[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Proposed Rules]
[Pages 35351-35361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14831]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 76, No. 117 / Friday, June 17, 2011 /
Proposed Rules
[[Page 35351]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1425]
RIN 7100-AD 77
Capital Plans
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Proposed rule.
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SUMMARY: The Board is proposing amendments to Regulation Y to require
large bank holding companies to submit capital plans to the Federal
Reserve on an annual basis and to require such bank holding companies
to provide prior notice to the Federal Reserve under certain
circumstances before making a capital distribution.
DATES: Comments must be received by August 5, 2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1425 and
RIN No. 7100 AD 77, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Benjamin W. McDonough, Counsel, (202)
452-2036, April C. Snyder, Counsel, (202) 452-3099, or Christine E.
Graham, Attorney, (202) 452-3005, Legal Division; Timothy P. Clark,
Senior Advisor, (202) 452-5264, Michael Foley, Senior Associate
Director, (202) 452-6420, or Thomas R. Boemio, Manager, (202) 452-2982,
Division of Banking Supervision and Regulation, Board of Governors of
the Federal Reserve System, 20th and C Streets, NW., Washington, DC
20551.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Scope
III. Capital Plans
A. Annual Capital Planning Requirement
B. Mandatory Elements of a Capital Plan
C. Federal Reserve's Review of Capital Plans
D. Federal Reserve Action on a Capital Plan
E. Re-Submission of a Capital Plan
IV. Prior Notice Requirements
V. Conforming Changes to Section 225.4(b) of Regulation Y
VI. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Solicitation of Comments on Use of Plain Language
I. Background
The Board is proposing amendments to Regulation Y (12 CFR part 225)
to require large bank holding companies to submit capital plans to the
Federal Reserve on an annual basis and to require such bank holding
companies to provide prior notice to the Federal Reserve under certain
circumstances before making a capital distribution (the proposal or
proposed rule).\1\ During the years leading up to the recent financial
crisis, many bank holding companies made significant distributions of
capital, in the form of stock repurchases and dividends, without due
consideration of the effects that a prolonged economic downturn could
have on their capital adequacy and ability to continue to operate and
remain credit intermediaries during times of economic and financial
stress. The proposal is intended to address such practices, building
upon the Federal Reserve's existing supervisory expectation that large
bank holding companies have robust systems and processes that
incorporate forward-looking projections of revenue and losses to
monitor and maintain their internal capital adequacy.\2\
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\1\ The proposed amendments to Regulation Y would be codified at
12 CFR 225.8. As discussed in section V of this preamble, the
proposal would also make conforming changes to section 225.4(b) of
Regulation Y (12 CFR 225.4(b)).
\2\ See SR letter 09-4 (Revised March 27, 2009), available at
http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm;
see also Revised Temporary Addendum to SR letter 09-4 (November 17,
2010) (SR 09-04), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101117b1.pdf.
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The Federal Reserve has long held the view that bank holding
companies generally should operate with capital positions well above
the minimum regulatory capital ratios, with the amount of capital held
commensurate with the bank holding company's risk profile.\3\ Bank
holding companies should have internal processes for assessing their
capital adequacy that reflect a full understanding of their risks and
ensure that they hold capital corresponding to those risks to maintain
overall capital adequacy.\4\ Bank holding companies that are subject to
the Board's advanced approaches risk-based capital requirements must
satisfy specific requirements relating to their internal capital
adequacy processes in order to use the advanced approaches to calculate
their minimum risk-based capital requirements.\5\ Under section 165 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act), the Board is required to impose enhanced prudential
standards on large bank holding companies, including stress testing
requirements; enhanced capital, liquidity, and risk management
requirements; and a requirement to
[[Page 35352]]
establish a risk committee.\6\ While the proposal is not mandated by
the Dodd-Frank Act, the Board believes that it is appropriate to hold
large bank holding companies to an elevated capital planning standard
because of the elevated risk posed to the financial system by large
bank holding companies and the importance of capital in mitigating
these risks.
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\3\ See 12 CFR part 225, Appendix A; see also SR letter 99-18
(July 1, 1999), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM.
\4\ See SR letter 09-4 (Revised March 27, 2009), available at
http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm.
\5\ See 12 CFR part 225, Appendix G, section 22(a); see also,
Supervisory Guidance: Supervisory Review Process of Capital Adequacy
(Pillar 2) Related to the Implementation of the Basel II Advanced
Capital Framework, 73 FR 44620 (July 31, 2008).
\6\ See generally section 165 of Public Law 111-203, 124 Stat.
1376 (2010) (Dodd-Frank Act); 12 U.S.C. 5365.
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As part of their fiduciary responsibilities to a bank holding
company, the board of directors and senior management bear the primary
responsibility for developing, implementing, and monitoring a bank
holding company's capital planning strategies and internal capital
adequacy processes. The proposal does not diminish that responsibility.
Rather, the proposal is intended to (i) Establish minimum supervisory
standards for such strategies and processes for certain large bank
holding companies; (ii) describe how boards of directors and senior
management of these bank holding companies should communicate the
strategies and processes, including any material changes thereto, to
the Federal Reserve; and (iii) provide the Federal Reserve with an
opportunity to review bank holding companies' capital distributions
under certain circumstances. The proposal is designed to be flexible
enough to accommodate bank holding companies of varying degrees of
complexity and to adjust to changing conditions over time.
The proposal is also consistent with the Federal Reserve's recent
supervisory practice of requiring capital plans from large, complex
bank holding companies. In 2009, the Board conducted the Supervisory
Capital Assessment Program (SCAP), a ``stress test'' of 19 large,
domestic bank holding companies. The SCAP was focused on identifying
whether large bank holding companies had capital sufficient to weather
a more-adverse-than-anticipated economic environment while maintaining
their capacity to lend. The Federal Reserve required firms identified
as having capital shortfalls to raise specific dollar amounts of
capital within six months of the release of the SCAP results. The
Department of the Treasury established a government backstop available
to firms unable to raise the required capital from private markets.\7\
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\7\ See Board of Governors of the Federal Reserve System, The
Supervisory Capital Assessment Program: Overview of Results (May 7,
2009), available at http://www.federalreserve.gov/bankinforeg/bcreg20090507a1.pdf.
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In 2011, the Federal Reserve continued its supervisory evaluation
of the resiliency and capital adequacy processes of the same 19 bank
holding companies through the Comprehensive Capital Analysis and Review
(CCAR). CCAR involved the Federal Reserve's forward-looking evaluation
of the internal capital planning processes of the bank holding
companies and their anticipated capital actions in 2011, such as
increasing dividend payments or repurchasing or redeeming stock.\8\ In
CCAR, the Federal Reserve evaluated whether these bank holding
companies had satisfactory processes for identifying capital needs and
held adequate capital to maintain ready access to funding, continue
operations and meet their obligations to creditors and counterparties,
and continue to serve as credit intermediaries, even under stressful
conditions.
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\8\ See Board of Governors of the Federal Reserve System,
Comprehensive Capital Analysis and Review: Objectives and Overview
(March 18, 2010), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf.
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As noted above, the Dodd-Frank Act imposes enhanced prudential
standards, including stress testing requirements, on large bank holding
companies.\9\ As the Board implements the Dodd-Frank Act, bank holding
companies would be required to incorporate any related requirements
into their capital planning strategies and internal capital adequacy
processes, including the results of stress tests required by the Dodd-
Frank Act.
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\9\ Through separate rulemaking or by order, it is expected that
the proposal's requirements would be extended to apply to large
savings and loan holding companies and nonbank financial companies
supervised by the Board pursuant to section 113 of the Dodd-Frank
Act.
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The Dodd-Frank Act also requires the Board to impose early
remediation requirements on large bank holding companies under which a
large bank holding company experiencing financial distress must take
specific remedial actions in order to minimize the probability that the
company will become insolvent and minimize the potential harm of such
insolvency to the United States.\10\ These early remediation
requirements must impose limitations on capital distributions in the
initial stages of financial decline and increase in stringency as the
financial condition of the company declines.\11\ Depending on a bank
holding company's financial condition, early remediation requirements
imposed under the Dodd-Frank Act may result in additional limitations
on a company's capital distributions than the prior notice requirements
that would be imposed by the proposed rule.\12\
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\10\ See section 166 of the Dodd-Frank Act; 12 U.S.C. 5366.
\11\ Id.
\12\ The Board notes that Basel III includes a capital
conservation buffer designed to ensure that bank holding companies
build up capital buffers outside periods of stress that can be drawn
down as losses are incurred. Under Basel III, capital distribution
constraints would be imposed on a bank holding company when capital
levels fall within the capital conservation buffer. See Basel
Committee on Banking Supervision, Basel III: A Global Framework for
More Resilient Banks and Banking Systems (December 2010), available
at http://www.bis.org/publ/bcbs189.pdf.
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II. Scope
The proposed rule would apply to every top-tier bank holding
company domiciled in the United States that has $50 billion or more in
total consolidated assets (large U.S. bank holding companies).\13\ This
amount would be measured as the average over the previous two calendar
quarters, as reflected on the bank holding company's consolidated
financial statement for bank holding companies (FR Y-9C). Consistent
with the phase-in period for the imposition of minimum risk-based and
leverage capital requirements established in section 171 of the Dodd-
Frank Act, until July 21, 2015, the proposed rule would not apply to
any bank holding company subsidiary of a foreign banking organization
that has relied on Supervision and Regulation Letter SR 01-01 issued by
the Board of Governors (as in effect on May 19, 2010).\14\ The proposed
rule also would apply to any institution that the Board has determined,
by order, shall be subject in whole or in part to the proposed rule's
requirements based on the institution's size, level of complexity, risk
profile, scope of operations, or financial condition.
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\13\ Thus, the proposal would not apply to a foreign bank or
foreign banking organization that was itself a bank holding company
or treated as a bank holding company pursuant to section 8(a) of the
International Banking Act of 1978 (12 U.S.C. 3106(a)), but generally
would apply to any U.S.-domiciled bank holding company subsidiary of
the foreign bank or foreign banking organization that meets the
proposal's size threshold.
\14\ Under Supervision and Regulation Letter SR 01-01, as a
general matter, a U.S. bank holding company that is owned and
controlled by a foreign bank that is a financial holding company
that the Board has determined to be well-capitalized and well-
managed is not required to comply with the Board's capital adequacy
guidelines. See SR letter 01-01 (January 5, 2001), available at
http://www.federalreserve.gov/boarddocs/srletters/2001/sr0101.htm.
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As of March 31, 2011, there were approximately 35 large U.S. bank
holding companies. The Board notes that the proposed asset threshold of
$50 billion is consistent with the threshold established by section 165
of the Dodd-
[[Page 35353]]
Frank Act relating to enhanced supervision and prudential standards for
certain bank holding companies.\15\ The proposal generally would apply
to large U.S. bank holding companies when any final rule becomes
effective.
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\15\ See section 165(a) of the Dodd-Frank Act; 12 U.S.C.
5365(a). The Dodd-Frank Act provides that the Board may, upon the
recommendation of the Financial Stability Oversight Council,
increase the $50 billion asset threshold for the application of the
resolution plan, concentration limit, and credit exposure report
requirements. See 12 U.S.C. 5365(a)(2)(B).
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The Board solicits comment on whether the capital planning and
prior notice requirements in the proposed rule should apply, as
proposed, to large U.S. bank holding companies. What other asset
threshold(s) would be appropriate and why? Are there other measures
other than total consolidated assets that should be considered?
In addition, the Board solicits comment on whether the proposed
rule should include a transitional period for institutions that did not
participate in CCAR. For example, should such institutions have an
additional year to come into compliance with the proposed capital
planning and prior notice requirements?
III. Capital Plans
A. Annual Capital Planning Requirement
The proposed rule would require a bank holding company to develop
and maintain a capital plan. For purposes of the proposal, a capital
plan is defined as a written presentation of a company's capital
planning strategies and capital adequacy processes that includes (i) An
assessment of the expected uses and sources of capital over a nine-
quarter forward-looking planning period (beginning with the quarter
preceding the quarter in which the bank holding company submits its
capital plan) that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions, (ii) a detailed description of the
bank holding company's processes for assessing capital adequacy, and
(iii) an analysis of the effectiveness of these processes. As described
below, the proposed rule specifies certain mandatory elements of a
capital plan. The level of detail and analysis expected in a capital
plan would vary based on the bank holding company's size, complexity,
risk profile, and scope of operations. Thus, for example, a bank
holding company with extensive credit exposures to commercial real
estate, but very limited trading activities, would be expected to have
robust systems in place to identify and monitor its commercial real
estate exposures; its systems related to trading activities would not
need to be as sophisticated or extensive. In contrast, a bank holding
company with extensive exposure to a variety of risk exposures,
including both retail and wholesale exposures, as well as significant
trading activities and international operations, would be expected to
have an integrated system for measuring all these risk exposures and
the interactions among them.
The bank holding company's board of directors or a designated
committee thereof would be required at least annually to review the
effectiveness of the holding company's processes for assessing capital
adequacy, ensure that any deficiencies in the firm's processes for
assessing capital adequacy are appropriately remediated, and approve
the bank holding company's capital plan.\16\ After the capital plan is
approved by the board of directors, the bank holding company would be
required to submit its complete capital plan to the appropriate Reserve
Bank and the Board by the 5th of January of each year, or such later
date as directed by the appropriate Reserve Bank, after consultation
with the Board. A later date may be appropriate if, for example, the
bank holding company would need additional time to update its plan to
reflect any scenarios that the Federal Reserve has required the bank
holding company to evaluate and incorporate in its capital plan as part
of its submission.
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\16\ As part of this review the board of directors should be
made aware of any remaining uncertainties, limitations, and
assumptions associated with the bank holding company's capital
adequacy processes.
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A bank holding company would be required to update and resubmit its
capital plan to the appropriate Reserve Bank and the Board within 30
calendar days after the occurrence of one of the following events:
(i) The bank holding company determines there has been or will be a
material change in the bank holding company's risk profile (including a
material change in its business strategy or any material risk
exposures), financial conditions, or corporate structure since the bank
holding company adopted the capital plan; \17\ or
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\17\ For purposes of determining whether a change in its risk
profile was material, a bank holding company would be required to
consider a variety of risks, including credit, market, operational,
liquidity, and interest rate risks.
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(ii) The appropriate Reserve Bank, after consultation with the
Board, directs the bank holding company to update its capital plan for
reasons described in the proposal.
The appropriate Reserve Bank, after consultation with the Board,
could at its sole discretion extend this 30-day period for up to an
additional 60 calendar days. Any updated capital plan would be required
to satisfy all the requirements of the proposal as if it were the
original submission, unless otherwise specified by the appropriate
Reserve Bank, after consultation with the Board. However, to the extent
that the analysis underlying an initial capital plan were still
considered valid, the bank holding company would be able to continue to
rely on this analysis for purposes of any revised or updated plan,
provided that the analysis was accompanied by an explanation of how the
analysis should be considered in the light of any new capital actions
or changes in risk profile or strategy.
B. Mandatory Elements of a Capital Plan
Every capital plan would be required to contain at least the
following elements:
(i) A discussion of how the bank holding company will, under
stressful conditions, maintain capital commensurate with its risks,
maintain capital above the minimum regulatory capital ratios, and serve
as a source of strength to its depository institution subsidiaries;
(ii) A discussion of how the bank holding company will, under
stressful conditions, continue its operations by maintaining ready
access to funding, meeting its obligations to creditors and other
counterparties, and continuing to serve as a credit intermediary;
(iii) A discussion of the bank holding company's sources and uses
of capital over a minimum nine-quarter planning horizon reflecting the
risk profile of the firm, including:
(A) Estimates of projected revenues, losses, reserves, and pro
forma capital levels, including any minimum regulatory capital ratios
(for example, leverage, tier 1 risk-based, and total risk-based) and
any additional capital measures deemed relevant by the bank holding
company, over the planning horizon under expected conditions and under
a range of stressed scenarios, including any scenarios provided by the
Federal Reserve and at least one stressed scenario developed by the
bank holding company appropriate to its business model and portfolios,
and a probabilistic assessment of the likelihood of the bank holding
company-developed scenario(s); \18\
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\18\ With respect to this criterion, for any Federal Reserve-
provided stressed scenarios and any related data requests that would
be required to be reflected in the bank holding company's annual
capital plan, the Federal Reserve would provide such scenarios and
data requests to bank holding companies several weeks before the
capital plan due date of January 5. With respect to scenarios
designed by the bank holding company, such an exercise will involve
robust scenario design and effective translation of scenarios into
measures of impact on capital positions. Selection of scenario
variables is important for this purpose, as scenarios serve as the
link between the overall narrative of the scenario and the tangible
capital impact on the firm as a whole. For instance, in aiming to
capture the combined capital impact of a severe recession and a
financial market downturn, a firm may choose a set of variables that
include changes in U.S. Gross Domestic Product, unemployment rate,
interest rates, stock market levels, or home price levels.
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[[Page 35354]]
(B) A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(C) A description of all planned capital actions over the planning
horizon (for example, issuances of debt and equity capital instruments,
distributions on capital instruments, and redemptions and repurchases
of capital instruments);
(iv) The bank holding company's capital policy;
(v) A discussion of any expected changes to the bank holding
company's business plan that are likely to have a material impact on
the firm's capital adequacy or liquidity; and
(vi) Until January 1, 2016, a calculation of the pro forma tier 1
common ratio under expected and stressful conditions and discussion of
how the company would maintain a pro forma tier 1 common ratio of 5
percent under stressed scenarios.
These proposed mandatory elements of a capital plan are consistent
with the Federal Reserve's existing supervisory practice with respect
to the information that it expects certain bank holding companies to
include in a capital plan for internal planning purposes. As bank
holding companies begin to conduct stress tests in accordance with
rules to be issued by the Board pursuant to section 165(i)(2) of the
Dodd-Frank Act, bank holding companies would be required to incorporate
the results of these stress tests into their capital plans.\19\ A bank
holding company should include in its capital plan other information
that it determined was relevant to its capital planning strategies and
internal capital adequacy processes.
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\19\ At this time, the Board does not expect that the results of
stress tests conducted under the Dodd-Frank Act alone will be
sufficient to address all relevant adverse outcomes that should be
covered in a satisfactory capital plan for purposes of this proposed
rule.
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For purposes of the proposal, a capital action would be defined as
any issuance of a debt or equity capital instrument, capital
distribution, and any similar action that the Federal Reserve
determines could impact a bank holding company's consolidated capital.
A capital distribution would be defined as a redemption or repurchase
of any debt or equity capital instrument, a payment of common or
preferred stock dividends, a payment that may be temporarily or
permanently suspended by the issuer on any instrument that is eligible
for inclusion in the numerator of any minimum regulatory capital ratio,
and any similar transaction that the Federal Reserve determines to be
in substance a distribution of capital.\20\
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\20\ For example, this definition would include payments on
trust preferred securities, but would not include payments on
subordinated debt that could not be temporarily or permanently
suspended by the issuer.
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A capital policy would be defined as the bank holding company's
written assessment of the principles and guidelines used for capital
planning, capital issuance, usage and distributions, including internal
capital goals; the quantitative or qualitative guidelines for dividend
and stock repurchases; the strategies for addressing potential capital
shortfalls; and the internal governance procedures around capital
policy principles and guidelines. With respect to a bank holding
company's internal capital goals, such goals should apply throughout
the planning horizon in the form of capital levels or ratios. The bank
holding company should be able to demonstrate that achieving its stated
internal capital goals would allow it to continue its operations after
the impact of the stressed scenarios included in its capital plan. As
part of the continuation of a bank holding company's operations, the
Federal Reserve would expect the bank holding company to maintain ready
access to funding, meet its obligations to creditors and other
counterparties, and continue to serve as a credit intermediary.\21\
Similarly, a bank holding company's capital policy should reflect
strategies for addressing potential capital shortfalls, such as by
reducing or eliminating capital distributions, raising additional
capital, or preserving its existing capital, to support circumstances
where the bank holding company has underestimated its risks or where
its performance has not met its expectations.
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\21\ In addition, each bank holding company would be required to
ensure that its internal capital goals reflect any relevant minimum
regulatory capital ratio levels, any higher levels of regulatory
capital ratios (above regulatory minimums), and any additional
capital measures that, when maintained, would allow the bank holding
company to continue its operations.
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As noted above, a bank holding company must include pro forma
estimates of its minimum regulatory capital ratios in its capital plan.
The proposal would define minimum regulatory capital ratios as any
minimum regulatory capital ratio that the Federal Reserve may require
of a bank holding company, by regulation or order, including the bank
holding company's leverage ratio and tier 1 and total risk-based
capital ratios as calculated under Appendices A, D, E, and G to this
part 225 (12 CFR part 225 Appendices A, D, E, and G), or any successor
regulation. If the Board were to adopt additional or different minimum
regulatory capital ratios in the future, a bank holding company would
be required to incorporate these minimum capital ratios into its
capital plan as they come into effect and reflect them in its planning
horizon.
In addition to the requirements discussed above, until January 1,
2016, a bank holding company would be required to calculate its pro
forma tier 1 common ratio under expected and stressful conditions and
discuss in its capital plan how the bank holding company would maintain
a pro forma tier 1 common ratio of 5 percent under those conditions
throughout the planning horizon. For purposes of this requirement, a
bank holding company's tier 1 common ratio would mean the ratio of a
bank holding company's tier 1 common capital to its total risk-weighted
assets. Tier 1 common capital would be calculated as tier 1 capital
less non-common elements in tier 1 capital, including perpetual
preferred stock and related surplus, minority interest in subsidiaries,
trust preferred securities and mandatory convertible preferred
securities.\22\ Tier 1 capital would have the same meaning as under
Appendix A to Regulation Y, or any successor regulation, and total
risk-weighted assets would have the same meaning as under Appendices A,
E, and G of Regulation Y, or any successor regulation.\23\
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\22\ Specifically, non-common elements would include the
following items captured in the FR Y-9C: Schedule HC, line item 23
net of Schedule HC-R, line item 5; Schedule HC-R, line items 6a, 6b,
and 6c; and Notes to the Balance Sheet--Other as captured in
Schedule HC-R, line item 10.
\23\ See 12 CFR part 225, Appendices A, E, and G.
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This definition of tier 1 common capital is consistent with the
definition that the Federal Reserve has used for supervisory purposes,
including in CCAR. The Basel III framework proposed by the Basel
Committee on Bank Supervision includes a different
[[Page 35355]]
definition of tier 1 common capital.\24\ In recognition of the fact
that the Board and the other federal banking agencies continue to work
on implementing Basel III in the United States, the Board is proposing
to require a bank holding company to demonstrate until January 1, 2016
how it would meet a minimum tier 1 common ratio of 5 percent under
stressful conditions under the Board's existing supervisory definition
of tier 1 common capital. This level reflects a supervisory assessment
of the minimum capital needed to be a going concern on a post-stress
basis, based on an analysis of the historical distribution of earnings
by large banking organizations.\25\
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\24\ See Basel Committee on Banking Supervision, Basel III: A
global framework for more resilient banks and banking systems
(December 2010), available at http://www.bis.org/publ/bcbs189.pdf.
\25\ As indicated in footnote 21, a bank holding company's
internal capital goals must reflect any relevant minimum regulatory
capital ratio levels, any higher levels of regulatory capital ratios
(above regulatory minimums), and any additional capital measures
that, when maintained, would allow the bank holding company to
continue its operations. See SR 09-04; see also Basel Committee on
Banking Supervision, Calibrating regulatory minimum capital
requirements and capital buffers: A top-down approach (October
2010), available at http://www.bis.org/publ/bcbs180.htm.
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In connection with its submissions of a capital plan to the Federal
Reserve, a bank holding company would be required to provide certain
data to the Federal Reserve. To the greatest extent possible, the data
templates, and any other data requests, would be designed to minimize
burden on the bank holding company and to avoid duplication,
particularly in light of potential new reporting requirements arising
from the Dodd-Frank Act. Data required by the Federal Reserve would
include, but not be limited to, information regarding the bank holding
company's financial condition, structure, assets, risk exposure,
policies and procedures, liquidity, and management. For example, the
Federal Reserve will require the bank holding company to complete data
templates that describe in greater detail the bank holding company's
assets and potential exposures, whether these reside on balance sheet
or not. The frequency of the data collection will depend on the type of
data being collected, and certain data may be collected on a quarterly,
monthly, weekly, or daily basis. In some cases, the Federal Reserve may
require this information to be reported on a loan-level basis.
The Board solicits comment on the proposed mandatory elements of a
capital plan. In particular, the Board solicits comment on the
requirement that a bank holding company calculate its pro forma tier 1
common ratio under expected and stressful conditions, and the manner in
which a bank holding company should include internal capital goals as
part of its capital policy.
C. Federal Reserve's Review of Capital Plans
The proposal provides that the Federal Reserve would consider the
following factors in reviewing a bank holding company's capital plan:
(i) The reasonableness of the bank holding company's assumptions
and analysis underlying the capital plan and its methodologies for
reviewing the effectiveness of its capital adequacy processes;
(ii) The comprehensiveness of the capital plan, including the
company's capital policy; and
(iii) The bank holding company's ability to maintain capital above
each minimum regulatory capital ratio, and, until January 1, 2016, a
tier 1 common ratio of 5 percent, on a pro forma basis under stressful
conditions throughout the planning horizon.
The Federal Reserve would also consider the following information
in reviewing a bank holding company's capital plan:
(i) Relevant supervisory information about the bank holding company
and its subsidiaries;
(ii) The bank holding company's regulatory and financial reports,
as well as supporting data that would allow for an analysis of a bank
holding company's loss, revenue, and reserve projections;
(iii) As applicable, the Federal Reserve's own pro forma estimates
of the firm's potential losses, revenues, reserves, and resulting
capital adequacy under stressful conditions, as well as the results of
any stress tests conducted by the bank holding company or the Federal
Reserve; and
(iv) Other information requested or required by the Federal
Reserve, as well as any other information relevant, or related, to the
bank holding company's capital adequacy.
With respect to the third criterion, the Board expects that, as it
develops and conducts supervisory stress testing requirements pursuant
to section 165(i)(1) of the Dodd-Frank Act and reviews stress tests
submitted by companies pursuant to section 165(i)(2) of the Dodd-Frank
Act, the Federal Reserve would consider the results of such stress
tests in its evaluation of bank holding companies' capital plans.\26\
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\26\ See section 165(i)(1) and (2) of the Dodd-Frank Act; 12
U.S.C. 5365(i)(1) and (2).
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D. Federal Reserve Action on a Capital Plan
The proposed rule describes the timeframe under which the Federal
Reserve would review and act on a bank holding company's capital plan.
Generally, as described in more detail below, the Federal Reserve's
review of a capital plan would not delay a bank holding's ability to
make capital distributions. Under the proposed rule, a bank holding
company would be required to submit a complete annual capital plan by
January 5 with respect to that calendar year. The Federal Reserve would
object by March 15 to the capital plan, in whole or in part, or provide
the bank holding company with a notice of non-objection.
This proposed timeframe is intended to balance the Federal
Reserve's interest in having adequate time to review a capital plan
with the bank holding company's interest in a process that does not
unduly interfere with the ability of its board of directors and senior
management to take appropriate capital actions. For example, if a firm
submitted a complete annual plan to the Federal Reserve on January 5 of
Year 1 with respect to its Year 1 capital plan, the Federal Reserve
would provide a response by no later than March 15 of Year 1. The
Federal Reserve expects that any non-objection to a capital plan would
cover the subsequent four quarters (through the fourth quarter of Year
1). If the firm discussed above submitted a complete capital plan by
January 5 of Year 2 with respect to its Year 2 capital plan and had
received the Federal Reserve's non-objection to the capital plan
provided in Year 1, any fourth-quarter capital distributions in Year 1
would have been covered by non-objection that the Federal Reserve
provided in Year 1, and the firm would be notified by March 15 whether
or not the Federal Reserve had any objection to dividend payments in
the first quarter of Year 2. Thus, for this hypothetical firm, the
Federal Reserve's review of its capital plan generally would not delay
the bank holding company's ability to pay dividends or take other
capital actions while awaiting a response from the Federal Reserve.
In order to adhere to the schedule set forth in the proposed rule,
the Federal Reserve would likely require bank holding companies to
submit data templates and other required information several weeks
before complete capital plans are due.
The proposed rule provides that the Federal Reserve may object to a
capital plan, in whole or in part, if (i) The Federal Reserve
determines that the
[[Page 35356]]
bank holding company has material unresolved supervisory issues,
including but not limited to issues associated with its capital
adequacy processes; (ii) the assumptions and analysis underlying the
bank holding company's capital plan, or the bank holding company's
methodologies for reviewing the effectiveness of its capital adequacy
processes, are not reasonable or appropriate; (iii) the bank holding
company has not demonstrated an ability to maintain capital above each
minimum regulatory capital ratio, or until January 1, 2016, a tier 1
common ratio of 5 percent, on a pro forma basis under stressful
conditions throughout the planning horizon; or (iv) the bank holding
company's capital planning processes or proposed capital distributions
constitute an unsafe or unsound practice, or would violate any law,
regulation, Board order, directive, or any condition imposed by, or
written agreement with, the Board.\27\
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\27\ In determining whether a capital plan or proposed capital
distributions would constitute an unsafe or unsound practice, the
appropriate Reserve Bank would consider whether the bank holding
company is and would remain in sound financial condition after
giving effect to the capital plan and all proposed capital
distributions.
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With respect to the first criterion, material supervisory issues
could include inadequate risk management processes, such as the
inability to accurately identify and monitor credit risk, market risk,
operational risk, liquidity risk or interest rate risk, and any other
significant weaknesses in a bank holding company's ability to identify
and measure its risk exposures or other potential and material
vulnerabilities. The Federal Reserve generally would expect an
institution to correct such deficiencies before making any significant
capital distributions.
The Federal Reserve would notify the bank holding company in
writing of the reasons for a decision to object to a capital plan.
Within 5 calendar days of receipt of a notice of objection, the bank
holding company could submit a written request for reconsideration of
the objection, including an explanation of why reconsideration should
be granted. Within 10 calendar days of receipt of the bank holding
company's request, the Board would notify the company of its decision
to affirm or withdraw the objection to the bank holding company's
capital plan.
To the extent that Federal Reserve objected to a capital plan and
to the capital actions described therein, and until such time as the
Federal Reserve determined that the bank holding company's capital plan
satisfies the factors provided in the proposal, the bank holding
company generally would not be able to make a capital distribution
without providing prior notice to the Federal Reserve under the
procedures discussed in section IV of this preamble.
As discussed below in section IV of this preamble, prior notice
would not be required in circumstances where the Federal Reserve
expressly did not object to specific capital distributions. For
example, the Federal Reserve may object to a bank holding company's
proposed payments of dividends on common stock, but expressly not
object to payments on its preferred stock. In this situation, the bank
holding company would not have to provide prior notice in order to make
payments on its preferred stock in accordance with its capital plan.
The Board solicits comment on the proposed rule's process for the
Federal Reserve's review and action on a capital plan, including the
proposed annual deadline for submission of the capital plan of January
5 and the proposed date of March 15 by which the Federal Reserve would
object or provide the bank holding company with a notice of non-
objection.
E. Resubmission of a Capital Plan
Under the proposal, a bank holding company would be required to
revise and resubmit its capital plan if the Federal Reserve objected to
the capital plan or the Federal Reserve directed the bank holding
company in writing to revise and resubmit its capital plan for any of
the following reasons:
(i) The capital plan is incomplete or the capital plan or the bank
holding company's internal capital adequacy processes contain
weaknesses;
(ii) There has been or will likely be a material change in the bank
holding company's risk profile (including a material change in its
business strategy or any risk exposure), financial condition, or
corporate structure;
(iii) The bank holding company-developed stressed scenario(s) in
the capital plan are not sufficiently stressed, or changes in the
macro-economic outlook that could have a material impact on a bank
holding company's risk profile require the use of updated scenarios; or
(iv) The capital plan or the condition of the bank holding company
raise any issues to which the Federal Reserve could object to in its
review of a capital plan.
IV. Prior Notice Requirements
The proposal would require a bank holding company to notify the
Federal Reserve before making a capital distribution if the Federal
Reserve had objected to the bank holding company's capital plan and
that objection was still outstanding.\28\ Even if the Federal Reserve
did not object to the bank holding company's capital plan, the bank
holding company still would be required to provide prior notice to the
Federal Reserve before making capital distributions if:
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\28\ For purposes of the proposed prior notice requirements, the
Federal Reserve would treat a bank holding company that became
subject to the proposed rule after January 5 of a calendar year as
if it had received the Federal Reserve's non-objection to its
capital plan. Accordingly, it would not be subject to this aspect of
the proposed prior notice requirements. See proposed sections
225.8(f)(1)(i),(iv).
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(i) After giving effect to the capital distribution, the bank
holding company would not meet a minimum regulatory capital ratio or,
until January 1, 2016, a tier 1 common ratio of 5 percent;
(ii) The Federal Reserve determines that the capital distribution
would result in a material adverse change to the organization's capital
or liquidity structure or that earnings were materially underperforming
projections; \29\
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\29\ A bank holding company would be notified in advance if any
of the circumstances in the second criterion applied or were likely
to apply.
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(iii) The dollar amount of the capital distribution would exceed
the amount described in the capital plan approved by the Federal
Reserve; or
(iv) The capital distribution would occur during a period in which
the appropriate Reserve Bank is reviewing the capital plan.
With respect to the third criterion, the Board solicits comments on
whether there should be a de minimis exception, and if so, how the
Board should measure materiality. For example, should the Board exempt
a capital distribution from the proposed prior notice requirements if
the effect of the distribution, combined with all other capital
distributions in the prior 12 months to which the Federal Reserve had
not been given prior notice, would reduce the bank holding company's
tier 1 risk-based capital ratio by 10 basis points or less?
Under any of these circumstances, notwithstanding a notice of non-
objection on its capital plan from the Federal Reserve, the bank
holding company would be required to provide the Federal Reserve with
30 calendar days prior notice of the proposed capital distribution. A
bank holding company would be required to file its notice of a proposed
capital distribution with the appropriate Reserve Bank. Such a notice
would be required to contain the following information:
[[Page 35357]]
(i) The bank holding company's previously approved capital plan or
an attestation that there have been no changes to its capital plan;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(iv) Any additional information requested by the appropriate
Reserve Bank or Board.
In most circumstances, within 15 calendar days of receipt of a
notice, the appropriate Reserve Bank would either approve the proposed
transaction or capital distribution or refer the notice to the Board
for decision. If the notice were referred to the Board for decision,
the Board would be required act on the notice within 30 calendar days
after the Reserve Bank receives the notice. The appropriate Reserve
Bank, after consultation with the Board, may, at its sole discretion,
shorten the 30-day prior notice period.
With respect to notices provided for capital distributions that
would occur during the period that the appropriate Reserve Bank is
reviewing the company's capital plan, a bank holding company would not
be permitted to consummate the proposed capital distribution until the
appropriate Reserve Bank provides the bank holding company with a
notice of non-objection to the capital plan.
The Board could deny the proposed capital distribution under
circumstances that parallel those under which the Board may object to a
bank holding company's capital plan.
The proposal provides that the Board would notify the bank holding
company in writing of the reasons for a decision to disapprove any
proposed capital distribution. Within 10 calendar days of receipt of a
notice of disapproval by the Board, the bank holding company could
submit a written request for a hearing.
If the bank holding company requested a hearing, the Board would
order a hearing within 10 calendar days of receipt of the request if it
finds that material facts are in dispute, or if it otherwise appears
appropriate. Any hearing conducted would be held in accordance with the
Board's Rules of Practice for Formal Hearings (12 CFR part 263). At the
conclusion of any hearing, the Board would by order approve or
disapprove the proposed capital action on the basis of the record of
the hearing.
The Board solicits comments on the proposed prior notice
requirements. Are there any circumstances that may arise under which
bank holding companies may need additional flexibility with respect to
capital distributions? If so, please describe those circumstances and
indicate how the Board could assure that any added flexibility would
not be used to circumvent the proposal's prior notice requirements.
V. Conforming Amendments to Section 225.4(b) of Regulation Y
In addition to the capital planning and prior notice requirements
discussed above, the Board is proposing to make conforming changes to
section 225.4(b) of Regulation Y, which currently requires prior notice
to the Federal Reserve of certain purchases and redemptions of a bank
holding company's equity securities.\30\ Because such prior notice
would be separately required in the proposed rule at section 225.8 of
Regulation Y, the Board is proposing an amendment to section 225.4(b)
to provide that section 225.4(b) shall not apply to any bank holding
company that is subject to section 225.8.
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\30\ See 12 CFR 225.4(b).
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The Board solicits comments on this proposed amendment to section
225.4(b) of Regulation Y and on all other aspects of the proposal.
VI. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires that an agency prepare and make available for public
comment an initial regulatory flexibility analysis in connection with a
notice of proposed rulemaking. Under regulations issued by the Small
Business Administration, a small entity includes a bank holding company
with assets of $175 million or less (small bank holding company).\31\
As of December 31, 2010, there were approximately 4,493 small bank
holding companies.
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\31\ 13 CFR 121.201.
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As discussed in the Supplementary Information, the proposed rule
applies to every top-tier bank holding company domiciled in the United
States with $50 billion or more in total consolidated assets. Bank
holding companies that are subject to the proposed rule therefore
substantially exceed the $175 million asset threshold at which a
banking entity would qualify as a small bank holding company.
Because the proposed rule is not likely to apply to any bank
holding company with assets of $175 million or less, if adopted in
final form, it is not expected to apply to any small bank holding
company for purposes of the RFA. The Board does not believe that the
proposed rule duplicates, overlaps, or conflicts with any other Federal
rules. In light of the foregoing, the Board does not believe that the
proposed rule, if adopted in final form, would have a significant
economic impact on a substantial number of small entities. Nonetheless,
the Board seeks comment on whether the proposed rule would impose undue
burdens on, or have unintended consequences for, small organizations,
and whether there are ways such potential burdens or consequences could
be minimized in a manner consistent with the purpose of the proposed
rule.
B. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by Office of
Management and Budget (OMB). The Board may not conduct or sponsor, and
a respondent is not required to respond to, an information collection
unless it displays a currently valid OMB control number. The OMB
control number will be assigned.
The proposed rule contains requirements subject to the PRA. The
collection of information that would be required by this proposed rule
is found in new section 225.8 of Regulation Y (12 CFR part 225). The
Board is proposing to require certain bank holding companies to submit
capital plans to the Federal Reserve on an annual basis and to require
such holding companies to provide prior notice to the Federal Reserve
under certain circumstances before making a capital distribution.
Section 225.8(d)(1)(i) would require a bank holding company to
develop and maintain an initial capital plan. The level of detail and
analysis expected in a capital plan would vary based on the bank
holding company's size, complexity, risk profile, scope of operations,
and the effectiveness of its processes for assessing capital adequacy.
Section 225.8(d)(2) provides a list of the mandatory elements to be
included in the capital plan.
Sections 225.8(d)(1)(ii) would require a bank holding company to
submit its complete capital plan to the appropriate Reserve Bank and
the Board each year by the 5th of January, or such later date as
directed by the appropriate Reserve Bank after consultation with the
Board.
Section 225.8(d)(1)(iii) would require the bank holding company's
board of directors or a designated committee to review and approve the
bank holding company's capital plan prior to its
[[Page 35358]]
submission to the appropriate Federal Reserve Bank under section
225.8(d)(1)(ii). In addition, section 225.8(d)(1)(iv) would require the
bank holding company to update and re-submit its capital plan within 30
days of the occurrence of certain events.
Within 5 calendar days of receipt of a notice of objection by the
Board of the bank holding company's capital plan, pursuant to section
225.8(e)(3), the banking holding company may submit a written request
for reconsideration.
In certain circumstances, large bank holding companies would be
required, pursuant to section 225.8(f)(1), to provide prior notice to
the Federal Reserve before making capital distributions. As listed in
section 225.8(f)(2), such a notice would be required to contain the
following information: The bank holding company's current capital plan
or an attestation that there have been no changes to its current
capital plan; the purpose of the transaction; a description of the
capital action, including for redemptions or repurchases of securities,
the gross consideration to be paid, and for dividends, the amount of
the dividend(s); the terms and sources of funding for the transaction;
and any additional information requested by the appropriate Reserve
Bank or Board.
Under section 225.8(f)(8)(i), if the Federal Reserve disapproves of
a bank holding company's capital plan, the bank holding company within
10 calendar days of receipt of a notice of disapproval by the Board may
submit a written request for a hearing.
In connection with submissions of capital plans to the Federal
Reserve, bank holding companies would be required pursuant to section
225.8(d)(3) to provide certain data to the Federal Reserve. Data
request templates, would be designed to minimize burden on the bank
holding company and to avoid duplication. Data required by the Federal
Reserve could include, but would not be limited to, information
regarding the bank holding company's financial condition, structure,
assets, risk exposure, policies and procedures, liquidity, and
management.
The proposed rule would apply to every top-tier bank holding
company domiciled in the United States with $50 billion or more in
average total consolidated assets. Currently, 35 bank holding companies
would be required to comply with the proposed information collection.
The Federal Reserve estimates that each of the bank holding
companies would take, on average, 12,000 hours to comply with the
section 225.8(d)(1)(i) recordkeeping requirement to develop and
maintain the initial capital plan and with the section 225.8(d)(1)(ii)
reporting requirement to submit the initial capital plan. The one-time
implementation burden for these requirements is estimated to be 420,000
hours.
The Federal Reserve estimates that each of the bank holding
companies would take, on average, 100 hours annually to comply with the
section 225.8(d)(1)(iii) recordkeeping requirement to review and revise
its capital plan. The annual burden for this recordkeeping requirement
is estimated to be 3,500 hours.
Upon written request from the Federal Reserve, each bank holding
company would be required to revise and resubmit its capital plan to
the Federal Reserve. It is estimated that 10 bank holding companies
would be requested to provide revised capital plans. The Federal
Reserve estimates that it would take this subset of bank holding
companies, on average, 100 hours to comply with the section
225.8(d)(1)(iv) recordkeeping requirement to revise and resubmit their
capital plans.
Of the 10 bank holding companies, it is estimated that 2 would
provide written request for a hearing regarding the disapproval of its
capital plan. These bank holding companies would take, on average, 16
hours to comply with the section 225.8(e)(3) reporting requirement. The
annual burden for these requirements is estimated to be 1,832 hours.
The Federal Reserve estimates that approximately 10 bank holding
companies would be required to provide prior notice before giving
capital distributions. The 10 bank holding companies would take, on
average, 16 hours to comply with the section 225.8(f)(1) reporting
requirement. Of the 10 bank holding companies, it is estimated that 2
would provide written request for a hearing regarding the disapproval
of its prior notice. The 2 bank holding companies would take, on
average, 16 hours to comply with the section 225.8(f)(8)(i) reporting
requirement. The annual burden for these reporting requirements is
estimated to be 192 hours.
The Federal Reserve estimates that bank holding companies would
take, on average, 1,042 hours monthly to comply with the section
225.8(d)(3) reporting requirement to provide additional data to the
Federal Reserve in connection with the submission of capital plans. The
annual burden for this reporting requirement is estimated to be 437,640
hours.
The total annual burden for this proposed information collection is
estimated to be 862,364 hours.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Cynthia
Ayouch, Acting Federal Reserve Clearance Officer, Division of Research
and Statistics, Mail Stop 95-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-to be assigned), Washington, DC 20503.
C. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102,
requires the Federal banking agencies to use plain language in all
proposed and final rules published after January 1, 2000. The Board
invites comment on how to make the interim final rule easier to
understand. For example:
Have we organized the material to suit your needs? If not,
how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
[[Page 35359]]
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System proposed to amend subpart A of Regulation Y,
12 CFR part 225 as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
Subpart A--General Provisions
2. Section 225.4 is amended by adding paragraph (b)(7):
Sec. 225.4 Corporate practices.
* * * * *
(b) * * *
(7) Exception for certain bank holding companies. This section
225.4(b) shall not apply to any bank holding company that is subject to
Sec. 225.8 of Regulation Y (12 CFR 225.8).
* * * * *
2. Add Sec. 225.8 to read as follows:
Sec. 225.8 Capital planning.
(a) Purpose. This section establishes capital planning and prior
notice requirements for capital distributions by certain bank holding
companies.
(b) Scope and Effective Date.
(1) This section applies to every top-tier bank holding company
domiciled in the United States:
(i) With total consolidated assets greater than or equal to $50
billion computed on the basis of the average of the company's total
consolidated assets over the course of the previous two calendar
quarters, as reflected on the bank holding company's consolidated
financial statement for bank holding companies (FR Y-9C); provided that
until July 21, 2015, this section will not apply to any bank holding
company subsidiary of a foreign banking organization that has relied on
Supervision and Regulation Letter SR 01-01 issued by the Board of
Governors (as in effect on May 19, 2010); or
(ii) That is subject to this section, in whole or in part, by order
of the Board based on the institution's size, level of complexity, risk
profile, scope of operations, or financial condition.
(2) On or after January 1, 2012, the provisions this section shall
apply to any bank holding company that becomes subject to this section
under paragraph (b)(1) beginning on the date the company becomes
subject to this section, except that, for purposes of the requirements
described in paragraph (f), a bank holding company that becomes subject
to this section pursuant to paragraph (b)(1)(i) after the 5th of
January of a calendar year will be deemed to have received a notice of
non-objection from the Federal Reserve on its capital plan for capital
distributions made within that calendar year.
(3) Nothing in this section shall be read to limit the authority of
the Federal Reserve to issue a capital directive or take any other
supervisory or enforcement action, including action to address unsafe
or unsound practices or conditions or violations of law.
(c) Definitions. For purposes of this section, the following
definitions apply:
(1) Capital action means any issuance of a debt or equity capital
instrument, any capital distribution, and any similar action that the
Federal Reserve determines could impact a bank holding company's
consolidated capital.
(2) Capital distribution means a redemption or repurchase of any
debt or equity capital instrument, a payment of common or preferred
stock dividends, a payment that may be temporarily or permanently
suspended by the issuer on any instrument that is eligible for
inclusion in the numerator of any minimum regulatory capital ratio, and
any similar transaction that the Federal Reserve determines to be in
substance a distribution of capital.
(3) Capital plan means a written presentation of a bank holding
company's capital planning strategies and capital adequacy processes
that includes--
(i) an assessment of the expected uses and sources of capital over
a nine-quarter forward-looking planning period (beginning with the
quarter preceding the quarter in which the bank holding company submits
its capital plan) that reflects the bank holding company's size,
complexity, risk profile, and scope of operations, assuming both
expected and stressful conditions,
(ii) a detailed description of the bank holding company's processes
for assessing capital adequacy, and
(iii) an analysis of the effectiveness of these processes.
(4) Capital policy means a bank holding company's written
assessment of the principles and guidelines used for capital planning,
capital issuance, usage and distributions, including internal capital
goals; the quantitative or qualitative guidelines for dividend and
stock repurchases; the strategies for addressing potential capital
shortfalls; and the internal governance procedures around capital
policy principles and guidelines.
(5) Minimum regulatory capital ratio means any minimum regulatory
capital ratio that the Federal Reserve may require of a bank holding
company, by regulation or order, including the bank holding company's
leverage ratio and tier 1 and total risk-based capital ratios as
calculated under Appendices A, D, E, and G to this part (12 CFR part
225), or any successor regulation.
(6) Tier 1 capital has the same meaning as under Appendix A to this
part or any successor regulation.
(7) Tier 1 common capital means tier 1 capital less the non-common
elements of tier 1 capital, including perpetual preferred stock and
related surplus, minority interest in subsidiaries, trust preferred
securities and mandatory convertible preferred securities.
(8) Tier 1 common ratio means the ratio of a bank holding company's
tier 1 common capital to total risk-weighted assets.
(9) Total risk-weighted assets has the same meaning as under
Appendices A, E, and G to this part, or any successor regulation.
(d) General requirements.
(1) Annual capital planning.
(i) A bank holding company must develop and maintain a capital
plan.
(ii) A bank holding company must submit its complete capital plan
to the appropriate Reserve Bank and the Board each year by the 5th of
January, or such later date as directed by the appropriate Reserve Bank
after consultation with the Board.
(iii) The bank holding company's board of directors or a designated
committee thereof must at least annually and prior to submission of the
capital plan under paragraph (d)(1)(ii):
(A) Review the effectiveness of its processes for assessing capital
adequacy,
(B) Ensure that any deficiencies in its processes for assessing
capital adequacy are appropriately remediated; and
(C) Approve the bank holding company's capital plan.
(iv) The bank holding company must update and re-submit its capital
plan to the appropriate Reserve Bank within 30 calendar days of the
occurrence of one of the following events:
(A) The bank holding company determines there has been or will be a
material change in the bank holding company's risk profile, financial
condition, or corporate structure since the bank holding company
adopted the capital plan; or
(B) The appropriate Reserve Bank, after consultation with the
Board,
[[Page 35360]]
directs the bank holding company to revise and re-submit its capital
plan under paragraph (e)(4).
(v) The appropriate Reserve Bank, after consultation with the
Board, may at its sole discretion extend the 30-day period in paragraph
(d)(1)(iv) for up to an additional 60 calendar days.
(vi) Any updated capital plan must satisfy all the requirements of
this section, including the requirements set forth in paragraphs
(d)(1), (d)(2), and (e)(4), unless otherwise specified by the
appropriate Reserve Bank, after consultation with the Board.
(2) Mandatory elements of capital plan. Every capital plan must
contain at least the following elements:
(i) A discussion of how the bank holding company will, under
stressful conditions, maintain capital commensurate with its risks,
maintain capital above the minimum regulatory capital ratios, and serve
as a source of strength to its depository institution subsidiaries;
(ii) A discussion of how the bank holding company will, under
stressful conditions, continue its operations by maintaining ready
access to funding, meeting its obligations to creditors and other
counterparties, and continuing to serve as a credit intermediary;
(iii) A discussion of the bank holding company's sources and uses
of capital reflecting the risk profile of the firm over a minimum nine-
quarter planning horizon, including:
(A) Estimates of projected revenues, losses, reserves, and pro
forma capital levels, including any minimum regulatory capital ratios
(for example, leverage, tier 1 risk-based, and total risk-based capital
ratios) and any additional capital measures deemed relevant by the bank
holding company, over the planning horizon under expected conditions
and under a range of stressed scenarios, including any scenarios
provided by the Federal Reserve and at least one stressed scenario
developed by the bank holding company appropriate to its business model
and portfolios, and a probabilistic assessment of the likelihood of the
bank holding company developed scenario(s);
(B) A discussion of the results of any stress test required by law
or regulation, and an explanation of how the capital plan takes these
results into account; and
(C) A description of all planned capital actions over the planning
horizon;
(iv) The bank holding company's capital policy;
(v) A discussion of any expected changes to the bank holding
company's business plan that are likely to have a material impact on
the firm's capital adequacy or liquidity; and
(vi) Until January 1, 2016, a calculation of the pro forma tier 1
common ratio under expected and stressful conditions and discussion of
how the company will maintain a pro forma tier 1 common ratio of 5
percent under the stressed scenarios required under paragraph
(d)(2)(iii).
(3) Data collection. Upon the request of the appropriate Reserve
Bank or the Board, the bank holding company shall provide the
appropriate Reserve Bank with information regarding--
(i) the bank holding company's financial condition, including its
capital;
(ii) the bank holding company's structure;
(iii) amount and risk characteristics of the bank holding company's
on- and off-balance sheet exposures, including exposures within the
bank holding company's trading portfolio, other trading-related
exposures (such as counterparty-credit risk exposures) or other items
sensitive to changes in market factors, including, as appropriate,
information about the sensitivity of positions in the trading portfolio
to changes in market rates and prices;
(iv) the bank holding company's relevant policies and procedures,
including risk management policies and procedures;
(v) the bank holding company's liquidity profile and management;
and
(vi) any other relevant qualitative or quantitative information
requested by the appropriate Reserve Bank or the Board to facilitate
review of the bank holding company's capital plan under this section.
(e) Review of capital plans by the Federal Reserve.
(1) Considerations and inputs.
(i) The appropriate Reserve Bank, after consultation with the
Board, will consider the following factors in reviewing a bank holding
company's capital plan:
(A) The reasonableness of the bank holding company's assumptions
and analysis underlying the capital plan and its methodologies for
reviewing the effectiveness of its capital adequacy processes;
(B) The comprehensiveness of the capital plan, including the
company's capital policy; and
(C) The bank holding company's ability to maintain capital above
each minimum regulatory capital ratio, and until January 1, 2016, a
tier 1 common ratio of 5 percent, on a pro forma basis under expected
and stressful conditions throughout the planning horizon.
(ii) The appropriate Reserve Bank, after consultation with the
Board, will also consider the following information in reviewing a bank
holding company's capital plan:
(A) Relevant supervisory information about the bank holding company
and its subsidiaries;
(B) The bank holding company's regulatory and financial reports, as
well as supporting data that would allow for an analysis of a bank
holding company's loss, revenue, and reserve projections;
(C) As applicable, the Federal Reserve's own pro forma estimates of
the firm's potential losses, revenues, reserves, and resulting capital
adequacy under stressful conditions, as well as the results of any
stress tests conducted by the bank holding company or the Federal
Reserve; and
(D) Other information requested or required by the appropriate
Reserve Bank or the Board, as well as any other information relevant,
or related, to the bank holding company's capital adequacy.
(2) Federal Reserve action on a capital plan.
(i) By March 15 of the calendar year in which a capital plan was
submitted, the appropriate Reserve Bank, after consultation with the
Board, will object, in whole or in part, to the capital plan or provide
the bank holding company with a notice of non-objection to the capital
plan.
(ii) The appropriate Reserve Bank, after consultation with the
Board, may object to a capital plan if it determines that:
(A) The bank holding company has material unresolved supervisory
issues, including but not limited to issues associated with its capital
adequacy processes;
(B) The assumptions and analysis underlying the bank holding
company's capital plan, or the bank holding company's methodologies for
reviewing the effectiveness of its capital adequacy processes, are not
reasonable or appropriate;
(C) The bank holding company has not demonstrated an ability to
maintain capital above each minimum regulatory capital ratio, or, until
January 1, 2016, a tier 1 common ratio of 5 percent, on a pro forma
basis under stressful conditions throughout the planning horizon; or
(D) The bank holding company's capital planning processes or
proposed capital distributions constitute an unsafe or unsound
practice, or would violate any law, regulation, Board order, directive,
or any condition imposed by, or written agreement with, the Board. In
determining whether a capital plan or
[[Page 35361]]
any proposed capital distribution would constitute an unsafe or unsound
practice, the appropriate Reserve Bank would consider whether the bank
holding company is and would remain in sound financial condition after
giving effect to the capital plan and all proposed capital
distributions.
(iii) The appropriate Reserve Bank, after consultation with the
Board, will notify the bank holding company in writing of the reasons
for a decision to object to a capital plan.
(iv) If the appropriate Reserve Bank, after consultation with the
Board, objects to a capital plan and until such time as the appropriate
Reserve Bank, after consultation with the Board, determines that the
bank holding company's capital plan does not give rise to a condition
described under paragraph (e)(2)(ii), the bank holding company may not
make any capital distribution, other than those capital distributions
with respect to which the appropriate Reserve Bank has indicated its
non-objection, without providing prior notice to the appropriate
Reserve Bank under the procedures set forth in paragraph (f).
(3) Request for reconsideration.
(i) Within 5 calendar days of receipt of a notice of objection by
the appropriate Reserve Bank, the bank holding company may submit a
written request to the Board requesting reconsideration of the
objection, including an explanation of why reconsideration should be
granted.
(ii) Within 10 calendar days of receipt of the bank holding
company's request under paragraph (i), the Board would notify the
company of its decision to affirm or withdraw the objection to the bank
holding company's capital plan.
(4) Re-submission of a capital plan. A bank holding company must
revise and resubmit its capital plan pursuant to paragraph
(d)(1)(iv)(B) if:
(i) The appropriate Reserve Bank objects to the capital plan; or
(ii) The appropriate Reserve Bank, after consultation with the
Board, directs the bank holding company in writing to revise and
resubmit its capital plan for any of the following reasons:
(A) The capital plan is incomplete or the capital plan or the bank
holding company's internal capital adequacy processes contain
weaknesses;
(B) There has been or will likely be a material change in the bank
holding company's risk profile (including a material change in its
business strategy or any risk exposure), financial condition, or
corporate structure;
(C) The bank holding company-developed stressed scenario(s) in the
capital plan are not sufficiently stressed, or changes in the macro-
economic outlook that could have a material impact on a bank holding
company's risk profile require the use of updated scenarios; or
(D) The capital plan or the condition of the bank holding company
raise any of the issues described in paragraph (e)(2)(ii).
(f) Prior notice requirements.
(1) Circumstances requiring prior notice. Except as provided in
paragraph (f)(2)(iv), notwithstanding a notice of non-objection under
paragraph (e)(2)(i), a bank holding company must provide the
appropriate Reserve Bank with 30 calendar days prior notice of a
capital distribution under the following circumstances:
(i) The appropriate Reserve Bank, after consultation with the
Board, has objected to the bank holding company's capital plan;
(ii) After giving effect to the capital distribution, the bank
holding company would not meet a minimum regulatory capital ratio, or,
until January 1, 2016, a tier 1 common ratio of 5 percent;
(iii) The Federal Reserve determines that the capital distribution
would result in a material adverse change to the organization's capital
or liquidity structure or that earnings were materially underperforming
projections;
(iv) The dollar amount of the capital distribution would exceed the
amount described in the capital plan approved under this section; or
(v) The capital distribution would occur during the period that the
appropriate Reserve Bank is reviewing the company's capital plan under
paragraph (e).
(2) Contents of notice. Any notice of a capital distribution under
this section shall be filed with the appropriate Reserve Bank and the
Board and shall contain the following information:
(i) The bank holding company's previously approved capital plan or
an attestation that there have been no changes to its capital plan;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for
redemptions or repurchases of securities, the gross consideration to be
paid and the terms and sources of funding for the transaction, and for
dividends, the amount of the dividend(s); and
(iv) Any additional information requested by the appropriate
Reserve Bank or Board.
(3) Shortening the notice period. The appropriate Reserve Bank,
after consultation with the Board, may, at its sole discretion, shorten
the prior notice period described in paragraph (f)(1).
(4) Acting on notice. Within 15 calendar days of receipt of a
notice under this section, the appropriate Reserve Bank, after
consultation with the Board, will either approve the transaction
proposed in the notice or refer the notice to the Board for decision.
If the notice is referred to the Board for decision, the Board will act
on the notice within 30 calendar days after the Reserve Bank receives
the notice.
(5) Notwithstanding any other provision in paragraph (f), with
respect to a prior notice provided under paragraph (f)(1)(v), a bank
holding company may not consummate the proposed capital distribution
until the appropriate Reserve Bank provides the bank holding company
with a notice of non-objection to the capital plan pursuant to
paragraph (e)(2).
(6) Factors considered in acting on notice. The Board may
disapprove a proposed capital distribution for any of the reasons
described in paragraph (e)(2)(ii).
(7) Disapproval and hearing.
(i) The Board will notify the bank holding company in writing of
the reasons for a decision to disapprove any proposed capital
distribution. Within 10 calendar days of receipt of a notice of
disapproval by the Board, the bank holding company may submit a written
request for a hearing.
(ii) The Board will order a hearing within 10 calendar days of
receipt of the request if it finds that material facts are in dispute,
or if it otherwise appears appropriate. Any hearing conducted under
this paragraph shall be held in accordance with the Board's Rules of
Practice for Formal Hearings (12 CFR part 263).
(iii) At the conclusion of the hearing, the Board will by order
approve or disapprove the proposed capital distribution on the basis of
the record of the hearing.
By order of the Board of Governors of the Federal Reserve
System, June 10, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-14831 Filed 6-16-11; 8:45 am]
BILLING CODE 6210-01-P