ratio of 6.5 percent or greater;
(D) Leverage Measure:
(1) The national bank or Federal savings association has a leverage
ratio of 5.0 percent or greater; and
(2) 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
(Form 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 (Form FR 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
(E) The national bank or Federal savings association is not subject
to any written agreement, order or capital directive, or prompt
corrective action directive issued by the OCC pursuant to section 8 of
the FDI Act, the International Lending Supervision Act of 1983 (12
U.S.C. 3907), the Home Owners' Loan Act (12 U.S.C. 1464(t)(6)(A)(ii)),
or section 38 of the FDI Act, or any regulation thereunder, to meet and
maintain a specific capital level for any capital measure.
(ii) Qualifying community banking organization: A qualifying
community banking organization, as defined under Sec. 3.12 of this
chapter, that has elected to use the community bank leverage ratio
framework under Sec. 3.12 of this chapter, shall be considered to have
met the capital ratio requirements for the well capitalized capital
category in paragraph (b)(1)(i) (A) through (D) of this section.
* * * * *
PART 23--LEASING
0
14. The authority citation for part 23 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a.
0
15. Section 23.2 is amended by revising paragraph (b) to read as
follows:
[[Page 61795]]
Sec. 23.2 Definitions.
* * * * *
(b) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus.
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in part 3 of this chapter, as
applicable, as reported in the bank's Consolidated Reports of Condition
and Income (Call Report) filed under 12 U.S.C. 161; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's Tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (b)(2)(i) of
this section, as reported in the bank's Consolidated Report of
Condition and Income filed under 12 U.S.C. 161.
* * * * *
PART 24--COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY
DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS
0
16. The authority citation for part 24 continues to read as follows:
Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818.
0
17. Section 24.2 is amended by revising paragraph (b) to read as
follows:
Sec. 24.2 Definitions.
* * * * *
(b) Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in part 3 of this chapter, as
applicable, as reported in the bank's Consolidated Reports of Condition
and Income (Call Report) as filed under 12 U.S.C. 161; plus
(ii) The balance of a bank's allowances for loan and lease losses
not included in the bank's tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (b)(2)(i) of
this section, as reported in the bank's Call Report as filed under 12
U.S.C. 161.
* * * * *
PART 32--LENDING LIMITS
0
18. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463,
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.
0
19. Section 32.2 is amended by revising paragraph (c) to read as
follows:
Sec. 32.2 Definitions.
* * * * *
(c) Capital and surplus means--
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses or allowance for credit losses, as applicable, as
reported in the national bank's or Federal savings association's Call
Report; or
(2) For all other national banks and Federal savings associations:
(i) A national bank's or savings association's tier 1 and tier 2
capital calculated under the risk-based capital standards applicable to
the institution as reported in the bank's or savings association's
Consolidated Reports of Condition and Income (Call Report); plus
(ii) The balance of a national bank's or Federal savings
association's allowances for loan and lease losses not included in the
bank's or savings association's tier 2 capital, for purposes of the
calculation of risk-based capital described in paragraph (c)(2)(i) of
this section, as reported in the national bank's or savings
association's Call Report.
* * * * *
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
20. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463,
1464, 1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B) and 15 U.S.C. 1639h.
0
21. Section 34.81 is amended by adding a definition for ``Capital and
surplus'' in alphabetical order to read as follows:
Sec. 34.81 Definitions.
Capital and surplus means:
(1) For qualifying community banking organizations that have
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter:
(i) A qualifying community banking organization's tier 1 capital,
as used under Sec. 3.12 of this chapter; plus
(ii) A qualifying community banking organization's allowances for
loan and lease losses, or allowance for credit losses, as applicable,
as reported in the national bank's Call Report; or
(2) For all other national banks:
(i) A bank's tier 1 and tier 2 capital calculated under the OCC's
risk-based capital standards set forth in part 3 of this chapter, as
applicable, as reported in the bank's Call Report; plus
(ii) The balance of a bank's allowances for loan and lease losses,
or allowance for credit losses, as applicable, not included in the
bank's tier 2 capital, for purposes of the calculation of risk-based
capital described in paragraph (a)(2)(i) of this section, as reported
in the bank's Call Report.
* * * * *
PART 160--LENDING AND INVESTMENT
0
22. The authority citation for part 160 continues to read as follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828,
3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.
0
23. Section 160.3 is amended by adding a definition for ``total
capital'' in alphabetical order to read as follows:
Sec. 160.3 Definitions.
* * * * *
Total capital means:
(1) For a qualifying community banking organization that has
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter, total capital refers to the qualifying community banking
organization's tier 1 capital, as used under Sec. 3.12(b)(2) of this
chapter;
(2) For all other Federal savings associations, total capital means
the sum of tier 1 capital and tier 2 capital,
[[Page 61796]]
as calculated under part 3 of this chapter.
PART 192--CONVERSIONS FROM MUTUAL TO STOCK FORM
0
24. The authority citation for part 192 continues to read as follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 2901,
5412(b)(2)(B); 15 U.S.C. 78c, 78l, 78m, 78n, 78w.
0
25. Section 192.500 is amended by adding (a)(3)(iii)to read as follows:
Sec. 192.500 What management stock benefit plans may I implement?
(a) * * *
(3) * * *
(iii) For a qualifying community banking organization that has
elected to use the community bank leverage ratio framework, as set
forth under the OCC's Capital Adequacy Standards at part 3 of this
chapter, the term tangible capital, as it is used in this paragraph
(a)(3), refers to the qualifying community banking organization's tier
1 capital, as used under Sec. 3.12 of this chapter.
* * * * *
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is amended as set forth below:
PART 206--LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)
0
26. The authority citation for part 206 continues to read as follows:
Authority: 12 U.S.C. 371b-2.
0
27. Section 206.2 is amended by revising paragraph (g) to read as
follows:
Sec. 206.2 Definitions.
* * * * *
(g) Total capital means the total of a bank's Tier 1 and Tier 2
capital under the risk-based capital guidelines provided by the bank's
primary federal supervisor. For a qualifying community banking
organization (as defined in Sec. 217.12 of this chapter) that is
subject to the community bank leverage ratio framework (as defined in
Sec. 217.12 of this chapter), total capital means the bank's Tier 1
capital (as defined in Sec. 217.2 of this chapter and calculated in
accordance with Sec. 217.12(b) of this chapter). For an insured branch
of a foreign bank organized under the laws of a country that subscribes
to the principles of the Basel Capital Accord, ``total capital'' means
total Tier 1 and Tier 2 capital as calculated under the standards of
that country. For an insured branch of a foreign bank organized under
the laws of a country that does not subscribe to the principles of the
Basel Capital Accord (Accord), ``total capital'' means total Tier 1 and
Tier 2 capital as calculated under the provisions of the Accord.
* * * * *
0
28. Section 206.5 is amended by adding paragraph (a)(4) to read as
follows:
Sec. 206.5 Capital levels of correspondents.
(a) * * *
(4) Notwithstanding paragraphs (a)(1) through (3) of this section,
a qualifying community banking organization (as defined in Sec. 217.12
of this chapter) that is subject to the community bank leverage ratio
(as defined in Sec. 217.12 of this chapter) is considered to have met
the minimum capital requirements in this paragraph (a).
* * * * *
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
29. The authority citation for part 208 is revised to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1817(a)(3), 1817(a)(12),
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, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780-
4(c)(5), 78q, 78q-1, 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
0
30. Section 208.2 is amended by adding paragraph (d)(3) to read as
follows:
Sec. 208.2 Definitions.
* * * * *
(d) * * *
(3) For a qualifying community banking organization (as defined in
Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter),
capital stock and surplus means the bank's Tier 1 capital (as defined
in Sec. 217.2 of this chapter and calculated in accordance with Sec.
217.12(b) of this chapter) plus allowance for loan and lease losses or
adjusted allowance for credit losses, as applicable.
* * * * *
0
31. Section 208.43 is amended by revising paragraphs (a) and (b) to
read as follows:
Sec. 208.43 Capital measures and capital category definitions.
(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this subpart, the relevant capital measures are:
(i) Total Risk-Based Capital Measure: The total risk-based capital
ratio;
(ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based
capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier
1 risk-based capital ratio; and
(iv) Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches bank, on January 1,
2018, and thereafter, the supplementary leverage ratio.
(C) With respect to any bank that is a subsidiary (as defined in
Sec. 217.2 of this chapter) of a global systemically important BHC, on
Jan. 1, 2018, and thereafter, the supplementary leverage ratio.
(2) For a qualifying community banking organization (as defined in
Sec. 217.12 of this chapter), that has elected to use the community
bank leverage ratio framework (as defined in Sec. 217.12 of this
chapter), the leverage ratio calculated in accordance with Sec.
217.12(b) of this chapter is used to determine the well capitalized
capital category under paragraph (b)(1)(i)(A) through (D) of this
section.
(b) Capital categories. For purposes of section 38 of the FDI Act
and this subpart, a member bank is deemed to be:
(1)(i) ``Well capitalized'' if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-
based capital ratio of 10.0 percent or greater; and
(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-
based capital ratio of 8.0 percent or greater; and
(C) Common Equity Tier 1 Capital Measure: The bank has a common
equity tier 1 risk-based capital ratio of 6.5 percent or greater; and
(D) Leverage Measure:
(1) The bank has a leverage ratio of 5.0 percent or greater; and
(2) Beginning on January 1, 2018, with respect to any bank that is
a subsidiary of a global systemically important BHC under the
definition of ``subsidiary'' in Sec. 217.2 of this chapter, the bank
has a supplementary leverage ratio of 6.0 percent or greater; and
(E) The bank is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
Board pursuant to section 8 of the FDI Act, the International Lending
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act,
or any regulation
[[Page 61797]]
thereunder, to meet and maintain a specific capital level for any
capital measure.
(ii) A qualifying community banking organization, as defined in
Sec. 217.12 of this chapter, that has elected to use the community
bank leverage ratio framework under Sec. 217.12 of this chapter, shall
be considered to have met the capital ratio requirements for the well
capitalized capital category in paragraph (b)(1)(i)(A) through (D) of
this section.
* * * * *
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
0
32. The authority citation for part 211 continues to read as follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq.,
3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s,
1681w, 6801 and 6805.
0
33. In part 211, remove the words ``Capital Adequacy Guidelines''
wherever they appear and add in their place the words ``capital rule''.
0
34. Section 211.2 is amended by revising paragraphs (b), (c), and (x)
to read as follows:
Sec. 211.2 Definitions.
* * * * *
(b) Capital and surplus means, unless otherwise provided in this
part:
(1) For organizations subject to the capital rule:
(i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under the capital rule); and
(ii) The balance of allowance for loan and lease losses or adjusted
allowance for credit losses, as applicable, not included in an
organization's tier 2 capital for calculation of risk-based capital,
based on the organization's most recent consolidated Report of
Condition and Income.
(iii) For qualifying community banking organizations (as defined in
Sec. 217.12 of this chapter) that are subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter),
tier 1 capital (as defined in Sec. 217.2 of this chapter and
calculated in accordance with Sec. 217.12(b) of this chapter) plus
allowances for loan and lease losses or adjusted allowance for credit
losses, as applicable.
(2) For all other organizations, paid-in and unimpaired capital and
surplus, and includes undivided profits but does not include the
proceeds of capital notes or debentures.
(c) Capital rule means part 217 of this chapter.
* * * * *
(x) Tier 1 capital has the same meaning as provided in Sec. 217.2
of this chapter. A qualifying community banking organization (as
defined in Sec. 217.12 of this chapter) that is subject to the
community bank leverage ratio framework (as defined in Sec. 217.12 of
this chapter), calculates its tier 1 capital in accordance with Sec.
217.12(b) of this chapter.
* * * * *
Sec. 211.9 [Amended]
0
35. Section 211.9 is amended by redesignating footnote 5 to paragraph
(a) as footnote 1 to paragraph (a).
PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
0
36. The authority citation for part 215 continues to read as follows:
Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468,
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991).
0
37. Section 215.2 is amended by adding paragraph (i)(3) to read as
follows:
Sec. 215.2 Definitions.
* * * * *
(i) * * *
(3) Notwithstanding paragraphs (i)(1) and (2) of this section, for
a member bank that is a qualifying community banking organization (as
defined in Sec. 217.12 of this chapter) that is subject to the
community bank leverage ratio framework (as defined in Sec. 217.12 of
this chapter), unimpaired capital and unimpaired surplus equals Tier 1
capital (as defined in Sec. 217.12 of this chapter and calculated in
accordance with Sec. 217.12(b) of this chapter) plus allowances for
loan and lease losses or adjusted allowance for credit losses, as
applicable.
* * * * *
PART 217--CAPITAL ADEQUACY OF BANKING HOLDING COMPANIES, SAVINGS
AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
38. The authority citation for part 217 is revised to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371, and 5371 note.
0
39. Section 217.10 is amended by revising paragraph (a) to read as
follows:
Sec. 217.10 Minimum capital requirements.
(a) Minimum capital requirements. (1) A Board-regulated institution
must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches Board-regulated institutions or, for
Category III Board-regulated institutions, a supplementary leverage
ratio of 3 percent.
(2) A qualifying community banking organization (as defined in
Sec. 217.12), that is subject to the community bank leverage ratio
framework (as defined Sec. 217.12), is considered to have met the
minimum capital requirements in this paragraph (a) of this section.
* * * * *
0
40. Section 217.12 is added as to read as follows:
Sec. 217.12 Community bank leverage ratio framework.
(a) Community bank leverage ratio framework. (1) Notwithstanding
any other provision in this part, a qualifying community banking
organization that has made an election to use the community bank
leverage ratio framework under paragraph (a)(3) of this section shall
be considered to have met the minimum capital requirements under Sec.
217.10, the capital ratio requirements for the well capitalized capital
category under Sec. 208.43(b)(1) of this chapter, and any other
capital or leverage requirements to which the qualifying community
banking organization is subject, if it has a leverage ratio greater
than 9 percent.
(2) For purposes of this section, a qualifying community banking
organization means a Board-regulated institution that is not an
advanced approaches Board-regulated institution and that satisfies all
of the following criteria:
(i) Has a leverage ratio of greater than 9 percent;
(ii) Has total consolidated assets of less than $10 billion,
calculated in accordance with the reporting instructions to the Call
Report or to Form FR Y-9C, as applicable, as of the end of the most
recent calendar quarter;
(iii) Has off-balance sheet exposures of 25 percent or less of its
total consolidated assets as of the end of the most recent calendar
quarter, calculated as the sum of the notional amounts of the exposures
listed in paragraphs (a)(2)(iii)(A) through (I) of this section,
divided by total consolidated assets,
[[Page 61798]]
each as of the end of the most recent calendar quarter:
(A) The unused portion of commitments (except for unconditionally
cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through guarantees and credit
derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to the Call Report or to Form FR Y-9C, as
applicable;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures; and
(iv) Has total trading assets and trading liabilities, calculated
in accordance with the reporting instructions to the Call Report or to
Form FR Y-9C, as applicable, of 5 percent or less of the Board-
regulated institution's total consolidated assets, each as of the end
of the most recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) For purposes of this paragraph (a)(3), a qualifying community
banking organization makes an election to use the community bank
leverage ratio framework by completing the applicable reporting
requirements of its Call Report or of its Form FR Y-9C, as applicable.
(iii)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio framework may opt out
of the community bank leverage ratio framework by completing the
applicable risk-based and leverage ratio reporting requirements
necessary to demonstrate compliance with Sec. 217.10(a)(1) in its Call
Report or its Form FR Y-9C, as applicable, or by otherwise providing
the information to the Board.
(B) A qualifying community banking organization that opts out of
the community bank leverage ratio framework pursuant to paragraph
(a)(3)(iii)(A) of this section must comply with Sec. 217.10(a)(1)
immediately.
(b) Calculation of the leverage ratio. A qualifying community
banking organization's leverage ratio is calculated in accordance with
Sec. 217.10(b)(4), except that a qualifying community banking
organization is not required to:
(1) Make adjustments and deductions from tier 2 capital for
purposes of Sec. 217.22(c); or
(2) Calculate and deduct from tier 1 capital an amount resulting
from insufficient tier 2 capital under Sec. 217.22(f).
(c) Treatment when ceasing to meet the qualifying community banking
organization requirements. (1) Except as provided in paragraphs (c)(5)
and (6) of this section, if an Board-regulated institution ceases to
meet the definition of a qualifying community banking organization, the
Board-regulated institution has two reporting periods under its Call
Report or Form FR Y-9C, as applicable (grace period) either to satisfy
the requirements to be a qualifying community banking organization or
to comply with Sec. 217.10(a)(1) and report the required capital
measures under Sec. 217.10(a)(1) on its Call Report or its Form FR Y-
9C, as applicable.
(2) The grace period begins as of the end of the calendar quarter
in which the Board-regulated institution ceases to satisfy the criteria
to be a qualifying community banking organization provided in paragraph
(a)(2) of this section. The grace period ends on the last day of the
second consecutive calendar quarter following the beginning of the
grace period.
(3) During the grace period, the Board-regulated institution
continues to be treated as a qualifying community banking organization
for the purpose of this part and must continue calculating and
reporting its leverage ratio under this section unless the Board-
regulated institution has opted out of using the community bank
leverage ratio framework under paragraph (a)(3) of this section.
(4) During the grace period, the qualifying community banking
organization continues to be considered to have met the minimum capital
requirements under Sec. 217.10(a)(1), the capital ratio requirements
for the well capitalized capital category under Sec.
208.43(b)(1)(i)(A) through (D) of this chapter, and any other capital
or leverage requirements to which the qualifying community banking
organization is subject, and must continue calculating and reporting
its leverage ratio under this section.
(5) Notwithstanding paragraphs (c)(1) through (4) of this section,
a Board-regulated institution that no longer meets the definition of a
qualifying community banking organization as a result of a merger or
acquisition has no grace period and immediately ceases to be a
qualifying community banking organization. Such a Board-regulated
institution must comply with the minimum capital requirements under
Sec. 217.10(a)(1) and must report the required capital measures under
Sec. 217.10(a)(1) for the quarter in which it ceases to be a
qualifying community banking organization.
(6) Notwithstanding paragraphs (c)(1) through (4) of this section,
a Board-regulated institution that has a leverage ratio of 8 percent or
less does not have a grace period and must comply with the minimum
capital requirements under Sec. 217.10(a)(1) and must report the
required capital measures under Sec. 217.10(a)(1) for the quarter in
which it reports a leverage ratio of 8 percent or less.
0
41. Section 217.22 is amended by revising paragraph (f) to read as
follows:
Sec. 217.22 Regulatory capital adjustments and deductions.
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
Board-regulated institution does not have a sufficient amount of a
specific component of capital to effect the required deduction after
completing the deductions required under paragraph (d) of this section,
the Board-regulated institution must deduct the shortfall from the next
higher (that is, more subordinated) component of regulatory capital.
Notwithstanding any other provision of this section, a qualifying
community banking organization (as defined in Sec. 217.12) that has
elected to use the community bank leverage ratio framework pursuant to
Sec. 217.12 is not required to deduct any shortfall of tier 2 capital
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES
(REGULATION W)
0
42. The authority citation for part 223 continues to read as follows:
Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).
0
43. Section 223.3 is amended by adding paragraph (d)(4) to read as
follows:
[[Page 61799]]
Sec. 223.3 What are the meanings of the other terms used in sections
23A and 23B and this part?
* * * * *
(d) * * *
(4) Notwithstanding paragraphs (d)(1) through (3) of this section,
for a qualifying community banking organization (as defined in Sec.
217.12 of this chapter) that is subject to the community bank leverage
ratio framework (as defined in Sec. 217.12 of this chapter), capital
stock and surplus equals tier 1 capital (as defined in Sec. 217.12 of
this chapter and calculated in accordance with Sec. 217.12(b) of this
chapter) plus allowances for loan and lease losses or adjusted
allowance for credit losses, as applicable.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
44. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
45. Section 225.2 is amended by revising paragraph (h), redesignating
footnote 2 to paragraph (r)(1) as footnote 1 to paragraph (r)(1), and
adding paragraph (r)(4).
The revision and addition read as follows:
Sec. 225.2 Definitions.
* * * * *
(h) Lead insured depository institution means the largest insured
depository institution controlled by the bank holding company as of the
quarter ending immediately prior to the proposed filing, based on a
comparison of the average total risk-weighted assets controlled during
the previous 12-month period be each insured depository institution
subsidiary of the holding company. For purposes of this paragraph (h),
for a qualifying community banking organization (as defined in Sec.
217.12 of this chapter) that is subject to the community bank leverage
ratio framework (as defined in Sec. 217.12 of this chapter), average
total risk-weighted assets equal the qualifying community banking
organization's average total consolidated assets (as used in Sec.
217.12 of this chapter).
* * * * *
(r) * * *
(4) Notwithstanding paragraphs (r)(1) through (3) of this section:
(i) A bank holding company that is a qualifying community banking
organization (as defined in Sec. 217.12 of this chapter) that is
subject to the community bank leverage ratio framework (as defined in
Sec. 217.12 of this chapter) is well capitalized if it satisfies the
requirements of paragraph (r)(1)(iii) of this section.
(ii) A depository institution that is a qualifying community
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter) is well capitalized.
* * * * *
0
46. Section 225.14 is amended by:
0
a. Redesignating footnote 3 to paragraph (a)(1)(ii) as footnote 1 to
paragraph (a)(1)(ii);
0
b. Revising paragraphs (a)(1)(v)(A), (a)(1)(vii), and (c)(6)(i)(A) and
(B); and
0
c. Adding paragraphs (c)(6)(iii) and (f).
The revisions and additions read as follows:
Sec. 225.14 Expedited action for certain bank acquisitions by well-
run bank holding companies.
(a) * * *
(1) * * *
(v)(A) If the bank holding company is not a qualifying community
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter), and:
(1) If the bank holding company has consolidated assets of $3
billion or more, an abbreviated consolidated pro forma balance sheet as
of the most recent quarter showing credit and debit adjustments that
reflect the proposed transaction, consolidated pro forma risk-based
capital ratios for the acquiring bank holding company as of the most
recent quarter, and a description of the purchase price and the terms
and sources of funding for the transaction; or
(2) If the bank holding company has consolidated assets of less
than $3 billion, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, and a description of the purchase price, the
terms and sources of funding for the transaction, and the sources and
schedule for retiring any debt incurred in the transaction;
(B) If the bank holding company is a qualifying community banking
organization (as defined in Sec. 217.12 of this chapter) that is
subject to the community bank leverage ratio framework (as defined in
Sec. 217.12 of this chapter), an abbreviated consolidated pro forma
balance sheet as of the most recent quarter showing credit and debit
adjustments that reflect the proposed transaction, consolidated pro
forma leverage ratio (as calculated under Sec. 217.12 of this chapter)
for the acquiring bank holding company as of the most recent quarter,
and a description of the purchase price and the terms and sources of
funding for the transaction;
* * * * *
(vii)(A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in Sec. 217.12
of this chapter) that is subject to the community bank leverage ratio
framework (as defined in Sec. 217.12 of this chapter)) whose Tier 1
capital, total capital, total assets or risk-weighted assets change as
a result of the transaction, the total risk-weighted assets, total
assets, Tier 1 capital and total capital of the institution on a pro
forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter), whose Tier 1 capital (as
defined in Sec. 217.2 of this chapter and calculated in accordance
with Sec. 217.12(b) of this chapter) or total assets change as a
result of the transaction, the total assets and Tier 1 capital of the
institution on a pro forma basis; and
* * * * *
(c) * * *
(6) * * *
(i) * * *
(A) Limited growth. Except as provided in paragraphs (c)(6)(ii) and
(iii) of this section, the sum of the aggregate risk-weighted assets to
be acquired in the proposal and the aggregate risk-weighted assets
acquired by the acquiring bank holding company in all other qualifying
transactions does not exceed 35 percent of the consolidated risk-
weighted assets of the acquiring bank holding company. For purposes
paragraph (c)(6) of this section, other qualifying transactions means
any transaction approved under this section or Sec. 225.23 during the
12 months prior to filing the notice under this section; and
(B) Individual size limitation. Except as provided in paragraph
(c)(6)(iii) of this section, the total risk-weighted assets to be
acquired do not exceed $7.5 billion;
* * * * *
(iii) Qualifying community banking organizations. Paragraphs
(c)(6)(i)(A)
[[Page 61800]]
and (B) of this section shall not apply if:
(A) The acquiring bank holding company is a qualifying community
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter);
(B) The sum of the total assets to be acquired in the proposal and
the total assets acquired by the acquiring bank holding company in all
other qualifying transactions does not exceed 35 percent of the average
total consolidated assets (as used in Sec. 217.12 of this chapter) of
the acquiring bank holding company as last reported to the Board; and
(C) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
(f) Qualifying community banking organizations. For purposes of
this section, a qualifying community banking organization (as defined
in Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter)
controls total risk-weighted assets equal to the qualifying community
banking organization's average total consolidated assets (as used in
Sec. 217.12 of this chapter) as last reported to its primary banking
supervisor.
0
47. Section 225.22 is amended by adding paragraph (d)(8)(vi) to read
as follows:
Sec. 225.22 Exempt nonbanking activities and acquisitions.
* * * * *
(d) * * *
(8) * * *
(vi) Qualifying community banking organizations. For purposes of
paragraph (d)(8)(ii) of this section, a lending company or industrial
bank that is a qualifying community banking organization (as defined in
Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter),
or is a subsidiary of such a qualifying community banking organization,
has risk-weighted assets equal to:
(A) Its average total consolidated assets (as used in Sec. 217.12
of this chapter) as most recently reported to its primary banking
supervisor (as defined in Sec. 225.14(d)(5)); or
(B) Its total assets, if the company or industrial bank does not
report such average total consolidated assets.
* * * * *
0
48. Section 225.23 is amended by:
0
a. Redesignating footnote 2 to paragraph (a)(1) as footnote 1 to
paragraph (a)(1);
0
b. Revising paragraphs (a)(1)(iii) and (c)(5)(i); and
0
c. Adding paragraphs (c)(5)(iii) and (e).
The revisions and additions read as follows:
Sec. 225.23 Expedited action for certain nonbanking proposals by
well-run bank holding companies.
(a) * * *
(1) * * *
(iii) If the proposal involves an acquisition of a going concern:
(A) If the acquiring bank holding company is not a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter):
(1) If the bank holding company has consolidated assets of $3
billion or more, an abbreviated consolidated pro forma balance sheet
for the acquiring bank holding company as of the most recent quarter
showing credit and debit adjustments that reflect the proposed
transaction, consolidated pro forma risk-based capital ratios for the
acquiring bank holding company as of the most recent quarter, a
description of the purchase price and the terms and sources of funding
for the transaction, and the total revenue and net income of the
company to be acquired; or
(2) If the bank holding company has consolidated assets of less
than $3 billion, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, a description of the purchase price and the terms
and sources of funding for the transaction and the sources and schedule
for retiring any debt incurred in the transaction, and the total
assets, off-balance sheet items, revenue and net income of the company
to be acquired;
(B) If the acquiring bank holding company is a qualifying community
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter), an abbreviated consolidated pro forma
balance sheet for the acquiring bank holding company as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, consolidated pro forma leverage ratio for the
acquiring bank holding company as of the most recent quarter, a
description of the purchase price and the terms and sources of funding
for the transaction, and the total revenue and net income of the
company to be acquired;
(C) For each insured depository institution (that is not a
qualifying community banking organization (as defined in Sec. 217.12
of this chapter) that is subject to the community bank leverage ratio
framework (as defined in Sec. 217.12 of this chapter)) whose Tier 1
capital, total capital, total assets or risk-weighted assets change as
a result of the transaction, the total risk-weighted assets, total
assets, Tier 1 capital and total capital of the institution on a pro
forma basis; and
(D) For each insured depository institution that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter) whose Tier 1 capital (as
defined in Sec. 217.2 of this chapter and calculated in accordance
with Sec. 217.12(b) of this chapter) or total assets change as a
result of the transaction, the total assets and Tier 1 capital of the
institution on a pro forma basis;
* * * * *
(c) * * *
(5) * * *
(i) In general--(A) Limited growth. Except as provided in
paragraphs (c)(5)(ii) and (iii) of this section, the sum of aggregate
risk-weighted assets to be acquired in the proposal and the aggregate
risk-weighted assets acquired by the acquiring bank holding company in
all other qualifying transactions does not exceed 35 percent of the
consolidated risk-weighted assets of the acquiring bank holding
company. For purposes of paragraph (c)(5) of this section, ``other
qualifying transactions'' means any transaction approved under this
section or Sec. 225.14 during the 12 months prior to filing the notice
under this section;
(B) Consideration paid. Except as provided in paragraph (c)(5)(iii)
of this section, the gross consideration to be paid by the acquiring
bank holding company in the proposal does not exceed 15 percent of the
consolidated Tier 1 capital of the acquiring bank holding company; and
(C) Individual size limitation. Except as provided in paragraph
(c)(5)(iii) of this section, the total risk-weighted assets to be
acquired do not exceed $7.5 billion;
* * * * *
(iii) Qualifying community banking organizations. Paragraphs
(c)(5)(i)(A) through (C) of this section shall not apply if:
(A) The acquiring bank holding company is a qualifying community
[[Page 61801]]
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter); and
(B) The sum of the total assets to be acquired in the proposal and
the total assets acquired by the acquiring bank holding company in all
other qualifying transactions does not exceed 35 percent of the average
total consolidated assets (as used in Sec. 217.12 of this chapter) of
the acquiring bank holding company as last reported to the Board;
(C) The gross consideration to be paid by the acquiring bank
holding company in the proposal does not exceed 15 percent of the Tier
1 capital (as defined in Sec. 217.2 of this chapter and calculated in
accordance with Sec. 217.12(b) of this chapter) of the acquiring bank
holding company; and
(D) The total assets to be acquired do not exceed $7.5 billion;
* * * * *
(e) Qualifying community banking organizations. For purposes of
this section, a qualifying community banking organization (as defined
in Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter)
controls total risk-weighted assets equal to the qualifying community
banking organization's average total consolidated assets (as used in
Sec. 217.12 of this chapter) as last reported to its primary banking
supervisor.
0
49. Section 225.24 is amended by revising paragraphs (a)(2)(iv)(B) and
(a)(2)(vi) to read as follows:
Sec. 225.24 Procedures for other nonbanking proposals.
(a) * * *
(2) * * *
(iv) * * *
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring bank holding company as of the most
recent quarter (or, in the case of a qualifying community banking
organization (as defined in Sec. 217.12 of this chapter) that is
subject to the community bank leverage ratio framework (as defined in
Sec. 217.12 of this chapter), consolidated pro forma leverage ratio
calculations under Sec. 217.12 of this chapter for the acquiring bank
holding company as of the most recent quarter); and
* * * * *
(vi)(A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in Sec. 217.12
of this chapter) that is subject to the community bank leverage ratio
framework (as defined in Sec. 217.12 of this chapter)) whose Tier 1
capital, total capital, total assets or risk-weighted assets change as
a result of the transaction, the total risk-weighted assets, total
assets, Tier 1 capital and total capital of the institution on a pro
forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter) whose Tier 1 capital (as
defined in Sec. 217.2 of this chapter and calculated in accordance
with Sec. 217.12(b) of this chapter) or total assets change as a
result of the transaction, the total assets and Tier 1 capital of the
institution on a pro forma basis;
* * * * *
0
50. Section 225.87 is amended by adding paragraph (b)(4)(iv) to read as
follows:
Sec. 225.87 Is notice to the Board required after engaging in a
financial activity?
* * * * *
(b) * * *
(4) * * *
(iv) For purposes of this paragraph (b)(4), a financial holding
company that is a qualifying community banking organization (as defined
in Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter)
calculates its Tier 1 capital (as defined in Sec. 217.2 of this
chapter) in accordance with Sec. 217.12(b) of this chapter.
0
51. Section 225.174 is amended by adding paragraph (d) to read as
follows:
Sec. 225.174 What aggregate thresholds apply to merchant banking
investments?
* * * * *
(d) Qualifying community banking organizations. For purposes of
this section, a financial holding company that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter) calculates its Tier 1
capital (as defined in Sec. 217.2 of this chapter) in accordance with
Sec. 217.12(b) of this chapter.
0
52. Section 225.175 is amended by adding paragraph (c)(3) to read as
follows:
Sec. 225.175 What risk management, record keeping and reporting
policies are required to make merchant banking investments?
* * * * *
(c) * * *
(3) Qualifying community banking organizations. For purposes of
this paragraph (c), a financial holding company that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter) calculates its Tier 1
capital (as defined in Sec. 217.2 of this chapter) in accordance with
Sec. 217.12(b) of this chapter.
PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
0
53. The authority citation for part 238 continues to read as follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464,
1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C. 78l.
0
54. Section 238.53 is amended by revising paragraphs (c)(2)(iii)(B) and
(c)(2)(v) to read as follows:
Sec. 238.53 Prescribed services and activities of savings and loan
holding companies.
* * * * *
(c) * * *
(2) * * *
(iii) * * *
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring savings and loan holding company as of
the most recent quarter (or, in the case of a qualifying community
banking organization (as defined in Sec. 217.12 of this chapter) that
is subject to the community bank leverage ratio framework (as defined
in Sec. 217.12 of this chapter), consolidated pro forma leverage ratio
calculations for the acquiring savings and loan holding company as of
the most recent quarter); and
* * * * *
(v)(A) For each insured depository institution (that is not a
qualifying community banking organization (as defined in Sec. 217.12
of this chapter) that is subject to the community bank leverage ratio
framework (as defined in Sec. 217.12 of this chapter)) whose Tier 1
capital, total capital, total assets or risk-weighted assets change as
a result of the transaction, the total risk-weighted assets, total
assets, Tier 1 capital, and total capital of the institution on a pro
forma basis; and
(B) For each insured depository institution that is a qualifying
community banking organization (as defined in Sec. 217.12 of this
chapter) that is subject to the community bank leverage ratio framework
(as defined in Sec. 217.12 of this chapter), whose Tier 1 capital (as
defined in Sec. 217.2 of this
[[Page 61802]]
chapter and calculated in accordance with Sec. 217.12(b) of this
chapter) or total assets change as a result of the transaction, the
total assets and Tier 1 capital of the institution on a pro forma
basis;
* * * * *
PART 251--CONCENTRATION LIMIT (REGULATION XX)
0
55. The authority citation for part 251 continues to read as follows:
Authority: 12 U.S.C. 1818, 1844(b), 1852, 3101 et seq.
0
56. Section 251.3 is amended by revising paragraph (c)(2) and adding
paragraph (c)(3) to read as follows:
Sec. 251.3 Concentration limit.
* * * * *
(c) * * *
(2) U.S. company not subject to applicable risk-based capital
rules. For a U.S. company that is not subject to applicable risk-based
capital rules (other than a qualifying community banking organization
(as defined in Sec. 217.12 of this chapter) that is subject to the
community bank leverage ratio framework (as defined in Sec. 217.12 of
this chapter)), consolidated liabilities are equal to the total
liabilities of such company on a consolidated basis, as determined
under applicable accounting standards.
(3) Qualifying community banking organizations. For a U.S. company
that is a qualifying community banking organization (as defined in
Sec. 217.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 217.12 of this chapter),
consolidated liabilities are equal to:
(i) Average total consolidated assets (as used in Sec. 217.12 of
this chapter) of the company as last reported on the qualifying
community banking organization's applicable regulatory filing with the
qualifying community banking organization's appropriate Federal banking
agency; minus
(ii) The company's tier 1 capital (as defined in Sec. 217.2 of
this chapter and calculated in accordance with Sec. 217.12(b) of this
chapter).
* * * * *
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 amend chapter III of Title 12, Code
of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
57. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note);
Pub. L. 115-174 Sec. 201.
0
58. Section 324.10 is amended by revising paragraph (a) to read as
follows:
Sec. 324.10 Minimum capital requirements.
(a) Minimum capital requirements. (1) An FDIC-supervised
institution must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches FDIC-supervised institutions or for
Category III FDIC-regulated institutions, a supplementary leverage
ratio of 3 percent.
(vi) For state savings associations, a tangible capital ratio of
1.5 percent.
(2) A qualifying community banking organization (as defined in
Sec. 324.12), that is subject to the community bank leverage ratio
framework (as defined in Sec. 324.12), is considered to have met the
minimum capital requirements in this paragraph (a).
* * * * *
0
59. Section 324.12 is added to read as follows:
Sec. 324.12 Community bank leverage ratio framework.
(a) Community bank leverage ratio framework. (1) Notwithstanding
any other provision in this part, a qualifying community banking
organization that has made an election to use the community bank
leverage ratio framework under paragraph (a)(3) of this section shall
be considered to have met the minimum capital requirements under Sec.
324.10, the capital ratio requirements for the well capitalized capital
category under Sec. 324.403(b)(1) of this part, and any other capital
or leverage requirements to which the qualifying community banking
organization is subject, if it has a leverage ratio greater than 9
percent.
(2) For purposes of this section, a qualifying community banking
organization means an FDIC-supervised institution that is not an
advanced approaches FDIC-supervised institution and that satisfies all
of the following criteria:
(i) Has a leverage ratio of greater than 9 percent;
(ii) Has total consolidated assets of less than $10 billion,
calculated in accordance with the reporting instructions to the Call
Report as of the end of the most recent calendar quarter;
(iii) Has off-balance sheet exposures of 25 percent or less of its
total consolidated assets as of the end of the most recent calendar
quarter, calculated as the sum of the notional amounts of the exposures
listed in paragraphs (a)(2)(iii)(A) through (I) of this section,
divided by total consolidated assets, each as of the end of the most
recent calendar quarter:
(A) The unused portion of commitments (except for unconditionally
cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise
from the movement of goods;
(C) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit;
(D) Sold credit protection through guarantees and credit
derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the
reporting instructions to the Call Report;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures; and
(iv) Has total trading assets and trading liabilities, calculated
in accordance with the reporting instructions to the Call Report of 5
percent or less of the FDIC-supervised institution's total consolidated
assets, each as of the end of the most recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use
the community bank leverage ratio framework if it makes an opt-in
election under this paragraph (a)(3).
(ii) For purposes of this paragraph (a)(3), a qualifying community
banking organization makes an election to use the community bank
leverage ratio framework by completing the applicable reporting
requirements of its Call Report.
(iii)(A) A qualifying community banking organization that has
elected to use the community bank leverage ratio framework may opt out
of the
[[Page 61803]]
community bank leverage ratio framework by completing the applicable
risk-based and leverage ratio reporting requirements necessary to
demonstrate compliance with Sec. 324.10(a)(1) in its Call Report or by
otherwise providing the information to the FDIC.
(B) A qualifying community banking organization that opts out of
the community bank leverage ratio framework pursuant to paragraph
(a)(3)(iii)(A) of this section must comply with Sec. 324.10(a)(1)
immediately.
(b) Calculation of the leverage ratio. A qualifying community
banking organization's leverage ratio is calculated in accordance to
Sec. 324.10(b)(4), except that a qualifying community banking
organization is not required to:
(1) Make adjustments and deductions from tier 2 capital for
purposes of Sec. 324.22(c); or
(2) Calculate and deduct from tier 1 capital an amount resulting
from insufficient tier 2 capital under Sec. 324.22(f).
(c) Treatment when ceasing to meet the qualifying community banking
organization requirements. (1) Except as provided in paragraphs (c)(5)
and (6) of this section, if an FDIC-supervised institution ceases to
meet the definition of a qualifying community banking organization, the
FDIC-supervised institution has two reporting periods under its Call
Report (grace period) either to satisfy the requirements to be a
qualifying community banking organization or to comply with Sec.
324.10(a)(1) and report the required capital measures under Sec.
324.10(a)(1) on its Call Report.
(2) The grace period begins as of the end of the calendar quarter
in which the FDIC-supervised institution ceases to satisfy the criteria
to be a qualifying community banking organization provided in paragraph
(a)(2) of this section. The grace period ends on the last day of the
second consecutive calendar quarter following the beginning of the
grace period.
(3) During the grace period, the FDIC-supervised institution
continues to be treated as a qualifying community banking organization
for the purpose of this part and must continue calculating and
reporting its leverage ratio under this section unless the FDIC-
supervised institution has opted out of using the community bank
leverage ratio framework under paragraph (a)(3) of this section.
(4) During the grace period, the qualifying community banking
organization continues to be considered to have met the minimum capital
requirements under Sec. 324.10(a)(1), the capital ratio requirements
for the well capitalized capital category under Sec.
324.403(b)(1)(i)(A) through (D) of this part, and any other capital or
leverage requirements to which the qualifying community banking
organization is subject and must continue calculating and reporting its
leverage ratio under this section.
(5) Notwithstanding paragraphs (c)(1) through (4) of this section,
an FDIC-supervised institution that no longer meets the definition of a
qualifying community banking organization as a result of a merger or
acquisition has no grace period and immediately ceases to be a
qualifying community banking organization. Such an FDIC-supervised
institution must comply with the minimum capital requirements under
Sec. 324.10(a)(1) and must report the required capital measures under
Sec. 324.10(a)(1) for the quarter in which it ceases to be a
qualifying community banking organization.
(6) Notwithstanding paragraphs (c)(1) through (4) of this section,
an FDIC-supervised institution that has a leverage ratio of 8 percent
or less does not have a grace period and must comply with the minimum
capital requirements under Sec. 324.10(a)(1) and must report the
required capital measures under Sec. 324.10(a)(1) for the quarter in
which it reports a leverage ratio of 8 percent or less.
0
60. Section 324.22 is amended by revising paragraph (f) to read as
follows:
Sec. 324.22 Regulatory capital adjustments and deductions.
* * * * *
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if an
FDIC-supervised institution does not have a sufficient amount of a
specific component of capital to effect the required deduction after
completing the deductions required under paragraph (d) of this section,
the FDIC-supervised institution must deduct the shortfall from the next
higher (that is, more subordinated) component of regulatory capital.
Notwithstanding any other provision of this section, a qualifying
community banking organization (as defined in Sec. 324.12) that has
elected to use the community bank leverage ratio framework pursuant to
Sec. 324.12 is not required to deduct any shortfall of tier 2 capital
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
0
61. Section 324.403 is amended by revising paragraphs (a) and (b) to
read as follows:
Sec. 324.403 Capital measures and capital categories.
(a) Capital measures. (1) For purposes of section 38 of the FDI Act
and this subpart H, the relevant capital measures are:
(i) Total Risk-Based Capital Measure: The total risk-based capital
ratio;
(ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based
capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier
1 risk-based capital ratio; and
(iv) Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches FDIC-supervised
institutions, on January 1, 2018, and thereafter, the supplementary
leverage ratio.
(2) For a qualifying community banking organization (as defined
under Sec. 324.12), that has elected to use the community bank
leverage ratio framework (as defined under Sec. 324.12), the leverage
ratio calculated in accordance with Sec. 324.12(b) is used to
determine the well capitalized capital category under paragraph
(b)(1)(i) (A) through (D) of this section.
(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)(i) ``Well capitalized'' if:
(A) Total Risk-Based Capital Measure: The FDIC-supervised
institution has a total risk-based capital ratio of 10.0 percent or
greater; and
(B) Tier 1 Risk-Based Capital Measure: The FDIC-supervised
institution has a tier 1 risk-based capital ratio of 8.0 percent or
greater; and
(C) Common Equity Tier 1 Capital Measure: The FDIC-supervised
institution has a common equity tier 1 risk-based capital ratio of 6.5
percent or greater; and
(D) The FDIC-supervised institution has a leverage ratio of 5.0
percent or greater; and
(E) The FDIC-supervised institution is not subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the FDIC pursuant to section 8 of the FDI Act (12
U.S.C. 1818), the International Lending Supervision Act of 1983 (12
U.S.C. 3907), or the Home Owners' Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the FDI Act (12 U.S.C. 1831o), or
any regulation thereunder, to meet and maintain a specific capital
level for any capital measure.
(ii) 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
[[Page 61804]]
institution satisfies paragraphs (b)(1)(i) (A) through (E) of this
section 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 (Form 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 (Form FR Y-15).
(iii) A qualifying community banking organization, as defined under
Sec. 324.12, that has elected to use the community bank leverage ratio
framework under Sec. 324.12 shall be considered to have met the
capital ratio requirements for the well capitalized capital category in
paragraph (b)(1)(i)(A) through (D) of this section.
* * * * *
PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
0
62. The authority citation for part 337 continues to read as follows:
Authority: 12 U.S.C. 375a(4), 375b, 1463(a)(1), 1816, 1818(a),
1818(b), 1819, 1820(d), 1828(j)(2), 1831, 1831f, 5412.
0
63. Section 337.3 is amended by redesignating footnote 3 to paragraph
(b) as footnote 1 and revising it to read as follows:
Sec. 337.3 Limits on extensions of credit to executive officers,
directors, and principal shareholders of insured nonmember banks.
* * * * *
(b) * * *
\1\ For the purposes of Sec. 337.3, an insured nonmember bank's
capital and unimpaired surplus shall have the same meaning as found in
Sec. 215.2(f) of Federal Reserve Board Regulation O (Sec. 215.2(f) of
this chapter). For a qualifying community banking organization (as
defined in Sec. 324.12 of this chapter) that is subject to the
community bank leverage ratio framework (as defined in Sec. 324.12 of
this chapter), capital and unimpaired surplus shall mean the FDIC-
supervised institution's tier 1 capital (as defined in Sec. 324.2 of
this chapter) plus adjusted allowances for credit losses or allowances
for loan and lease losses, as applicable (as defined in Sec. 324.2 of
this chapter).
* * * * *
PART 365--REAL ESTATE LENDING STANDARDS
0
64. The authority citation for part 365 continues to read as follows:
Authority: 12 U.S.C. 1828(o) and 5101 et seq.
0
65. Appendix A to subpart A of part 365 is amended:
0
a. In the first paragraph of the appendix, redesignating footnote 5 as
footnote 1;
0
b. Following the heading ``Supervisory Loan-to-Value-Limits'' in the
table, by redesignating footnotes 1 and 2 as footnotes 2 and 3; and
0
c. Following the heading ``Loans in Excess of the Supervisory Loan-to-
Value-Limits,'' redesignating the footnote 2 as footnote 4 and revising
it.
The revision reads as follows:
Appendix A to Subpart A of Part 365--Interagency Guidelines for Real
Estate Lending Policies
* * * * *
Loans in Excess of the Supervisory Loan-to-Value-Limits
\4\ For state non-member banks and state savings associations,
``total capital'' refers to that term described in Sec. 324.2 of this
chapter. For a qualifying community banking organization (as defined in
Sec. 324.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 324.12 of this chapter),
``total capital'' refers to the FDIC-supervised institution's tier 1
capital, as defined in Sec. 324.2 of this chapter.
* * * * *
PART 390--REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT
SUPERVISION
0
66. The authority citation for part 390 continues to read as follows:
Authority: 12 U.S.C. 1819.
0
67. Section 390.344 is amended by revising the definition of
``Capital'' to read as follows:
Sec. 390.344 Definitions applicable to capital distributions.
* * * * *
Capital means total capital, as computed under part 324 of this
chapter. For a qualifying community banking organization (as defined in
Sec. 324.12 of this chapter) that is subject to the community bank
leverage ratio framework (as defined in Sec. 324.12 of this chapter),
total capital means the FDIC-supervised institution's tier 1 capital,
as defined under Sec. 324.2 of this chapter and calculated in
accordance with Sec. 324.12(b) of this chapter.
* * * * *
Dated: September 17, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, October 7, 2019.
E. Misback,
Deputy Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on September 17, 2019.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2019-23472 Filed 11-12-19; 8:45 am]
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